US IRS issues guidance on computing deemed repatriation of foreign earnings

The US IRS on December 29 released an advance version of Notice 2018-07, providing guidance on how multinationals should compute the taxes arising from a deemed repatriation of their foreign earnings accumulated offshore, called for under the US’s newly enacted tax reform law.

US tax reform, signed into law on December 22, requires a deemed repatriation of a US company’s foreign subsidiary earnings at a 15.5 percent tax rate for earnings held in cash and at an 8 percent rate for earnings held in non-cash assets. The transition tax can be paid in installments over an eight-year period. The deemed repatriation is needed to transition to the US’s new territorial tax system.

This new tax on foreign earnings is quite significant — expected to bring the US tax revenue of $338.8 billion over 10 years, according to Joint Committee on Taxation estimates.

As discussed in a related IRS release, the guidance describes regulations that the Treasury Department and the IRS intend to issue, including rules for determining the amount of cash and cash equivalents for purposes of applying the 15.5 percent rate and rules for determining the amount of foreign earnings subject to the transition tax.

These rules will assist taxpayers by providing certain additional information needed for computing their transition tax.

The notice also seeks taxpayer input on what additional guidance is needed from the government to compute the transition tax.

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