Tax Bill Guidance Continues to Focus on Repatriation
In the few months since the Tax Cuts and Jobs Act (TCJA) was signed into law, the IRS has released three important items of guidance relating to the transition tax on foreign profits. The first Notice, explained in an earlier FD Insight column, told taxpayers how to pay the tax. The latest two documents are Notice 2018-13, which addresses corporations covered by the tax and how to calculate the earnings, and Revenue Procedure 2018-17, which explains procedures for changing the accounting period of foreign corporations owned by U.S. shareholders that are subject to the repatriation transition tax.
Under the TCJA, the untaxed earnings of foreign subsidiaries of U.S. companies now held offshore are now deemed to be repatriated and are subject to a one-time tax of 15.5% for liquid assets and 8% for illiquid assets. The repatriation tax can be paid over an 8-year period, 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. The tax applies to corporations determined to be DFICs, deferred foreign income corporations–those with net post-1986 foreign earnings and profits (E&P).
Who’s Covered, Calculation of Earnings
Which corporations are considered DFICs is the subject of forthcoming regulations, the IRS announced, giving examples of the DFIC determination. Notice 2018-13, addresses the calculation of earnings under the transition tax and provides an alternative method for calculating post-1986 E&P. Covered foreign corporations’ actual post-1986 E&P must be determined as of the close of both November 2, 2017, and December 31, 2017. For taxpayers who have practical problems with trying to determine post-1986 E&P on a date other than the last day of the month, the regulations will offer an election to use an alternative method for determining post-1986 E&P.
The regulations also will explain the allocation of deficits to different classes of stock. For example, when multiple classes of stock are outstanding, a specified E&P deficit will be allocated first among the shareholders holding common stock. Finally, the IRS rules will give instructions regarding how to aggregate foreign cash positions and how to treat demand obligations and foreign currency gain or loss.
Changes to Accounting Periods
The last pronouncement, Rev. Prov. 2018-17, prevents changes to the annual accounting periods of foreign corporations in 2017 under either the existing automatic or general procedures if the change could result in the avoidance, reduction, or delay of the transition tax. For example, if a calendar-year DFIC elected, beginning January 1, 2017, a tax year closing on November 30, the election could defer by 11 months a U.S. shareholder’s inclusion in income of untaxed profits and could also reduce the tax liability. In short, any attempted change of accounting period for entities subject to the repatriation transition tax will be carefully scrutinized by the IRS and will be denied if repatriation tax avoidance is the result.
The repatriation rules are definitely an IRS priority and have been put on the fast track to release. The repatriation tax is a big revenue raiser and the IRS is working hard to make sure the tax gets paid on time and in the correct amounts.