The IRS recently released Notice 2018-13 (set to be published in the Internal Revenue Bulletin Feb. 5, 2018) providing taxpayers with much needed guidance regarding, among other things, the calculation of foreign earnings and profits subject to the one-time repatriation tax, along with guidance regarding what constitutes cash and cash equivalents for the purposes of the new tax, and clarification of the potential filing requirements stemming from the expanded stock attribution rules.
Under the new Tax Cuts and Jobs Act (TCJA), taxpayers owning certain foreign corporation’s with deferred foreign income are required to calculate their accumulated foreign earnings and profits as of either Nov. 2, 2017 or Dec. 31, 2017, the greater of which must then be used in the calculation of the new one-time repatriation tax. Recognizing that it may be impractical for some taxpayers to calculate a specified foreign corporation’s earnings and profits on a date other than a month’s end, the Treasury and the IRS stated in Notice 2018-13 that they intend to issue regulations allowing taxpayers to elect an alternative method to calculating a foreign corporation’s earnings and profits. Specifically, Notice 2018-13 states that under the alternative method, taxpayers may calculate foreign earnings and profits as of Oct. 31, 2017 (instead of Nov. 2, 2017) then use “the corporation’s annualized earnings and profits amount” to determine the remaining two days of earnings and profits necessary to comply with the Nov. 2, 2017 calculation requirement.
The notice goes on to provide additional guidance regarding the determination of what constitutes cash and cash equivalents for the purpose of the new repatriation tax – a crucial determination for taxpayers to make, given the varying tax rates depending upon whether earnings are held in cash and cash equivalents (15.5 percent) or in illiquid assets (8 percent). Most notably, the notice provides that debt with a demand feature will be treated as short term debt, and thus as a cash equivalent for the purposes of the repatriation tax.
Finally, as part of the enactment of the TCJA, the stock held by a foreign person can now be attributed to a U.S. person for the purposes of determining whether or not that U.S. person is a shareholder of a foreign corporation and, in turn, whether or not the foreign corporation is a controlled foreign corporation (CFC). CFCs are required to file Form 5471, Information Return of U.S. Persons With Respect To Certain Foreign Corporations. The notice states, however, that the IRS intends to amend the Form 5471 instructions to provide an exception from filing in instances in which a U.S. person is considered to indirectly own the stock of a CFC as a result of this new ‘downward attribution rule’.
Taxpayers subject to this new one-time repatriation tax should pay careful attention to this much needed guidance, as well as be on the look-out for the forthcoming regulations.