February 14, 2018
By Ryan Finley
Published in Tax Notes

To prevent unintended deferral of transition tax, calendar-year specified foreign corporations (SFCs) will be barred from changing their tax years if the resulting 2017 year would end before December 31, new IRS guidance says.

With its February 13 release of Rev. Proc. 2018-17, the IRS modified prior guidance on changes of tax year to address foreign entities classified as SFCs under the Tax Cuts and Jobs Act (P.L. 115-97). The revenue procedure amends Rev. Proc. 2002-39 and Rev. Proc. 2006-45 to deny any request to change the tax year of an SFC with deferred earnings and profits and a 2017 tax year beginning January 1, 2017, to any date other than December 31, 2017. (Related analysis.)

The new rules will prevent “changes to the annual accounting periods of certain foreign corporations in 2017 under either the existing automatic or general procedures if such change could result in the avoidance, reduction, or delay of the transition tax,” according to an IRS press release.

Under the amended section 965, U.S. shareholders with an interest of 10 percent or more in an SFC are subject to a one-time tax — at a 15.5 percent rate for liquid assets and an 8 percent rate for other assets — on their pro rata share of the SFC’s accumulated earnings in the last tax year ending before January 1, 2018. Section 965(o) of the new law grants broad authority to Treasury to issue antiavoidance rules for purposes of the transition tax, and the conference report for the Tax Cuts and Jobs Act specifically calls on the IRS to issue rules addressing tax planning strategies that reduce E&P involving changes in entity classification, accounting method, or tax year.

Issuing rules addressing tax-year changes made sense for the IRS given its congressional mandate, but the greater concern among practitioners involves the government’s stance on more complex issues, according to Robert Russell of Alliantgroup LP.

“This one was easy, I think. There still will be some holding our breath to see which [of the] more complicated transactions, if any, are specifically on the blacklist,” Russell said. “Antiavoidance can sometimes be in the eye of the beholder, but since the conference report specifically [mentioned changes in tax year] they probably felt they had to at least to put something down.”

Rev. Proc. 2018-17 says that an SFC with a tax year beginning January 1, 2017, could defer transition tax by as much as 11 months or even reduce its tax liability by changing to a tax year ending November 30, 2017. According to Russell, giving taxpayers nearly a year to devise ways to reduce their liability is probably the greater concern.

“The fact that you can defer paying it [by] 11 months, I think, is not that much of a big deal. The bigger deal would be having more time and ways to massage the E&P number, which, for better or worse, is seen as more offensive,” Russell said. “From the statute, [section] 965(o), and conference report, Congress clearly felt there was a strong need for antiavoidance provisions because, as with any mechanical calculation, there are ideas on how to get your E&P and cash numbers to a more favorable position.”

Robert M. Russell, Esq., CPA, has accomplished a lifetime of success in little more than a decade of legislative practice, having solidified his presence as a congressional authority on international tax policy and other cross-border matters.


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