foreign earnings

IRS Releases New Guidance on Transition Tax

Jan 8th 2018
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The IRS has released new guidance for computing the transition tax under the recently approved tax-reform law enacted in December.

Notice 2018-07 explains that the newly enacted Section 965 of the Internal Revenue Code imposes a transition tax on the untaxed foreign earnings of the foreign subsidiaries of U.S. companies by considering those earnings to be repatriated.

Foreign earnings held as cash or cash equivalents are taxed at 15.5 percent. Remaining earnings are taxed at 8 percent. The transition tax can be paid in installments over eight years, according to the IRS notice.

The notice describes the regulations that the IRS expects to issue. Those regulations include rules for determining the amount of cash and cash equivalents for applying the 15.5 percent tax rate and for determining the amount of foreign earnings subject to the transition tax.

According to the IRS, the rules will help taxpayers by providing the information they need to determine  their transition tax.

Notice 2018-07 will be published Jan. 22 in Internal Revenue Bulletin 2018-04.

The new Section 965 is effective for the last taxable years of foreign corporations that begin before Jan. 1 of this year and, for U.S. shareholders, for taxable years in which or with which such taxable years of the foreign corporations end.

The IRS intends to provide that the regulations in the notice are effective beginning in the first taxable year of a foreign corporation to which Section 965 applies.

Before the regulations actually are issued, taxpayers can use the rules in Section 3 of the notice, according to the IRS.

Comments can be submitted to addresses listed at the bottom of the notice. However, no deadline for submission is indicated.

Additional guidance is expected to be issued at a future date.

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