The new U.S. tax laws include an international tax provision that is of immediate relevance to many U.S. taxpayers, including corporations (C and S corps), pass-through entities, individuals and trusts, for both 2017 financial statement and 2017 U.S. tax compliance purposes. The new provision applies to the 2017 taxable year – i.e., the taxable year beginning on or after January 1, 2017. For calendar year taxpayers, this includes the 2017 calendar tax year just ended. For fiscal year taxpayers, this includes the current fiscal taxable year that will end during 2018.
The new international tax provision is the mandatory “Transition Tax” now imposed under IRC section 965. The Transition Tax is the mechanism by which the new U.S. tax laws facilitate low-tax repatriation to the U.S. of accumulated offshore earnings of U.S. multinational companies. Though designed primarily for the large U.S. corporations that have hordes of cash and assets offshore deferred from U.S. tax, the Transition Tax is also applicable to other U.S. taxpayers with a 10% or greater ownership interest in any foreign corporation.
Simply stated, all U.S. taxpayers with a 10% or greater ownership interest in any foreign corporation MUST determine if they have a 2017 tax year Transition Tax liability and, regardless of whether or not there is a liability, meet relevant 2017 U.S. financial statement (i.e., tax provision) requirements and 2017 U.S. tax reporting requirements. These Transition Tax requirements must be considered even if a U.S. taxpayer has existing U.S. tax NOLs or its foreign corporations have minimal accumulated offshore earnings.
The Transition Tax calculations, tax provision determinations, and payment and tax reporting requirements are exceedingly complex. In simplest terms, the Transition Tax applies to post-1986 accumulated tax-deferred earnings of relevant foreign corporations. A 15.5% Transition Tax rate applies to deferred earnings held in cash or other specified assets; a 8% rate applies to the remainder of deferred earnings. In addition to considering a U.S. taxpayer’s own existing U.S. tax attributes such as NOLs, there are significant Transition Tax elections and planning strategies that can greatly reduce a U.S. taxpayer’s actual Transition Tax liability and the timing of its resulting Transition Tax payments, which can be made over an elected eight-year period.
Even when the Transition Tax is not material for financial statement purposes, it must be properly calculated, accurately reported with U.S. tax returns and timely paid. Automatic IRS penalties of $10,000 per year, per foreign corporation may apply if insufficient, improper or no annual reporting of relevant items is made to the IRS.
BPM is Here to Assist You
We encourage you to work with BPM’s international tax professionals to understand if and how the Transition Tax applies to your company or you. For additional information, please contact one of the following BPM International Tax Services professionals: Doug Wright, ITS Partner, at (925) 296-1044; Alex Waniek, ITS Partner, at (408) 961-6367; or Lu Zhang, ITS Director, at (408) 961-6337.