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21 February 2018 US IRS Guidance under new Section 965 prevents certain foreign corporations from making accounting period changes On 13 February 2018, the United States (US) Department of the Treasury (Treasury) and the Internal Revenue Service (IRS) issued Revenue Procedure 2018-17, modifying Revenue Procedures 2002-39 and 2006-45, relating to IRS procedures for the adoption, retention or change in accounting periods, to prevent certain calendar year foreign corporations from changing their accounting period for 2017 when a US shareholder is required to include an amount in gross income under Internal Revenue Code1 Section 951(a)(1) by reason of Section 965. Revenue Procedure 2018-17 can apply with respect to a request by a foreign corporation to change an annual accounting period that ends on 31 December 2017, regardless of when such request was filed. Revenue Procedure 2002-39 sets forth procedures for establishing a business purpose and obtaining the approval of the IRS to adopt, change, or retain an annual accounting period for US federal income tax purposes under Section 442. Revenue Procedure 2006-45, in turn, includes procedures for corporations within its scope to obtain automatic approval to change their annual accounting periods, including certain foreign corporations, referred to as specified foreign corporations, making an election under Section 898(c)(2) to change their tax year to one beginning one month earlier than that of their majority US shareholders (or to a 52-53 month tax year that references such year) (Section 898 SFCs). P.L. 115-97, commonly known by its pre-enactment title, the Tax Cuts and Jobs Act (the Act), enacted a transition tax provision in Section 965. The transition tax requires a mandatory inclusion of the accumulated foreign earnings of controlled foreign corporations (CFCs) and other foreign corporations with a 10% domestic corporate shareholder, collectively referred to as specified foreign corporations (Section 965 SFCs).2 Section 965(a) provides that for the last tax year of a deferred foreign income corporation (DFIC) that begins before 1 January 2018, the subpart F income of the corporation is increased by the greater of: (1) the accumulated post-1986 deferred foreign income of such corporation determined as of 2 November 2017, or (2) the accumulated post-1986 deferred foreign income of such corporation determined as of 31 December 2017 (the measurement dates). For purposes of Section 965, any Section 898 SFC of a US shareholder that has accumulated post-1986 deferred foreign income (as of a measurement date) greater than zero will be a DFIC. Section 965(o) instructs Treasury to issue regulations or other guidance to implement Section 965, including with respect to preventing avoidance thereof through a reduction in earnings and profits, through changes in entity classification or accounting methods, or otherwise. The Conference Report accompanying the Act also refers to changes in tax years. Revenue Procedure 2018-17 can apply to Section 965 SFCs wanting to change their tax year that ends on 31 December 2017. For 52-53-week tax years, such years are treated as beginning on the first day of the calendar month nearest to the first day of the 52-53-week tax year, and ending or closing on the last day of the calendar month nearest to the last day of the 52-53-week tax year, as the case may be. In the Revenue Procedure, Treasury and the IRS state that a Section 965 SFC with a tax year ending on 31 December 2017, could avoid the purposes of Section 965 by changing its tax year to defer a US shareholder's inclusion or reduce the amount of such inclusion. Revenue Procedure 2018-17 modifies Revenue Procedures 2002-39 (adds Section 3.03) and 2006-45 (adds Section 4.02(15)) to make procedures therein for the approval of accounting period changes inapplicable to certain Section 965 SFCs. Section 4.02 of Revenue Procedure 2006-45 provides that certain corporations are not eligible for automatic approval to change their accounting period unless an exception applies. New Section 4.02(15) excludes Section 965 SFCs from Revenue Procedure 2006-45, even if an exception would otherwise apply, if the following conditions are satisfied:
The same exclusion for requests by Section 965 SFCs for consent to change their accounting period, notwithstanding any exception, is added as Section 3.03 of Revenue Procedure 2002-39. Revenue Procedure 2018-17 can apply with respect to a request by a calendar year Section 965 SFC to change an annual accounting period beginning on 1 January 2017 that ends on 31 December 2017, regardless of when such request was filed. The application of Revenue Procedure 2018-17 is also not limited to Section 965 SFCs where there is an actual transition tax inclusion or where the deficit of the Section 965 SFC offsets earnings of a DFIC. Instead, Revenue Procedure 2018-17 can apply to a Section 965 SFC that has any US shareholder with a transition tax inclusion. US shareholders of a Section 965 SFC that changed, or is considering changing, their annual accounting period from 31 December 2017 to an earlier date (e.g., 30 November 2017) should carefully consider the impact of Revenue Procedure 2018-17 both in terms of the transition tax and more broadly with respect to other considerations such as the effective date of other provisions of the Act. 1 All "Section" references are to the Internal Revenue Code of 1986, and the regulations promulgated thereunder. 2 For more information on the transition tax, see EY Global Tax Alert, US House and Senate release the Conference Report on the Tax Cuts and Jobs Act, dated 21 December 2017.
Document ID: 2018-5307 |
