Kudos to the IRS and the SEC for giving us much-needed guidance as we emerge from our holiday week. For many of us, the toll charge on deferred foreign income is now the first order of business. Thankfully, the IRS released Notice 2018-07 last week, and the SEC issued Staff Accounting Bulletin No. 118 the week before. Impressive response times by both agencies during the holiday season!
The good news is that the IRS filled in a few of the key gaps pertaining to the toll charge that Congress left open in the Tax Cuts and Jobs Act. See below for a summary of the highlights of the Notice. In addition, the SEC chimed in and provided some leniency for reporting the impact of the Tax Cuts and Jobs Act in U.S. GAAP financial statements.
On the other hand, the IRS Notice brings to light many nuances of the toll charge and adds several new mandatory calculations. Unfortunately, we have no extension of time to pay the tax, which for many companies can begin as early as April 15. And we have no comfort that an election to spread payments over eight years would be valid if the first payment is later considered inadequate.
The SEC Bulletin might provide some companies with up to a one-year window to account for the impact of the Act. But many companies will have a hard time arguing that they cannot calculate the toll charge, especially when the first payment is due so quickly. In addition, investors will soon ask questions about the charge, e.g., during earnings calls. And the Bulletin still requires disclosures that many companies will prefer to avoid.
The bottom line: most taxpayers are still under tremendous time pressure to calculate and pay the toll charge and to disclose the impact of the Tax Cuts and Jobs Act in their financial statements.
We’ve been helping our clients with a sample calculation and step plan. It serves as a great starting point and a tool for quickly developing a customized approach. Reach out to us or watch for future releases of additional modules covering varying assumptions and complicating fact patterns.
Also, look for future guidance from the IRS in its announced regulations and from the anticipated “blue book,” to be prepared by the Joint Committee on Taxation, providing a general explanation of the Tax Cuts and Jobs Act provisions.
Notable Highlights of IRS Notice 2018-07
In the Notice, the IRS announced its intention to issue regulations to do the following:
For cash and cash-equivalent determinations:
- Prevent double-counting of cash where a U.S. shareholder has two or more specified foreign corporations (SFCs) with different inclusion years that end in two different taxable years of the U.S. shareholder
- Prevent double-counting of cash by disregarding receivables and payables between related SFCs
- Provide clarification on inclusion of hedges and derivatives for determining cash position
For E&P determinations:
- Prevent double-counting of earnings and profits (E&P) that could occur for related SFC transactions that occur between measurement dates
- Prevent elimination of E&P when one SFC pays a dividend to another SFC between measurement dates such that the dividend reduces the payor’s E&P inclusion but does not increase the recipient’s E&P inclusion
- Prevent the over-counting of E&P by reducing accumulated controlled foreign corporation (CFC) E&P by the amount attributable to shareholders who are not “United States shareholders”
- Provide previously taxed income (PTI) ordering rules for distributions from one SFC to another SFC
- Clarify that PTI distributions reduce taxable basis, particularly for PTI distributed in the inclusion year
For consolidated groups:
- Treat consolidated group entities as one shareholder for purposes of calculating the transition tax
For foreign exchange:
- Reduce Section 986 gains/losses with respect to distributions of 965(a) PTI by an amount proportionate to the reduction in taxable income that resulted from the deduction allowed under 965(c)
The information contained herein is of a general nature and based on authorities that are subject to change. Readers are reminded that they should not consider this publication to be a recommendation to undertake any tax position, nor consider the information contained herein to be complete. Before any item or treatment is reported or excluded from reporting on tax returns, financial statements or any other document, for any reason, readers should thoroughly evaluate their specific facts and circumstances, and obtain the advice and assistance of qualified tax advisers. The information reported in this publication may not continue to apply to a reader's situation as a result of changing laws and associated authoritative literature, and readers are reminded to consult with their tax or other professional advisers before determining if any information contained herein remains applicable to their facts and circumstances.
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