New IRS Guidance for Foreign Deemed Repatriation Transition Tax Relief Under Section 965

Transcription

1 New IRS Guidance for Foreign Deemed Repatriation Transition Tax Relief Under Section 965 FOR LIVE PROGRAM ONLY TUESDAY, SEPTEMBER 25, 2018, 1:00-2:50 pm Eastern IMPORTANT INFORMATION FOR THE LIVE PROGRAM This program is approved for 2 CPE credit hours. To earn credit you must: Participate in the program on your own computer connection (no sharing) if you need to register additional people, please call customer service at ext.1 (or ext. 1). Strafford accepts American Express, Visa, MasterCard, Discover. Listen on-line via your computer speakers. Respond to five prompts during the program plus a single verification code. To earn full credit, you must remain connected for the entire program. WHO TO CONTACT DURING THE LIVE EVENT For Additional Registrations: -Call Strafford Customer Service x1 (or x1) For Assistance During the Live Program: -On the web, use the chat box at the bottom left of the screen If you get disconnected during the program, you can simply log in using your original instructions and PIN.

2 Tips for Optimal Quality FOR LIVE PROGRAM ONLY Sound Quality When listening via your computer speakers, please note that the quality of your sound will vary depending on the speed and quality of your internet connection. If the sound quality is not satisfactory, please immediately so we can address the problem.

3 New IRS Guidance for Foreign Deemed Repatriation Transition Tax Relief Under Section 965 TUESDAY, SEPTEMBER 25, 2018 Kimberlee S. Phelan, CPA, MBA, Tax Partner WithumSmith+Brown, Princeton, N.J. Mishkin Santa, JD LLM, International Tax Director The Wolf Group, Fairfax, Va.

4 Notice ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY THE SPEAKERS FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN. You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.

5 New IRS Guidance for Foreign Deemed Repatriation Transition Tax Relief Under Section 965 September 25, 2018 Mishkin Santa, J.D., LL.M, TEP International Tax Director, The Wolf Group Kimberlee S Phelan, CPA, MBA, CGMA Partner, International Services Practice Leader, Withum 5 WithumSmith+Brown - Princeton, NJ Washington, DC New York, NY The Wolf Group, PC Fairfax, VA Washington, DC New York, NY (703) WithumSmith+Brown, PC Certified Public Accountants and Consultants BE IN A POSITION OF STRENGTH BE IN A POSITION OF SM

6 AGENDA: - Shareholders Subject to the New Foreign Provisions - Common Errors - Frequently Asked Questions - Fiscal Year Taxpayers - Section 965 Regulations 6 WithumSmith+Brown, PC Certified Public Accountants and Consultants BE IN A POSITION OF STRENGTH BE IN A POSITION OF SM

7 Your Presenter Kimberlee S. Phelan, CPA, MBA, CGMA CPA, MBA, Partner Practice Leader, International Services Group WithumSmith+Brown, PC 506 Carnegie Center, Suite 400, Princeton, NJ p c WithumSmith+Brown, PC Certified Public Accountants and Consultants BE IN A POSITION OF STRENGTH BE IN A POSITION OF SM

8 TIMELINE: 12/22/2017 Tax Cut and Jobs Act 12/31/2017 Notice /19/2018 Notice /13/2018 Rev. Proc /13/2018 FAQs 1 12 posted 04/02/2018 Notice /06/2018 Publication /13/2018 FAQs posted; others updated 06/04/2018 FAQs posted 08/03/2018 Prop. Regulations (REG ) 8 WithumSmith+Brown, PC Certified Public Accountants and Consultants BE IN A POSITION OF STRENGTH BE IN A POSITION OF SM

9 Shareholders Subject to IRC Section WithumSmith+Brown, PC Certified Public Accountants and Consultants BE IN A POSITION OF STRENGTH BE IN A POSITION OF SM

10 Deemed Repatriation- What? One time taxable event on accumulate earnings of foreign corporations Accumulated Post-1986 Net Deferred Foreign Income Mechanism: Dividend from the foreign corporation to the US shareholder Dividend will be considered previously taxable income Effective for the last tax year beginning before January 1, % tax on cash and cash equivalents; 8% on illiquid assets Eight year election to defer tax available 10 WithumSmith+Brown, PC Certified Public Accountants and Consultants BE IN A POSITION OF STRENGTH BE IN A POSITION OF SM

11 Definition per Section 7701(a)(30) The term United States Person means Any trust if A citizen or resident of the United States A domestic partnership A domestic corporation Any estate (other than a foreign estate, within the meaning of paragraph (31)), and A court within the United States is able to exercise primary supervision over the administration of the trust, and One or more United States Persons have the authority to control all substantial decisions of the trust. 11 WithumSmith+Brown, PC Certified Public Accountants and Consultants BE IN A POSITION OF STRENGTH BE IN A POSITION OF SM

12 Definitions: SFC and CFC Specified Foreign Corporation (SFC) Any Controlled Foreign Corporation, and Any Foreign Corporation with respect to which one or more Domestic Corporations is a United States Shareholder. Controlled Foreign Corporation (CFC) Any foreign corporation if more than 50% of the total combined voting power of all classes of stock of such corporation entitled to vote, or the total value of the stock of such corporation is owned (within the meaning of 958(a) ), or is considered as owned by applying the rules of ownership of 958(b), by United States Shareholders on any day during the taxable year of such foreign corporation. 12 WithumSmith+Brown, PC Certified Public Accountants and Consultants BE IN A POSITION OF STRENGTH BE IN A POSITION OF SM

13 Controlled Foreign Corporations On ANY DAY Vote OR Value Only United States Shareholders considered All forms of ownership: Direct Indirect Constructive 13 WithumSmith+Brown, PC Certified Public Accountants and Consultants BE IN A POSITION OF STRENGTH BE IN A POSITION OF SM

14 FAQ #1 Who is required to report amounts under Section 965 of the Code on a 2017 tax return? A person that is required to include amounts in income under Section 965 of the Code in its 2017 taxable income, whether because, the person is a United States Shareholder of a deferred foreign income corporation (as defined under Section 965(d) of the Code) or because it is a direct or indirect partner in a domestic partnership, a shareholder in an S corporation, or a beneficiary of another passthrough entity that is a United States Shareholder of a deferred foreign income corporation, is required to report amounts under Section 965 of the Code on its 2017 tax return. 14 WithumSmith+Brown, PC Certified Public Accountants and Consultants BE IN A POSITION OF STRENGTH BE IN A POSITION OF SM

15 CFC: Example 1 US Co 50% F1 10% 51% F2 15 WithumSmith+Brown, PC Certified Public Accountants and Consultants BE IN A POSITION OF STRENGTH BE IN A POSITION OF SM

16 CFC: Example 2 US 1 US 2 US 99 US 100 1% 1% 1% 1% 1% 1% 1% 1% 1% FORco 16 WithumSmith+Brown, PC Certified Public Accountants and Consultants BE IN A POSITION OF STRENGTH BE IN A POSITION OF SM

17 Mandatory Repatriation- Who? US Person PFIC s not applicable Specified Foreign Corporation S Corporations..deferral until trigger 17 WithumSmith+Brown, PC Certified Public Accountants and Consultants BE IN A POSITION OF STRENGTH BE IN A POSITION OF SM

18 Mandatory Repatriation- Netting US Corporate Shareholder 100% 33% Foreign Corporation A $100 E&P Foreign Corporation B ($100) E&P 18 WithumSmith+Brown, PC Certified Public Accountants and Consultants BE IN A POSITION OF STRENGTH BE IN A POSITION OF SM

19 Mandatory Repatriation- How? $100,000 Accumulated Post-1986 Net Deferred Foreign Income -$77,143 plug deduction $22,857 Subtotal Amount Reported on Tax Return x 35% corporate rate of tax $8,000 tax equal to 8% NB! FIRST, Cash and Cash Equivalents Taxed at 15.5%; Remainder taxed at 8% NB! Subtotal is the amount reported on tax return regardless of type of taxpayer and is subject to tax as ordinary income 19 WithumSmith+Brown, PC Certified Public Accountants and Consultants BE IN A POSITION OF STRENGTH BE IN A POSITION OF SM

20

21 Common Errors 21 WithumSmith+Brown, PC Certified Public Accountants and Consultants BE IN A POSITION OF STRENGTH BE IN A POSITION OF SM

22 Your Presenter Partner at The Wolf Group Practice Units: International Corporate Tax, Cryptocurrency, Offshore Voluntary Disclosure, Exit Tax, Foreign Pensions, Foreign Trusts, Non-Resident Alien and International Organization Employee Taxation J.D. from Seattle University LL.M in Taxation from Boston University Member of the Washington, Texas, and District of Columbia Bars Associations U.S. Tax Court Certification Speaks regularly at professional events sponsored by attorney and CPA groups in the U.S. and abroad. 22

23 Common Error # 1 Explaining the Transition Tax to Your Client How are you explaining the Transition Tax to Your Client? People need context and can benefit from the origin story Discuss the System of Deferral Discuss the New System under TCJA 2016 The Wolf Group 23

24 US International Corporate Tax System History What happened from the end of World War II to 1962? International Corporate Tax Take 1 Worldwide Taxation with Deferral (US) vs. Territorial (Everyone Else) John F. Kennedy The Big Four Subpart F 956 Inclusions Transfer Pricing PFICs The FBAR The Bank Secrecy Act Richard Nixon The Repatriation Tax Take 1 George W. Bush 2004 IRC The Wolf Group 24

25 WWII to Top Tax Rate is 94% 50s and 60s Top Tax Rate is 70% 80s Top Tax Rate is 50% 90s/00s Top Tax Rate is 39.6% Now Top Tax Rate is 37% Millionaires in the US , , ,000 o millino 2016 The Wolf Group 25

26 Interlude: Light Reading 1. Congressional Research Service: Reform of US International Taxation: Alternatives December 17, 2010 RL Tax Policy and Administration: Federal Efforts to Define and Combat the Tax Haven Problem (GAO) 3. S. HRG : Tax Haven Bank and US Tax Compliance: Obtaining the Names of US Clients and Swiss Accounts (GPO) 4. Reporting Foreign Accounts to IRS: Extent of Duplications not Currently Known but Requirements can be Clarified (GAO) 5. Tax Havens: International Tax Avoidance and Evasion (Congressional Research Service) 6. Offshore Tax Evasion: IRS Has Collection Billions of Dollars, but May be Missing Continued Evasion (GAO) 7. Tax Compliance: Qualified Intermediary Program Provides Some Assurance That Taxes on Foreign Investors are Withheld and Reported, but Can Be Improved (GAO) 2016 The Wolf Group 26

27 US International Corporate Tax (Now) International Corporate Tax Take 2 TCJA IRC 965 They Say: Quasi-Territorial We Say: Deferral + GILTI + BEAT + 100% DRD Transition or Repatriation Tax President Trump We are going to get $5 Trillion in cash held abroad. Q1 Actual - $295 Billion Q2 Actual - $170 Billion Total to Date - $465 Billion The Wolf Group 27

28 IRC 965 Transition Tax Old Law: Temporarily existed for the 2004 tax year only. New Law: IRC 965 applies to tax year 2017 only (unless fiscal year filer) Deemed repatriation of non-previously taxed (or deferred) E&P Not reported on Form 5471 instead use IRC 965 Transition Tax Statement and associated election forms. Individuals get the highest rate of tax Consider a 962 Election Guidance Notices, FAQs, and Proposed Regulations 2016 The Wolf Group 28

29 Applicable Rate C-Corporations The participation exemption is essentially a deduction which allows corporate taxpayers to achieve a 15.5% tax rate on their inclusion amount pro-rated to cash and cash equivalents and an 8% tax rate on non-cash assets. Individuals These rates are slightly higher for non-corporate taxpayers and are not specifically referenced in the TCJA. In order to calculate the tax rate for noncorporate taxpayers, a separate calculation must be performed using the same amount of the deduction that would have been used for a corporate taxpayer to achieve the 15.5% and 8% rates. However, because the highest tax rate of individuals is 39.6% in 2017 (vs. 35%), the final tax rate will be roughly 17.5% and 9% (if not higher) The Wolf Group 29

30 Common Error #2 Foreign Corporate Taxes Paid - Individuals Incorrect Methodology #1 Calculate the Transition Tax on the Transition Tax Statement with Foreign Taxes Paid and no 962 Election Incorrect Methodology #2 Calculate the Transition Tax Add the Foreign Corporate Taxes Paid on the Form 1116 after the fact with no 962 Election and not listed on the Transition Tax Statement 2016 The Wolf Group 30

31 IRC 962 Election Allowed for an individual United States Shareholder since 1962 Election made on a year-by-year basis, for all CFCs Partnerships and S-Corps cannot make 962 Elections Partners and Shareholders on the individual level can Three specified effects of the election: Federal corporate tax rate on subpart F income, Transition Tax, and GILTI Section 960 indirect FTC allowed Some distributions are taxable under section 962(d), rather than being tax free PFI distributions. Smith v. Commissioner Are 962(d) taxable distributions qualified dividends? No Pending since 2015 and just decided on The Wolf Group 31

32 Common Error # 3 Errors on the Face of Form 5471 Purpose 1 Report activities of the foreign corporation. Corporation s Ownership Stock Transactions Shareholder and Company Transactions Foreign Taxes Foreign Bank and Financial Accounts Accumulated Earnings and Profits Currency Conversions Purpose 2 Provide roadmap for the IRS on transfer pricing The Wolf Group 32

33 Continued No category filer box checked] Missing Item C Total Percentage of FC s voting stock owned Name and/or Address of FC omitted Missing EIN or Reference ID Stating that required information will be furnished upon request or audit 2016 The Wolf Group 33

34 Common Errors # 4 Schedule J Starting and Ending Points Is your starting point correct? Do you have facts that require additional scrutiny? What about CFCs that were inherited after many years of operation? What gifted interests from Non-Resident Alien taxpayers to US Tax Residents? What about individuals that expatriated during 2017? Unknown Do you clear out the Schedule J for the ending point? What about individuals taking a 962 Election? 2016 The Wolf Group 34

35 (Continued) 2016 The Wolf Group 35

36 Common Error # 5 Not Performing an E&P Study Does your client have audited financials in their foreign jurisdiction? Have those financials been converted to US GAAP? Have book to tax adjustments been performed on Form 5471 Schedule H and tied properly to Schedule J? Has the foreign tax pool been tracked properly on Form 5471 Schedule E? Foreign Tax Refunds properly accounted? Do you have a breakdown of the historical distributions? If uncertainty as to any of the above, consider an E&P Study The Wolf Group 36

37 Common Error # 6 Trust the Tax Software for the Calculation Do not assume the tax software will get it right. See later discussion about Trusts/Estates/1041s/K-1s Run the tax due without the Transition Tax and then run it again with the Transition Tax (perhaps under v2) compare the differences. If entries or calculations were performed earlier in the year, perform a mirrored calculation now or have a third party firm do this. Prepare a Form 2848 for the client: Matter Income, Foreign Corporation, Transition Tax Forms 1040 (or 1120/1065/1120-S), 5471, IRC 965 Transition Tax Statement and Elections Year The Wolf Group 37

38 Common Error # 7 Not Following the Ordering Rules Ordering rules should be followed under the Proposed Regulation Section (b): i. Subpart F income. ii. Distributions from one SFC to another prior to January 1, iii. 965(a) Inclusion. iv. Distributions not accounted for in Step ii. v. Section 956 Inclusions 2016 The Wolf Group 38

39 Common Error # 8 Not Allocating Deficits, Expenses, and Netting Ensure all expenses and deficits are taken into account in netting against accumulated E&P. Allocate the deficits according to the accumulated earnings of each DFIC over the total earnings of all DFIC s. Ensure that receivables and payables are properly netted to help in reducing the cash position taxable at the higher 15.5% rate. If intercompany borrowings exist or intercompany distributions are made, these may be netted so as not to double-count, which will help in reducing the cash position, but these positions must be disclosed on the return. Remove taxes accrued between Nov 2, 2017, and Dec 31, 2017, from the Nov 2 P&L measurement 2016 The Wolf Group 39

40 Common Error # 9 Not Planning for GILTI 1. Setup a Micro-multinational Contribute CFC Stock to C- Corporation 2. Increase QBAI Section 338(g) Election 3. Combine Income and Loss CFCs into One CFC 4. Avoid CFC Status 5. Avoid US Shareholder Status 6. Convert GILTI to Subpart F Income 7. GILTI Election 2016 The Wolf Group 40

41 Common Error # 10 Forgetting about the NIIT Net investment income tax does not apply to the Transition Tax Distributions (i.e., dividends) from PTI are subject to the NIIT Summary: Income tax is paid in the year of Transition Tax Net Investment Income Tax is paid in the year of distribution to the taxpayer from the foreign corporation. The taxpayer can elect to have the NIIT be imposed in the year of Section 951 inclusion. See Regs (g) General Rule NIIT is always applicable to foreign source income May be able to take Totalization Agreement to exclude if practitioner and client agree that the tax is a social security tax May be able to take Treaty Position to apply Foreign Tax Credits against if practitioner and client agree that tax is an income tax Both Positions are risky and should be filed with Form The Wolf Group 41

42 Common Error # 11 Winning the Battle, Losing the War SS-4, W8 Series, 1042 Series Form 926 Return by US Transferor of Property to FC Form 1120, Schedule N Foreign Operations of US Corps Form 5713 International Boycott Report Form 8621 PFIC Form 8621-A PFIC Purge Election Form 8832 Check-the-Box Form 8833 Treaty Based Returns Position Form 8858 Foreign DRE Form 8275/8275-R Disclosure Statements Form 8023 Elections under IRC 338 Form 8883 Asset Allocation under IRC 338 Form 8886 Reportable Transaction Disclosure Statement Form 8938 Statement of Specified Foreign Financial Assets FinCEN Form 114 FBAR IRC 965 Transition Tax Statement and Accompanying Elections 2016 The Wolf Group 42

43 Common Error # 12 Not Creating an Audit File Auditors must apply IRS Campaign Scrutiny Section 965 Transition Tax Section 956 Avoidance See: Auditors must use International Practice Units for Guidance See: The Wolf Group 43

44 Common Error # 13 SFC that are not DFICs Minimal Guidance on what to do with Specified Foreign Corporations that have negative E&P How should Schedule J look for the transition from Deferral to TCJA? Should a $0 Transition Tax Statement be filed? 2016 The Wolf Group 44

45 Common Error # 14 Assuming Your Client Made 1 st Payment IRS has offered to let taxpayers make 1 st Payment in 2019 Have you confirmed 1 st Payment Made when calculated prior to April Filing Deadline? Did the IRS receive it and properly notate it to the taxpayer master file? Create POA and pull account transcript Add it to your Audit File Ask Client to Provide Documentation showing payment 2016 The Wolf Group 45

46 Common Error # 15 Running Afoul of IRC 965(o) Anti-Avoidance Rules and Presumptions Cash Reduction Transactions E&P Reduction Transactions Pro Rata Share Transactions Change in Accounting Methods Entity Classification Elections Cash Measurement Dates: The Cash Measurement Dates are modified, for purposes of determining the amount of cash and cash equivalents with respect to SFCs that go out of existence or are acquired or disposed of before the close of the last taxable year of such SFC that begins before January 1, The modifications require the United States shareholder to take into account its pro rata share of the cash and cash equivalents of the SFC only for the cash measurement dates on which such United States shareholder qualifies as a United States shareholder of such SFC. Proposed Regulation (g) See Andrew Mitchel Example Chart The Wolf Group 46

47 Common Error # 16 Letting the Year Lapse Streamlined Filing For taxpayers living offshore for than 330 days in the calendar year and not having a US abode, the Streamlined Filing Procedures Offshore are a great option to correct non-compliance. There is no Title 26 Misc Penalty. What happens if your client is a delinquent non-filer and you have to recreate three years of tax return (2015, 2016, and 2017)? Should you let the 2017 year lapse and file the transition tax through Streamlined Filed Foreign? What about the end of OVDP on ? 2016 The Wolf Group 47

48 Common Error # 17 Ignoring 965 State Ramifications State conformity to the 965 Inclusion could mean, depending on state law, that the 965 Inclusion: (1) is fully included in state income, (2) is fully excluded from state income, or (3) is partially included, partially excluded in state income. Idaho Provides an addback for the 965 Deduction. No parallel provision to eliminate the 965 Inclusion. Election that permits exclusion of 85% of controlled foreign corporation (CFC) dividend Net result in Idaho will be that 15% of the 965 Inclusion will be included in the Idaho tax base. Georgia Denies the 965 Deduction where the 965 Inclusion has not been taxed West Virginia Incorporates the 965 Inclusion and the 965 Deduction (although the 965 Inclusion may be eliminated, as Subpart F income is generally excluded from West Virginia income). Also watch out for double taxation at the state level if you take a 962 election and then later make distributions Virginia is prime example The Wolf Group 48

49 AICPA Other Open Issues Guidance is specifically needed on how to properly report earnings and profits related to Section 965 on Schedule J of Form 5471, including the deemed increase to E&P provided in Section 965(b)(4)(B) for the allocation of a foreign corporation s E&P deficits. The IRS should confirm if the Subpart F income arising from Section 965(a) is reported on Schedule I of Form 5471 as well. Taxpayers also need guidance to reflect any credits carried forward that are used to offset their section 965 transition tax liability The Wolf Group 49

50 Continued What about Trusts and Estates? See AICPA Letter to IRS on FAQ9 only requires pass-through entities to provide to their owners limited information and does not require pass-through entities to provide the owner s pro rata share of the aggregate cash position nor does it require the owner s percentage interest in the underlying SFCs. As a result, many of the Schedules K-1 that individuals, trusts and estates received do not include this information. While taxpayers can request the pass-through entities provide this information, such a process is burdensome during the already tight timeframe to file these tax returns, and in the case of multi-tiered pass-through entities, there is not sufficient time to gather this information to timely file a tax return The Wolf Group 50

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52 IRS Guidance: Selected FAQs 52 WithumSmith+Brown, PC Certified Public Accountants and Consultants BE IN A POSITION OF STRENGTH BE IN A POSITION OF SM

53 FAQ 3: IRC 965 Transition Tax Statement Signed Under Penalties of Perjury (PDF if electronically filed) Statement Must Include: Total Amount Required to be Included in Income Under Section 965(a) Aggregate Foreign Cash Position Total Deduction under Section 965(c) Deemed Paid Foreign Taxes with Respect to the Total Amount Required to be Included in Income Disallowed Deemed Paid Foreign Taxes Pursuant to Section 965 (g) Total Net Tax Liability Under Section 965 to be Paid in Installments Under Section 965(h), if applicable Total of the Net Tax Liability Under Section 965, the Payment of which has been Deferred under Section 965(i), if applicable Listing of Elections Under Section 965 or Election Provided in Notice that the Taxpayer has made, if applicable Adequate Records must be Kept Supporting the Section 965(a) Inclusion Amount, Deduction Under Section 965(c) and Net Tax Liability Under Section 965, as well as Underlying Calculations of these amounts. 53 WithumSmith+Brown, PC Certified Public Accountants and Consultants BE IN A POSITION OF STRENGTH BE IN A POSITION OF SM

54 54 FAQ 8: Form 5471 Form 5471 Required for All Specified Foreign Corporations, regardless of whether SPC is a CFC To Collect Information Relevant to the Calculation of a US Shareholder s Section 965(a) Inclusion Amount Complete Identifying Information on Page 1 Above Schedule A as well as Schedule J Notice , Section 5.02 provides an Exception to Filing Form 5471 for Certain US Shareholders Considered to Own Stock by Downward Attribution from a Foreign Person IRS to Modify Instructions to Form 5471 as Necessary WithumSmith+Brown, PC Certified Public Accountants and Consultants BE IN A POSITION OF STRENGTH BE IN A POSITION OF SM

55 FAQ 9: Pass-Through Entity Reporting Information Required to be Reported to Partners, Shareholders, Beneficiaries in Connection with Section 965 Section 965(a) Inclusion Amount Section 965 (c) Deduction Information Necessary for a Domestic Corporation Partner, or an Individual Making an Election Under Section 962, to Compute its Deemed Paid Foreign Tax Credits with respect to the Section 965(a) Inclusion Amount See Notice , Section 3.05(b) 55 WithumSmith+Brown, PC Certified Public Accountants and Consultants BE IN A POSITION OF STRENGTH BE IN A POSITION OF SM

56 Overpayments FAQs 13/14 Treat all tax payments made for the 2017 tax year (estimated tax payments, extension payments, and amounts paid specifically to satisfy the initial section 965(h) installment) If any overpayments, apply to future Installment Payments AICPA Letter to IRS on Taxpayers should be able to direct overpayments with options: o Application to 2018 estimated tax liability (non-section 965 tax liability); o Refund to the taxpayer in whole or partial amounts; or o Application to one or more future section 965(h) installment payments The Wolf Group 56

57 FAQ 15: 965 Payments &2018 Estimates Q15: If a taxpayer that has made a Section 965(h) election for 2017, filed a 2017 tax return that calculated an overpayment without including the taxpayer s total net tax liability under Section 965 and taxpayer attempted to elect to credit the calculated overpayment to its estimated tax liability for 2018, will the IRS determine an addition to tax for an underpayment of taxpayer s 2018 estimated taxes because the credit elect won t be available for the first required 2018 estimated tax installment? 57 WithumSmith+Brown, PC Certified Public Accountants and Consultants BE IN A POSITION OF STRENGTH BE IN A POSITION OF SM

58 FAQ 15: Estimated Payments The IRS is granting relief from estimated tax penalties if all required estimated tax payments are made before the due date for the second required estimated tax installment. How is this done? A taxpayer makes an estimated tax payment sufficient to satisfy both the underpayment of 1. The first required estimated tax installment for 2018 and 2. The full amount of the second required estimated tax installment for On or before the due date for the second installment (June 15, 2018, for calendaryear taxpayers). 4. This relief applies only to taxpayers whose first required installment for 2018 was due on or before April 18, If the IRS sends a taxpayer a notice of an addition to tax for a Sec or 6655 estimated tax underpayment, and the taxpayer meets all the conditions for relief described above, the taxpayer should contact the IRS office that issued the notice and request abatement of the addition to tax. FORM 2848 GET A POA! 2016 The Wolf Group 58

59 FAQ 16: 1st Installment of 965(h) Tax Q16: If an individual fails to timely pay his or her first installment of tax due under Section 965(h), will the IRS assess an addition to tax for failure to pay? Will the taxpayer s requirement to pay all subsequent installments be accelerated under Section 965(h)(3)? 59 WithumSmith+Brown, PC Certified Public Accountants and Consultants BE IN A POSITION OF STRENGTH BE IN A POSITION OF SM

60 FAQ 16: Installment Underpayments The IRS will waive the late-payment penalty if the installment is paid in full by April 15, Without this relief, a taxpayer who failed to make the first year s payment would have had the remaining eight installments become due immediately. The IRS is granting this relief only to individual taxpayers whose total transition tax liability is less than $1 million. Interest will still be due on the late payments. A later payment deadline of June 17, 2019, applies to certain individuals who live and work outside the United States The Wolf Group 60

61 FAQ 17: Late Section 965(h) Election Q17: If an individual filed his or her 2017 tax return, but has not made the Section 965(h) Election, may the individual file another 2017 return on which he or she makes the election? 61 WithumSmith+Brown, PC Certified Public Accountants and Consultants BE IN A POSITION OF STRENGTH BE IN A POSITION OF SM

62 FAQ 17: Late Section 965(h) Election A17: Yes! If an individual with a net tax liability under Section 965 in the individual s 2017 tax year has already filed his or her tax return and did not make an election under Section 965(h), such individual can make the Section 965(h) Election by filing a Form 1040X that complies with the procedures set forth in these FAQs on or before the due date of the individual s 2017 return, taking into account any additional time that would have been granted if the individual had made an extension request. For this purpose, the IRS will treat the individual as if he or she had requested and received the extension. 62 WithumSmith+Brown, PC Certified Public Accountants and Consultants BE IN A POSITION OF STRENGTH BE IN A POSITION OF SM

63 FAQ 17: Late Section 965(h) Election PROCEDURES IN FAQs - IRC 965 Transition Tax Statement, as described in FAQ 3 - Election Statement(s), as described in FAQ 7 63 WithumSmith+Brown, PC Certified Public Accountants and Consultants BE IN A POSITION OF STRENGTH BE IN A POSITION OF SM

64 Fiscal Year Taxpayers 64 WithumSmith+Brown, PC Certified Public Accountants and Consultants BE IN A POSITION OF STRENGTH BE IN A POSITION OF SM

65 Fiscal Year Filers 2017 Transaction Tax Deduction is based on 35% Rate 2018 Transaction Tax Deduction is based on 21% Rate 2018 Transition Tax Rates Jump: Estimated at 27.3% - Cash Estimated at 14.1% - Non-Cash 2016 The Wolf Group 65

66 Fiscal Year Taxpayers with Initial Payments Due in 2019 Due dates for individuals and C corporations and how we look on September 25th, 2018! 2016 The Wolf Group 66

67 Proposed Regulations 67 WithumSmith+Brown, PC Certified Public Accountants and Consultants BE IN A POSITION OF STRENGTH BE IN A POSITION OF SM

68 Proposed Regulations NB! Comment Period Ends on October 9, 2018 Estimates: Total Reporting Burden: 500,000 hours Avg Annual Burden hours per respondent: 5 hours Number of Respondents: 100, WithumSmith+Brown, PC Certified Public Accountants and Consultants BE IN A POSITION OF STRENGTH BE IN A POSITION OF SM

69 Proposed Regulations Background 965 Regulations -1 General Rules and Definitions -2 Adjustments to E&P and Basis -3 Determination of Section 965(c) Deductions -4 Rules that Disregard Certain Transactions -5 & -6 Rules with Respect to Foreign Tax Credits -7 Rules Regarding Elections and Payments -8 Rules Regarding Affiliated and Consolidated Groups -9 Date of Applicability 69 WithumSmith+Brown, PC Certified Public Accountants and Consultants BE IN A POSITION OF STRENGTH BE IN A POSITION OF SM

70 General Rules Definitions Specified Foreign Corporation Post-1986 Earning & Profits distributions between related SPCs No alternate to E&P Provided in Regulations E&P Deficit Foreign Corporation Impact of PTI (it is PART of E&P!) Accumulated Post-1986 Deferred Foreign Income Reduction for non-us Shareholders Cash Measurement Dates Cash Position & Derivative Financial Instruments Accounts Receivable and Accounts Payable Short-Term Obligations Pro Rata Share Domestic Pass-Through Entities Foreign Currency Translation use of Spot Rates 70 WithumSmith+Brown, PC Certified Public Accountants and Consultants BE IN A POSITION OF STRENGTH BE IN A POSITION OF SM

71 E&P Determination and Adjustments First, SubPart F Income of SFC determined without regard to Section 965(a) Second, Distribution form SFC to another SFC before 1/1/2018 is determined under Section 959 Third, all Section 965 amounts determined, with specific rule for post-measurement date SubPart F income Fourth, all SPC distributions (other than above) determined under Section 959 Fifth, Section 956 amount determined 71 WithumSmith+Brown, PC Certified Public Accountants and Consultants BE IN A POSITION OF STRENGTH BE IN A POSITION OF SM

72 Determination of Aggregate Foreign Cash Position Disregard Certain Obligations between Related SFCs Disregard Certain Assets to Prevent Double-Counting Section 965(c) deduction will NOT be treated as an Itemized Deduction for any purpose of the Code. 72 WithumSmith+Brown, PC Certified Public Accountants and Consultants BE IN A POSITION OF STRENGTH BE IN A POSITION OF SM

73 Disregard Certain Transactions Anti-Avoidance Rules, in general Transactions occurring between measurement dates Between related SFCs, both sides of transactions impacting E&P are disregarded 73 WithumSmith+Brown, PC Certified Public Accountants and Consultants BE IN A POSITION OF STRENGTH BE IN A POSITION OF SM

74 Allowance of Credit or Deduction for Foreign Taxes No credit for the applicable percentage of any taxes paid or accrued (or treated as paid or accrued) with respect to any amount for which a Section 965(c) deduction is allowed 74 WithumSmith+Brown, PC Certified Public Accountants and Consultants BE IN A POSITION OF STRENGTH BE IN A POSITION OF SM

75 Computation of Foreign Income Taxes Deemed Paid Sections 902 and 960 apply in the same manner for Section 965(a) inclusions as for other inclusions The Section 902 Fraction cannot exceed one; when the fraction is zero or less, no taxes are deemed paid 75 WithumSmith+Brown, PC Certified Public Accountants and Consultants BE IN A POSITION OF STRENGTH BE IN A POSITION OF SM

76 (h) Election Revoked by paying remaining Section 965 liability Inadvertent Underpayments can be rectified and prorated to remaining installments without acceleration 965(i) Election Applies only to DFICs owned by S Corporations; Election made by Shareholders Tax Deferred Until Triggering Event 965(m) Election REITs 965(n) Election Exclude usages of NOLs Alternative Method for Calculation of Post-198 E&P 10/31/2017 with annualization 52/53 week taxable years 76 WithumSmith+Brown, PC Certified Public Accountants and Consultants BE IN A POSITION OF STRENGTH BE IN A POSITION OF SM

77 Affiliated Groups (including Consolidated Groups) Consolidated Groups: All Section 958(a) US Shareholders of a SFC are treated as a single Shareholder for specific purposes (but not for determining the Section 965(a) Inclusion amount) Affiliated Groups: Rules provided for determining Section 965(a) Inclusion amounts when offsetting deficit E&P entities not in same affiliated groups Unused E&P Deficits records must be maintained by all members of the Affiliated Group 77 WithumSmith+Brown, PC Certified Public Accountants and Consultants BE IN A POSITION OF STRENGTH BE IN A POSITION OF SM

78 Questions? Kimberlee S. Phelan p c Mishkin Santa p f WithumSmith+Brown, PC Certified Public Accountants and Consultants BE IN A POSITION OF STRENGTH BE IN A POSITION OF SM