Today, December 14, Treasury released Notice 2019-01, which outlines previously taxed earnings and profits accounts (PTEP) regulations that Treasury intends to release due to the enactment of the 2017 Tax Act. PTEP refers to earnings and profits of a foreign corporation attributable to amounts which are, or have been, included in the gross income of a US shareholder under Section 951(a) or under Section 1248(a).
The Notice, 21 pages in length with two examples, identifies 16 categories of PTEP, nine described in Section 959(c)(1), relating to Section 956 and Section 956A inclusions and reclassifications, and seven described in Section 959(c)(2), relating to subpart F (including Section 965) and GILTI inclusions. The forthcoming regulations will prescribe new ordering rules: Section 959(c)(1) PTEP related to Section 965(a) and (b) is distributed first, followed by Section 959(c)(1) PTEP related to Section 965(b), followed by remaining categories of Section 959(c)(1) PTEP, pro rata on a LIFO basis. Thereafter, Section 959(c)(2) PTEP distributions are sourced to Section 965(a) E&P, then Section 965(b) E&P. Finally, Section 959(c)(2) PTEP unrelated to Section 965 (e.g., subpart F and GILTI PTEP) are distributed pro rata on a LIFO basis.
The Notice also provides a rule about how GILTI inclusions in excess of current year PTI can create deficits in Section 959(c)(3) E&P.
The forthcoming regulations will apply to tax years of US shareholders (and successors in interest) ending after December 14, 2018 and to taxable years of foreign corporations ending with or within such tax years of US shareholders. Before the issuance of the forthcoming regulations, a shareholder may rely on the rules described in section 3 of the Notice if certain criteria is met.
PwC will publish a detailed analysis of the Notice within the coming days.
Principal, International Tax Services, PwC US