Guidance Addresses Earnings Calculation Under Transition Tax

Internal Revenue Service

The IRS has issued guidance (Notice 2018-13) describing additional regulations that it intends to issue for determining amounts included in gross income by a U.S. shareholder under <a href="/research/federal/usc26/951#cq5b-0000003" resolve="/lr/resolve/section-951a1/cq5b#cq5b-0000003" title="section 951(a)(1)">section 951(a)(1)</a> as a result of <a href="/research/federal/usc26/965" resolve="/lr/resolve/section-965/cnmx" title="section 965">section 965</a>, which imposes a transition tax on the untaxed foreign earnings of foreign subsidiaries of U.S. companies under the Tax Cuts and Jobs Act (TCJA). The guidance describes regs that Treasury and the IRS intend to issue addressing the application of <a href="/research/federal/usc26/965" resolve="/lr/resolve/section-965/cnmx" title="section 965">section 965</a>, including rules for determining the status of a specified foreign corporation as a deferred foreign income corporation or an earnings and profits deficit foreign corporation. The TCJA provides that a specified foreign corporation's E&amp;P must be determined as of two measurement dates. The guidance addresses determinations by Treasury and the IRS based on that requirement and describes regs providing for an alternative method for calculating a specified foreign corporation’s post-1986 E&amp;P. Other guidance will specify how to make an election to use the alternative method. Treasury and the IRS will also issue regs addressing the treatment of deficits, including the allocation of deficits to different classes of stock for purposes of determining a U.S. shareholder’s pro rata share of the specified E&amp;P deficit of an E&amp;P deficit foreign corporation and the inclusion of hovering deficits when determining the post-1986 E&amp;P of a specified foreign corporation. The regs will also provide translation rules for purposes of determining the E&amp;P of a foreign corporation in its functional currency. Other rules address the appropriate exchange rate under section 989(b) for translating the <a href="/research/federal/usc26/965#cnmx-0000259" resolve="/lr/resolve/section-965a/cnmx#cnmx-0000259" title="section 965(a)">section 965(a)</a> earnings amount. Under the regs, the cash position of a specified foreign corporation for any cash measurement date must be expressed in U.S. dollars. Notice 2018-13 describes a modification to regs described in <a href="/lr/resolve//22w23">Notice 2018-7</a> regarding the repatriation of earnings subject to the transition tax. The regs will provide that the gain reduction rule described in Notice 2018-7 also applies to distributions received from a deferred foreign income corporation through a chain of ownership described in section 958(a). Notice 2018-13 also provides guidance under <a href="/research/federal/usc26/863" resolve="/lr/resolve/section-863/cqfd" title="section 863">sections 863</a> and <a href="/research/federal/usc26/6038" resolve="/lr/resolve/section-6038/cnr8" title="section 6038">6038</a> in connection with the repeal of section 958(b)(4) by the TCJA. <a href="/research/federal/usc26/965" resolve="/lr/resolve/section-965/cnmx" title="Section 965">Section 965</a> is effective for the last tax years of foreign corporations that begin before January 1, 2018, and for U.S. shareholders, for the tax years in which the foreign corporations' tax years end. Treasury and the IRS intend for the regs described in the guidance to be effective beginning in the first tax year of a foreign corporation to which section 965 applies. The repeal of section 958(b)(4) has a similar effective date, and taxpayers may rely on the applicable guidance for the last tax year of foreign corporations beginning before January 1, 2018, and for the tax years of U.S. shareholders in those tax years of foreign corporations end, pending the issuance of further guidance. Comments are requested on the rules described in the guidance and on what additional guidance is needed to help taxpayers apply <a href="/research/federal/usc26/965" resolve="/lr/resolve/section-965/cnmx" title="section 965">section 965</a>.

The IRS has issued guidance describing additional regulations that it intends to issue for determining amounts included in gross income by a U.S. shareholder under section 951(a)(1) as a result of section 965, which imposes a transition tax on the untaxed foreign earnings of foreign subsidiaries of U.S. companies under the Tax Cuts and Jobs Act.

The IRS has issued guidance (Notice 2018-13) describing additional regulations that it intends to issue for determining amounts included in gross income by a U.S. shareholder under section 951(a)(1) as a result of section 965, which imposes a transition tax on the untaxed foreign earnings of foreign subsidiaries of U.S. companies under the Tax Cuts and Jobs Act (TCJA). The guidance describes regs that Treasury and the IRS intend to issue addressing the application of section 965, including rules for determining the status of a specified foreign corporation as a deferred foreign income corporation or an earnings and profits deficit foreign corporation. The TCJA provides that a specified foreign corporation's E&P must be determined as of two measurement dates. The guidance addresses determinations by Treasury and the IRS based on that requirement and describes regs providing for an alternative method for calculating a specified foreign corporation’s post-1986 E&P. Other guidance will specify how to make an election to use the alternative method. Treasury and the IRS will also issue regs addressing the treatment of deficits, including the allocation of deficits to different classes of stock for purposes of determining a U.S. shareholder’s pro rata share of the specified E&P deficit of an E&P deficit foreign corporation and the inclusion of hovering deficits when determining the post-1986 E&P of a specified foreign corporation. The regs will also provide translation rules for purposes of determining the E&P of a foreign corporation in its functional currency. Other rules address the appropriate exchange rate under section 989(b) for translating the section 965(a) earnings amount. Under the regs, the cash position of a specified foreign corporation for any cash measurement date must be expressed in U.S. dollars. Notice 2018-13 describes a modification to regs described in Notice 2018-7 regarding the repatriation of earnings subject to the transition tax. The regs will provide that the gain reduction rule described in Notice 2018-7 also applies to distributions received from a deferred foreign income corporation through a chain of ownership described in section 958(a). Notice 2018-13 also provides guidance under sections 863 and 6038 in connection with the repeal of section 958(b)(4) by the TCJA. Section 965 is effective for the last tax years of foreign corporations that begin before January 1, 2018, and for U.S. shareholders, for the tax years in which the foreign corporations' tax years end. Treasury and the IRS intend for the regs described in the guidance to be effective beginning in the first tax year of a foreign corporation to which section 965 applies. The repeal of section 958(b)(4) has a similar effective date, and taxpayers may rely on the applicable guidance for the last tax year of foreign corporations beginning before January 1, 2018, and for the tax years of U.S. shareholders in those tax years of foreign corporations end, pending the issuance of further guidance. Comments are requested on the rules described in the guidance and on what additional guidance is needed to help taxpayers apply section 965.

Sec. 965 Treatment of deferred foreign income upon transition to participation exemption system of taxation

Sec. 951 Amounts included in gross income of United States shareholders

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Guidance Addresses Earnings Calculation Under Transition Tax