May 25, 2020

Illinois Confirms Treatment of Deemed Repatriated Foreign Earnings Provisions

On Wednesday, the Illinois Department of Revenue (Department) issued additional guidance concerning its treatment of the new deemed repatriated foreign earnings provisions found in Internal Revenue Code Section 965, enacted in the federal tax reform bill (known as the Tax Cuts and Jobs Act, or “TCJA”).  The Department confirmed key aspects of Illinois’ treatment of the repatriation provisions, including:

  • Both the income inclusion and deduction provided for in the deemed repatriated foreign earnings provisions will be taken into account in determining a taxpayer’s tax base, so that the inclusion in Illinois will be net. The Department’s guidance references the new federal IRC 965 Transition Tax Statement, which a taxpayer must file with its 2017 federal return when reporting deemed repatriated foreign earnings; that statement includes both income under IRC 965(a) and the corresponding participation deduction under IRC 965(c).

  • Additionally, the Department’s guidance also confirms that the net amount included as deemed repatriated foreign earnings will be treated as a foreign dividend eligible for Illinois’ dividend-received deduction, which can be a 70 percent, 80 percent or 100 percent deduction depending on a taxpayer’s percentage share of ownership of the foreign subsidiary subject to the repatriation provisions. See 35 ILCS 5/203(b)(2)(O). (For tax periods beginning on or after January 1, 2018, 80 percent is reduced to 65 percent and 70 percent is reduced to 50 percent because this provision incorporates the federal dividend-received deduction rates found in IRC 243, which was amended as such by the TCJA.)

  • The Department recently revised the instructions to its corporate income return and to Schedule M (reporting additions and subtractions) and Schedule J (Foreign Dividends) of the return to reflect that Illinois will take into account net deemed repatriated foreign earnings plus any amount eligible for the dividend-received deduction. On Schedule J, the Department specifically instructs taxpayers to report deemed repatriated foreign earnings amounts eligible for the dividend-received deduction on lines 7–9.

  • Not surprisingly, the Department’s guidance provides that any tax liability resulting from the deemed repatriated foreign earnings provisions is due in 2017 and confirms that Illinois does not conform to the federal election (IRC 965(h)) to pay the tax liability resulting from the deemed repatriated foreign earnings provisions over eight years.

  • The Department confirms that reporting and payment related to the repatriation provisions is subject to Illinois’ penalties and interest provisions.

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