The U.S. Treasury and the IRS recently released comprehensive proposed regulations with respect to the deemed repatriation provision (the "transition tax"), which imposes a one-time "toll charge" on certain U.S. persons with foreign earnings accumulated offshore (the "proposed regulations"). For the most part, the proposed regulations follow guidance announced in three prior notices and a revenue procedure, with some modifications and additional rules.
The transition tax was enacted as part of sweeping U.S. tax reform legislation at the end of 2017, and is intended to implement the U.S. shift from a worldwide tax system to a participation exemption system. The tax is imposed on the post-1986 earnings and profits (E&P) of specified foreign corporations as of November 2, 2017 or December 31, 2017, by deeming the earnings to be repatriated, regardless of whether the earnings were actually transferred to the United States.
The tax affects U.S. individuals and domestic corporations that directly or indirectly own 10% or more of a specified foreign corporation. For domestic corporations, foreign earnings held as cash or cash equivalents are effectively taxed at 15.5 percent, and other earnings are taxed at 8 percent. The lower rates are achieved by way of a deduction keyed to the corporate tax rate; because of this mechanism, U.S. individuals may be subject to higher tax rates on the deemed repatriated amounts.
Taxpayers may generally elect to pay their transition tax liability in installments over an eight-year period, and various other elections are available under the transition tax provisions and the related guidance.
Although the proposed regulations typically rejected taxpayers' comments requesting relief from the application of the rules contained in the statute and previous guidance, they do provide greater certainty on many of the issues flagged as requiring additional clarity.
The proposed regulations provide general rules and definitions for the transition tax, as well as technical rules related to adjusting E&P and basis, determining the allowable deduction, the coordination with foreign tax credit provisions, and the treatment of taxpayers who are members of affiliated groups. They also provide procedural rules regarding payments and the various elections that are available under the transition tax provisions, and under a separate provision that allows a U.S. individual to elect to be taxed as a domestic corporation in certain circumstances.
The proposed regulations contain anti-avoidance rules, which diverge slightly from the anti-avoidance rules provided for in a prior notice. These rules disregard certain transactions for purposes of the transition tax (specifically, those which were undertaken with a principal purpose of reducing the amount of the transition tax imposed, involved changes in method of accounting or entity classification elections, or occurred between November 2, 2017 and December 31, 2017). No de minimis exceptions will be available.
How Venable Can Help
The Treasury and the IRS continue to work to address complicated tax reform provisions. Although the proposed regulations generally follow their previous guidance, the relevant calculations and decisions that taxpayers must make with respect to the transition tax remain incredibly complex. Venable's international tax team can provide our clients with strategic and timely advice with respect to their transition tax liability under the proposed regulations, and knowledgably help them navigate new administrative guidance as it is released.