The US Internal Revenue Service and the Department of the Treasury have released comprehensive guidance on how to calculate liability to the Transition Tax, provided for in Section 965 of the Tax Cuts and Jobs Act, and explained elections available to taxpayers.
New Publication 5292 is intended to support taxpayers to prepare 2017 returns.
The "transition tax" applies to the untaxed foreign earnings of foreign subsidiaries of US companies.
Prior to the reform, US tax on the income of a foreign corporation could be deferred until the income was distributed as a dividend or otherwise repatriated by the foreign corporation to its US shareholders. A report from the Institute on Taxation and Economic Policy (ITEP) from March 2017 estimated that Fortune 500 companies are avoiding USD767bn in US federal income taxes by holding more than USD2.6 trillion offshore.
The transition tax seeks to regularize these holdings as part of the switch from a tax system with a worldwide corporate tax basis towards a territorial tax basis system, with a concessionary tax rate for newly repatriated income. The transition tax generally may be paid in installments over an eight-year period.
The tax functions by deeming to have been repatriated any untaxed foreign earnings of US companies' foreign subsidiaries. Foreign earnings held in the form of cash and cash equivalents are taxed at a 15.5 percent rate, and the remaining earnings are taxed at an eight percent rate.
The IRS said of the change:
"As a result of the amendment, certain taxpayers are required to include in income an amount (section 965(a) inclusion amount) based on the accumulated post-1986 deferred foreign income of certain foreign corporations that they own either directly or indirectly through other entities. Other taxpayers may have inclusions in income under section 951(a) by reason of section 965 due to ownership of deferred foreign income corporations (DFICs) through US shareholder pass-through entities."
"Section 965 also allows for a deduction (section 965(c) deduction). Section 965(a) inclusions and corresponding section 965(c) deductions are taken into account based on the last tax year of the relevant foreign corporations that begin before January 1, 2018."
"Certain taxpayers may make certain elections with respect to section 965. These elections include: (i) an election to pay the section 965 net tax liability over eight years, (ii) an election by S corporation shareholders to defer payment of the section 965 net tax liability with respect to such S corporation until a triggering event, (iii) an election by real estate investments trusts to take both section 965(a) inclusions and the corresponding section 965(c) deductions into account over eight years, (iv) an election not to apply a net operating loss, and (v) an election to use an alternative method to calculate post-1986 earnings and profits (post-1986 earnings and profits)."
The new publication defines the deferred income that will be liable to the transition tax and the types of entities covered by the regime.
It also covers which entities are obligated to report Section 965 amounts; how to report Section 965 amounts on 2017 tax returns; guidance for those taxpayers that may have to include Section 965(a) inclusion amounts in a return for the 2016 tax year; guidance on calculating Section 965 amounts, in a worksheet provided within the publication; and guidance on currency valuations.
On August 3, 2018, Russia ratified the protocol to the DTA with Belgium.
On July 27, 2018, the DTA between Belarus and the United Kingdom entered into force.
On August 3, 2018, Russia ratified its pending DTA with Japan.
On July 30, 2018, Taiwan expressed its desire to negotiate a TIEA with Spain.
On May 29, 2018, China and Chile signed a DTA.
On August 1, 2018, Ecuador ratified the pending Protocol to the 1994 DTA with Switzerland.
In a bulletin released on July 30, 2018, Colombia's Ministry of Finance announced that negotiations on the country's prospective DTA with Japan have been concluded.
On July 27, 2018, Kosovo ratified the DTA signed with Austria.
According to a Maltese Government press release on 24 July, 2018, officials from Bosnia and Herzegovina and Malta are negotiating a DTA.
On July 18, 2018, a DTA between Cyprus and the United Kingdom entered into force.
During a meeting held in Brazil on July 17, 2018, representatives of the Brazilian and Lithuanian governments engaged in negotiations on a prospective DTA between the two countries.
The UK Government on July 23, 2018, published a consolidated version of the twice amended Belize-UK DTA.
On July 13, 2018, an amending protocol signed in February between the United Kingdom and Mauritius entered into force.
Finland's President on July 13, 2018, approved the signature of a Protocol to the 1996 DTA with the Nordic countries: Finland, Denmark, the Faroe Islands, Iceland, Norway, and Sweden.
India's Ministry of Finance published a notification declaring that the protocol signed on January 27, 2016, amending the country's 2003 double tax treaty with Armenia, entered into force on June 14, 2017. The notification was published in the Gazette of India on July 5, 2018.
During a meeting held in Hanoi on July 13, 2018, representatives from Vietnam and Algeria discussed potentially negotiating a DTA.
On July 14, 2018, the tax authorities of Maldives and Singapore concluded a first round of negotiations on a prospective DTA.
On July 10, 2018, officials from Kenya and Portugal signed a DTA.
On July 11, 2018, San Marino and the United Arab Emirates signed a DTA.
The UAE's Cabinet on June 13, 2018, approved DTAs signed with Saudi Arabia, Rwanda, and Turkmenistan.
A law to ratify the Azerbaijan-Morocco DTA was tabled before Morocco's Cabinet on June 14, 2018.
Qatar's Government on June 14, 2018, confirmed that it had completed its domestic ratification procedures in respect of a DTA signed with Argentina.
Ukraine's Cabinet on June 6, 2018, approved a law to ratify a DTA Protocol signed with the United Kingdom.
Luxembourg and Vietnam agreed to continue negotiations towards a DTA Protocol at a June 15 meeting.
Sweden's Parliament on June 7, 2018, approved an amendment to the country's DTA with Switzerland to clarify the scope of the term pension fund in the agreement.