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The tax community has been waiting for guidance on several aspects of US tax reform before acting |
The US Treasury Department and the Internal Revenue Service (IRS) have proposed new regulations on the payment of the repatriation rates as part of US tax reform.
The US Treasury and the IRS released proposals on August 1 for how to clarify the rules on the repatriation tax rates for different companies. The guidance will affect US shareholders with direct or indirect ownership in certain specified foreign corporations (SFCs).
Section 965 (the section) imposes a one-time tax on the deferred foreign earnings and profits of some US-owned foreign corporations as part of the shift to a partial participation system. The section has introduced a dual system where a 15.5% rate applies to earnings from cash assets and 8% applies to non-cash assets. But this has brought a new level of complexity for companies.
One of the proposals is to ignore transactions after November 2 2017, in order to focus on post-1986 foreign earnings. This would "reduce the taxpayer's liability imposed by reason of section 965, even if such future actions are otherwise respected" under the Internal Revenue Code (IRC), says the new guidance.
"The choice of a November 2, 2017, measurement date reflects an intent to impose a transition tax on a snapshot of earnings as of a date that coincides with the introduction of the Act in Congress," the guidance says.
Taxpayers are still anxious for certainty over the future of the US tax code. These proposals are just a part of trying to settle the system that has been put in place since January 2018.
What's on the drawing board?
Section 965 was drawn up to create incentives to shift profits back to the US by raising barriers to abuse and creating favourable rates for businesses. The success of the reforms depends more on what guidance and regulations are put forward than on anything else. Without guidance, the taxpayer has to speculate.
"Companies are being forced to anticipate future tax guidance in their analysis," Dan Lange, Deloitte's global tax leader, told ITR. "Uncertainty in the tax law does cause a slowdown in determining the tax effects of certain transactions."
The transition tax requires taxpayers to include the accumulated foreign earnings of controlled foreign corporations (CFCs), and other foreign companies with a 10% domestic shareholder, as SFCs.
The proposed guidance clarifies that US shareholders of deferred foreign income corporations (DFICs) and real estate investment trusts (REITs) can make the payments over eight years, while the exact rules for US-owned partnerships have yet to be decided.
"Eight percent of the REIT section 965 amounts in each taxable year in the five-taxable year period beginning with the taxable year the amount would otherwise be included," according to the guidance. "Fifteen percent of the REIT section 965 amounts in the first year following the five year period."
How such assets are defined will determine companies' net tax liability. So the IRS is planning to focus on how multinationals classify assets as cash or non-cash in order to detect any attempts to redefine assets to gain an unwarranted tax advantage.
Andrew Bernard, managing director at Andersen Tax in Philadelphia, explained why the section has been controversial among some tax professionals.
"Section 965 in particular has a very broad anti-abuse rule that really shuts down any real planning and the notices that have been issued by the IRS have confirmed this," Bernard told ITR.
Bernard stressed that the TCJA was drafted in a month and a half, with little input from business or independent economic analysis. While LeSage pointed out that the US tax authority has been engaging with taxpayers as part of its efforts. This is essential for compliance.
"It is important that they continue to listen to taxpayer feedback on the questions the new rules raise and the challenges they create," LeSage said. "Not only so that these rules fairly represent Congressional intent, but also so that taxpayers and their advisers can comply with them."
Several months after the TCJA came into force and the effects of the Trump tax plan are still unfolding week by week, keeping taxpayers and tax advisers on their toes. The US Treasury and the IRS still have a lot of work to do to satisfy the demands for certainty.
Taxpayers still need more guidance
What's still missing is clear guidance on two key parts of US tax reform: the base erosion anti-abuse tax (BEAT) and the global intangible low-taxed income (GILTI) rules. Until the US issues proposals on the BEAT and the GILTI rules, these measures will continue to look like blunt tools for complex problems.
"For many taxpayers the main effort so far has been to understand and apply the new law to their existing facts," Jeffrey LeSage, Americas vice chairman – tax at KPMG, told International Tax Review. "We've been seeing some activity that I believe can be traced to the new law, ranging from some increased capital investment to an uptick in M&A and stock repurchases."
"We'll see more of those types of activities as opportunities present themselves and as business leaders gain a better understanding of the law's overall impact on their enterprises," he explained.
At the same time, the revenue service has been working hard to clarify the implications of the new rules, but most some tax advisers were already clear about the difficulties the Tax Cuts and Jobs Act (TCJA) raises for the delicate work of tax planning.
If the Trump tax plan works as intended, the sums repatriated could be immense. Citigroup estimates that US companies have more than $2.5 trillion in capital held overseas, and the joint committee on taxation estimates that the repatriation rates will generate nearly $340 billion in tax revenue over the next decade.
This is why US Treasury Secretary Steven Mnuchin sees US tax reform as "a historic opportunity for American companies". Even so, the short-term impact may be felt more in the compliance arena as US businesses adjust to the new terrain.
