IR-2018-53 was released the afternoon of March 13, two days prior to the March 15th tax filing deadline (https://www.irs.gov/newsroom/irs-provides-additional-details-on-section-965-transition-tax-deadlines-approach-for-some-2017-filers), providing much-anticipated guidance regarding reporting and payment of the one-time mandatory transition tax under section 965 as promulgated under the Tax Cuts and Jobs Act (TCJA). The release includes frequently asked questions (FAQs) and answers to U.S. taxpayers’ questions regarding how to disclose the section 965 tax on their income tax returns and other related matters. The following are just a few highlights:
- Failure to follow the instructions per IR-2018-53 as it relates to section 965 may present some complications with respect to return filing and submission (e.g., rejections, delays, or erroneous filings).
- A U.S. taxpayer with income under section 965 must attach an ‘IRC 965 Transition Tax Statement,’ signed under penalty of perjury, which includes specifically enumerated information supporting their section 965 tax liability, including total inclusion amount, aggregate foreign cash position, total deductions, deemed paid foreign tax credits, disallowed deemed paid foreign tax credits, total net tax liability, installment payments (if applicable), deferral if elected, and a listing of elections permitted under section 965. Model statement templates are included in the release’s appendices.
- Elections under section 965(h), (i), (m), and (n) (the “section 965 elections”) are limited to U.S. taxpayers with a net section 965 tax liability. This means that certain pass-through entities, such as partnerships and S-corporations, are ineligible to make section 965 elections. Treasury and the IRS anticipate publishing additional guidance with respect to these elections of interest holders of pass through entities.
- Section 965 elections should be made by the due date (including extensions) for filing the return for the relevant year. However, the section 965 tax liability itself (or first installment thereof) must be paid by the return due date (without regard to extensions) for the relevant year.
- Section 965 elections should be made by attaching a statement, signed under penalty of perjury, to the 2017 tax year return. Model statement templates are included in the release in the accompanying appendices.
- S. shareholders must attach a Form 5471 (Information Return of U.S. Persons With Respect to Certain Foreign Corporations) to their U.S. income tax return with respect to ‘specified foreign corporations’ (as defined under section 965), regardless of its classification as a controlled foreign corporation, to support the calculation of its section 965 tax. This includes the population of schedule J, which details accumulated earnings and profits for foreign corporations. The IRS expects to amend the Form 5471 instructions as necessary.
- Pass-through entities are required to report additional information regarding section 965 to their interest holders, inclusive of such interest holders’ pro rata share of the entity’s section 965 inclusion, deductions, and deemed paid foreign tax credits.
- Payment of the section 965 tax liability should be paid separate and apart from the U.S. taxpayer’s regular tax liability, such that the U.S. taxpayer will, in effect, make two payments: (i) one payment reflecting its regular tax liability (without regard to the section 965 tax) and (ii) one payment reflecting only the section 965 tax. The release further details specifics as to how to make such payments via wire, check or money order.
- If a U.S. taxpayer has already filed their 2017 tax return prior to this IRS news release regarding clarifying guidance on section 965, then such U.S. taxpayer may wish to consider filing an amended return. Failure to accurately file the net tax liability under section 965 carries with it interest and penalties. Details regarding the amendment procedure are also included in the release.
In addition to the above, the Treasury Department and the IRS previously released three pieces of guidance – Notices 2018-07 and 2018-13 and Revenue Procedure 2018-17 impacting section 965.
Further, the IRS has indicated that it will continue to provide additional information on IRS.gov in the weeks ahead.
Please consult your Mazars USA Tax professional for additional information.