The Tax Cuts and Jobs Act (TCJA or the Act) has drastically changed the way U.S. multinationals are taxed and fundamentally changed how U.S. multinationals operate abroad. The transition from a worldwide income system to a hybrid territorial system via a participation exemption (i.e., dividends received deduction) has brought about a one-time repatriation tax under section 965. As a result, we have seen significant repatriation of profits in the first two quarters of 2018 and expect the trend to continue into 2019. The hybrid territorial tax system combined with our new low corporate tax rate of 21 percent has made the U.S. extremely competitive in the global economy.
The TCJA made other significant changes, such as eliminating the indirect foreign tax credits under section 902 (i.e., deemed paid foreign tax credits) which are no longer allowable on future foreign earnings, with some exceptions. The scope of the current Subpart F anti-deferral provisions was also expanded by implementing new base erosion measures, the most significant of which is the introduction of a tax on global intangible low-taxed income (GILTI). Another base erosion measure is the limitation of interest expense to 30 percent of adjusted taxable income. However, the introduction of a new special deduction for certain foreign-derived intangible income (FDII) was a welcomed new provision, granting the benefit of a reduced income tax rate to a new class of income earned directly by a U.S. corporation. Finally, the TCJA introduced the base erosion and anti-abuse tax (BEAT) which generally imposes a minimum tax on certain amounts paid by U.S. payors to certain related foreign recipients to the extent the amounts are deductible by the U.S. payor.
The implementation of these new rules has been quite arduous for the Treasury Department and IRS. What follows is a high-level outline of legislative updates in 2018 that address the major changes to U.S. international tax provisions included in the Act. We expect new guidance in the upcoming months in the form of proposed regulations, notices and other guidance.
Proposed section 965 repatriation tax regulations, guidance and draft forms
Proposed section 965 repatriation tax regulations: The IRS and Treasury Department released proposed regulations on Aug. 1, 2018, implementing section 965 of the Internal Revenue Code. Section 965, as amended by the TCJA, requires U.S. shareholders to pay a one-time repatriation tax on the previously untaxed foreign post-1986 earnings and profits (E&P) of a deferred foreign income corporation (DFIC). The proposed regulations contain the rules related to section 965 described in previously issued notices (see below) with certain modifications as well as additional guidance. The proposed repatriation tax regulations affect U.S. persons with direct or indirect ownership interests in certain foreign corporations.
Prior to issuing the proposed section 965 regulations, the IRS released three notices, a revenue procedure, a publication and frequently asked questions to provide:
- guidance on how to determine any repatriation tax liability;
- direction on how and when to report any tax liability to the IRS;
- clarification on how to make certain elections;
- a description of the section 965 regulations the IRS intended to issue; and
- anti-abuse rules meant to prevent the avoidance of the provision
Additionally, the IRS issued the following guidance throughout the year to address the repatriation tax:
Notice 2018-07: Describes the rules the IRS intended to include in regulations to assist taxpayers in determining any section 965 repatriation tax liability. Guidance in the notice included calculating post-1986 E&P to account for certain dividends distributed during the inclusion year in order to address any potential double counting or double non-counting of the E&P, measuring the cash position of a specified foreign entity and a U.S. shareholder’s aggregate cash position, explaining the interaction of the “previously taxed income” rules of section 959 and section 965 during the inclusion year (including when distributions are made to related companies) and describing the basis adjustment rules. The proposed section 965 regulations issued in August reference many of the provisions in Notice 2018-07.
Notice 2018-13: Modified the guidance provided in Notice 2018-07, described additional E&P and cash position rules, outlined rules the IRS intended to include in the section 965 regulations and informed filers of Form 5471 of a change to the instructions of the form to accommodate the so-called “downward attribution” rule. The proposed regulations issued in August also include references to Notice 2018-13.
Notice 2018-26: Prior to issuing the proposed section 965 regulations, the IRS released Notice 2018-26. This notice modified some of the provisions of Notice 2018-13, described foreign tax credit guidance and outlined the final cash measurement dates of a specified foreign corporation. The notice also clarified the definitions of “accounts receivable” and “accounts payable” and outlined the section 962 election (whereby an individual can elect to be taxed at corporate rates for gross income under section 951(a)).
Notice 2018-78: The IRS issued Notice 2018-78 after it released the proposed section 965 regulations to extend the due date for making a basis election to take into account the reduction of its pro rata share of the section 965(a) earnings amount of the DFIC under section 965(b). The new deadlines will be included in final regulations as follows:
- When final repatriation tax regulations are published in the Federal Register, they will state the basis election must be made no later than 90 days after their publication;
- If a basis election was made on or before the date the final regulations are published, the basis election may be revoked no later than 90 days after the publication of the final regulations in the Federal Register; and
- Relevant tax returns must be filed consistently with an election that has been made and not revoked.
Separately, Notice 2018-78 also provided that the final repatriation tax regulations will treat all members of a consolidated group that are U.S. shareholders as a single U.S. shareholder to disregard certain assets for purposes of determining the group’s aggregate foreign cash position. Finally, the notice stated that the filing relief in IR-2018-187 for taxpayers affected by Hurricane Florence is applicable to section 965 elections and transfer agreements. As such, the elections and transfer agreements that were originally due on or after Sept. 7, 2018, and before Jan. 31, 2019, can be filed by Jan. 31, 2019.
Rev. Proc. 2018-17: This anti-abuse provision outlines the rules used to prevent taxpayers from avoiding or postponing application of the repatriation tax by making changes to tax years, accounting methods or classification of certain foreign entities.
Publication 5292, How to Calculate Section 965 Amounts and Elections Available to Taxpayers: The IRS released Publication 5292 in April 2018, which explains how amounts under section 965 should be reported and included in income. The publication also includes guidance on calculating section 965 amounts.
IRS section 965 Q&As for 2017 returns: In March 2018, the IRS released “Questions and Answers about Reporting Related to Section 965 on 2017 Tax Returns,” addressing repatriation tax return filing and tax payment obligations. Additional guidance on how to calculate the section 965 tax liability and various reporting questions was issued throughout the year.
Draft Form 965 and schedules: In August 2018, the IRS posted a number of early draft releases of Form 965, Inclusion of Deferred Foreign Income Upon Transition to Participation Exemption System, and Schedule H, Amounts Reported on Forms 1116 and 1118 and Disallowed Foreign Taxes. In early September, the IRS also released the following draft schedules for section 965:
- Schedule A, U.S. Shareholder's Section 965(a) Inclusion Amount;
- Schedule B, Deferred Foreign Income Corporation's Earnings and Profits (E&P);
- Schedule C, U.S. Shareholder's Aggregate Foreign Earnings and Profits Deficit;
- Schedule D, U.S. Shareholder's Aggregate Foreign Cash Position;
- Schedule E, U.S. Shareholder's Aggregate Foreign Cash Position – Detail;
- Schedule F, Foreign Taxes Deemed Paid by Domestic Corporation (for tax years of foreign corporations whose last taxable year, beginning before January 1, 2018, ends during the U.S. shareholder’s 2018 tax year);
- Schedule G, Foreign Taxes Deemed Paid by Domestic Corporation (for tax years of foreign corporations whose last taxable year, beginning before January 1, 2018, ends during the U.S. shareholder’s 2017 tax year).
The IRS reissued Form 965 with a draft stamp of Sept. 24, 2018. The IRS did not explain the changes it made when it reissued draft Form 965. However, it would appear that notes were edited in the following two lines:
- The note on line 3 “Total 2018 Tax Year Section 965(a) Inclusion” providing that Form 1040 filers enter the amount from this line on line 21 of that form has been deleted. Also, the phrase “All others: see instructions” was added.
- A note was added to line 17 “Total 2018 Tax Year Section 965(c) Deduction” instructing corporations to enter the line 17 total on Form 1120, Schedule C, line 15, column (c), regarding the foreign dividend gross-up, or the corresponding line of other corporate tax returns. Again, filers of all other forms are directed to see the instructions to the form.
To date, no draft instructions for the Form 965 or supporting schedules have been released. The IRS cautioned that these drafts are subject to review and may change before they are finalized and released.
Once finalized, the form and schedules should be used by 2018 calendar-year and fiscal-year taxpayers to satisfy filing and reporting obligations of the section 965 repatriation tax. Tax filings for 2017 should be made following the guidance provided in the section 965 questions and answers — but amended filings may be required.
Section 951A GILTI guidance and forms
Proposed section 951A GILTI regulations: On Sept. 13, 2018, the IRS and Treasury released proposed regulations on implementing section 951A of the Internal Revenue Code. Section 951A annually subjects GILTI earned by a controlled foreign corporation (CFC) to U.S. tax on a current basis in the same manner as Subpart F income.
In addition to providing computational and mechanical guidance, the proposed GILTI regulations included anti-avoidance rules related to the determination of a U.S. shareholder’s GILTI inclusion and rules in the context of partnerships and consolidated groups. Notably, the proposed regulations did not include rules relating to foreign tax credits, the section 250 deduction or the interaction with sections 163(j), 245A and 267A. The preamble noted that such rules will be addressed in future guidance and will include rules for assigning the section 78 gross-up attributable to section 960(d) deemed paid foreign taxes to the section 904(d)(1)(A) separate category.
Draft Form 8992, Schedule A and Instructions: The IRS released a draft of Form 8992, U.S. Shareholder Calculation of Global Intangible Low-Taxed Income (GILTI), and Schedule A with a date stamped of Aug. 22, 2018. Around the same time the IRS issued the proposed section 951A GILTI regulations, it also issued draft instructions to the form and schedule (date stamped Sept. 20, 2018). Once finalized, the form and schedule is to be filed by a U.S. shareholder of one or more CFCs required to take into account its pro rata share of any GILTI inclusion amount of the CFC(s). The IRS notes it has provided the form, schedule and instructions for information purposes only and that the draft version of the form and schedule should not be filed.
Draft Form 8993: The IRS also posted a revised draft of Form 8993, Section 250 Deduction for Foreign-Derived Intangible Income (FDII) and Global Intangible Low-Taxed Income (GILTI), to be used by a taxpayer to determine any FDII and GILTI deductions. The draft Form 8993 is date stamped Sept. 20, 2018, and should not be filed with the IRS until it is finalized.
Rev. Proc. 2018-48: This revenue procedure provides guidance as to how amounts included in gross income under sections 951(a)(1) (except repatriation tax amounts of section 965), 951A(a) (GILTI), 1291(a), 1293(a)(1), and 1296(a) and foreign currency gain under section 986(c) with respect to distributions of previously taxed earnings and profits are treated for determining whether a real estate investment trust satisfies the gross income test of section 856(c)(2).
Base erosion and anti-abuse tax
Section 59A imposes a minimum tax added to deductible payments by certain taxpayers to non-U.S. affiliates. This BEAT will be computed and reported to the IRS on Form 8991, Tax on Base Erosion Payments of Taxpayers with Substantial Gross Receipts. The IRS released an early draft version of Form 8991 with a date stamp of Sept. 5, 2018.
Section 163(j) earnings stripping guidance
Another base erosion and anti-abuse provision of the Act is contained in section 163(j). Section 163(j) was amended by the Act and contains new rules limiting the deduction of business interest expense for taxable years beginning after Dec. 31, 2017, based on revised thresholds. The IRS issued Notice 2018-28, which provides guidance with respect to:
- the treatment of disallowed disqualified interest under the previous rules,
- the clarification of the definition of “business interest expense and income,”
- the application of the rules to consolidated groups and the impact they have on E&P.
Withholding of U.S. tax related to transfers of interests in nonpublicly traded partnerships
The Act added section 1446(f), which provides that gain or loss from the sale or exchange of an interest in a partnership will be effectively connected with a U.S. trade or business to the extent the transferor would have effectively connected gain or loss had the partnership sold all of its assets at fair market value on the date of the sale or exchange. Two withholding mechanisms were also enacted (a 10 percent withholding requirement imposed on the transferee of a partnership interest and the other imposed on the partnership if the transferee fails to withhold the correct amount).
On Dec. 29, 2017, the Treasury Department and IRS released Notice 2018-08 which suspended the requirement to withhold on dispositions of interests in publicly traded partnerships (PTPs) until further guidance was issued. However, withholding applies to dispositions of non-PTP interests occurring after Dec. 31, 2017. In Notice 2018-29, the IRS notice provides interim guidance on determining, reporting and paying over an amount required to be withheld under section 1446(f)(1).
Delay of regulations under section 987
The IRS announced in Notice 2018-57 the deferral of the applicability dates of final and temporary section 987 regulations dealing with recognition of foreign currency gain or loss in certain qualified business units. Generally, the regulations will apply to tax years beginning on or after the date that is three years after the first day of the first tax year following Dec. 7, 2016.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.