Treasury Releases Proposed Regulations on FIRPTA Foreign Pension Fund Exemption
The Treasury Department yesterday issued proposed tax regulations clarifying the scope and operation of the foreign pension fund exemption from the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA). (Federal Register, June 7) The proposed rules appear to be overwhelming positive and likely to resolve most, if not all, of foreign investors' remaining concerns.
The Treasury Department issued proposed tax regulations clarifying the scope and operation of the foreign pension fund exemption from the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA). (Federal Register, June 7) The proposed rules appear to be overwhelming positive and likely to resolve most, if not all, of foreign investors' remaining concerns.
- FIRPTA imposes U.S. capital gains tax on the sale of a U.S. repeal property interest by a foreign investor. FIRPTA results in a discriminatory tax on foreign investment in US real estate and infrastructure that does not apply to any other asset class. The FIRPTA regime is an anti-competitive outlier that deflects global capital to other markets.
- With the strong support of The Real Estate Roundtable, Congress passed in 2015 the first major reforms to FIRPTA since its enactment in 1980. The changes included a new exemption from FIRPTA for qualified foreign pensions funds and doubled the amount a foreign interest may invest in a U.S. publicly traded REIT. (Roundtable Weekly, Dec. 18, 2015)
- After passage of the 2015 PATH Act, some questions remained regarding whether certain foreign entities and arrangements would qualify for the foreign pension fund exemption. The Roundtable encouraged Congress to clarify that the foreign pension fund definition covers a number of number of different arrangements, including: governmental, Social Security-type plans; plans established for the self-employed; multi-employer plans; plans sponsored by political subdivisions; and situations where an entity pools retirement assets from multiple pension plans.
- In March 2016, the Joint Committee on Taxation provided support for a broad interpretation of the FIRPTA foreign pension fund exemption with its "Blue Book" on tax legislation enacted in 2015. (Roundtable Weekly, March 18, 2016) In March 2018, Congress passed FIRPTA technical corrections legislation codifying many of The Roundtable's recommendations. (Roundtable Weekly, Mar. 23, 2018; The Blue Slip, Mar. 2018)
- The newly proposed regulations adopt a broad view on what constitutes a qualified foreign pension fund. According to the regulations' preamble, "[t]he Treasury Department and the IRS have determined that the purpose of section 897(l) is best served by permitting a broad range of structures to be eligible to be treated as a qualified foreign pension fund." This sentiment is then extended in the proposed rules to a wide range of pension arrangements, including multi-employer and government-sponsored public pension funds, as well as retirement funds organized by trade unions, professional associations, or similar groups.
- Additionally, the proposed regulations confirm that entities wholly owned by multiple foreign pension funds can qualify for the exemption. Similarly, entities can qualify for the exemption indirectly through a chain of ownership. These were important clarifications for common foreign pension fund structures.
Building on the success of the PATH Act reform, The Roundtable and other stakeholders are encouraging Members of Congress to repeal FIRPTA entirely by passing the bipartisan Invest in America Act sponsored by Representatives John Larson (D-CT) and Kenny Marchant (R-TX). (Roundtable Weekly, Apr. 12, 2019) FIRPTA will be one of several tax topics discussed during The Roundtable's Annual Meeting on June 11 in Washington, DC and at the Tax Policy Advisory Committee meeting on June 12.
Roundtable Urges Treasury to Clarify Tax Consequences of Transition Away from LIBOR as Reference Rate
The Real Estate Roundtable yesterday asked the U.S. Treasury Department and IRS to reduce the risk of market disruption by clarifying the tax treatment of financial contracts that replace the expiring London Inter-bank Offered Rate (LIBOR) with a substitute reference rate. Over $200 trillion of LIBOR contracts are outstanding, including roughly $1.3 trillion of commercial real estate debt. (Roundtable LIBOR letter, June 6)
The Real Estate Roundtable yesterday asked the U.S. Treasury Department and IRS to reduce the risk of market disruption by clarifying the tax treatment of financial contracts that replace the expiring London Inter-bank Offered Rate (LIBOR) with a substitute reference rate. (Roundtable LIBOR letter, June 6).
- The United Kingdom's Financial Conduct Authority (FCA), which regulates LIBOR, announced in 2017 that it is phasing out the global borrowing index by the end of 2021. LIBOR will need to be replaced in both new agreements and innumerable existing legacy contracts.
- Several factors may necessitate or accelerate parties' adoption of alternative reference rates on existing contracts well before the end of 2021. To facilitate the transition, the Federal Reserve Bank of New York in 2018 began publishing an alternative U.S. benchmark to work alongside LIBOR – the Secured Overnight Financing Rate (SOFR). (See: A User's Guide to SOFR and SOFR: A Year in Review)
- However, several issues may be contributing to the reluctance of market participants to use SOFR, including the absence of necessary internal infrastructure to support its accounting and trading, and the lack of tax guidance.
- Roundtable President and CEO Jeffrey DeBoer noted in the comment letter, "If the terms of a debt instrument are significantly modified, for Federal income tax purposes there is a deemed exchange of the old debt for a new (modified) debt instrument." Without relief, this deemed exchange could trigger the recognition of taxable gain or loss for the lender, or debt discharge income for the borrower.
- "Moreover, the tax consequences of the deemed exchange can arise without generating actual cash to pay any ensuing tax liability," wrote DeBoer.
Randal Quarles – the Fed's vice chairman in charge of financial regulation – reiterated the urgency of moving forward on the transition to SOFR.
- The Roundtable's June 6 comments recommend that a safe-harbor rule confirm that a replacement index or formula identified by regulators, broad industry groups, or similar objective sources-or by the parties themselves in good faith-is not considered an alteration or modification of the original instrument. The Roundtable letter states, "Instead, the replacement should be treated for Federal tax purposes as a continuation of the instrument's original terms."
- This week, Randal Quarles – the Fed's vice chairman in charge of financial regulation – reiterated the urgency of moving forward on the transition to SOFR: "I believe that the ARRC has chosen the most viable path forward and that most will benefit from following it, but regardless of how you choose to transition, beginning that transition now would be consistent with prudent risk management and the duty that you owe to your shareholders and clients .... With only two and a half years of further guaranteed stability for LIBOR, the transition should begin happening in earnest." (Bloomberg, June 3)
- The Wall Street Journal reported last July that companies were adopting SOFR sparingly – despite regulators urging banks and traders to stop launching new Libor-based contracts ahead of the 2021 deadline. (WSJ, July 12 and Roundtable Weekly, July 13, 2018)
The Roundtable letter was developed by a task force that included Tax Policy Advisory Committee (TPAC) Chairman Frank Creamer Jr., TPAC member Don Susswein, and chair of the Real Estate Capital Policy Advisory Committee (RECPAC) Working Group on LIBOR, Joseph Philip Forte. On June 11, at The Roundtable's Annual Meeting in Washington DC, Joseph Forte will lead a RECPAC discussion on real estate's concerns with the LIBOR transition.
Real Estate Coalition Opposes FCC’s Notice That May Permit Broadband Equipment on Private Property Without Owner Consent
Installation of certain communications equipment on leased property to enable expansion of wireless networks should not be allowed without owner consent. That is the message submitted on June 3 to the Federal Communications Commission (FCC) by an industry coalition that includes The Real Estate Roundtable. (Joint Industry Comments to FCC).
The installation of certain communications equipment on leased property to enable expansion of wireless networks should not be allowed without owner consent. (Joint Industry Comments to FCC, June 3)
- The coalition's comments come as the FCC considers whether to expand its interpretation of federal law regarding consumer home antennas, spurred by the development of 5G technology for the next generation of advanced communications equipment.
- Current FCC rules allow residential and commercial tenants to install in leased spaces certain types of "customer-end" antennas and satellite dishes known as Over-the-Air-Reception Devices ("OTARD"). The current scope of the OTARD rules is designed to enable consumer choice for tenants to select the kinds of cable and broadband services they desire.
- The FCC's Notice of Proposed Rulemaking (announced on March 22) suggests a regulatory expansion outside the existing scope of "customer-end" devices in leased residential apartments and indoor office spaces. The agency's proposal would confer a broad grant of rights on broadband providers to access rooftops and other common areas – without the building owner's consent – for the dense deployment of "hub and relay" antennas and other fixed wireless devices attendant to 5G infrastructure.
- The real estate coalition believes new FCC rules are not necessary because apartment residents, commercial tenants, and other customers demand fast and reliable Internet service in the 21st century marketplace. "[C]ompetitiveness
… has driven property owners to ensure that broadband infrastructure is available in their communities and other buildings," the industry's comments state. "This deployment has taken place without government mandates, and the
Real Estate Associations strongly believe that government intervention is not needed."
The Real Estate Associations' opposition to the Over-the-Air-Reception Devices ("OTARD") rule's expansion is detailed in expansive comments.
- According to the coalition, property owners have invested in excess of half a billion dollars over the past decade – a low-ball estimate – of their own capital to deploy broadband infrastructure in their assets. Additionally, a basic exercise of building management is to enter into mutually beneficial arrangements with broadband providers to provide tenants with Internet access. Government intervention – and regulation of rooftops and other building spaces – is not necessary because the market is already functioning and thriving.
- The real estate groups' comments acknowledged that broadband deployment in the nation's rural areas (81.7 percent coverage) lags considerably behind urban coverage (99 percent). Strides need to be made to "close the gap between urban and rural deployment. But we also think it is important to note that existing rates of deployment were achieved with cooperation of the real estate industry," the groups explained to the FCC.
The Real Estate Associations' opposition to the OTARD rule's expansion is detailed in its expansive comments. For more information, see the National Multifamily Housing Council's resources on telecommunications issues.
House Tax Writers Air Priorities, Address Technical Correction for Qualified Improvement Property Provision
The House Ways and Means Committee on June 4 held a Members' Day Hearing to address tax legislative priorities for the remainder of the year – including technical corrections to the Tax Cuts and Jobs Act (TCJA) that would correct a drafting error affecting qualified improvement property (QIP). Numerous other tax priorities are also expected to crowd the congressional agenda, including expired or expiring tax provisions; repeal of the state and local tax deduction cap; the national debt limit; and budget spending caps.
The House Ways and Means Committee held a Members' Day Hearing to address tax legislative priorities for the remainder of the year – including technical corrections to theTax Cuts and Jobs Act(TCJA) that would correct a drafting error affecting qualified improvement property (QIP).
- A coalition of businesses and trade groups, including The Real Estate Roundtable, urged all members of Congress in April to cosponsor the Restoring Investment in Improvements Act (H.R. 1869 / S. 803) – a bill that would correct the QIP drafting error. The legislation would give qualified improvement property a 15-year depreciation period and restore its eligibility for accelerated bonus depreciation. (QIP Policy Comment Letter and Roundtable Weekly, April 26)
- The QIP error has resulted in a significantly longer 39- or 40-year cost recovery period for interior improvements to nonresidential property, such as tenant build-outs. The intent of Congress was to allow the immediate expensing of QIP – or provide a 20-year recovery period in the case of taxpayers electing out of new limitations on the deductibility of business interest.
- During the hearing, Rep. Adrian Smith (R-NE) said that QIP should be addressed as soon as possible and technical corrections should reflect the intent of lawmakers. Rep. Roger Marshall (R-KS) discussed how QIP's 39 depreciation adversely impacts small businesses, suggesting it should be dropped to 15 years. And Rep. Jackie Walorski (R-IN) emphasized the need for a QIP fix, advocating for H.R. 1869.
- Reps. Walorski and Jimmy Panetta (D-CA) introduced the Restoring Investment in Improvements Act on March 26. The Senate companion bill (S. 803) was introduced earlier that month by Sens. Pat Toomey (R-PA) and Doug Jones (D-AL). (Roundtable Weekly, March 15)
Ways and Means Chairman Richard Neal (D-MA) will discuss tax policy with Roundtable members on June 11 during the organization's Annual Meeting in Washington, DC.
- Beth Bell, Democratic tax counsel for Ways and Means, acknowledged many committee members are interested in TCJA technical fixes, including QIP. Yet she emphasized during a May 30 Federal Bar Association meeting, "I think we need to get through processing or considering what to do with an extenders package before we get to a technical corrections package." (BGov, May 30)
- In the Senate, Finance Committee Chairman Chuck Grassley (R-IA) and Ranking Member Ron Wyden (D-OR) last month announced the formation of several bipartisan taskforces to examine and help permanently resolve the fate of 42 expired and expiring tax provisions. (Senate Finance Committee Announcement, May 16 and Roundtable Weekly, May 17)
- A preliminary draft of House legislation obtained by Bloomberg Tax last week would pay for the extension of temporary tax provisions through 2019 by changing the expiration date of estate tax relief included in TCJA.
House Ways and Means Chairman Richard Neal (D-MA) will discuss tax policy with Roundtable members on June 11 during the organization's Annual Meeting in Washington, DC. QIP and tax extenders will be among several tax policy issues discussed in detail during The Roundtable's Tax Policy Advisory Committee (TPAC) meeting on June 12.