2017 non-US repatriation opportunity
Both the Trump administration’s tax proposal, as well as 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 income subject to tax.
The ability of Congress and the administration to enact legislation relating to untaxed non-U.S. earnings in 2017 appears to be remote. However, U.S. multinationals should analyze the potential impact of this proposed legislation on both their future tax position as well as the impact on their financial statements.
In addition, for U.S. multinationals that have the ability to remit non-US earnings currently with little to no residual US tax cost, this alternative should be strongly considered. Taxpayers that may have the ability to hype foreign tax pools in order to reduce or eliminate the tax cost of a remittance should consider the option and how it may affect their tax liability. Such hyping may be achieved through 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.