The United States (US) Government has begun the urgent task of issuing tax guidance on some of the provisions enacted on 22 December in the Tax Cuts and Jobs Act. The Internal Revenue Service (IRS) on 29 December issued Notice 2018-07, its first guidance on the newly-enacted Internal Revenue Code¹ Section 965 transition tax on foreign earnings.

The legislation's repatriation provision requires a mandatory inclusion to a US shareholder of its pro rata share of the accumulated foreign earnings of a controlled foreign corporation (CFC) and other foreign corporations with a 10% domestic corporate shareholder, collectively referred to as specified foreign corporations (SFCs). The mandatory inclusion is implemented by increasing the Subpart F income of the SFC in its last taxable year beginning before 1 January 2018 (transition year), by the greater of its "accumulated post-1986 deferred foreign income" determined as of 2 November 2017 or 31 December 2017. The mandatory inclusion is subject to tax at reduced rates: 15.5% for earnings held in cash or other specified assets, and 8% for the remainder. The tax can be paid in installments.

Notice 2018-07 announces some of the details regarding future regulations that will be issued on the transition tax. For instance, the notice states that for US shareholders with a Section 965 mandatory inclusion in more than one year, coming regulations will provide that the aggregate foreign cash position taken into account in the first taxable year will equal the lesser of the US shareholder's aggregate foreign cash position or the aggregate Section 965 mandatory inclusion for that taxable year. The amount of the aggregate foreign cash position taken into account in any succeeding taxable year will be the US shareholder's aggregate foreign cash position, less the amount of aggregate foreign cash position taken into account in any preceding taxable year.

The notice further describes how future regulations will adjust post-1986 earnings and profits (E&P) to account for certain amounts paid between SFCs during the period between 2 November 2017 and 31 December 2017.

Other areas covered in the Notice include reductions in E&P to reflect dividends distributed to another SFC, how to determine accumulated post-1986 deferred foreign income for CFCs that have non-US shareholders on a measurement date, and the steps for determining, in the transition year, the Section 965 mandatory inclusion of an SFC, the treatment of distributions by that SFC under Section 959, and the amount of the Section 956 inclusion.

The IRS also issued Notice 2018-08 on 29 December, announcing it is suspending withholding obligations under new Section 1446(f) with respect to certain publicly traded partnership interests, pending further guidance. Section 1446(f), which was added to the Code by the Tax Cuts and Jobs Act, provides that if any portion of the gain on any disposition of an interest in a partnership would be treated under new Section 864(c)(8) as effectively connected with the conduct of a trade or business within the US (effectively connected gain), then the transferee must withhold a tax equal to 10% of the amount realized on the disposition. An exception provides that withholding is generally not required if the transferor furnishes an affidavit to the transferee stating that, among other things, the transferor is not a foreign person.

According to the Notice, stakeholders had indicated that applying new Section 1446(f) without government guidance would present significant practical problems.

The IRS noted that the temporary suspension is limited to dispositions of interests that are publicly traded, and does not extend to non-publicly traded interests. The Notice further announced that Treasury and the IRS intend to issue future regulations or other guidance on how to withhold, deposit, and report the tax withheld under Section 1446(f) with respect to a disposition of an interest in a publicly traded partnership. That future guidance will be prospective, according to the Notice, and will include transition rules to allow taxpayers sufficient time to prepare systems and processes for compliance.

The Financial Accounting Standards Board (FASB) announced on 4 January that it will issue additional guidance to clarify how Accounting Standards Codification 740, Income Taxes, applies to certain provisions of the Tax Cuts and Jobs Act, including several of the international tax provisions. FASB indicated that the guidance, which will be discussed at a 10 January meeting, will address: the discounting of the one-time transition tax; accounting for base erosion anti-deferral taxes; and consideration of global intangible low-taxed income in deferred tax calculations, among several other provisions.

The US Tax Court this week ruled that the six-year limitations period in Section 6501 only applies for tax years to which Section 6038D foreign financial asset reporting requirement is effective. The Court in Mehrdad Rafizadeh v. Commissioner concluded that because the six-year limitations period under Section 6501(e)(1)(A)(ii) applies only to omissions from gross income of amounts attributable to certain foreign financial assets (which must be reported under Section 6038D), the six-year limitations period cannot be applied to the years at issue (2006–2008), as the Section 6038D reporting requirement was not effective for those years. The Court therefore found that the IRS deficiency notice was untimely.

———————————————
ENDNOTE

¹ All "Section" references are to the Internal Revenue Code of 1986, and the regulations promulgated thereunder.

———————————————
CONTACTS

For additional information with respect to this Alert, please contact the following:

Ernst & Young LLP, International Tax Services, Washington, DC

• Arlene Fitzpatrick
  arlene.fitzpatrick@ey.com
• Joshua Ruland
  joshua.ruland@ey.com

———————————————
ATTACHMENT

PDF version of this Tax Alert