IRS Notice addresses the ‘Toll Tax’ under amended Section 965

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Overview

The IRS and Treasury issued Notice 2018-07 on December 29, 2017, providing preliminary administrative guidance and indicating plans to issue regulations relating to the ‘toll tax’ due upon the mandatory deemed repatriation of certain deferred foreign earnings.  The Notice is the first administrative guidance released as part of the transition to a new territorial tax regime under the 2017 tax reform reconciliation act. The Notice addresses questions that have arisen as companies compute the toll tax for purposes of preparing their financial statements.

The takeaway

Notice 2018-07 is the first guidance issued by the IRS and Treasury under the Act, and addresses certain issues arising from the ‘toll tax’ of repatriated foreign earnings under amended Section 965.  The Notice sets forth a number of rules related to the determination of the AFCP of a US shareholder and an SFC’s accumulated post-1986 deferred foreign income, as well as rules to coordinate Sections 959 and 965, which the IRS and Treasury intend to include in forthcoming regulations.  The provisions of the Notice are consistent with the expected application of Section 965 under the Act.  

Additional guidance from the IRS and Treasury on the application of Section 965 is expected in the near future and the IRS and Treasury request comments on specific issues that should be addressed.  In this regard, it is expected that the IRS and Treasury will address several issues related to claiming foreign tax credits, including the election to forego the use of an NOL deduction in a Section 965 inclusion year, and the impact, if any, on the amount of an SFC’s foreign taxes considered under Section 965 when the SFC’s E&P subject to the ‘toll tax’ is reduced by a deficit of another SFC.  

Taxpayers should review and assess the impact of the specific proposals in the Notice on their business and industry, and consider commenting on the proposals, or other issues arising under amended Section 965 that the IRS and Treasury should address.

See also:

Republican tax bill will significantly impact US international tax rules

IRS suspends withholding on dispositions of publicly traded partnership interests

Contact us

Michael Urse

Partner, International Tax Services, PwC US

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