The United States (US) Internal Revenue Service (IRS) on 4 June issued a news release (IR-2018-131) announcing that certain late-payment penalties relating to the Internal Revenue Code¹ Section 965 repatriation transition tax will be waived, and providing additional information for individuals subject to the transition tax regarding the due date for relevant elections. The relief is explained in three new FAQs posted on the IRS' tax reform page, supplementing 14 existing questions and answers that provide details on reporting and paying the tax.

The IRS announced that, in some cases, the IRS will waive estimated tax penalties for taxpayers subject to the transition tax who improperly attempted to apply a 2017 calculated overpayment to their 2018 estimated tax, if all required estimated tax payments are made by 15 June 2018. In addition, the IRS will waive the late payment penalty for individual taxpayers who missed the 18 April 2018 deadline, if the installment is paid in full by 15 April 2019. This relief is only available if the total transition tax liability is less than US$1 million.

The IRS also announced that those who have already filed a 2017 return without electing to pay the transition tax in eight annual installments may still make the election by filing a 2017 Form 1040-X. The amended IRS Form 1040 generally must be filed by 15 October 2018.²

US government officials this week offered more insights into upcoming international tax reform guidance. A senior Treasury official was quoted as saying the Government is aware of some of the harsher aspects of the new base erosion and anti-abuse tax (BEAT), particularly for the international banking, insurance and service industries. He said Treasury is currently considering to what extent the department has authority to blunt some of the provision's results. The official declined to offer any specifics, including with regard to the services cost method. The official tempered his comments by adding that Treasury is constrained by the statute in terms of how much it can ameliorate certain aspects of the provision.

Regarding allocation issues associated with the global intangible low-taxed income (GILTI) provision, the official conceded the inherent tension between having a separate foreign tax credit basket and having the GILTI serve as an anti-abuse backstop to territoriality. The pragmatic solution, he said, would be a reasonable combination of interest expense allocation rules and look-through rules.

The Treasury official further disclosed that the department is now reviewing a draft of the proposed Section 965 transition regulations, which are expected to be released at the end of July. He said that while the proposed rules will touch on many of the difficult questions, he cautioned they would not tackle all issues and taxpayers in those situations will have to use their best judgment.

And addressing the ongoing digital tax debate, the official said that while the US Government agrees that the existing rules on global profit allocation can result in anomalous results when applied to digital business models, the US opposes any excise taxes on gross revenues. He noted that tax regimes that target digital companies would disproportionately fall on US multinationals. At the present time, the US favors broad policy discussions on the issue and is ready to participate in such talks at the multilateral level, including at the Organisation for Economic Co-operation and Development (OECD).

In other news, the IRS Commissioner, Large Business and International Division, warned taxpayers they may face examination if they participate in the OECD's voluntary International Compliance Assurance Program (ICAP) and have high-risk transfer pricing and permanent establishment issues. The IRS official said tax administrations participating in ICAP are finding that their greatest challenge is agreeing to what constitutes low- and medium-risk activities. While participants are starting to coalesce around some common views of risk, he said, there is no firm agreement at this time. He also said if the ICAP program is to be made permanent, it will need to be streamlined because it is currently too resource driven.

The IRS reportedly will deploy the portal for Foreign Account Tax Compliance Act (FATCA) certifications at the end of July or early August. An IRS official was quoted as saying the Service will notify financial institutions of the certification deadline on the FATCA registration home page several weeks after the FATCA portal goes live. The IRS also plans to issue FAQs for the portal in the coming weeks.

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ENDNOTES

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

² See EY Global Tax Alert, US IRS updates Section 965 transition tax FAQs to include late-payment penalty and filing relief — action may be needed by 15 June 2018, dated 7 June 2018.

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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

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ATTACHMENT

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