On August 1, 2018, the Internal Revenue Service and the Department of the Treasury issued proposed regulations on the Section 965 transition tax, which was enacted under the Tax Cuts and Jobs Act. Section 965 levies a one-time transition tax on US shareholders on the accumulated offshore earnings in certain offshore companies and many taxpayers owe this tax with respect to their 2017 US tax year.
The proposed regulation package is significant and covers a number of areas, including earnings and profits adjustments, aggregate foreign cash positions, rules related to credits for foreign taxes paid by the offshore companies and the allocation and apportionment of deductions, how to determine the “deduction” to calculate the taxable amount, the availability, timing and method of making certain elections, and anti-avoidance rules. The package also contains proposed regulations related to the election by individual taxpayers to credit corporate taxes paid by the offshore companies.
Taxpayers who have interests in offshore companies should contact a US international tax professional to discuss their exposure under Section 965 and the impact of the proposed regulations on their particular circumstances.