The IRS has rushed out yet another guidance document on the Tax Cuts and Jobs Act’s deemed repatriation rules for offshore profits. Notice 2018-26 includes rules on penalty waivers, special elections, and the mechanics of reporting and paying the transition tax. It also describes forthcoming regulations on other issues. Taxpayers may rely on the rules described in the Notice until new regulations are issued. The Notice also states that the IRS intends to issue regulations which require foreign corporations to increase their subpart F income for their last tax year that begins before January 1, 2018, by the amount of their deferred foreign income. (Previous IRS repatriation guidance on changes to accounting periods and calculation of earnings is available at FD Insights.)
Penalties Waived for Underpayment
The Notice clarifies that the IRS will waive certain underpayment penalties for taxpayers required to pay the repatriation tax, including those electing installment payments under the deemed repatriation rules. Accordingly, a company’s required installments of estimated tax need not include amounts attributable to its net repatriation tax liability.
TCJA Repatriation Tax on Offshore Profits
The new tax law moves the U.S. to a modified territorial system of international taxation. Multinational corporations that own 10% or more of a foreign corporation would receive a 100% exemption on the foreign-sourced dividends paid by the foreign corporation to the U.S. shareholder.
As a transition to the lower corporate tax rate and the territorial tax system, profits now held offshore will face a one-time tax of 15.5% for liquid assets and 8% for illiquid assets. The tax may 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.
Anti-Avoidance Rule
The Notice seeks to stop taxpayers from entering into transactions after the effective date of the TCJA to try to reduce their repatriation tax liability. New regulations will provide that a transaction will be disregarded for purposes of determining a U.S. shareholder’s repatriation tax liability if the following conditions are satisfied: (1) the transaction occurs on or after November 2, 2017; (2) the transaction is undertaken with a principal purpose of reducing the repatriation tax liability of the shareholder; and (3) the transaction would actually reduce that liability. Cash reduction and E&P reduction will be presumed to be undertaken with a principal purpose of reducing repatriation tax liability, but this presumption can be rebutted. These rules indicate that the IRS will be taking a hard line to stop attempts to understate repatriation tax liability. Accurate reporting of a company’s cash position and E&P is essential to avoid run-ins with the agency.
Stock Attribution, Cash Measurement
The Notice also describes rules for downward attribution, which requires the attribution of stock owned by a partner to a partnership. The IRS acknowledges this rule may make it difficult to determine if a foreign corporation has a 10% domestic corporate shareholder through constructive ownership. The IRS will issue regulations providing that stock owned, directly or indirectly, by or for a partner will not be considered as being owned by a partnership if the partner owns less than 5% of the interests in the partnership’s capital and profits.
The IRS also will include in the forthcoming regulations a set of narrow final cash measurement dates for specified foreign corporations covered by the tax.
Domestic Passthroughs
The Notice offers instructions on how the repatriation rules will apply to domestic passthrough entities and will identify required computations and information reporting. The elections available to passthrough owners also are explained as they relate to inclusion of income from deferred foreign income corporations (DFICs).
Comments Requested
The IRS has requested public comments on the rules described in the Notice and also is interested in hearing from taxpayers on what additional guidance should be issued to help them compute the transition tax. Written comments may be submitted to the Office of Associate Chief Counsel (International), Attention: Leni C. Perkins, Internal Revenue Service, IR-4579, 1111 Constitution Avenue, NW, Washington, DC 20224. Taxpayers may submit comments electronically to Notice.comments@irscounsel.treas.gov.