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should apply to digital businesses that derive
significant value from U.K. user participation and
to revenue relating to U.K. users, according to the
new paper. This would include revenue from
online advertising targeting U.K. users of an
online platform, regardless of the physical
location of the business, the paper says.
Using gross revenue as the tax base could
cause problems given the differences in
taxpayers’ profitability, according to Bill Dodwell
of Deloitte. “The U.K. continues to support the
EU’s position that a tax on sales is needed in the
interim, pending broader change. This remains
challenging, since business profitability varies
wildly, and a new tax could apply to large loss-
making businesses,” he said. “There are examples
of some businesses that have been forced to
withdraw from markets due to high taxes on
sales.”
The paper says the government is aware of the
potential distortions associated with using gross
revenue as a proxy for taxable profit, including
the imposition of tax on loss-making businesses.
To mitigate these distortions, the paper suggests a
rate set at an appropriate level, a high de minimis
threshold, and the possible inclusion of safe
harbors for businesses with losses or low profit
margins. The government will continue exploring
whether and in what circumstances revenue
could be offset by passthrough costs, including
advertising revenue passed on to third-party
websites.  deference, the court held that Treasury’s
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UNITED STATES
Recent Tax Court Case May Confine
Altera to Transfer Pricing
by Andrew Velarde
At least one practitioner is questioning if a
recent Tax Court case upholding the validity of
subpart F regulations might blunt the impact of a
high-profile Tax Court case that invalidated
another set of regs.
The Tax Court in Altera Corp. v. Commissioner,
145 T.C. 91 (2015), invalidated regs that require
participants in qualified cost-sharing
arrangements to share stock-based compensation
costs, finding that they were arbitrary and
capricious.
However, a more recent ruling could be
interpreted to “cabin Altera to the context of
transfer pricing regulations,” according to Jim
Gadwood of Miller & Chevalier Chtd., speaking
at a March 9 Federal Bar Association Section of
Taxation conference in Washington.
In January, the Tax Court in SIH Partners LLLP
v. Commissioner, 150 T.C. No. 3 (2018), upheld the
validity of section 956 regulations and found that
a partnership had income inclusions under
sections 951 and 956 from two controlled foreign
corporations that guaranteed obligations for a
U.S. entity.
Finding that the rules were entitled to Chevron
procedures in promulgating the rules satisfied the
general requirement to provide an explanation
that will enable the court to evaluate Treasury’s
rationale at the time of decision and were not
arbitrary or capricious. The decision makes only
two brief citations to Altera without any detailed
discussion of the earlier case.
The court in SIH Partners was also quick to
differentiate its facts from a seminal case in the
administrative law world — Motor Vehicle
Manufacturers Association v. State Farm Mutual
Automobile Insurance Co., 463 U.S. 29 (1983) —
wherein the Supreme Court established that
review of arbitrariness requires a “hard look” to
determine if the agency engaged in reasoned
decision-making.
“Treasury’s rulemaking in this case differs
fundamentally from the agency action in State
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Farm because Treasury’s decision did not (and
could not) purport to rely on findings of fact,” the
court in SIH Partners held. “Treasury’s actions
promulgating the rules for pledges and
guaranties reflect at most the implementation of a
policy judgment. The administrative record
reflects that no substantive alternatives to the final
rules were presented for Treasury’s consideration
during the rulemaking process,” it said.
“The court in SIH [Partners] seemed to be of
the view that State Farm is a more strict level of
scrutiny than what is ordinarily required under
the Administrative Procedure Act,” Gadwood
said, noting that the rationale was not entirely
clear to him.
The future fallout from Altera — on appeal
before the Ninth Circuit — has been the subject of
much debate, and it has already affected
rulemaking.  the temporary suspension of withholding
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Partnership Dispositions’ Withholding
Suspension to Be Expanded
by Andrew Velarde
The recent suspension of new withholding
obligations enacted by the Tax Cuts and Jobs Act
(P.L. 115-97) for dispositions of partnership
interests by a foreign person will be expanded to
non-publicly-traded partnerships as well.
According to Brenda Zent, special adviser,
Treasury Office of International Tax Counsel,
Treasury is working on a second notice to provide
the expanded relief, though she did not provide a
timeline for its release. Zent spoke at a March 9
Tax Law Conference in Washington sponsored by
the Federal Bar Association Section on Taxation.
In Notice 2018-8, 2018-4 IRB 1, released
December 29, Treasury and the IRS announced
obligations under new section 1446(f) for
dispositions of some publicly traded partnership
(PTP) interests. The notice said that regulations or
other guidance will be issued on how to withhold,
deposit, and report the tax withheld under section
1446(f) for those dispositions. Notice 2018-8
responds to the new 10 percent withholding tax
applicable on amounts realized from the
disposition of a partnership interest by a non-U.S.
person under the TCJA and was seen as a
necessary reprieve by practitioners.
The upcoming notice will be limited to issues
under section 1446 rather than substantive issues
under section 864, according to Zent. The TCJA
also amended section 864(c) so that if a foreign
person owns an interest in a partnership that is
engaged in a U.S. trade or business, gain or loss on
the sale or exchange of such interest is treated as
effectively connected with the conduct of such
trade or business to the extent it does not exceed a
specified amount.
In separate letters, both the Securities Industry
and Financial Markets Association and PwC
previously requested the expansion for
nonpublicly traded partnerships.
“Many of the challenging issues described in
the notice as affecting transferees and PTPs in
applying new section 1446(f) also affect
nonpublicly traded partnerships,” the PwC letter
states. “In order to ensure an orderly, effective,
and efficient implementation of the new
TAX NOTES INTERNATIONAL, MARCH 19, 2018

withholding rules for nonpublicly traded
partnership interests there is also need for
regulations or other guidance.” Both letters said
guidance is needed for numerous issues,
including those related to certification and
documentation, withholding, and intermediaries
and agents.
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TCJA Vindicates IRS’s Transfer Pricing
Positions, Official Says
by Ryan Finley
Amendments made by the Tax Cuts and Jobs
Act (P.L. 115-97) confirm that the IRS’s long-
 standing views on the definition of intangibles
and selecting transfer pricing methods were
correct all along, according to an IRS official.
Speaking March 9 at the Federal Bar
Association Section on Taxation Tax Law
Conference in Washington, Robert Kelley,
assistant to the Branch 6 chief of the IRS Office of
Associate Chief Counsel, said the TCJA’s
amendments to sections 482 and 936(h)(3)(B) will
not require any major changes to the section 482
regulations. According to the TCJA conference
report, the amendments “confirm the authority to
require certain valuation methods” and “do not
modify the basic approach of the existing transfer
pricing rules with regard to income from
intangible property.”
“I think the codification is pretty clearly a
vindication of the pricing approaches we’ve been
taking for a number of years now,” Kelley said. “I
think, just like what Congress did with the
definition of [intangibles] in [section] 936, these
were really clarifications of what existing, prior
law really was, and so I think from our
perspective this is clearly a confirmation of what
we’ve already been doing.”
Although the 1994 update to the section 482
regulations states that the IRS may price
transactions based on the realistic alternatives
available to the taxpayer or aggregate multiple
transactions if that provides the most reliable
result, the IRS has failed to persuade the Tax
Court to apply these rules in Veritas Software Corp.
v. Commissioner, 133 T.C. 297 (2009), and
Amazon.com Inc. v. Commissioner, 148 T.C. No. 8
(2017).
Kelley said the IRS received a boost from the
Tax Court’s decision in Wycoff v. Commissioner,
T.C. Memo. 2017-203, in which the court accepted
the IRS’s application of the comparable profits
method over the taxpayer’s combination of
transactional approaches. Like the realistic
alternatives principle and aggregation rules, the
profit-based CPM was introduced by the 1994
regulations. The IRS had been unsuccessful in
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court in many of its earlier efforts to apply the
CPM, including in Medtronic v. Commissioner, T.C.
Memo. 2016-112.
“Over the years we’ve gotten arguments from
taxpayers in controversies that for some reason or
another the CPM is not a good method or that
courts don’t like or have never accepted the CPM,
despite, of course, the fact that the CPM is used in
a majority of [advance pricing agreements], and
despite what our regs say about it and what the
OECD [transfer pricing guidelines] say,” Kelley
said. “I think Wycoff is a good rebuttal to those
arguments that taxpayers have made.”
Because the amendments clarify rather than
change existing law, any post-TCJA revisions to
the section 482 regulations will be minor.
“Any time a statute changes in this way, it
might make sense to sort of do a housekeeping or
a cleanup type change to the corresponding
regulations, though I would make the point that
in our view, the definition of intangible under
current [reg. section 1.482-4] is broad enough to
include items that Congress now decided
specifically to list out in the statute,” Kelley said.
“I’d also note that we believe that the flush
language of the catchall provision, even in current
[reg. section 1.482-4(b)], is extremely broad, so
this would be more sort of a housekeeping type of
change, but we’re certainly considering it.” 
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Action 2 Report Instructive for
Hybrid Dividend Rules
by Alexander Lewis
The action 2 report from the OECD’s base
erosion and profit-shifting project may be
instructive for taxpayers attempting to interpret
the phrase “other tax benefit” under the hybrid
dividend rules in IRC section 245A.
Speaking March 9 on a panel on international
tax developments at the Tax Law Conference of
the Federal Bar Association Section on Taxation in
Washington, Doug Poms, Treasury international
tax counsel, said taxpayers evaluating whether a
payment from a controlled foreign corporation to
a U.S.-based C corporation is a hybrid dividend
under section 245A(e) because of the CFC’s receipt
of a deduction or other tax benefit for the
dividend in a foreign jurisdiction may find it
helpful to review the BEPS action 2 report on
hybrid mismatches. Poms has emphasized this
point in the past.
“The statute definitely contemplates a
deduction or other tax benefit in a foreign
jurisdiction. We’re going to have to interpret what
‘or other tax benefit’ means,” Poms said. “The
issue was also considered in the action 2 BEPS
hybrids work. In developing the hybrid rules, the
[action 2] report says the [“other tax benefits”]
include amounts that are equivalent to the
deduction and should include any tax relief that is
economically equivalent to a deduction, such as a
tax credit for dividends paid.”
Instead of focusing on interpreting the hybrid
rules, some taxpayers are looking to avoid the
rules entirely, said Carol Tan, IRS special counsel.
“In terms of BEPS action item 2, I think one of the
things we anticipate is that with these rules it will
be a deterrent. I think we’re going to get into
issues as to whether something falls within the
rule or it doesn’t in terms of the technical
interpretations, but we have also been hearing
questions about unwinding structures that have
hybrid instruments in place,” she said.
Tan said IRS officials are evaluating questions
of interpretation in other areas of the Tax Cuts and
Jobs Act as well. One such area is the new foreign-
derived intangible income provisions. Tan said
Treasury has received several questions regarding
TAX NOTES INTERNATIONAL, MARCH 19, 2018

what level in group structures, including tiered
partnerships and consolidated groups, is eligible
for the deduction. She added that clarifying the
foreign-derived intangible income’s foreign-use
requirement is also a priority for the agency. 
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Participation Exemption System
Changes Paradigm for CFC Spinoffs
by Emily L. Foster
The transition to a territorial international tax
system under the Tax Cuts and Jobs Act raises
questions concerning the device and business
purpose requirements for tax-free spinoffs
involving controlled foreign corporations.
The new participation exemption system
under the TCJA (P.L. 115-97) with a dividends
received deduction creates a paradigm shift that’s
contrary to the underlying premise of section 355
if dividend treatment is now “not such a bad
thing,” Robert Wellen, IRS associate chief counsel
(corporate), said March 9 during the Federal Bar
Association Section on Taxation conference in
Washington. The appropriateness of that section’s
principal focus — whether a distribution would
be taxed as a dividend — and the traditional
device test in the international context are now
being questioned, he said.
A corporation may generally distribute the
stock of a controlled corporation to its
shareholders without recognizing gain or loss if
the requirements of section 355 are met. The
device requirement for those tax-free spinoffs
prevents corporations from structuring
transactions primarily for the purpose of
distributing the company’s earnings to
shareholders at favorable tax rates rather than
having the distributions treated as section 301
dividends that would be taxed at higher rates.
The participation exemption under section
245A provides a 100 percent dividends received
deduction for the foreign-source portion of
dividends paid to U.S. corporate shareholders
owning 10 percent or more of the foreign payer
corporation for longer than a year.
Jay M. Singer of McDermott Will & Emery
said the traditional thinking that companies may
structure spinoff transactions to convert dividend
income to capital gains may no longer apply in the
context of CFC spinoffs because dividends paid to
U.S. corporate shareholders would not be subject
to tax while the capital gains on the disposition of
CFC stock would still be taxed.
Section 1248 rules also operate differently
under a participation exemption system because
those rules generally prevent companies with
significant earnings and profits from “escaping
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taxation on the disposition of CFCs” by recasting
capital gains as dividends, Singer said. That
regime “has gone from something [designed] to
protect the fisc to something that is a friend of the
taxpayer” because the deemed dividend qualifies
for the section 245A deduction, he said.
Now that deemed dividends paid from CFCs
to U.S. corporate shareholders are “generally
good for U.S. taxpayers rather than bad,”
practitioners are wondering how the IRS will
apply the device requirement in the context of
CFCs, Singer said.
The IRS has given this some thought, but “it’s
far too early for us to have reached any
conclusions [on] how we might adapt these
rules,” Wellen said. Under final regulations that
have been in place for a long time, “if a dividend
is subject to a 100 percent or 80 percent dividends
received deduction, then ordinarily the
transaction is a device. That kind of points the
way to looking at this,” he said, noting that there
aren’t any rules for dealing with the new
international regime.
Wellen suggested that whether “old-
fashioned device thinking would be appropriate
is going to be fact-intensive,” which will put more
pressure on the IRS’s letter ruling process to
determine whether consequences of a taxable
section 301 dividend are in fact benign or whether
in some cases “other consequences might be less
friendly.”
Wellen said he doesn’t envision the IRS
“reaching a systematic global view of the
consequences of these changes for quite some
time,” but the agency is “open for business” on
letter rulings that could involve device issues. The
IRS will need to understand how all the moving
parts in the international tax provisions work in a
taxpayer’s deal before it “could make an intelligent
assessment of what an alternative [section] 301
distribution might look like,” he added.
In May 2017 Wellen said the IRS will only rule
on significant legal issues pertaining to the device
requirement and that generally questions
involving the ambiguity of the good and bad
device factors would be legal issues the IRS would
be interested in.
Sandwich Spinout: Good Business Purpose?
Multinationals have used transactions to
unwind so-called sandwich structures in which
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either a foreign entity is sandwiched between two
U.S. entities or the other way around, and the
entity at the bottom of the structure is spun off to
the parent.
Singer explained that the sandwich structure
generally arises when a U.S.-parented corporation
acquires a foreign-parented company that has a
U.S. subsidiary, which can result in “an
inconvenient and inefficient structure.” Thus,
corporations then look for a way to combine all
the U.S. subsidiaries into a single consolidated
group.
According to Singer, it has been difficult for
practitioners to write opinions for taxpayers that
their transaction — spinning out of a sandwich —
meets section 355 business purpose requirements
because the U.S. tax benefits were so significant.
But under the TCJA, the stakes — the tax
inefficiencies of the sandwich structure — are
dramatically reduced by the participation
exemption system, which raises the question
whether the IRS would view the section 355
business purpose hurdle differently for those
transactions in which the corporation is trying to
consolidate all its U.S. subsidiaries into a single
group.
Wellen agreed that the stakes involved in
spinning out of a sandwich qualifying under
section 355 are likely to be reduced compared
with pre-TCJA scenarios, but said that may not
necessarily affect the narrow question of business
purpose. He noted that whether “joining a
consolidated group is the kind of business
purpose that [section] 355 is intended to cover” is
something the IRS is going to have to think about.
If a taxpayer has an important tax and nontax
business purpose for a section 355 spinoff but
each is insufficient by itself to do the transaction,
Wellen said that could be a legal issue that the IRS
might consider ruling on. He emphasized that
generally the IRS resists evaluating a taxpayer’s
business purpose and that these “novel
questions” would have to go through an internal
challenge process.
In August 2016 the IRS announced in Rev.
Proc. 2016-45, 2016-37 IRB 344, that it would rule
on significant legal issues not inherently factual in
nature pertaining to whether a tax-free section 355
spinoff is motivated by a nonfederal tax corporate
business purpose. 
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IRS Floats Release of Tax Data to The proposed regulations would add the State
State Department Contractors Department to the list of agencies whose officers
and employees may disclose returns and return
by J.P. Finet information to any person, or to an officer or
The IRS could release the tax information of employee of that person, for tax administration
individuals with seriously delinquent debts to purposes in connection with a written contract for
contractors working with the State Department to the acquisition of property or services, the IRS
approve or deny passports under new proposed said. 
regulations.
“The purpose of these regulations is to allow
the Department of State to share tax return
information with its contractors for tax
administration purposes,” the IRS said in the
proposed regs (REG-129260-16). The State
Department is responsible for meeting standards
for safeguarding the information, it said.
Under the Fixing America’s Surface
Transportation (FAST) Act, the State Department
is generally required to deny or revoke the
passports of individuals certified by the IRS as
having seriously delinquent tax debts. The act
generally defines this as an unpaid, legally
enforceable individual federal tax liability of more
than $50,000. Additionally, the individual’s
administrative rights regarding a notice of lien
must have been exhausted or lapsed, or a levy
must have been made.
Some observers have predicted that the
statute will lead to litigation.
While the FAST Act authorizes the IRS to
disclose these delinquent taxpayers’ information
to State Department officers and employees, the
State Department often uses contractors — who
do not qualify as officers or employees — to carry
out its responsibilities regarding passports, the
regs note. However, the IRS said section 6103(n)
authorizes the disclosure of returns and return
information to any person for the purpose of tax
administration in connection with a contract for
services.
Treasury regulations provide that officers and
employees of the Treasury Department, a state tax
agency, the Social Security Administration, or the
Justice Department are authorized to disclose
returns and return information to an officer or
employee for the purposes of tax administration,
the IRS said. With written authorization from the
IRS, those agencies may disclose information to
their agents or subcontractors to the extent
necessary to provide services.

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AICPA Lobbying for Downward percent of the stock of a foreign subsidiary of the
Attribution Transition Tax Relief same foreign parent and converting the foreign
subsidiary into a CFC.
by Andrew Velarde
Practitioners have previously questioned how
Recent changes to downward attribution rules the repeal would affect the definition of a
that treat some foreign corporations as controlled specified foreign corporation and have criticized
foreign corporations require immediate relief previous guidance on the transition tax for its
from the transition tax, according to the American failure to address larger concerns surrounding the
Institute of Certified Public Accountants. repeal. Treasury has acknowledged that whether
In a March 13 letter to the IRS and Treasury, it has the authority to essentially turn on section
the organization asked the government to use its 958(b)(4) for some transactions in light of the
authority under section 965(o) to grant relief from TCJA is “a good question,” and has sought public
the income inclusion. The relief would exclude input for how to address the issue.
from the definition of a specified foreign The AICPA argued that income inclusion
corporation a foreign corporation that is included would be inconsistent with the intent of section
only because of the downward attribution rules of 965 and the repeal of section 958(b)(4). It cited the
section 318(a)(3). conference report’s explanation for the provision
For purposes of determining a U.S. as a way “to render ineffective certain
shareholder’s section 965 inclusion under the transactions that are used as a means of avoiding
transition tax, a specified foreign corporation is the subpart F provisions,” like de-control
defined as any CFC or foreign corporation with a transactions that would convert a former CFC to a
domestic corporation as a U.S. shareholder. non-CFC despite continuous U.S. shareholder
“Interpreting the plain language of the ownership. It also cited the Senate Finance
relevant code sections does not provide the Committee explanation that the repeal provision
intended result of the [Tax Cuts and Jobs Act], was not intended to treat a foreign corporation as
resulting in an increasing number of taxpayers a CFC because of ownership attribution under
falling under the definition of a U.S. shareholder section 318(a)3) to an unrelated U.S. person to the
of a CFC greater than anticipated by Congress,” U.S. shareholder of the foreign corporation. 
the letter states. “In order to address this issue, a
technical fix to the statutory language is likely
required since the IRS does not appear to have
sufficient regulatory authority to apply a broad
solution. However, the AICPA believes that the
grant of authority in section 965(o), which
provides that the ‘Secretary shall prescribe such
regulations or other guidance as may be necessary
or appropriate to carry out the provisions of this
section’ (emphasis added), is sufficient to allow
the IRS to implement our recommended targeted
relief.”
Section 958(b) provides rules for determining
constructive stock ownership of a foreign
corporation for subpart F purposes. In its
transition tax provision the TCJA repealed section
958(b)(4), which had provided that downward
attribution was not to be applied so that a U.S.
person would be regarded as owning stock
owned by a non-U.S. person. As the AICPA noted,
the repeal could result in a foreign-parented U.S.
subsidiary being treated as the owner of 100

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IRS Explains How Section 965 Reporting
Affects 2017 Tax Returns
by Alexander Lewis
The IRS has released a list of FAQs for
taxpayers affected by section 965 that explains
how they should report their section 965 liabilities
and outlines several elections they can make
under section 965.
The FAQ explains which taxpayers are
required to report section 965 income: any person
that is a U.S. shareholder, either directly or
indirectly as a result of ownership through a
passthrough entity, in a deferred foreign income
corporation (as defined in section 965(d)).
Affected taxpayers should report section 965
income as reflected in the table included in
Appendix: Q&A2 to the FAQ. The FAQ also notes
that affected taxpayers must include with their
returns an IRC 965 Transition Tax Statement, and
lists all the information that must be included in
the statement. A model statement is included in
Appendix: Q&A3.
Available elections — like the election to pay
the transition tax over eight years — and who can
make them under section 965 are also explained.
The FAQ says that Treasury and the IRS will issue
more guidance before April 2 regarding the
availability of elections to direct and indirect
partners in domestic partnerships, shareholders
in S corporations, and beneficiaries in other
passthrough entities that are subject to section
965. The FAQ also lists the additional information
that domestic partnerships, S corporations, and
other passthrough entities are required to report
to their partners, shareholders, or beneficiaries in
connection with section 965.
“A taxpayer should make two separate
payments as follows: one payment reflecting tax
owed without regard to section 965 of the Code,
and a second, separate payment reflecting tax
owed resulting from section 965 of the Code,” the
FAQ says.
The IRS also requests in the FAQ that
taxpayers filing Form 1040 electronically wait
until April 2 to file so the agency can make
necessary system changes.  attributed the reduced importance of the OVDP in
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IRS Offshore Voluntary Disclosure
Program to Close in September
by Nathan J. Richman
The IRS has announced that it will close its
offshore voluntary disclosure program on
September 28.
In general, the OVDP frees previously
noncompliant taxpayers from the risk of criminal
prosecution and other potential penalties,
including the foreign bank account report
sledgehammer. In exchange, taxpayers entering
the program must cooperate and pay taxes,
interest, and penalties, including accuracy-related
penalties, failure-to-file penalties, and a
miscellaneous penalty of 27.5 percent or 50
percent of account value.
Released on March 13, the newly updated
FAQs and announcement both make clear that the
streamlined filing procedures for taxpayers
whose noncompliance has not been willful does
not stop with the end of the OVDP. However, the
announcement does warn that the streamlined
program may close in the future as well.
In the announcement, the IRS notes that the
number of taxpayers coming in through the
OVDP has declined in recent years, with only 600
in 2017. Since 2009 the OVDP has resulted in over
56,000 disclosures that have included taxpayers
paying $11.1 billion in taxes, penalties, and
interest, according to the announcement.
According to the updated FAQs, a complete
voluntary disclosure must be postmarked by
September 28, 2018, to qualify for the OVDP.
“Partial, incomplete, or placeholder submissions”
will not hold the door open, the FAQs note.
Mark E. Matthews of Caplin & Drysdale Chtd.
said that the recent, precipitous decline in OVDP
submissions makes the end of the program
unsurprising, especially since the IRS previously
warned that the OVDP would eventually end.
Barbara T. Kaplan of Greenberg Traurig LLP
said, “Those with continuing criminal tax
exposure should act now to come into compliance
before this program is discontinued.” She
part to the IRS’s access to data from the Foreign
Account Tax Compliance Act.
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Charles Bruce, legal counsel to American passport revocation, and the last call for OVDP
Citizens Abroad and an attorney with Bonnard submissions, those taxpayers will have to
Lawson-Lausanne, said, “There are many people carefully consider how to move forward, he said,
who still have not come forward and, in my view, adding that tragically the options under
many of these cannot go the route of the consideration will include renouncing their U.S.
streamlined filing compliance procedure because citizenship.
they cannot swear to being ‘nonwillful.’” Andrew Velarde contributed to this article. 
Jeffrey A. Neiman of Marcus Neiman &
Rashbaum LLP told Tax Analysts, “By closing
OVDP, the IRS is not shutting the door on those
with undeclared offshore assets. There are still
other means for taxpayers to come forward.”
Kaplan noted that both the streamlined
program and the standard voluntary disclosure
program included in the Internal Revenue
Manual remain after the announcement.
The updated FAQs include an opening for
practitioners and taxpayers to send feedback and
suggestions for the future of voluntary
disclosures to the IRS Large Business and
International Division.
“I think it is encouraging and good practice
for the IRS that they are seeking practitioner
comments,” Matthews said. “We appreciate that
opportunity.”
In the past couple of years, practitioners have
been raising questions about the costliness of the
OVDP.
Neiman, a former tax prosecutor, said he
thought the OVDP was flawed. “Under OVDP,
the penalty regime just became too rigid and too
excessive,” he said, adding that he hopes the IRS
will approach future disclosures more practically.
As a result of a 2015 IRS memorandum (SBSE-
04-0515-0025) that generally limits the penalty for
willful failure to file FBARs to 50 percent of the
high value of the account during open years, the
closure will likely have limited impact on those
taxpayers who failed to file or filed false FBARs,
Matthews said. The primary effect of the OVDP
closure may be to put the sections 6663 and
6651(f) fraud penalties and other, non-FBAR
information return penalties in play, he added.
Bruce said that many of the taxpayers who
still need to come into compliance are Mexican
and Canadian so-called accidental Americans
who may not have fully appreciated their U.S. tax
filing obligations. Between the FATCA
information disclosures, the possibility of

1234 TAX NOTES INTERNATIONAL, MARCH 19, 2018

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Corporate Tax Reform Winners and
Losers
by Amanda Athanasiou
Forecasts of foreign-based multinationals,
including some that inverted in recent years,
suggest that their tax rates may not be helped, and
are sometimes hurt, under U.S. tax reform. Their
U.S. counterparts are reporting better results.
Foreign-owned companies were treated
especially harshly by U.S. tax reform, Michael
Layden of Deloitte said during a February 27
webcast on U.S. tax reform and corporate growth
strategies sponsored by Deloitte. Foreign
multinationals have done an exceptional job of
stripping the U.S. tax base through interest
expense deductions and other base-eroding
payments, so the new rules hit those companies
especially hard, he said.
“I think the expectation is that if you’re a
foreign multinational, you’re likely to pay more
tax in the U.S. going forward and you’ll have to
work much harder to achieve a similar result,”
Layden said.
Higher Tax Rates for Foreign Multinationals
Allergan PLC, which moved its tax home out
of the United States when it was acquired by
Ireland’s Actavis PLC in 2015, reported a 12.6
percent effective tax rate for 2017, which it expects
will increase to roughly 14 percent in 2018,
“reflecting the full impact from U.S. tax reform,”
outgoing CFO Maria Teresa Hilado said during a
February 6 earnings presentation.
“Now that corporate tax reform has passed,
the advantages of being an inverted company are
less obvious,” said Jami Rubin of Goldman Sachs,
who asked CEO Brenton Saunders if he had
considered “reinverting.” “Certainly, there would
be a great PR advantage, I would think, to moving
back,” Rubin said. “No, we’re an Irish company;
we’re going to stay in Ireland,” Saunders replied.
Despite speculation that mergers and
acquisitions will pick up now that U.S. tax reform
has passed, Saunders said Allergan will be taking
a break from its stepping-stone M&A strategy.
“It’s most likely that 2018 will be a relatively
boring year for Allergan on the M&A front,” he
said.
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Allergan recorded an overall benefit of $2.8
billion related to the Tax Cuts and Jobs Act (P.L.
115-97), comprised of a $730 million tax expense
payable on deemed repatriated earnings and a
$3.5 billion reduction of U.S. deferred tax
liabilities.
Johnson Controls’ CFO Brian Stief said he
expects a 14 percent effective tax rate in fiscal 2018
and a rate of between 16 and 18 percent in fiscal
2019, “based upon the effective dates of certain
provisions of the new legislation.” Johnson
Controls inverted to Ireland in 2016 through its
€15 billion acquisition of Tyco International.
U.S. tax reform was cited by the company’s
CEO, George Oliver, on March 12 as among the
factors to be considered as it contemplates selling
or spinning off its auto battery business. Johnson
Controls recorded a net tax charge of $200 million
for the first quarter of 2018, comprised of a $100
million benefit related to the remeasurement of
U.S. deferred tax liabilities offset by a repatriation
charge of $300 million.
Eaton Corp. PLC said it expects a tax rate of
between 13 and 15 percent for 2018 — an increase
over its rates of 11.3 percent in 2017 and 9.4
percent in 2016. “We expect our tax rate for 2019
onwards to stabilize in the 14 percent to 16 percent
range,” CEO Craig Arnold said February 1.
Formerly Ohio-based Eaton Corp. acquired
Dublin’s Cooper Industries in a $13 billion
transaction in 2012.
Eaton issued guidance December 28, 2017,
reflecting an anticipated one-time charge from the
TCJA of between $90 million and $110 million in
the fourth quarter of 2017, but company
executives announced February 1 that U.S. tax
reform has instead yielded a $62 million benefit
for the company. “The adjustment of our deferred
tax assets and liabilities to the lower tax rate
created $79 million of income, which was partially
offset by a $17 million charge for the mandatory
repatriation tax,” Arnold said.
Eaton CFO Rick Fearon said that although an
analyst had suggested that the company’s tax bill
might require Eaton to change its manufacturing
footprint, “we don’t believe that there will be any
need to make any significant changes as a result of
the tax bill.”
Executives of Canada-based Valeant
Pharmaceuticals said February 28 that they expect
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a 13 percent effective tax rate for the company in
2018, roughly the same as 2017’s rate. But “net-net,
the impact of U.S. tax reform on 2018 is that we
will pay a bit more in U.S. cash taxes,” CFO Paul
Herendeen said during a year-end earnings
presentation.
Valeant has “a very good tax structure, which
enables us to convert a large proportion of our
earnings to cash, which is a good thing when
you’re a leveraged company,” Herendeen said.
Valeant recorded an income tax benefit of $4.1
billion in 2017, attributable primarily to a tax
reorganization effort and benefits from the TCJA,
the company said in a February 28 release.
Mylan NV said it expects its 2018 effective tax
rate to fall between 17.5 and 19 percent — not
necessarily an improvement over its 18 percent
tax rate for 2017. “For 2018, we do expect the
potential slight upward pressure on our adjusted
effective tax rate due to the implementation of the
tax reform changes” and changes to the
company’s mix of geographic profits, CFO
Kenneth Scott Parks said during Mylan’s fourth-
quarter earnings presentation February 28.
Medtronic, which redomiciled in Ireland
through its acquisition of Covidien PLC in 2015,
reported a tax rate of 14.6 percent for the first
three quarters of fiscal 2018 and said it expects its
fourth-quarter tax rate to be between 15 and 16
percent. “Our initial estimates indicated that we
would benefit from a slightly lower effective tax
rate beginning in fiscal year 2019,” CFO Karen
Parkhill said during a February 20 earnings call.
Medtronic reported a $2.2 billion tax charge
related to the transaction tax on accumulated
income.
“Medtronic has been advocating for U.S. tax
reform for many years, and we are pleased that
the final package included the ability to gain
access to our future earnings outside the United
States,” Parkhill said. “We do have $14 billion of
cash on our balance sheet, and we have access to
the vast majority of that post-tax reform,” she
said, adding that the larger benefit of the new
rules will be the company’s ability to access
ongoing cash generation in the future.
Some foreign-based non-inverters — in
particular, British pharmaceutical company
GlaxoSmithKline and French pharmaceutical
Sanofi — fared a little better in the tax rate delta
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department. U.S. tax reform is expected to benefit
GlaxoSmithKline’s effective tax rate by 2 to 3
percentage points, CFO Simon Dingemans said
during the company’s February 7 earnings call.
The company’s expected effective tax rate for 2018
and subsequent years is 19 to 20 percent, he said.
Dingemans said U.S. tax reform will also help
stabilize the company’s tax rate, which was
previously expected to rise over time. “The lower
tax rate will increase our flexibility to support our
capital allocation priorities, particularly pharma
R&D,” he said. An increase in the after-tax
valuations of GlaxoSmithKline’s U.S. businesses
was also attributed to U.S. tax reform.
The impact of the tax legislation’s changes,
particularly in the U.S., will allow Sanofi to adjust
its expected effective tax rate for 2018 to around 22
percent, down from a rate of 23.5 percent in 2017,
according to company CFO Jérôme Contamine.
“In tax, there are a lot of moving pieces across the
world. Of course, the most important is the U.S.,
but I will not minimize the evolution of the tax
rate in France either,” Contamine said.
France has announced plans to reduce its
corporate tax rate from 33.33 percent in 2017 to 28
percent by 2020. The government’s draft budget
for 2018, released in September 2017, proposed
cutting the rate further: to 25 percent by 2022.
U.S. Pharmaceutical Companies
The new tax code addresses the historical
competitive disadvantage of U.S.-based
multinationals in terms of tax rates and
international access to capital, and helps level the
playing field for U.S. companies, Pfizer CEO Ian
Read said during the company’s fourth-quarter
2017 earnings call January 30. Read has long been
one of the industry’s most vocal advocates for U.S.
tax reform.
Thanks to the new tax rules, Pfizer plans to
invest approximately $5 billion in capital projects
in the United States, including the strengthening
of its domestic manufacturing presence,
according to Read. The new corporate tax rate
reduced the company’s 2017 provision for taxes
by $10.7 billion, primarily because of the
remeasurement of deferred tax liabilities, CFO
Frank D’Amelio said.
Pfizer said it expects to repatriate the majority
of its offshore cash stockpile, which is one of the
TAX NOTES INTERNATIONAL, MARCH 19, 2018

largest among U.S. multinationals, in 2018. The
company anticipates a repatriation tax bill of $15
billion, according to a January 30 release.
D’Amelio said tax reform has not increased the
chances that Pfizer will spin off its essential health
business.
D’Amelio said Pfizer’s effective tax rate is
expected to be approximately 17 percent in 2018,
which is significantly lower than the
approximately 23 percent it had anticipated for
2017. While Pfizer does business in over 150
countries, “the major part of business is inside the
U.S.,” D’Amelio said.
Tax reform doesn’t fundamentally change
how the company views M&A, Read said, adding
that he expects company valuations to change as
the premiums for tax advantages of some
companies disappear. “We’ll continue to look at
M&A from the point of view of value for our
shareholders, and we’ll be directed by the science
and the opportunities,” he said.
Johnson & Johnson’s M&A strategy will also
stay consistent post tax reform, according to CEO
Alex Gorsky. Tax reform “helps make us more
competitive, particularly on an international level
because now we have greater flexibility on how
we can access that cash,” he said during a January
23 earnings presentation.
CFO Dominic Caruso said roughly $12 billion
of Johnson & Johnson’s$16 billion in offshore cash
will be repatriated immediately. The company’s
TCJA charge was $13.6 billion. Its expected
effective tax rate for 2018 of 16.5 to 18 percent
doesn’t differ significantly from its 2017 rate of
17.2 percent.
Gilead Sciences reported a $5.5 billion charge
in the fourth quarter of 2017 related to the TCJA.
The company said it expects a 21 to 23 percent tax
rate for 2018, down from its 2017 rate of 24.5
percent. “Tax reform will have a positive impact
on Gilead’s earnings by lowering our global
effective tax rate and increasing our financial
flexibility as a result of our ability to repatriate our
ex-U.S. cash,” CFO Robin Washington said,
adding that the TCJA doesn’t fundamentally
change the company’s capital allocation priorities.
The new tax law will enable Gilead to invest in
R&D, expand U.S.-based manufacturing, and
create U.S. jobs, Washington said. Without the
new law, the company’s tax rate would have crept
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up significantly in 2018, due in part to revenue
increasing in the United States, she added.
Merck’s TCJA-related charge for the last
quarter of 2017 was $2.6 billion, which included
its repatriation tax of $5 billion, offset by
adjustments to deferred tax liabilities. The
company’s tax rate was 19.1 percent for 2017,
down from 22.3 percent for 2016. The company
said it expects an effective tax rate of 19 to 20
percent for 2018.
Asked why the rate is expected to be relatively
flat in 2018 compared with 2017 while Merck’s
peers are expecting lower rates, CFO Robert Davis
said 2017’s rate benefited from some one-time tax
items related to foreign tax credits. “We have a
higher mix of income in the United States relative
to some other companies,” Davis said, adding
that he expects the rate to decline after 2018.
AbbVie, which is still embroiled in lawsuits
concerning the failure of its planned inversion in
2014, said it expects its tax rate to increase from 9
percent in 2018 to 13 percent over the next five
years because of increased domestic income and
investment. “Our business mix will change over
the coming years, most notably with products
driving increased U.S. revenue and income,”
which will drive the tax rate up, CFO William
Chase said during the company’s fourth-quarter
earnings call. Even 13 percent would be an
improvement over the company’s 2017 rate of 18.9
percent.
AbbVie’s repatriation tax was $4.5 billion.
Over the next five years the company will invest
$2.5 billion in capital in the United States,
according to CEO Richard Gonzalez. 
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