On January 15, 2019, the Internal Revenue Service published its final regulations on the so-called “repatriation” or “transition” tax, announced in the Tax Cuts and Jobs Act 2017 (TCJA). The one-time tax relates to foreign earnings of foreign corporations owned by US citizens.
The published regulations give general rules and definitions for s965 (the section of the Bill relating to a repatriation tax), as well as:
- adjustments to earnings and profits and basis;
- s965(c) deductions;
- certain disregarded transactions;
- the allowance of a credit or deduction for foreign income tax; and
- the computation of foreign income taxes deemed paid and allocation and apportionment of deductions.
While the measure was introduced into the TCJA with the aim of cracking down on large multinational corporations that have been investing billions of dollars in foreign subsidiaries, it has caused widespread concern in Canada.
The repatriation tax pulls previously untaxed earnings into the net from as far back as 1986, and has caused concerns in Canada where tax professionals point out that it has created huge problems for thousands of Canadian-resident US citizens, such as small business owners and those with incorporated companies.
Further, as the TCJA was enacted into legislation at the end of 2017, it also applied the 2017-2018 tax year, despite the lack, until last week, of guidelines and final regulations.
Discussions around the proposed regulations have been ongoing since August 2018, and consultation was open until October 2018. Canadian Finance Minister Bill Morneau confirmed in August that the Canadian government had raised the issues of Canadian residents with the US government; however, very little change has been made to the original proposals.
Industry experts have pointed to a minor change in the definition of “cash position” to exclude certain assets held by a specified foreign corporation in the ordinary course of trade or business and certain privately negotiated contracts to buy or sell such assets.
The complexity of the final regulations (running to more than 300 pages) will need particular attention from practitioners with US-citizen clients.
The final regulations will be effective as soon as they are published in the Official Federal Register.