Wednesday, June 5, 2019
A review of the deemed repatriation tax under the United States Tax Cuts and Jobs Act 2017 by the Treasury Inspector General for Tax Administration has found that the Internal Revenue Service encountered significant problems administering the retroactive components of the tax.
The deemed repatriation tax, also known as the transition tax, was added to the tax code under new Section 965. It is a tax on the untaxed foreign earnings of foreign subsidiaries of US companies.
Prior to the reform, US tax on the income of a foreign corporation could be deferred until the income was distributed as a dividend or otherwise repatriated by the foreign corporation to its US shareholders. The transition tax seeks to regularize these holdings as part of the switch from a tax system with a worldwide corporate tax basis towards a territorial tax basis system, with a concessionary tax rate for newly repatriated income.
The tax functions by deeming any untaxed foreign earnings of US companies' foreign subsidiaries to have been repatriated. Foreign earnings held in the form of cash and cash equivalents are taxed at a 15.5 percent rate, and the remaining earnings are taxed at an eight percent rate. The tax generally may be paid in installments over an eight-year period.
However, TIGTA's investigation found that the retroactive components of Section 965 "presented significant challenges for the IRS in implementing the provision."
According to a summary of TIGTA's report published on May 22, 2019, the IRS was found to have made reasonable efforts to provide information to taxpayers to explain Section 965 requirements and the process for filing a 2017 tax return reporting a Section 965 inclusion amount. However, TIGTA noted that in issuing guidance, the IRS initially did not specifically address the circumstances when taxpayers made payments in excess of the Section 965 portion of their 2017 income liability immediately due and did not clearly inform taxpayers of the implications of making these excess remittances.
TIGTA found that this resulted in at least 115 taxpayers making USD2.8bn in payments on their Section 965 liability that they did not intend to make, with the Internal Revenue Code preventing the IRS from refunding any excess remittances until the entire Section 965 liability is paid, even if the taxpayer elected to pay the liability in installments.
Additionally, TIGTA found that some taxpayers experienced delays in the processing of their filed returns. Furthermore, the process established contained risks, TIGTA observed, such as the proper identification of returns reporting the tax as well as the proper tracking of Section 965 tax payments. For example, as of November 8, 2018, about USD11.2bn in taxes have been tracked as being paid pursuant to Section 965, which is far below estimates of repatriation tax liability, the summary said.
TIGTA recommended that if the IRS is unable to refund excess remittances to taxpayers because the entire income tax liability was not overpaid, it should take steps to inform taxpayers that their excess remittances were applied to the deferred Section 965 portion of their income tax liability and inform them of the status of the liability, including when the next installment payment is due.
TIGTA also recommended that the IRS take steps to ensure that Section 965 payments were properly recorded and that the IRS establish a comprehensive compliance plan.
The summary said that the IRS agreed with TIGTA's recommendations and has initiated corrective actions.