United States

Tax reform and the impact on 2017 repatriation planning

INSIGHT ARTICLE  | 

Both the Trump administration’s tax proposal and the House Republican tax blueprint contain provisions which would tax unrepatriated earnings of foreign subsidiaries of U.S. multinational corporations. The administration’s proposal provides for a 10 percent tax on unremitted earnings; the House Republican plan provides for an 8.75 percent tax on cash held offshore, with a 3.5 percent tax on remaining non-U.S. unremitted earnings.

Under both plans, the timing of the tax payment as well as the ability to claim foreign tax credits against the tax are uncertain. In addition, there is uncertainty regarding the ability of U.S. multinationals to utilize federal net operating loss carryforwards against an unremitted earnings tax. 

When we last saw similar legislation in 2003, under Internal Revenue Code section 965, the ability to utilize foreign tax credits against the tax on unremitted earnings was limited. In addition, federal net operating losses could not be utilized against the amount of income subject to tax.

The ability of Congress and the administration to enact legislation relating to untaxed non-U.S. earnings appears to be withering as 2017 unfolds. However, U.S. multinationals should analyze the potential impact of this proposed legislation on both their future tax positions and their financial statements.  

2017 action items

For U.S. multinationals that currently have the ability to remit non-US earnings with little-to-no residual U.S. tax cost, this alternative should be strongly considered. Accordingly, these companies should consider the following:

  • Update foreign earnings and profits as well as tax pools
  • Perform foreign tax pool planning to reduce or eliminate the tax cost of a remittance
  • Consider triggering losses under section 987, analyzing the impact of changes in foreign exchange rates on the effective rate of unremitted earnings and possibly through a restructuring of non-US operations, among other scenarios.
  • Consider changing accounting methods to credit foreign taxes versus deducting, if applicable

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