Rules affect CFC status of foreign subsidiaries & could be retroactive
On Nov. 14, 2018, IRS Deputy Associate Chief Counsel Daniel McCall acknowledged taxpayer concerns and stated that the IRS is working on regulations to correct certain adverse consequences resulting from certain changes to the Internal Revenue Code (the Code) made by the 2017 Tax Cuts and Jobs Act (TCJA). Speaking at an American Institute of Certified Public Accountants (AICPA) event, McCall stated the government is working on proposed regulations and is considering making the relief retroactive. The regulations would address what McCall described as an unintended consequence of the repeal of certain technical attribution rules.
Prior to repeal in the 2017 TCJA, Section 958(b)(4) of the Code prevented a U.S. shareholder of a foreign corporation from being treated as owning shares in the foreign corporation that are actually owned by the U.S. shareholder’s foreign corporate parent. After the repeal, the U.S. corporation will be treated as owning shares owned by the foreign parent by attribution. This so-called ‘downward attribution’ can result in controlled foreign corporation (CFC) status for the foreign corporation. As a result, any U.S. shareholder of the foreign subsidiary will likely be subject to increased U.S. tax and reporting requirements. Tax professionals have argued that Congress did not intend to transform such foreign companies into CFCs and that this treatment is contrary to the key premise of the CFC rules: that only U.S. taxpayers, either individually or with other U.S. taxpayers, who in fact control a foreign entity should have additional reporting and tax obligations.
Notably, McCall revealed the government is actively working on rules to remediate the issue. The timing of such rules is unknown, but McCall did disclose that the relief may be retroactive, including for the 2017 tax year. Should the government provide retroactive relief, taxpayers who treated foreign corporations as CFCs as a result of the downward attribution rule may be entitled to file amended returns to claim refunds. McCall also stated the new rules may be published in ‘reliance’ mode, which would result in taxpayers being able to reply on the rules as proposed for 2018.
Taxpayers that own foreign corporations should consult with their advisors to understand if this downward attribution rule affects them. Additionally, taxpayers should understand if they stand to benefit should the relief apply retroactively to their 2017 tax year. While the filing deadline for the 2018 tax year is several months away, taxpayers would be prudent to seek the advice of their tax preparer before the end of the year in order to consider potential tax planning opportunities.