The United States (US) Internal Revenue Service (IRS) issued final regulations on the Internal Revenue Code¹ Section 965 transition tax on 15 January 2019. The final regulations are generally consistent with the proposed regulations² published on 9 August 2018, but with certain modifications. Notable changes from the proposed regulations include:

• Excluding certain commodities from the cash position of a specified foreign corporation (SFC)
• Requiring a US shareholder of an SFC at any point during the inclusion year to include in gross income its pro rata share an SFC’s Section 965 amount, even if the SFC ceases to be an SFC during the transition year
• Clarifying the inclusion ordering rules, including for Section 1248 amounts and amounts paid between SFCs that are disregarded for Section 965 purposes
• Clarifying that Section 965(b) previously taxed earnings and profits (PTI) are treated as included under Section 951 for purposes of Section 1248(d)(1)
• Allowing a US shareholder to limit the basis adjustments required under the basis-shifting election to avoid gain recognition from the election
• Allowing US shareholders to elect to not disregard payments between SFCs occurring between earnings and profits (E&P) measurement dates
• Making foreign taxes associated with a hovering deficit available to the extent of current E&P of the SFC with the hovering deficit
• Taking only actual Section 956 inclusions into account in the “without” calculation when calculating the net tax liability for purposes of the Section 965(h) installment election
• Determining the aggregate foreign cash position of a consolidated group by treating the consolidated group as a single US shareholder

The final regulations retain the applicability dates that were in the proposed regulations and, consistent with Section 965, generally apply beginning with the last taxable year of a foreign corporation that begins before 1 January 2018. With respect to a US person, the final regulations apply beginning in the taxable year in which or with which such taxable year of the foreign corporation ends.

The Office of Management and Budget’s Office of Information and Regulatory Affairs is currently reviewing proposed regulations under Section 250 on the deductions for foreign-derived intangible income (FDII) and global intangible low-taxed income (GILTI).

Senate Finance Committee Chairman Chuck Grassley this week said his committee would address tax extenders as the first major piece of tax legislation in the new Congress. The Chairman was quoted as saying that he expected that tax extenders and a separate IRS restructuring bill would move quickly, as they received bipartisan support in the last Congress. Chairman Grassley did not indicate when extenders legislation would be introduced, nor did he mention technical corrections. On the House side, Ways and Means Committee Chairman Richard Neal earlier indicated health care was his top priority, although he also said he was considering how to address tax extenders legislation.

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 Treasury Department releases proposed Section 965 regulations, dated 6 August 2018.

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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