US IRS to deny accounting period changes that avoid tax on deemed repatriation

The US IRS today announced it will deny a change in the accounting period of some US companies’ foreign affiliates if the change results in avoidance of the US’s newly enacted transition tax, which deems a repatriation of US company’s existing offshore earnings.

Rev. Proc. 2018-17 prevents 2017 changes to the annual accounting periods of some foreign corporations under both automatic or general rules if the change could result in the avoidance, reduction, or delay, of the transition tax, enacted in the Tax Cuts and Jobs Act.

The IRS said that the changes are needed to prevent a section 965 specified foreign corporation with a taxable year ending on December 31, 2017, to avoid the purposes of section 965 by changing its taxable year.

“For example, if a [deferred foreign income corporation (DFIC)] with the calendar year as its taxable year elected, effective for its taxable year beginning January 1, 2017, a taxable year closing on November 30, the election could defer by as much as 11 months a United States shareholder’s inclusion with respect to the DFIC under section 965. Further, the election could, depending on the facts, reduce the amount of the tax liability of a United States shareholder of the DFIC by reason of section 965, including through the reduction of the post-1986 earnings and profits of the DFIC,” the IRS said.

The official version of Proc 2018-17 will be published in IRB 2018-09 on Feb. 26.


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