IRS provides guidance for computing repatriation transition tax under new tax reform law

On Dec. 29, the IRS and Treasury issued Notice 2018-07, which provides guidance for computing the transition tax under the new tax reform bill enacted on Dec. 22 (commonly referred to as the Tax Cuts and Jobs Act). The notice provides taxpayers additional guidance regarding computation of the transition tax liability.

In general, newly amended Section 965 imposes a transition tax on previously untaxed post-1986 foreign earnings and profits of certain foreign corporations owned by a U.S. shareholder by deeming those earnings to be repatriated. Foreign earnings considered held in the form of cash and cash equivalents are taxed at a 15.5% rate, and the remaining earnings are taxed at an 8% rate.

Notice 2018-07 describes regulations that the IRS and Treasury intend to issue, including rules for determining the aggregate foreign cash position for purposes of applying the 15.5% rate including rules to prevent double counting of intercompany amounts and rules regarding the treatment of derivative financial instruments. The notice also provides rules for determining the amount of post-1986 foreign earnings and profits subject to the transition tax, including ordering rules where other inclusions under Subpart F or related to actual cash distributions occur in the transition tax year. The notice also indicates that the IRS and Treasury intend to issue regulations addressing gain or loss recognized under Section 986(c) with respect to distributions made out of earnings and profits previously taxed under Section 965, stock basis adjustments as a result of inclusions under Section 965, and the treatment of affiliated groups making a consolidated return for purposes of Section 965.

The regulations described in the notice would be effective for the last taxable year of a foreign corporation that begins before Jan. 1, 2018, and with respect to U.S. shareholders, for the taxable years in which or with which such taxable years of the foreign corporations end (i.e., the first taxable year that foreign corporations are subject to Section 965 under the new tax reform legislation).

Contact David Sites
Partner, Washington National Tax Office
T +1 202 861 4104

David Zaiken
Managing Director, Washington National Tax Office
T +1 202 521 1543

Cory Perry
Tax – Exp. Manager, Washington National Tax Office
T +1 202 521 1509

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