TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Wednesday, January 3, 2018

IRS Issues Tax Rate Guidance For Stockpiled Foreign Income

Bloomberg:  IRS Issues Tax Rate Guidance for Stockpiled Foreign Income, by Lynnley Browning:

The Internal Revenue Service and Treasury Department will generally allow existing loans and other related-party transactions involving the overseas affiliates of multinational corporations to be taxed at the lower of two preferential rates, according to an official notice [Notice 2018-07].

The notice, released Friday afternoon, says the IRS and Treasury “intend to issue” new regulations clarifying how multinational companies must compute tax bills on the foreign earnings they have accumulated to date.

The tax-overhaul bill signed last week by President Donald Trump requires companies to pay taxes on those earnings at two discounted rates -- 15.5 percent on income held as cash and cash equivalents and 8 percent for illiquid assets. Those rates apply to an estimated $3.1 trillion in earnings stockpiled overseas since 1986.

The 22-page guidance notice from the two federal agencies discusses how authorities plan to define the two types of income. It also addresses how U.S. companies with ownership stakes in certain foreign corporations must tally up the earnings that will be subject to the tax rates when the U.S. entity and the foreign entity have different taxable years. And the new rules will “avoid double counting and double non-counting of earnings” subject to the new tax rates, according to the notice.

The changes come as the U.S. is transitioning away from its previous international tax system as part of the Republican tax-overhaul plan. Previously, U.S. authorities applied a 35 percent tax rate to companies’ earnings globally, but allowed them to defer paying taxes on offshore income until they returned it -- or “repatriated” it -- to the U.S. As a consequence, companies have accumulated years’ worth of profits offshore.

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