IRS Provides Additional Transition Tax Guidance

by Mike Godfrey, Tax-News.com, Washington

25 July 2019

On July 16, 2019, the United States Internal Revenue Service announced the publication of additional information to help taxpayers meet their filing and payment requirements in respect of the Section 965 transition tax on untaxed foreign earnings.

Section 965 was added to the tax code by the 2017 Tax Cuts and Jobs Act. It is a tax on the untaxed foreign earnings of foreign subsidiaries of US companies.

Prior to the reform, US tax on the income of a foreign corporation could be deferred until the income was distributed as a dividend or otherwise repatriated by the foreign corporation to its US shareholders. The transition tax seeks to regularize these holdings as part of the switch from a tax system with a worldwide corporate tax basis towards a territorial tax basis system, with a concessionary tax rate for newly repatriated income.

The tax functions by deeming any untaxed foreign earnings of US companies' foreign subsidiaries to have been repatriated. Foreign earnings held in the form of cash and cash equivalents are taxed at a 15.5 percent rate, and the remaining earnings are taxed at an eight percent rate. The tax generally may be paid in installments over an eight-year period.

The IRS has now released information in question and answer format related to Section 965 that addresses certain general issues that are not specific to the filing of a 2017 or 2018 tax return. The issues addressed include how to make subsequent installment payments when the transition tax is paid over eight years. The guidance also address the filing of Transfer Agreements and Consent Agreements.

The Treasury Department and the IRS released final regulations related to Section 965 in February 2019 and on June 14, 2019, released final regulations on the Global Intangible Low-Taxed Income regime, which include revisions to the Section 965 final regulations.

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