GATT Bill Effects Tax Changes

Journal of Accountancy, February 1995 | Go to article overview

GATT Bill Effects Tax Changes


The enactment of the General Agreement on Tariffs and Trade on December 8, 1994, included a number of tax changes to offset the $11.5 billion cost of the reduction in tariffs. Among the changes are provisions to speed up some tax payments and alterations in pension rules and tax shelter penalty provisions intended to tighten standards.

The U.S. Treasury is assessing the tax changes and developing guidance to aid taxpayers in complying with them. Although some are administrative and require little regulation, more guidance may be needed to implement proposals such as a change in the treatment of partnership distributions.

Subpart F income. The largest single revenue raiser in the GATT treaty alters the estimated tax treatment for U.S. corporations in Puerto Rico and other U.S. possessions. An estimated $1.4 billion is expected to be raised over five years by requiring that estimated tax payments be made throughout the year for subpart F inclusions and certain amounts includable under Internal Revenue Code section 936. In response to criticisms by multinational corporations that it is too difficult to estimate controlled foreign corporations' (CFCs') income during a given year, the GATT treaty will allow U.S. corporations with controlling interests in CFCs to meet a safe harbor by electing to include pro rata in income 115% of the prior year's subpart F income.

Lower interest rate on overpayments. Another revenue source expected to raise an estimated $799 million is the lower interest rate the IRS will pay on any part of corporate income tax overpayments that exceed $10,000; the rate will drop to the federal short-term rate plus one-half percentage point. The rate payable on large corporate underpayments is set at five percentage points above the federal short-term rate and does not change under GATT. The new rate applies for interest rate periods after December 31, 1994.

Partnerships distributions. Distributions by certain partnerships of marketable securities made after December 8, 1994, must be treated as a distribution of cash for measuring gain. Exempted are distributions before January 1, 1995, by partnerships that held the securities on July 27, 1994.

Understatement penalty for corporate tax shelters. An estimated $95 million will be raised by a penalty imposed for any corporate tax shelter item unless the corporatoin qualifies for the general waiver for reasonable cause under IRC section 6664. …

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