As April 17 quickly approaches, the stakes are higher than ever as many companies face head-on the new transition tax on unrepatriated foreign earnings, or, as we have affectionately come to know it as, the toll charge. The IRS recently affirmed in IR-2018-53 issued on March 13, 2018, that companies electing to pay the toll charge in installments must pay the first installment, equal to 8 percent of the total toll charge liability, by their federal return due date without extensions. For calendar year companies, this means that a payment must be made by April 17.
Many companies and individuals have likely already calculated their toll charge liability. However, given the scale of the liability coupled with the significant risk if there are any errors, it can’t hurt to have a second set of eyes on the calculation and compliance.
Recent IRS Guidance Provides New Mandatory Compliance
In its recent Q&A guidance, the IRS has provided both a new statement, IRC 965 Transition Tax Statement, which must be attached to the return of taxpayers subject to the toll charge, and new instructions on how to report the toll charge based on the taxpayer’s classification (i.e., domestic corporation, partnership, individual, etc.). For example, domestic corporations will exclude the full toll charge inclusion and applicable deduction from Form 1120, and instead, report such income and deduction on lines 1 and 3 of the new statement. The net inclusion amount, however, is to be reported on Schedule J of Form 1120. Taxpayers may find these new reporting protocols under Appendix Q&A2 of the guidance. Taxpayers should take notice of the Q&A’s key points and report in conformity with this guidance.
Incorrect Calculations or Late Payments Could Result in Forfeiture of Installment Right
For entities and persons expecting a toll charge, the election to pay the charge over an eight-year period makes the current year cash outlay less burdensome up front. However, making such an election puts even more pressure on the accuracy of the calculations. If a taxpayer’s calculations are understated or if a taxpayer is late in paying an installment of the toll charge, the ability to continue paying in installments may be voided, and all remaining liability may be due immediately. As the calculations are not straightforward and the stakes are so high, most companies will find that a toll charge review is in order.
Many U.S. Shareholders Will Be Surprised to Learn They Could be Subject to the Toll Charge
The new rules include a broader group of taxpayers subject to the toll charge beyond the typical U.S. multinational with subsidiaries historically considered controlled foreign corporations. Any U.S. person (including individuals) holding 10 percent or more of the vote or value in a foreign corporation may now be subject to the toll charge. In addition, the modified constructive ownership rules mean more foreign entities may be converted to controlled foreign corporations, much to the chagrin of pre-tax reform “de-control” structural planning.
Taxpayers Must Ask for Permission to Fix Double-Counted Assets
Some global groups with intercompany transactions might see their foreign assets being double-counted in the calculations, resulting in exaggerated balances of E&P or cash and, hence, an artificially inflated toll charge. In expectation of this issue, the new rules allow taxpayers to prove to the Secretary of the Treasury that they qualify for relief from double-counting.
Taxpayers May Exclude Some Types of E&P
Not all E&P held in foreign companies is subject to the toll charge. For example, E&P during years where entities were not CFCs or 902 corporations may be partially or fully excluded. Additionally, pre-1987 E&P, previously taxed Subpart F income and E&P that has already been taxed by the U.S. is excluded.
Taxpayers Will Be Frustrated by Complexities of New Calculations
The mechanical rules for applying the toll charge to E&P calculations present several difficulties for taxpayers — not only in definitional terms, but also in terms of gathering all necessary information. For example, the toll charge requires E&P and cash calculations as of two (possibly three) different measurement dates, one of which is November 9, a date companies are unlikely to use as a measurement date.
Benefits of Accurate Reporting
The introduction of this toll charge isn’t all bad news for taxpayers who are subject to it. Taxpayers that accurately calculate and comply with the provisions of the toll charge will reap many benefits as well. Not only is the toll charge subjecting previously deferred income to historically low tax rates, but the payments may be made in installments if the taxpayer elects to do so. Further, taxpayers, even if they elect to pay the toll charge in installments, immediately have access to cash (or added basis in stock) that until now was isolated in their foreign structures, which, in turn, may be an extremely valuable tool in future tax, cash or other planning efforts.
Alvarez and Marsal TAXAND Says
More taxpayers than ever are subject to a new, complicated international tax regime. If relying on the installment plan, there is significant risk that any late or underpayments may result in acceleration of the full toll charge liability. Without the benefit of deferral, many taxpayers could have major financial statement and cash tax impacts. Guidance is continually rolling out on the toll charge (most recently on the filing obligations), and without a second set of eyes, some taxpayers may find themselves inadvertently forfeiting the installment plan and subject to penalties. Given the stakes, taxpayers subject to the toll charge should get a second look at this highly technical and completely new calculation. A&M has developed a toll charge modeling tool that we can use quickly assist taxpayers with a second review. We can confirm your toll charge liability, assist in compliance, and discuss how to make the benefits inherent in the toll charge work in your favor.