March 28, 2023

Volume XIII, Number 87


March 27, 2023

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What Do You Think About…Deemed Repatriation?

The tax reform bill signed into law by President Trump on December 22, 2017, taxes U.S. shareholders on their share of the previously untaxed deferred income of foreign corporations. Known as “deemed repatriation,” this tax serves as a transition rule to a significantly revised system of international taxation where certain income of U.S. corporations derived through foreign subsidiaries may be exempted permanently from U.S. taxation. The tax on the deemed repatriation—15.5 percent for cash and cash equivalent assets and 8 percent for other assets—is imposed regardless of whether offshore earnings are actually repatriated or how the remaining assets are ultimately used.

Several of the most impactful changes brought about by the legislation known as the Tax Cuts and Jobs Act (TCJA) are found within its international provisions. The TCJA shifts the United States from its former worldwide system of international taxation, with deferral for certain offshore earnings, to a new system that includes aspects of “territorial” taxation, under which the income of U.S. corporations earned abroad is generally not subject to U.S. tax or may be subject to a lower rate of tax on an imputation basis. In order to bring about that change, however, the new law enacts a one-time deemed repatriation tax, requiring that U.S. shareholders include as income the previously untaxed, post-1986 earnings of any deferred foreign income corporation (DFIC). A DFIC is any controlled foreign corporation and any foreign corporation in which a U.S. corporation is a shareholder with post-1986 accumulated deferred foreign income greater than zero. The tax applies to tax years of DFICs beginning prior to December 31, 2017, generally the 2017 tax year for calendar year corporations. The new law also contemplates an election that allows taxpayers to pay the tax without interest over an 8-year period.

Given the immediate effect of the deemed repatriation tax and the number of stakeholder questions about how to calculate the tax, the Department of Treasury (Treasury) and the Internal Revenue Service (IRS) have prioritized guidance on the issue, issuing Notice 2018-7 on December 29, 2017, and Notice 2018-13 on January 19, 2018. The notices address several items already identified by taxpayers but acknowledge many details that remain to be identified and resolved. They request comments to identify questions and concerns and to provide input and suggestions on how to implement the new law. The Treasury and the IRS intend to issue regulations on the subject and may issue additional notices in the interim that will take this stakeholder input into account. In addition to interpreting the legislation, forms and instructions will be promulgated.

Copyright 2023 K & L GatesNational Law Review, Volume VIII, Number 51

About this Author

Mary Baker Burke, KL Gates Law Firm, Tax Attorney
Government Affairs Advisor

Mary Burke Baker is a government affairs advisor in the Washington, D.C. office. Mary focuses on federal tax matters affecting businesses—including domestic and multi-national corporations and all types of pass-through entities—and individuals. Her practice covers tax policy, tax reform, regulatory and other guidance, tax administration and technical tax issues, with particular emphasis on the OECD and the European Union, accounting methods, energy and medical device issues, and FBAR compliance matters for individuals.

Mary consults with and...

Charles Purcell, KL Gates Law Firm, Tax Attorney

Charles Purcell works extensively in the alternative investments areas with a focus on federal and international tax issues.  He has broad experience in the formation of domestic and foreign investment funds including private equity, venture, real estate and infrastructure funds and fund-of-funds; large joint venture transactions; mergers and acquisitions; financing and banking transactions; ventures capital investments and start-up companies; and compensation of managers, executives and promoters.  Mr. Purcell represents numerous domestic and foreign institutional...

Adam Tejeda, KL Gates Law Firm, New York, Tax Law Attorney

Mr. Tejeda counsels clients on a wide range of tax matters associated with domestic and international business transactions. He focuses his practice primarily on tax planning in connection with inbound and outbound investments; cross-border financings; domestic and cross-border mergers and acquisitions; multinational IP planning; advising US based clients with regards to Subpart F; corporate and tax aspects of joint ventures and other partnership issues; hedge fund and private equity fund structures; tax planning with respect to the tax consequences of overseas...

Elizabeth Crouse Tax Lawyer K&L Gates Law Firm

Elizabeth Crouse is a partner in the tax group of the Seattle office. She provides business-focused solutions for U.S. federal, state, and international tax matters pertinent to mergers and acquisitions, corporate divestitures, internal reorganizations, cross-border transactions, private equity and venture capital fund creation and investments, and start-up companies.

Ms. Crouse is also experienced with U.S. federal and state alternative energy tax incentive programs (including the investment tax credit, production tax credit, and 1603 cash...