Corporations that have been paying the Sec. 965 repatriation tax may get further tax relief for those earnings. The IRS has determined that, in some circumstances, it may be appropriate to provide relief from double taxation when the same earnings and profits of foreign corporations are taxed both as dividends and as repatriated earnings. An example would be where a corporation paid an unusual dividend for business reasons and not because of the enactment of the Tax Cuts and Jobs Act (TCJA).
The problem arose with the original measurement of income to be repatriated. The TCJA measured income on two dates, November 2, 2017, when the legislation was first introduced in Congress, and then again after the bill became law on December 22, 2017. Companies are required to pay the repatriation tax on the higher of the two amounts. Some distributions made during this period could be double-taxed, and the regulations double-counting rules may not reach all situations.
The IRS will consider relief from double taxation “where there is no significant reduction in the resulting tax by application of foreign tax credits, such that the taxpayer would be required to pay more tax than it would have if the dividend had not been paid.” What this means is that companies need to prove they were double taxed even after they used any available foreign tax credits. Companies also must show that they had business reasons for making distributions and paying dividends unrelated to obtaining tax benefits.
Taxpayers who have fact patterns that may fit these limited circumstances should consult their tax advisor to assess the situation. The Office of Associate Chief Counsel (International) will consider relief on a case-by-case basis and may issue a private letter ruling or enter into a closing agreement. Both of these procedures are complex and best handled by tax experts.
Deemed Repatriation of Offshore Profits under TCJA
As a transition to the lower 21% corporate tax rate and the territorial tax system enacted by the Tax Cuts and Jobs Act, untaxed profits previously held offshore are subject to a one-time tax of 15.5% for liquid assets and 8% for illiquid assets. The tax can be paid over an 8-year period, starting in 2018, with 8% paid in each of the first five years, 15% in the 6th year, 20% in the 7th year, and 25% in the 8th year.
Going forward, the United States exempts the earnings of U.S. firms from foreign subsidiaries, even if the earnings are repatriated, by allowing a 100% dividends-received deduction.