Rhode Island issues regulation on Section 965 treatment

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August 2018

Overview

On August 3 the Rhode Island Department of Revenue adopted a regulation regarding the treatment of repatriated income. With some exceptions described below, under the regulation IRC Section 965 income generally does not qualify for a dividends received deduction (DRD). The regulation includes provisions precluding a DRD for certain foreign corporations with US source income, limiting intercompany eliminations, disallowing a DRD for unitary foreign subsidiaries, and allowing a DRD for nonunitary foreign subsidiaries.

The Department does not allow installment payments for net IRC Section 965 tax liability.

Finally, the regulation provides guidance regarding apportionment, filing procedures, and penalty relief.

The takeaway

Rhode Island taxpayers may be surprised at this late date regarding the disallowance of DRDs on Net Section 965 Income given the state’s history of allowing such deductions for Subpart F income.  Taxpayers will have to examine the nature of Net Section 965 Income and characterize such income by the various treatments delineated in the regulation (unitary foreign subsidiaries, nonunitary foreign subsidiaries, certain foreign corporations with US source income, income from combined years, etc.) in order to determine the proper tax treatment.  Despite the late notice of such guidance and the complexities of the Net Section 965 treatment, the regulation does not address relief for interest on underpayments to the extent taxpayers are underpaid for the 2017 tax year due to Net Section 965 income.

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Peter Michalowski

Peter Michalowski

State and Local Tax Leader, PwC US

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