The US IRS and Treasury today released comprehensive proposed regulations under section 965, a transition rule added in the Tax Cuts and Jobs Act that requires a taxable repatriation of US companies’ existing foreign subsidiary earnings at reduced tax rates.
The transition tax was added to the 2017 tax bill to allow the US to switch its international tax system of deferral to a quasi-territorial tax system.
The new regulations follow guidance announced in three prior notices, with some modifications, and also add new rules. Related proposed regulations are also provided under sections 962 and 986.
The proposed regulations, which run 249 pages, provide guidance on general rules and definitions; rules related to the determination and treatment of section 965(c) deductions; rules on disregarding certain transactions in connection with section 965; rules on foreign tax credits; rules on elections and payments, rules on the application of the section 965 regulations to affiliated groups, including consolidated groups; rules on dates of applicability; rules relating to section 962 elections; and rules regarding the application of section 986(c) in connection with section 965.
The government said that there are multiple instances throughout Section 965 where the transition tax may be artificially inflated because of double counting of cash and earnings and profits due to multiple testing dates and chains of ownership.
The regulations aim to produce more equitable results by preventing double counting in computing the aggregate foreign cash position, for example by disregarding receivables and payables between related specified foreign corporations with a common US shareholder and preventing double-counting and non-counting in the computation of deferred earnings arising from amounts paid or incurred between related parties between measurement dates, the government said.
The proposed regulations also seek to reduce uncertainty and ambiguity by providing that all members of a consolidated group that are US shareholders of a specified foreign corporation are treated as a single US shareholder, introducing definitions of terminology used, coordinating foreign tax credit rules, making explicit the process for making elections and paying the tax, and providing dates of applicability, the government said.
“The Tax Cuts and Jobs Act creates a historic opportunity for American companies to bring capital back home from overseas to invest in our domestic economy and create jobs for hardworking Americans,” said Treasury Secretary Steven T. Mnuchin, announcing proposed regulations.
“Our administration’s policies are focused on creating a more competitive system for business, which has already led to greater economic and wage growth,” Mnuchin said.
–MNE Tax expects to publish an expert report on these regulations shortly.
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