Finally final: The US Section 987 FX regs

(upbeat music) Welcome to Cross-Border Tax Talks, where we discuss the latest trends in international taxation, from US tax regulations to the OECD's latest developments. I'm Doug McConey, PWC's International Tax Services Global Leader. PWC's pillar two engine, powered by Beacon, is a game changer for pillar two modeling, provision, and compliance calculations. Built on a graph system, utilizing over 20 years of international tax technology, this cloud-based centralized rules engine is developed by a team of pillar two tax experts from around the globe. PWC's pillar two engine is currently available as a service, and is now available to license. On this week's episode of Cross-Border Tax Talks, we're in Washington, D.C., PWC's policy on demand studio, we're excited to have Rebecca Lee back on the podcast. Rebecca hardly needs an introduction to this podcast, but she's an international tax principle in PWC's Washington National Tax Service in the group, specializing in financial transactions and digital assets. Rebecca, welcome to the podcast. - Hey Doug, thank you for having me. - I sometimes describe you as doing all the areas of tax law and international tax law that nobody else really wants to do. - I built a practice around it. - It's a great business model, I admire it. I admire it. And I also will say before we dive into these 987 rags, that I get more nervous for your podcast with you than any others. And mostly it has to do with the technical material and not you personally, just definitely. - I appreciate that, thank you. - You're welcome. - All right, well, you know I like to, you know how this game works. I like to start off with an icebreaker. I've been, I'm like hooked on a new streaming show. And before I share that, I wanted to know anything you've been watching recently, you know, we're a little past the hour, quite a bit past the holidays at this point, but favorite new show or recommendation for listeners? - It's not necessarily new, but they have a new season coming out. The show Taskmaster, it's a UK based show, and it's a quiz show where they have five comedians on, and they run them through a series of challenges. They're coming up on season 19. I discovered them over the break. And so we started at season one and have been watching them serially. And it's franchised all over the world. So there's like Taskmaster, New Zealand, and Australian, Indonesian, so on. As well as a junior Taskmaster, which I've watched with my son. And so it's just, it's really, really fun. I have to check that out, that's right in my wheelhouse. There's a lot of like shows that just start in the UK. It's amazing, like Kudos to our foreign UK listeners and how much of that TV ends up in the US and also around the globe for that matter. I assume this has nothing to do with Simon Cowell, or Cole Cowell. - No, this is like, they actually, they syndicate the show out on Simon Cowell. No, this is like the brainchild of the guy named Alex Horn, and it is just, it's really funny. They now, like they have their own app, so you can watch all the shows in one spot. You know, mine is, and you may have seen it, 'cause I'm always usually late to the party, is AP Maya. - I'm not sure. - Well, that show, it's Michael Patrick O'Brien, former Sarah and I live, writer, and I think he was a performer for a few years, but really takes me back to my advanced placement high school days, and it is just a really funny show. - I like it 'cause it has Pat and Oswald on it, and Pat and Oswald is able to leave a Mary alum, graduated two years before I did. - Very nice. Okay, well, we're not gonna turn this into a TV review show as much as it's interesting. Make me come turn to the '97 regs, but let's dive in. And well, I guess maybe before we dive in, can you remind our listeners, and you've been through this a number of times of the podcast, but what is Code Section 987? Why does it exist? - So in relevant part for today's discussion, 987 is the Code Section that tells you where you have operations that are run in branch format, or in today's world, also in the form of a disregard entity, that's permitted to adopt a different functional currency than its owner. 987 tells you the currency in which it calculates its income deduction gain or loss, which is in its functional currency, and then provides rules or the statute directs the secretary to provide regulations on how those items create ordinary gain or loss from translation differences from when the income or the assets were acquired or earned versus when they are distributed or remitted from the branch. - All right. So we recently got a set of final regulations, as well as some proposed regulations. We're gonna start from the final regulations, but I will remind listeners and encourage them if they have the heart to do it. To revisit our podcast from this late 2023, doesn't really feel like that long, covering the proposed regulations, and we're gonna be discussing the regulations that were finalized here in 2024. We're also gonna talk, we're gonna go through some of the technical mechanics, we're also gonna talk a little bit about a few minutes on some of the accounting implications of these new rules. So let's start with methods for calculating section 987 gain or loss, if you can kind of remind us of the default and a couple of the elections, and also maybe a little bit of context, 'cause this has certainly been a moving target for almost 30 years now. - Yeah. I mean, this is the first time since we are now passed for many calendar year tax payers, to see effective date. This is the first time we have had final and currently effective 987 regulations since enactment in 1986. - So in our entire career? Is it about about 25 years or so? Wow, yeah, that's right. - It's a big deal. - Yeah, it's a big deal. - And so the 2024 finalized regulations largely retain the structure, mechanics, and general rules of the 2023 proposed regulations, which means to calculate your branch gain or loss that's recognized on remittances. The baseline or default method is something that's referred to as the FEAP method, the foreign exchange exposure pool method, which that's adorable, right? - I know, I feel like they could have done better on the acronym. - But it's just FEAP, it's all FEAP. - All right, it's like PEAPs like that. - That's exactly got it, okay, it's growing on me. - See? - And so what it does is it breaks the world into essentially monetary assets and non-monetary assets. And so your monetary assets think that instruments accounts payable, accounts receivable that are denominated in the functional currency of the branch. Those are remeasured on an annual basis, which actually looks a lot like what financial accounting does. And things that are non-monetary assets, plant, equipment, intangibles, goodwill, those assets are all held at their historic rate. And so the functional equivalent or the impact of that methodology is that you have foreign currency gain or loss on things that had you held them directly, would have produced transactional gain or loss under our foreign currency rules. And that's the default. But the 223 rights proposed and the 2024 regulations finalized, an ability to elect out onto a method which is referred to as the current rate election, which produces a result that's quite similar to the 1991 proposed regulation. So it creates foreign currency gain or loss on everything. Your foreign currency denominated loans and your plant and equipment and everything else, all of the activities. - Which is how we learned it. - That's exactly, that was the rule. And arguably what's in the legislative history. So the concept is they allow you to elect out and there are some limitations that come with making that election. The 223 rights proposed and the 2024 regulations finalized an annual remittance election as well. So if you don't want to keep track of pools year on year, you're allowed to elect to recognize all of your unrealized 987 gain or loss on an annual basis. - Are there specific, can you go back and forth? Is there consistency? How does the, these elections work? - These are treated a lot like accounting methods. And we can have a debate about whether they are accounting methods. But there are, you make an initial election or an adoption and then you can change. But once you've changed, you have to run out a 60 month period before you can change again. And this is an area, frankly, a lot of our folks that we work with are struggling a little bit because you're going to make this initial determination. You're going to elect a method for the first period in which this is relevant for you. And so folks are really feeling a lot of pressure to make a good choice because I feel like they're going to be stuck with it. - All right, and then along the same lines, there are similar lines, transition rules. So talk like why do we need transition rules and then what are those transition rules? - This is an area of the rags where I think iris and treasury were incredibly mindful of the fact that we've had, you know, 30 plus years of no finalized regulations and a diversity of practice amongst taxpayers. And so they divide the world really into the pre-effective date period or the pre-transition period and then post-transition. And what they have you do is essentially calculate whatever your unrealized 987 gain our losses from the formation of the branch until the date of transition. And they have very detailed rules that tell you how to calculate that if you've adopted an eligible method and then how to calculate that if you haven't adopted a method or if you've adopted a method but it's not an eligible method. That number becomes your pre-transition gain or loss. It's not triggered at the time of transition. So when the final rags become applicable to you but instead becomes carried forward. So pre-transition gains just go into your net accumulated 987 gain or loss determination for when remittances are made post-transition. And if you have pre-transition losses which honestly many taxpayers have very significant pre-transition losses, those losses become suspended losses which are subject to a whole host of rules that govern one that can be recognized. - Okay, and we're gonna dive a little bit. We'll dive into detail on this. - Maybe before we get into some of the specific details since we have talked about the transition and the various methods, what are the applicability dates? 'Cause I think that's probably the most common question right of like, when does this apply? What do I, 'cause this is, I mean, we were getting this question when do I actually really need to follow these rules? And now we've got final rags. When do taxpayers really need to follow? - Like, what do you really need to do this? Is this real this time? - Well, we'll come back and talk about the new administration but in general, this is for real. So, the effective date or the applicability date are for taxable years beginning on or after December 31st, 2024. So if you're a calendar year taxpayer, that means that these regulations became applicable on 1-1-25, the beginning of your taxable year, with a caveat or an asterisk, which is if you had a branch termination after November 9th, 2023, these regulations are just a little bit retroactive because they apply to any branch termination or any election, think, check the box elections, made after November 9th, 2023, even if the effect of it is a branch termination prior to that date. That's the date that the proposed regulations were released. And so, you are required to apply the final rags to that QBU on the date it terminated as if those rags applied immediately for termination. - Got it. All right, so, into some a little bit more than nitty gritty, let's go. - That wasn't nitty gritty enough for you? - Well, we're going to get nitty grittier, is that? - Yeah, grittier. - Okay, treatment of section 988 transactions within a 987 QBU. So we've got two code sections. By the way, I will mention, I think the last one of these we did, we said no code sections. - It was so good. - It was so, I mean, I think for the record, I won. I had no code section references and you had won, but I will acknowledge that you spoke 96% of the time and I only spoke 4%, but fair enough. - And what it-- - The code section was 987, by the way. - That's what I said. - So maybe just for some of our non-US listeners that people aren't as detailed with this, what is 988? You've already explained what 987 is. And then we can talk about how 988 is impacted by 987. - So 988 transactions are 988 gain or loss. That's transactional foreign currency gain or loss. So what's recognized when you have a partial or complete repayment of the foreign currency dominated loan and account payable, account receivable? And so our rules distinguish between translational gain or loss when you sort of have an entity who's permitted to operate in that functional currency and they make distributions or remittances. That's our 987 versus when I have transactions that are not in my functional currency. And I realize gain or loss with respect to each individual transaction. - So an issue where you could have 988 within the 987, if you haven't checked the box or real branch or probably most more likely a check the box and I need to legally own, say, as a receivable, for example, a non-functional currency or repayment of that could trigger 988. - Exactly. - How do these rules work now when you trigger a potential 988 transaction in the context of 987? - So this is a great example of where there was a rule that was proposed. It actually predates the 2023 regulations. But it was a bit of a sleeper 'cause it was part of a proposed reg package that kind of didn't go anywhere and as part of the 23 regulations was kind of repurposed. There was this proposed reg that said that you make the determination of whether a transaction gives rise to transactional foreign currency gain or loss at the branch level. But then you calculate it by reference to the owner's functional currency. So a very simple example. I have a US dollar functional foreign corporation. It owns a branch that uses euro as its functional currency. That branch owns a pound-adominated debt instrument. Step one, is it a foreign currency transactional kind of exposure at the branch level? Yes, it's pound-adominated in a euro QBU. But then I run the calculation, at least as proposed, comparing the pound rate against the dollar rate, the functional currency of the owner. This is a calculation that exists no way. No one would run this calculation, doesn't exist for book or any other local tax. And so there were substantial comments submitted that this is just unadministrable and it's not achieving any policy goal because the amount ought to shake out to be relatively similar as combining the 987 and the 98 together. And so, treasury in the IRS took into account these comments and reversed the rule. So now foreign currency gain or loss at the branch level is calculated, both determined and calculated based on the branch's functional currency. So in our simplified example, comparing pound rates against euro and not involving the US dollar at all, which is now going to align with what the local NADCs for local stat purposes, local gap. It also has an indirect benefit if you're thinking about the strong pillar two lens that the US tax rules, US gap rules, and the local rules are all seeing the same transaction and the amount of foreign currency gain or loss is calculated against the same benchmark. So this is a really favorable change. - Yeah, and just as an aside, not related to 987 specifically, but what are the things that I think we have said, Rebecca, when we've been on these podcasts, it's made comments, you know? Like, and we try to encourage taxpayers to get involved in the process. I mean, we stick on a lot of these when we're covering proposed regs. And I loved to highlight those examples of where, you know, treasury in the service, listen and say, all right, and then they make the change. - Your comments matter. - Your comments matter. - Well, sometime, you know, some comments matter, some comments, and now, like, what will we often see now in the preambles is that they're even addressing the comments that, and it's trying to explain why, there are a number of reasons for that. But again, I think the moral of the story is, folks should comment like on these proposed regulations, 'cause in particularly if they are administratively burdensome and can we understand the policy, those are particularly right for comment. Okay, so let's move on. Do they make any changes around the calculations themselves? And I'm specifically thinking about the QBU net value calculation and these kind of, these remittance rules. - I think this follows a similar trend of the IRS and Treasury listening to taxpayer comments. So there's a number of places in the regulations where you're starting point for the calculation is a tax basis balance sheet, which in many cases for your individual QBUs, you may not have. You may have a local tax package or a local controller records. And so the idea that you first had to create a tax basis balance sheet and then run your calculations was fairly burdensome. And as part of the final rights package, they introduced in a number of places, both for determining pre-transition gain or loss, as well as post-transition running your calculations year on year, they allow you to utilize a book-based balance sheet rather than a tax basis balance sheet. And this is one hopes going to help folks who don't have all the underlying available data and will ease administrative burden. In all cases, it might not necessarily be simpler, but it is an alternative that's available to taxpayers. And most importantly, if we think of taxes being largely data-driven, this allows you to match your calculation to the data that natively exists in your system, which is always going to be, if nothing else, more reliable. - I will note that for some true branches, that data may not be in the system either. This is one of the challenges that we've seen with pillar two as well, but certainly in my view, makes more sense to base that on book than taxes. - Elizabeth, it gives you two different choices, one of which may be easier to track down our determine. - Okay. And then what about remittance and these remittance proportion calculations? - A similar concept. So everything in 987, at the end of the day, in determining how much gain or loss you recognized, is based on looking at what the amount of your remittance was per year, as a portion or percentage of your total assets, that of liabilities at the branch level. And so similarly, they allow you to do some of these calculations by reference to the percentage of book assets rather than tax basis assets. So it's again going to tie back to numbers that might be more accessible for certain taxpayers. - Okay. I want to move on to what I think is one of the more controversial aspects of these final regulations and it's something referred to as the suspended loss rules. Tell us about those. Why are they so controversial? I know we have a diminimist exception, but just give us the background and a little bit of what you're taking on them. - Okay, you've asked for background, so I'm going to take you in the way back machine. - Okay, please do. - So the year is 2000. We've just passed Y2K now, sorry. So when we only had the 91 regs, a fundamental concern of the iris and treasury was the idea that foreign currency gain or loss was being what they would say is imputed on assets like plant and equipment and trucks that really don't inherently change in value based on fluctuations in foreign currency rates. And iris and treasury published a notice in 2000, notice in 2020, where they said we are concerned that taxpayers are creating artificial losses because of the way 987 is calculated that it's imputed on all these non-financial assets and then you choose to make remittances or even make remittances and then immediately contribute back into the branch in a way that lacks economic substance and that those transactions are problematic. So at first, in this notice in 2000, they said we're going to publish some regs with a different methodology, but we are concerned about this overstatement of losses. This is what led fundamentally to the feet method so that foreign currency gain or loss is only imputed on monetary assets. - Yeah. - When iris and treasury agreed to reintroduce a 91 method type calculation through the form of the current rate election, they said that the trade-off for adopting that methodology is going to be rules that suspend losses in certain circumstances. And so the most controversial of those is what's called the loss to the extent of gain rule. If you have a loss, it's not the only kind of suspended loss, but it's the most interesting. If you find any of this interesting. The amount of loss that you're permitted to take in any given year is, if you have made a current rate election, so you've got this larger pool of losses to take, is permitted only to the extent of gain in the same category and not just that, but the same source, character, FTC, basketing, it has to be the exact kind of gain so that you're not able to take nine A7 losses and offset other kinds of income. And when proposed, this was a year-by-year annual accounting convention concept. So you could have had years of gain recognition, you hit a year with a loss and that loss is suspended until you recognize gain in the future. And taxpayers commented on this. And in response to comment, Iris and Treasury added a three year lookback period and they said you're permitted to take a loss to the extent of gain in the same residual characterization in the current year and gains recognized in the prior three years. And so this is quite helpful for folks who have currency fluctuation. Your pre-transition gain or loss is also a suspended loss. And so it gets carried forward and its recognition is also potentially limited in certain circumstances. - And there's also a demand and a succession too. - Again, a helpful rule. In the '06 and '16 rags, there was a concept, my step back. We had deferral rules that are still preserved in the file rags today in a slightly different format that if you had a branch that terminated, but still existed in a different format. So things like you have a reorganization to have a different owner for a QBU. Or I have a QBU where I liquidate its owner. So you've liquidated into the US, things like that. We have deferral rules that defer your gains and losses and in some circumstances like defer your losses. So in those rules, there was a diminished rule that if the amount of loss being deferred to small, we'll let you take it. They've imported a similar concept here with suspended losses that if the amount of the loss is small, then you get to take it currently. You don't have to worry about this carry forward and the extent to which you've gained to offset it. It's a very small threshold though. Small is relative and keeping for me, but for a large corporation, maybe not. - Right, all right. So let's move on to character and source of section 987 gainer loss. One of the final rags tells us about that. - Baseline, final rags are similar to the proposed regulations where you determine that, I mean, as a starting point, 987 gainer losses or near income or near loss. In the hands of a U.S. person, like a U.S. company earning it directly, its source is determined by reference to the manner in which interest is allocated on a Modified Gross Income basis. And so you have to look at the income that is being derived from the branch, similar for a foreign corporation as well. There are currently finalized regulations on source under the FTC rules that cross reference back to now, these final regulations as well. So it's all very consistent and it's determined based on the income derived from the assets that are treated as assets of the QBU and on its books and records. So this concept of what is in the QBU's books of records from 989, kind of what are books and records of this taxable unit becomes really important because it drives the interest allocation and then that turns the sourcing. So completely consistent from 2023, the big change in the file right package, they had proposed a rule that said, if you have 987 gain or loss that's allocable to subpart F income and that could be passive income, that could be foreign-based sales, foreign-based services income, they said we're gonna treat it like it's foreign currency gain or loss in its own subpart F bucket. - Not by category. - Not by category. - Yes, sub F. - Yeah, and so it's kind of like foreign currency gain or loss on transactional exposure. So 98 exposures, if you don't qualify for business needs, is it its own little bucket? So they were treating 987 the same way. - But the problem was, if I have a branch that let's say all I earned is foreign-based sales or foreign-based services income. I'm now generated either a 987 loss that is in its own bucket that can't offset any other category of income or a generated gain or if I'm running losses in my business, they don't offset. - Yeah. - Either way, not a great result. And again, taxpayers comment, IRS and Treasury modified the rule and said you can match it based on the category of subpart F from which it came. - Okay. All right, now we're gonna cover a couple of the special rules. We're not gonna cover insurance companies in any detail, but I will note for those that are interested in that area, do we have an alert with some of the specifics related to the insurance company? That'll be in the show notes so you can check that out. But what I wanted to start with is partnerships and how these 987 rules apply in the partnerships. Do we talk about QBUs as a branch? What about partnerships and why or how is that different? - So this, I keep saying like this is a big deal, but these are all like really fundamental changes. So the rules have struggled with what to do with partnerships because they are both a juridical entity. Like I have a real legal entity that has separate personality, but also is flow through to its partners. - I mean, one could argue to interrupt that disregarded entities could meet that same characterization, but you only have one owner. - Your pillar too is showing. - All right. - But the original approach back in 1991 was that- - Before the check the box rules. - Before the check the box rules to be fair. - To be fair. - So the original approach was it's a juricality. It is a per se QBU because it is a partnership and an entity for local purposes. And it can adopt its own functional currency. And because it is flow through to its owners, it is a branch or a QBU and you pass through, you have some kind of gain or loss that should be taken into account fine. In the '06 regs, they adopted a pure aggregate approach. So each partner street is if it owned, it pro-renta slice of the assets and liabilities in the partnership and you run your 987 calculation as if it's your own little branch. Like it's your own little disregarded entity. - Yeah, that attracted a lot of comments. The 16 regulations kind of adopted that only for related party partnerships. And then you had 20, the 23 regs kind of preserved that and then were very complicated rules for partnerships. And what happens when a partnership owned itself owns a branch below the partnership. There were a lot of comments that were submitted. And I think that a surprising number of types of taxpayers were otherwise unaffected by these regs. So we think of this through the lens oftentimes at large multinational corporations. As a manager, particularly like fund complexes who invest across multiple jurisdictions, these rules were incredibly meaningful. And whether you had foreign currency gain or loss these structures or not, was something that was an issue really of first impression. The 2006 regs had a diminimus rule that said if you're less than a 5% owner, you just are kind of out of the scope of the regs. And the 23 regs didn't pick that up. So even if you owned a very small sliver of a partnership, you had this potential host of reporting obligations and foreign currency gain or loss. Lots of comments submitted. And IRS and Treasury reserved on the treatment of partnerships. They put out a new solicitation for comments under their proposed reg package. And they reserved on the section of the definition of what's a qualified business unit, which are starting point for all this analysis on the treatment of partnerships. So preamble says you can kind of use a reasonable method. You can use aggregate. You can use entity consistently applied for now as they consider future rules. - Right. And then what are the other special rules? And maybe if we can try to do this briefly, then that investment hedges, and I know this is one of your areas, but any kind of highlights or low lights with respect to how that investment hedges treat it. - Brand new rule. If you're hedging an investment into a qualified business unit, your gap or Treasury folks might see that as a net investment hedge of the equity investment into that entity, any in its properly identified, the gain or loss from that transaction is treated as adjusting your amount of 9/8/7 gain or loss. So instead of having discrete kind of foreign currency gain or loss, which would be either, for example, for CFC sub part F or business needs, very binary analysis, you match it to the categories of 9/8/7 gain or loss. This really solved a problem. That otherwise could create some really material mismatches. And again, was the result of an industry group commenting that this was a place where there could be substantial mismatch. - This one makes a ton of sense, right? And some of those net investment hedges can be massive. - Unequivocally. - So all right. So kind of moving from the final regulation, we wanna talk about some of the tax accounting considerations and implications. And just, of course, tax accounting is always important for public companies. But now with the pillar two, right? Which is based on book accounting implications. And so we talk about tax accounting, tax accounting within the books. So it's important for pillar two. Also important for the KMT as well. So maybe just to remind folks, we'll start with accounting for changes in the tax law. And I guess maybe the other thing before I throw this question, I think cause these regs have been proposed for so long. Many taxpayers have just kind of put some of this off. Maybe they've developed their own kind of methods, whatever. But like we're here now, we've got final rules. How do we account for these changes in the tax law? - Of course, and of course, I would be remiss if I didn't caveat that you've got two tax lawyers talking about tax accounting. - Right, fair enough. - So take it with the original solid. As a starting point, if there's a change in tax law, you know, an organization is responsible for accounting for the change in tax law in the quarter in which the change occurs, even if it has a deferred effective date. So the fact that these regulations were finalized in December of 2024 means that companies need to address them in some manner in the quarter or year end if they're a calendar year taxpayer that's ending now even if those regulations don't apply until subsequent year. - So maybe some homework for companies to do as part of their year end to make sure that they get that right. - And it doesn't necessarily mean that they have things that they need to do differently. If you had been calculating 987 gain or loss on eligible methods, so you know what your unrealized 987 amounts are. Maybe the amount of homework that you have to do isn't as significant. - Yes, yeah. - All right, so what about the recognition of deferred taxes in the context of these 987 rules? And obviously this, again, big implications potentially for pillar two, camp D and book income for that matter. - So I think there's a few different levers. The first is I think you will care about whether it's a branch owned directly under the United States or whether it's owned under a CFC if you're a US company because you're really going to care about, is this an item that will directly affect my income deduction gain or loss of a US tax return or is this something that is going into the computation of my sub part F inclusion or guilty? If we stick with the US for a second, the second thing I probably care a lot about is whether I anticipate making remittances from the branch or to flip it into financial statement language, whether I have asserted that I am permanently reinvesting in this entity such that I don't expect to have remittances 'cause if I've made a permanent reinvestment assertion, perhaps those items that relate to that entity 'cause they're never coming back, I don't necessarily book deferreds on those. Within the grounds of CFCs, now this gets more complicated. - Yeah, I think it does. - Because if I divide the world roughly speaking into sub part F and non-high tax sub part F and guilty, you have a limited population of folks who necessarily book deferred items on guilty and might be those as period costs. So there's a whole bunch of different levers that are gonna influence whether there are items that you need to book as a result of transition. The other thing that's worth pointing out is that you also have to think about whether you've made any elections that might crystallize items that are then taken into account in the future. One of the levers around 987 gain or loss is that it's only recognized at the time of remittance, which is something that in general companies control the timing of when a remittance or a distribution is made by a branch. There is an election that's part of the transition rules that says for your pre-transition gain or loss, you can elect to amortize it over a 10 year period and you take it one tenth a year. And so as a company, you'd wanna assess whether if you are gonna make that election and if you've made that election, does that mean you now have an amount that is crystallized that has a different impact on whether you have to book deferreds? And then the final item is for many companies, this isn't the first time we've had final regs, it's just the first time we've gotten past the effective date for such regs. - Correct. - So in 2016, we had regulations under 987 that were finalized and that with this feet method being the only method. And so some companies made adjustments 'cause it affects basically you have a book to tax difference on the basis of assets that are non-monetary assets. And that might have generated deferred items because those regulations are now no longer effective. They've been replaced by the 2024 final regulations. Companies need to assess whether those are items that need to be adjusted or pulled down because they're no longer relevant. - All right, so let's move to the proposed regs. Where I think the prime, the issue there was something referred to as the recurring transfer group election. So what is that and then we can then talk a little bit about applicability dates. - So I've found really positive about the final regs and the proposed regs. So I heard some treasures received a lot of comments on the fact that in a world where we have disregarded entities, the volume of disregarded transactions between entities is huge. And those can be disregarded, inventory sales, services, payments, royalties, that this is sort of a hallmark of the current tax system post check box rooms. And there's a huge administrative burden that goes into a few to account for every single transaction on the spot rate on which the transfer is made. That is not a data point that's retained for gap or any other purpose. And if the volume of those transactions is high, it's incredibly burdensome to track. And so they provided an election that allows you to use the average rate for the year as a simplifying assumption to calculate sort of the contribution or remittance as appropriate. It's limited to things that are non-monetary transactions. So disregarded services, royalties, rental payments, and similar. And they solicit comments on whether they can extend it to other kinds of like disregarded loans and interest payments and discarded cash transfers. - So listeners out there comment comment and when would these rules potentially apply? - They're proposed with a perspective effective date. But again, it's gonna really depend on whether they're finalized. - All right, so last question for you here. We spent all this time going through all these new final regulations. You may have read that we have a change of administration here. - Really? - Yeah, new president in the US. How could that change of administration potentially impact this? 'Cause just to remind listeners, particularly some of our non-US listeners, if they're still listening at this point, that these rules were finalized and proposed by the Biden administration. We know that the Trump administration has come in. And this is unique to the Biden Trump trend. I mean, this is an issue every time we have a change of administration and the IRS and the Treasury are part of the executive branch. And so there's always this change. - Your tax law tends to be, in my view, sometimes, particularly at this technical level sort of less partisan than maybe other areas that we see. But any ending thoughts here on what the change of administration can mean for either these proposed or final rules? - Obviously, not in a position to make any kind of prediction, but I think some history is relevant here. So I mentioned that there were previously regulations that were finalized and then never became effective. They were deferred. Those regulations were finalized in 2016. And one of the choices that the first Trump administration made was to, by executive order, sort of defer the effective date of certain regulations, and then ultimately to put them out for additional study. And NNA7 was one of those right packages. And the Trump administration came back as part of the report out in this executive order and said, we think that these regulations need changes. We need, for example, taxpayers need the option of utilizing something that looks like the 91 regs and other administrative changes to make them more administrative. So the reg package that we see proposed in 23 and finalized in 24 reflects a lot of the recommendations that were made during the time of the first Trump administration. Now, that doesn't mean that necessarily views will remain consistent. But I think it is one of those reg packages that IRS and Treasury personnel might do as being fairly bipartisan because it reflects feedback from multiple administrations, including the current administration. - Yeah, and for those taxpayers out there hoping, well, maybe this just goes away. I think that was one of the reasons we wanted to cover the accounting point is that for calendar your taxpayers, this was enacted in 2024. You may not have the ability to sort of wait and see what's going to happen for financial statement accounting purposes of nothing else. - I think that's fair. - Okay. All right, Rebecca, always a pleasure having you on. Fun going through this, this particular area. I was learned so much when you joined these podcasts. So thank you very much for joining. - Thanks so much. - Thanks for tuning in to this week's episode of Crossburner Tax Talks. Thank you, Rebecca Lee, International Tax Principle in Kinnabusee's Washington National Tax Services Practice. I'm Doug McCodey, Kinnabusee's International Tax Services Global World. Stay tuned for another exciting edition of the Crossburner Tax Talks podcast. (upbeat music) (upbeat music) - This podcast is brought to you by PWC, All Rights Reserved. PWC refers to the US member firm or one of its subsidiaries or affiliates and may sometimes refer to the PWC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This podcast is for general information purposes only and should not be used as a substitute for consultation with professional advisors.