The first topic the IRS tackled in guidance regarding the new tax law is how corporate taxpayers should compute and pay the “transition tax” on the untaxed earnings of foreign subsidiaries. In exchange for the lower 21% corporate tax rate and the territorial tax system, corporate profits now held offshore will be deemed to be repatriated. This means the profits will be subject to a one-time tax of 15.5% for liquid assets and 8% for illiquid assets.
It is estimated that over $1.4 trillion of corporate profits were being held offshore as of November 2017. Taxing this income will be a huge boost in Treasury revenues to offset the cost of the Tax Cuts and Jobs Act. It is expected that this one-time repatriation tax will bring in an estimated $339 billion over the next 10 years.
Eight Years to Pay
The repatriation tax can 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. Going forward, 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 and would not owe this type of tax.
The repatriation tax applies to earnings for the last tax year of foreign corporations that begins before January 1, 2018. The IRS Notice explains how to compute post-1986 earnings and profits as a benchmark for applying the tax and how to distinguish between liquid and illiquid assets. Liquid assets are cash and cash equivalents while the illiquid assets include things like investments in factories and real estate.
The IRS guidance also addresses how U.S. companies with ownership stakes in foreign corporations must compute the earnings subject to the tax when the U.S. company and the foreign entity have different taxable years. Finally, the notice provides taxpayers relief from unintended regulatory and reporting consequences arising from a change to existing stock attribution rules in the new tax legislation.
The IRS and Treasury Department have requested public comments on the rules in the Notice and on what additional guidance should be issued to help taxpayers compute and pay the tax. Comments may be sent electronically to Notice.firstname.lastname@example.org. Comments also can be mailed to the Office of Associate Chief Counsel (International), Attention: Leni C. Perkins, Internal Revenue Service, IR-4549, 1111 Constitution Avenue, NW, Washington, D.C. 20224.