On July 2, 2018, the IRS announced five new Large Business and International (LB&I) Division compliance campaigns. Two of these campaigns focus on repatriation of foreign earnings.
One campaign targets the Section 965 one-time transition tax introduced by the Tax Cuts and Jobs Act. §965 requires U.S. shareholders to pay a toll charge on untaxed foreign earnings of specified foreign corporations as if those earnings had been repatriated. The transition tax is imposed at a reduced rate—15.5 percent for foreign earnings held in cash and 8 percent for foreign earnings held in illiquid assets for C corporations that are in the top 35 percent federal tax bracket. For noncorporate taxpayers in the top 39.6 percent federal tax bracket, the reduced transition tax rate is 17.5 percent for foreign earnings held in cash and 9.1 percent for foreign earnings held in illiquid assets. Additional state income taxes may apply.
Taxpayers may elect to pay the §965 transition tax in installments over an eight-year period. For most taxpayers the first installment tax payment equal to 8 percent of the transition tax is due by the original due date (without extension) of their 2017 income tax return. S corp shareholders may elect to defer payment of the transition tax indefinitely, until a triggering event such as transfer of S corp shares, conversion of the S corp to a C corp or liquidation of the S corp.
The §965 LB&I campaign may be directed at raising awareness to shareholders who may be unfamiliar with their filing and payment obligations, such as individuals, S corps and partnerships. In April 2018, LB&I circulated a communication to trade groups, advisers and other stakeholders as part of an outreach campaign to raise awareness of filing and payment obligations under §965.
The other cross-border LB&I campaign introduced on July 2 targets repatriation via foreign triangular reorganizations. In December 2016, the IRS issued Notice 2016-73, which curtails the claimed “tax-free” repatriation of basis and untaxed controlled foreign corporation earnings following the use of certain foreign triangular reorganization transactions. The LB&I campaign’s goal is to identify and challenge these transactions by educating and assisting examination teams in audits of these repatriations.
Contact Chris or your trusted BKD advisor if you have questions.