United States

Revised transition tax FAQs address transfer agreement requirements

TAX ALERT  | 

On November 6, the IRS revised their Questions and Answers about Reporting Related to Section 965 on 2017 Tax Returns, a list of Frequently Asked Questions (FAQs) and answers, to provide further guidance on how taxpayers are to file a Transfer Agreement under section 965. Under proposed regulations, certain corporate taxpayers that elected the installment plan for their section 965 transition tax liability and subsequently transferred substantially all of the assets of their foreign corporation to another entity could be required to file a transfer agreement by Oct. 9, 2018 in order to avoid triggering current liability for deferred transition tax arising under section 965. Recognizing that they had not issued adequate guidance prior to the regulatory deadline the IRS, on Oct. 8, 2018, issued a “Special Update” to the FAQs to provide an extension of the deadline. The new FAQs, questions 18, 19, and 20, provide the address where all Transfer Agreements must be filed, the specific consent language transferees must include, and establish that previously filed Transfer Agreements must be resubmitted to the new address with the exact consent language provided in the FAQs. The ultimate due date for the filing of the Transfer Agreement remains uncertain, the FAQs only state that, “Transfer Agreements will be considered timely filed if filed by the date provided in the [yet to be issued] final regulations under section 965.”

The proposed regulations for section 965 had previously outlined “terms of agreement” for the Transfer Agreement. However, Answer 19, appears to add a new requirement. It was always known that the transferee would be required to immediately assume any outstanding section 965 liability; under the Code, the buyer essentially steps into the shoes of the seller. However, the language set forth in the FAQs requires that the buyer also waive its right to contest the liability in Tax Court. This added requirement raises the stakes on the accuracy of a seller’s section 965 liability calculation as it may limit a buyer’s ability to correct any calculation errors they may uncover.

Taxpayers with transition tax exposure, that have also been involved in subsequent reorganizations of foreign assets, or otherwise triggered acceleration of any deferred transition tax, should consult with their advisors to determine their Transfer Agreement filing requirements. While no firm deadline has been established, it would likely be prudent to file any outstanding Transfer Agreements in a timely manner and not let them linger.

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