Proposed Guidance Announced on One-Time Transition Tax

On August 1, 2018, the Internal Revenue Service and the Department of the Treasury issued long-awaited guidance in the form of proposed regulations to Section 965 on the one-time transition tax.
These regulations cover several aspects of the Section 965 transition tax including:

  • An overview of the general rules and definitions relative to Section 965;
  • Computing the Deferred E&P considering deficit foreign corporations, previously taxed income and current year adjustments;
  • Necessary adjustments to basis as a result of Section 965;
  • Impact of deficit foreign corporations on the indirect foreign tax credit available;
  • Rules related to the computation of the Participation exemption under Section 965(c), in particular, which assets may be disregarded in determining aggregate foreign cash position, method to determine the testing date for U.S. shareholders that may have interest in multiple CFCs with various fiscal years, and the clawback as a result of expatriation;
  • Anti-abuse provisions which disregard certain changes in method of accounting or entity classification elections that were intended to reduce a taxpayer’s inclusion under Section 965;
  • Guidance on how the Section 965 inclusion and tax is computed in the context of a consolidated group; and
  • The rules for making a payment of tax and the manner of making elections related to Section 965.

Much of this guidance has already been promulgated by the IRS in the form of the several recent IRS Notices issued over the last few months.

Additional Guidance on Transition Tax

Interestingly enough while this tax was due in April 2018, the IRS and Treasury still seem to be struggling with how certain facets of the transition tax should work. In several instances in the preamble, the IRS and Treasury specifically ask for comments from taxpayers on whether or not additional guidance is required for items such as:

  • The treatment of hovering deficits that may create a specified E&P deficit;
  • How previously taxed income should be treated in computing a specified E&P deficit;
  • If there are instances where E&P deficits should be allocated to preferred shareholders;
  • The appropriate amount of basis adjustment where a Section 962 election is made with respect to a Section 962 inclusion;
  • Whether special rules for determining bases when computing foreign source income for foreign tax credit purposes was necessary; and
  • How a Section 965 inclusion should be categorized for Foreign Tax Credit purposes.

Technical Guidance on Transition Tax

Finally adding a little flavor to the very technical guidance, the authors address comments and requests that they have considered and denied and their reasoning for doing so including:

  • Requests that individuals should not be subject to Section 965;
  • Requests that the participation exemption be adjusted for individual shareholders;
  • Providing an alternative method of computing E&P if the historical information is not easily available;
  • Requests for modification on the definition of Accounts Payable;
  • Requests that anti-avoidance rules do not apply to transactions which result in a reduction of tax under this provision with a matching increase of tax under another IRC provision; and
  • Request of De minimis provision in the anti-avoidance rule.

Unfortunately, these regulations do not provide much in the way of good news for taxpayers – just more technical jargon to process in the quest to compute their Section 965 inclusion.


Contact Our International Tax Team

Withum’s International Services Group will continue to update you on these much-anticipated transition tax regulations. In the meantime, please contact us with any questions by filling out the form below.

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