Daily Tax Update - September 24, 2014: PFIC Guidance Expected Within Six Months

PFIC Guidance Expected Within Six Months:  At a Practicing Law Institute seminar in San Francisco on September 22, Douglas Poms, senior counsel, Treasury Office of International Tax Counsel, announced that Treasury expects to issue guidance within the next six months on the passive foreign investment company (PFIC) regime.  According to Poms, the guidance will address whether the same exceptions that apply to foreign personal holding company income under subpart F also apply to passive income under the PFIC regime.  Additionally, the guidance may include modifications to the PFIC related-party look-through rule by applying modified foreign tax credit policies to determine the proper allocation of income between the related parties.  The guidance will also examine foreign companies that separate their passive and active activities into separate subsidiaries and therefore trigger PFIC status, Poms said. 

Stack Comments on BEPS Proposals:  Commenting on the OECD BEPS proposals at the International Tax Review’s Global Transfer Pricing Forum in Washington, DC on September 23, Robert Stack, Treasury deputy assistant secretary (international tax affairs), suggested that the U.S. may not enact regulatory changes in response to the OECD recommendations.  Stack emphasized that the U.S. position remains focused on the arm’s-length standard.  He commented that many prefer transfer pricing to be based on people functions with readily identifiable jurisdictions, as opposed to assets and risks, which are highly mobile.  In response to the OECD Action 8 draft, which is directed at curbing profits reported to cash box companies in low-tax jurisdictions, Stack noted that the idea that a cash box is not entitled to a return is inconsistent with the arm’s-length standard.  He further questioned if returns to the cash box are reduced, where will the return go?  Stack stated that “the United States says it goes to where the people functions are the high-value people functions.  That, we think, often comes back to the United States, where all of this development is done, where the strategic decisions are made.”