Repatriation tax – IRS provides penalty reliefs to many

In recently published Newswire, IRS announced that it will grant penalty relief in certain cases with regard to repatriation tax under IRC 965.

In nutshell, following are the new three relief provisions:

In general, the questions and answers indicate that:
• In some instances, the IRS will waive the estimated tax penalty for taxpayers subject to the transition tax who improperly attempted to apply a 2017 calculated overpayment to their 2018 estimated tax, as long as they make all required estimated tax payments by June 15, 2018.
• For individual taxpayers who missed the April 18, 2018, deadline for making the first of the eight annual installment payments, the IRS will waive the late-payment penalty if the installment is paid in full by April 15, 2019. Absent this relief, a taxpayer’s remaining installments over the eight-year period would have become due immediately. This relief is only available if the individual’s total transition tax liability is less than $1 million. Interest will still be due. Later deadlines apply to certain individuals who live and work outside the U.S.
• Individuals who have already filed a 2017 return without electing to pay the transition tax in eight annual installments can still make the election by filing a 2017 Form 1040X with the IRS. The amended Form 1040 generally must be filed by Oct. 15, 2018.

IRS accordingly updated the FAQ page and added these reliefs.

Please contact CPA Global Tax (www.cpaglobaltax.com) team if you have any questions regarding repatriation tax as well as GILTI tax.

 

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Who says MNCs want to keep the earnings offshore

IRS recently stated that the U.S. based holding companies claimed $18.3 billion in foreign tax credit in 2013 which is up from $8.17 billion in the previous year. The foreign tax credit was generally claimed for the tax paid in foreign countries on the dividend income repatriated to the U.S. by these holding companies. The data says that the holding companies reported $25.1 billion in such dividend income in 2013.

The data suggests that U.S. companies are bringing in more income from the foreign earnings to finance U.S. operations.

Since the tax incentives are not the motivation for repatriating the earnings, the economic factors seem to be the driving such a trend.

IRS says inverted companies won’t be allowed to access foreign earnings without paying US tax

IRS announced that it intends to issue regulations under Code Sec. 304(b)(5)(B), Code Sec. 367 , Code Sec. 7701(l), and Code Sec. 7874 with respect to corporate inversion transactions.

Among others, the regulations will prevent inverted companies from accessing a foreign subsidiary’s earnings while deferring U.S. tax through the use of creative loans, which are known as “hopscotch” loans (under section 956(e) of the code).

In general, the forthcoming regulations will prevent inverted companies from using certain techniques to access the overseas earnings of the U.S. company’s foreign subsidiaries without being subject to US tax. This would close a loophole to prevent inverted companies from transferring cash or property from a controlled foreign corporation to a new parent to completely avoid U.S. tax, and make it more difficult for U.S. entities to invert.

Notice 2014-52 further added that regulations will generally apply to transactions completed on or after Sept. 22, 2014.

“Investment in US property” inclusion is not qualified dividend – Tax Court affirms

In Osvaldo Rodriguez et ux V. Commissioner, the fifth circuit recently upheld the decision in a transaction involving inclusion of IRC 956 income with respect to the taxpayers’ Controlled Foreign Corporation (CFC) in Mexico.

Osvaldo and Ana Rodriguez, husband and wife, were citizens of Mexico and permanent residents of the U.S. They were the sole shareholders of Editora Paso del Norte, S.A. de C.V. (Editora). Editora had been incorporated in 1976 under Mexican  law, and in 2001 it had established operations in the U.S. as a branch under the name Editora Paso del Norte, S.A. de C.V., Inc.—a controlled foreign corporation (CFC).  On their amended 2003 and original 2004 U.S. federal income tax returns, the taxpayers included in gross income $1,585,527 and $1,478,202, respectively, for amounts of Editora’s earnings invested in U.S. property and taxable directly under IRC 951(a)(1)(B) and IRC 956. 

Taxpayers treated the IRC 951 inclusions as qualified dividend income subject to preferential qualified dividend rates. IRS determined that the Code Sec.  951 inclusions were taxable at ordinary income rates.

The fifth circuit upheld the decision and ruled that the amounts included in the Rodriguez’s gross income under IRC 951(a)(1)(B) and IRC 956 with respect to their CFC’s investments in U.S. property were not qualified dividend  income under IRC 1(h)(11).