Preliminary Guidance Issued on Transition Tax Computation (IR-2017-212; Notice 2018-7)

The IRS has issued preliminary guidance on the transition tax computation. The “transition tax” was enacted as part of the budget resolution on December 22, 2017. Also, the IRS has announced that it will issue rules for determining what amounts are included in gross income by a U.S. shareholder under Code Sec. 951(a)(1).  Taxpayers may rely on the guidance in this notice, which includes examples, until the IRS issues regulations. The new regulations will be effective beginning in a foreign corporation first tax year to which Code Sec. 965 applies.

Transition Tax Computation

Generally, the newly enacted Code Sec. 965 imposes a tax on untaxed foreign earnings of U.S. companies’ foreign subsidiaries by deeming those earning repatriated. Under the new law, foreign earnings held in cash and cash equivalents are taxed at a 15.5-percent rate. The remaining earnings are taxed at an 8-percent rate. In general, the transition tax may be paid in installments over an eight-year period. Code Sec. 965 is effective for the last tax years of foreign corporations that begin before January 1, 2018. Also, it applies to U.S. shareholders for tax years in which or with which such foreign corporations’ tax years end.

Future Regulations

The regulations will include rules for determining cash and cash equivalents for purposes of applying the 15.5 percent rate. In addition, they will include rules for determining the amount of foreign earnings subject to the transition tax. These rules will assist taxpayers by providing additional information needed for computing their transition tax.

Comments Requested

Comments are requested on the rules described in the notice and on additional guidance that should be issued to assist taxpayers in computing the transition tax. Submit written comments to the Office of Associate Chief Counsel (International), Attention: Leni C. Perkins, Internal Revenue Service, IR-4549, 1111, Constitution Avenue, NW, Washington, D.C. 20224. Alternatively, taxpayers may submit comments electronically to Notice.comments@irscounsel.treas.gov.

AUTHOR

Deborah Petro

All stories by: Deborah Petro