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Minneapolis MN International Tax Lawyer & Attorney | PLR 201922010

On May 31, 2019, the IRS released a Private Letter Ruling (“PLR”) on the extension of time to make an election to be treated as a disregarded entity for US tax purposes under Treas. Reg. Section 301.7701 (26 CFR 301.7701-3). Let’s explore this PLR 201922010 in more detail.

PLR 201922010: Fact Pattern

PLR 201922010 deals with a typical fact pattern for someone who is doing business overseas. A US citizen wholly owns a foreign corporation which wholly owns a foreign subsidiary. The foreign subsidiary wants to make an election to be classified as a disregarded entity for US tax purposes, but misses the deadline to do so timely. Hence, it files a request for the IRS to grant a discretionary extension of time to file Form 8832 pursuant to Treas. Reg. Sections 301.9100-1 and 301.9100-3.

PLR 201922010: Legal Analysis

The IRS began its legal analysis of the request by noting that, under Treas. Reg. Section 301.7701-3(a), a business entity that is not classified as a corporation under Treas. Reg. Section 301.7701-2(b)(1), (3), (4), (5), (6), (7) or (8) (hereinafter, an “eligible entity”) can elect its classification for federal tax purposes as provided in Treas. Reg. Section 301.7701-3. An eligible entity with at least two members can elect to be classified as either an association (and thus a corporation under the Treas. Reg. Section 301.7701-2(b)(2)) or a partnership. An eligible entity with a single owner, however, can elect to be classified as an association (i.e. a corporation) or to be disregarded as an entity separate from its owner.

The IRS then focused specifically on the classification of foreign entities relying on Treas. Reg. Section 301.7701-3(b)(2)(I). This provision states that, unless it elects otherwise, a foreign eligible entity is (A) a partnership if it has two or more members and at least one member does not have limited liability; (B) an association if all members have limited liability; or © disregarded as an entity separate from its owner if it has a single owner that does not have limited liability.

What does “limited liability” mean in this context? Treas. Reg. Section 301.7701-3(b)(2)(ii) answers this question by stating that a member of a foreign eligible entity has limited liability if the member has no personal liability for the debts of or claims against the entity by reason of being a member.

How does one make this classification election? Treas. Reg. Section 301.7701-3(c)(1)(I) provides, in part, that an eligible entity may elect to be classified other than as provided under Treas. Reg. Section 301.7701-3(b), or to change its classification, by filing Form 8832 with the service center designated on Form 8832.

Then, the IRS addressed the key issue for this PLR – when this classification election can be made. Treas. Reg. Section 301.7701-3(c)(1)(iii) provides that the election will be effective on the date specified by the entity on Form 8832 or on the date filed if no such date is specified on the election form. The effective date specified on Form 8832 can not be more than 75 days prior to the date on which the election is filed and can not be more than 12 months after the date on which the election is filed.

Is it possible to make a late election? The IRS answered this question by referring to Treas. Reg. Section 301.9100-1(c), which provides that the Commissioner may grant a reasonable extension of time to make a regulatory election, or a statutory election (but no more than six months except in the case of a taxpayer who is abroad), under all subtitles of the Internal Revenue Code (Code), except subtitles E, G, H, and I. Treas. Reg. Section 301.9100-1(b) defines “regulatory election” as an election whose due date is prescribed by a regulation published in the Federal Register, or a revenue ruling, revenue procedure, notice or announcement published in the Internal Revenue Bulletin.

Treas. Reg. Section 301.9100-3 addresses extensions of time for making late regulatory elections. Treas. Reg. Section 301.9100-3(a) states that such requests for relief will be granted when the taxpayer provides the evidence (including affidavits described in Treas. Reg. Section 301.9100-3(e)) to establish to the satisfaction of the Commissioner that the taxpayer acted reasonably and in good faith, and the grant of relief will not prejudice the interests of the Government.

PLR 201922010: IRS Granted Request for Extension to Time to Make the Election

Based on the information submitted and the representations made, the IRS concluded that the foreign entity satisfied the requirements of Treas. Reg. Sections 301.9100-1 and 301.9100-3. As a result, the IRS granted to the foreign entity an extension of time of 120 days from the date of PLR 201922010 to file a properly executed Form 8832 with the appropriate service center electing to be treated as a disregarded entity.

PLR 201922010: The Electing Foreign Entity Must Submit Form 8858 and All Other Returns

The IRS emphasized that its ruling was contingent on the electing foreign entity and its owner filing within 120 days from the date of the PLR all of the required federal income tax and information returns for all relevant years. The IRS specifically mentioned Form 8858 (Return of U.S. Persons With Respect to Foreign Disregarded Entities).

Contact Sherayzen Law Office if You Need to File a PLR Request for Late Entity Classification Election Similar to PLR 201922010

If you need to ask the IRS to grant a late entity classification request, you can contact Sherayzen Law Office for professional help with drafting and submitting your request for a Private Letter Ruling.

FDII Export Incentive | Foreign Business Income Tax Lawyer & Attorney

The 2017 Tax Cuts and Jobs Act (the “2017 tax reform” or “TCJA”) enacted a highly-lucrative incentive for US corporations to export directly from the United States – the Foreign-Derived Intangible Income (“FDII”) regime. In this article, I would like to introduce the readers in a general manner to the FDII export incentive contained in the TCJA.

FDII Export Incentive: TCJA

The creation of the participation exemption system posed a problem for the drafters of the TCJA – how does one stop US corporations from running all of their foreign business through a foreign corporation since foreign corporate profits may actually be transferred to the United States tax-free? Among other provisions of this complex law, the drafters utilized two powerful incentives for US corporations to export directly overseas.

The first one was a “stick” – the Global Intangible Low-Taxed Income or GILTI. The GILTI regime established what can be best described as a global minimum tax on the earnings of foreign subsidiaries of a US business entity.

The second approach was a “carrot” – the FDII export incentive. The FDII regime creates a powerful incentive for US corporations to export goods and services from the United States by creating a deemed deduction of a large percentage of corporate export income. In other words, the effective corporate tax rate is reduced through the FDII regime because a portion of a corporation’s export income is being deducted and never subject to US taxation.

FDII Export Incentive: General Description of the Deemed Deduction

The deemed deduction applies only to a US corporation’s FDII. FDII is basically a certain portion of corporate income from foreign sources determined by a formula established by Congress.

The formula requires a multi-step process. The first steps involve the determination of the Deduction-Eligible Income (DEI), Qualified Business Asset Investment (“QBAI”), Foreign-Derived Deduction-Eligible Income (“FDDEI”). Once all of these items are calculated, then the Deemed Intangible Income (“DII”) is figured out.

FDII is calculated last. The basic formula for FDII is: DII times the ratio of FDDEI over DEI.

The last step is to calculate the tax liability which involves the reduction of FDII by 37.5%. Thus, the effective tax rate for a corporate taxpayer (assuming the current 21% corporate tax rate stays the same) with respect to its FDII is only 13.125%.

It should be mentioned that the current deemed deduction will stay at 37.5% only through December 31, 2025. For the years after December 31, 2025, the deemed deduction will go down to 21.875%. This means that the effective tax rate on FDII will be 16.406%. Unless the law changes (which is possible), non-FDII corporate income will continue to be taxed at 21%.

FDII Export Incentive: Net Impact of the Deemed Deduction

Based on even just this general analysis of FDII, we can understand why the FDII export incentive is such an important part of the US corporate tax law. First, in most cases, the FDII deduction is a disincentive to shift foreign-source income from a US corporation to a controlled foreign corporation (“CFC”). A CFC may be subject to taxation under two different anti-deferral regimes, Subpart F or GILTI tax. Subpart F income will just force the recognition of foreign income by the CFC right away without any deemed deduction (i.e. this would be the worst-case scenario).

If the Subpart F rules do not apply, then the corporation may be subject to the GILTI tax. It is true that the effective corporate tax rate for GILTI, after its current 50% deemed reduction is only 10.5%. Nevertheless, FDII”s effective tax rate of 13.125% significantly reduces the difference from that what it would have been otherwise (i.e. between 10.5% and 21%). Moreover, when one factors in the additional administrative, US tax compliance and local tax compliance expenses, this difference may become nonexistent.

Second, the FDII deemed deduction makes US corporations more competitive worldwide, because they may now realize a higher profit margin even if they lower the prices for their products and services sold overseas.

Contact Sherayzen Law Office for Professional Help With FDII Calculations and International Business Tax Planning

If your business engages in selling products or services overseas, there are opportunities for international business tax planning from US perspective. Contact Sherayzen Law Office to take advantage of these opportunities through professional, creative and ethical tax help.

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