IRS sets out rules for computing transition tax

The US Treasury Department and the Internal Revenue Service (IRSH) has issued guidance for computing the transition tax following the enactment of the Tax Cuts and Jobs Act, ushering in major US tax reform

In general, newly enacted section 965 of the Internal Revenue Code imposes a transition tax on untaxed foreign earnings of foreign subsidiaries of US companies by deeming those earnings to be repatriated.

Foreign earnings 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.

The transition tax generally may be paid in instalments over an eight-year period.

Notice 2018-07 describes regulations that the Treasury Department and the IRS intend to issue, including rules for determining the amount of cash and cash equivalents for purposes of applying the 15.5% rate and rules for determining the amount of foreign earnings subject to the transition tax.

These rules will assist taxpayers by providing certain additional information needed for computing their transition tax.

Treatment of accumulated post-1986 deferred foreign income as Subpart F Income Section 965(a) provides that for the last taxable year of a deferred foreign income corporation (DFIC) that begins before 1 January 1 2018 (such year of the DFIC, the ‘inclusion year’), the subpart F income of the corporation (as otherwise determined for such taxable year under s952) shall be increased by the greater of (1) the accumulated post-1986 deferred foreign income of such corporation determined as of November 2, 2017, or (2) the accumulated post-1986 deferred foreign income of such corporation determined as of 31 December 2017 2 (each such date, a ‘measurement date’, and the greater of the accumulated post-1986 deferred foreign income of the corporation as of the measurement dates, the ‘section 965(a) earnings amount’).

In cases where specified foreign corporations have inclusion years that end in or with different taxable years of the same US shareholder, s965 could result in double-counting such shareholder’s aggregate foreign cash position for purposes of determining the shareholder’s deduction under s965(c).

A joint Treasury Department and IRS consultation on the proposed rules will be issued on 22 January 2018. This will also ask for comment on what additional guidance should be issued to assist taxpayers in computing the transition tax. The Treasury Department and the IRS expect to issue additional guidance in the future.

IRS Guidance on Transition Tax on Foreign Earnings – Section 965 - Notice 2018-07

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