The Repatriation ‘Toll Tax’ – Thoughts on the 2017 Tax Cuts and Jobs Act

Filed in CPA Blog by on February 23, 2018
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As one of the top, boutique CPA firms in San Francisco, our phones are ringing off the hook with questions from taxpayers about the Trump tax changes, formerly known as the “2017 Tax Cuts and Jobs Act.” We do a lot of work for international firms and/or people who have international tax exposure, so the changes in how monies can be “repatriated” or especially important to our customerHere is a summary of some of the changes with respect to “repatriation,” which is a fancy word to discuss how profits / monies can be moved from abroad. One significant change to the attribution rules will result in many more taxpayers being subject to this one-time tax than previously anticipated. Because the tax applies in 2017, individuals and corporations will need to understand the impact on cash flows and financial statements. In order to evaluate this impact, every structure in which a U.S. corporation or a U.S. individual owns (directly or indirectly) 10% or more of a foreign corporation anywhere in the structure should be reviewed immediately.

Review of Some of the Provisions of the Repatration ‘Toll Tax’

Repatriation 'Toll Tax'First of all, who is subject to the tax? A U.S. shareholder (corporate or individual) of a deferred foreign income corporation is subject to the repatriation toll tax in 2017. A deferred foreign income corporation is any specified foreign corporation that has accumulated post-1986 deferred foreign income greater than zero as of November 2, 2017 or December 31, 2017.
The term specified foreign corporation (“SFC”) includes:

  • A controlled foreign corporation (“CFC”) and
  • A foreign corporation in which a U.S. corporation owns 10% or more of voting power

A CFC is any foreign corporation if more than 50% of the total combined voting power of all classes of stock of such corporation entitled to vote is owned directly, indirectly or constructively by U.S. shareholders for at least 30 days during the taxable year.

For tax years after 12/31/17, the definition of a U.S. shareholder has been expanded to any U.S. person owning 10% or more of the combined voting power of all classes of stock or 10% or more of the value of the shares of all classes of stock. In addition, the definition of a CFC has been expanded to change the 30 day holding requirement to any day during the taxable year. Although these changes will not impact the repatriation tax calculation, it will impact the determination of a CFC in future years.

Second, let’s review the background on Accelerated Taxation of Foreign Corporations (or ‘Subpart F’). A U.S. shareholder of a foreign corporation is generally not subject to U.S. tax on the foreign income of such corporation until the income is distributed as a dividend to the shareholder. However, a U.S. shareholder must include in taxable income its pro rata share of a CFC’s Subpart F income, whether or not such income is actually distributed during the year. This results in the current taxation of certain income of CFCs to U.S. shareholders.

Under the new repatriation tax provisions, the Subpart F income of a deferred foreign income corporation is increased by the greater of the foreign corporation’s accumulated post-1986 deferred foreign income determined as of November 2, 2017 or the foreign corporation’s accumulated post-1986 deferred foreign income determined as of December 31, 2017. The increased Subpart F income must be recognized in tax year 2017.
This means that a U.S. shareholder of a deferred foreign income corporation must pick up additional taxable income on its 2017 tax return for its pro rata share of the accumulated post-1986 earnings and profits (the “mandatory inclusion amount”).

Third, what earnings are subject to tax? Accumulated post-1986 deferred foreign income subject to tax equals the corporation’s accumulated post-1986 Earnings & Profits (“E&P”) for the periods in which the corporation was a specified foreign corporation. E&P is excluded to the extent such earnings were treated as income effectively connected with a U.S. trade or business or is considered previously taxed income (“PTI”).
When determining E&P for purposes of the income inclusion, adjustments may be required to the extent that there were intercompany distributions during 2017.

The new law provides a mechanism to allow E&P deficits to offset positive earnings, however this is not necessarily an equal offset. In addition, adjustments may be required for deductible payments between SFCs occurring between November 2, 2017 and December 31, 2017.

It is important to note that the shareholder’s mandatory inclusion amount for repatriation tax purposes is based on the greater of the foreign corporation’s E&P determined as of November 2, 2017 or December 31, 2017. The actual tax calculation, however, looks at the corporation’s cash position on multiple dates.

Fourth, how is the tax calculated? Although the mechanics of the calculation are convoluted, the ultimate effect is to tax accumulated E&P attributable to liquid assets such as cash (the “aggregate foreign cash position”) at a rate of 15.5% and to tax accumulated E&P attributable to illiquid assets at a rate of 8%.

A calendar year foreign corporation’s aggregate foreign cash position must be evaluated as of December 31, 2017, December 31, 2016 and December 31, 2015. Specifically, the cash position is the greater of the cash position as of December 31, 2017 or 50% of the sum of the cash position on December 31, 2016 and December 31, 2015.

Fifth, how do you pay the tax? Corporations may offset the repatriation tax with a deemed-paid foreign tax credit; however, individuals may not do so unless they make an election to be taxed as a corporation under IRC §962.
U.S. shareholders (corporate and individual) subject to the tax may elect to pay the net tax liability in unequal installments over 8 years, beginning with the due date of the 2017 tax return (without extensions). This means, an election must be filed by April 17th, 2018 in order to take advantage of the 8 year installment payment option.

Key Takeaways and Things to do

  • Specified foreign corporations must determine their accumulated post-1986 E&P for the periods in which the corporation was a specified foreign corporation.
  • U.S. corporations that are subject to the repatriation tax must accrue for such tax in their 2017 financial statements.
  • Individual shareholders subject to the repatriation tax should evaluate whether an IRC §962 election should be made and should be prepared to have adequate cash to pay the tax.
  • ALL structures in which a U.S. corporation or a U.S. individual owns (directly or indirectly) 10% or more of a foreign corporation anywhere in the structure should be evaluated immediately for repatriation tax implications.

Consulting with a San Francisco CPA Firm in International Tax

If all of this sounds complicated, well, it is. However, reach out to our CPA firm as we have deep experience in international tax issues here in San Francisco. We can consult with you on tax strategies for your overseas assets and income so as to minimize taxes within the extent of the law.

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