Second IRS Notice regarding the ‘Toll Tax’ under amended Section 965

January 2018

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Overview

The IRS and Treasury issued Notice 2018-13 on January 19, 2018, providing additional administrative guidance relating to the ‘toll tax’ due upon the mandatory deemed repatriation of certain deferred foreign earnings.  The Notice is the second installment of guidance with respect to amended Section 965 under the 2017 Tax Reform Reconciliation Act (the Act), also known as the ‘Tax Cuts and Jobs Act.’ 

The Notice provides guidance to the Act’s amended Section 965, which uses the mechanics under the current subpart F provisions to impose a one-time ‘toll tax’ on the undistributed, non-previously taxed post-1986 foreign earnings and profits (E&P) of certain US-owned corporations.  The Notice provides guidance for addressing the calculation of foreign E&P subject to the ‘toll tax’ and other rules clarifying certain aspects of the new law.  Notice 2018-13 also modifies Notice 2018-07 regarding the repatriation of earnings subject to the ‘toll tax.’  Finally, Notice 2018-13 provides taxpayers targeted relief from certain unintended regulatory and reporting consequences arising from a change to existing stock attribution rules in the recent tax legislation.  In addition, the IRS and Treasury indicate taxpayers will have an opportunity to provide comments on the rules described in the Notice.

The takeaway

Notice 2018-13 is the second set of 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 calculation of foreign E&P, modifies Notice 2018-07 regarding the repatriation of earnings subject to the ‘toll tax,’ and provides taxpayers targeted relief from certain unintended regulatory and reporting consequences arising from a change to existing stock attribution rules in the recent tax legislation.   

The Notice, however, leaves a number of issues unresolved.  For example, it is unclear how the foreign tax credit rules are applied for purposes of Section 965.  In addition, the Notice does not address the application of the anti-avoidance rules provided in Section 965(o)(2) (relating to guidance to prevent the avoidance of Section 965) and Section 965(c)(3)(F) (relating to transactions with a principal purpose of reducing the aggregate foreign cash position).  It is unclear if these and other outstanding issues will be addressed in the next notice.

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.

Contact us

Michael Urse
ITS Leader, PwC US
Tel: +1 (216) 875 3358
Email

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