The 2017 tax reform act (the Act) introduced new Code Section 965, which imposes a ‘toll charge’ on mandatory deemed repatriation of certain deferred foreign earnings. The IRS on January 15 released final regulations under Section 965 that retain the overall structure and basic approach of the proposed Section 965 regulations released on August 1, 2018, with modifications. Significant divergences from the rules in the proposed regulations include modifications to cash position determinations, basis adjustment elections, and the five-step ordering rule for E&P adjustments (including the interaction of the ordering rule with foreign tax credits and disregarded payment rules). The final regulations also clarify the timing and procedures for certain Section 965 elections and payments.
The final regulations generally apply beginning with the last tax year of a foreign corporation that begins before January 1, 2018, and, with respect to a US person, beginning with the tax year in which or with which such tax year of the foreign corporation ends.
The final regulations raise a number of important issues. PwC on January 23 hosted a webcast featuring PwC specialists who discussed some of these issues. This Insight highlights those discussions. Watch the webcast replay and register for future webcasts in PwC’s Tax Reform Readiness series, which addresses other areas affected by tax reform.
Although the final regulations generally follow the structure and approach set forth in the proposed regulations, there are significant modifications that are likely to affect a ‘toll tax’ calculation. Taxpayers subject to Section 965 should review the final regulations immediately to determine the impact, if any, on their toll tax liability. The above-mentioned highlights are not an exhaustive list of the provisions in the final regulations.
Observation: When asked during the January 23 webcast which provision in the proposed regulations they believe should have been modified in the final regulations, but was not, respondents were closely divided among certain publicly traded stock (e.g., controlled by a specified foreign corporation) (20%); illiquid cash (27%); cash related to PTEP generated by a Section 956 inclusion (26%); and notional cash pooling arrangements treated as creating intercompany receivables (26%).
Observation: When asked during the January 23 webcast which revision in the final regulations is most significant to their company, most respondents said foreign tax credits (42%), followed by E&P adjustments (26%) and basis adjustments (21%).
Washington National Tax Services International Tax Leader, PwC US