IRS Issues Preliminary Guidance on One-Time Repatriation Tax under Tax Reform Law by Andre’ Benayoun, JD
Posted on January 10, 2018 by Andrè Benayoun, JD
Following the passage of the Tax Cuts and Jobs Act (TCJA), the IRS issued preliminary guidance to help multi-national businesses comply with the new law’s “deemed repatriation tax” on foreign profits that U.S. companies and their overseas subsidiaries hold offshore.
Effective for the last tax year beginning prior to Jan. 1, 2018, U.S. businesses will be subject to a one-time “deemed repatriation tax” of 15.5 percent on certain earnings they made since 1987 and invested in liquid assets held overseas and an 8 percent tax on foreign earnings invested in illiquid, fixed assets, such as plants and equipment. The tax due may be spread over an eight-year period and is due regardless of whether or not businesses actually bring foreign profits back to the U.S.
This provision replaces the previous tax regime, under Section 965 of the Internal Revenue Code, for which U.S. businesses were able to defer paying a 35 percent tax on repatriated earnings by stockpiling profits offshore. It aims to move the U.S. to a more territorial system in which U.S. companies would pay taxes in the future solely to the foreign governments where they earn profits.
The end result of the new law would be an immediate tax hit on corporate profits with the benefit of avoiding U.S. taxes in the future, even on earnings that businesses bring back to the States. However, it is important to note that these benefits are afforded solely to C Corporations and not to S Corporations or individuals. This may be a surprising result for some because, while the future benefits of a territorial regime only apply to C Corporations, the deemed repatriation of foreign earnings does, indeed, apply to S Corporations that do not elect to defer the income pick-up as well as to individuals, for which no election to defer the income pick-up is available.
Under IRS Notice 2018-07, the agency has declared its plan to better define, in the near future, what constitutes liquid and illiquid assets held offshore for purposes of calculating the effective tax rate applicable to the deemed repatriation of foreign earnings. Furthermore, the Notice attempts to further explain and eliminate the double taxation issue that may arise when foreign corporations of a U.S. company have different tax years (e.g., one foreign corporation has a December 31 year-end and another has a November 30 year-end.)
About the Author: Andre Benayoun, JD, is an associate director of International Tax Services with Berkowitz Pollack Brant, where he works with inbound and outbound multinational businesses and nonresident aliens on a variety of matters, including structuring for mergers, acquisitions and liquidations; planning for profit repatriation; treaty analysis; tax-efficient debt financing; and pre-immigration tax planning. He can be reached at the CPA firm’s Miami office at (305) 379-7000 or via email at firstname.lastname@example.org.