You probably are confused already, right? Rest assured, you are not alone – welcome to another complicated provision in the Tax Cuts and Jobs Act (the “Act”) passed in December 2017. This Act fundamentally changes the way in which a U.S. corporation is taxed on foreign income. The Act moves the U.S. from a worldwide taxation scheme closer to a territorial taxation scheme. Prior to the Act, a corporation was taxed on worldwide income; now, a corporation generally will not be taxed on income earned by a foreign subsidiary. Canada, Japan, and the United Kingdom are a few of the countries that have territorial systems. Sounds great, right? Well, the cost of transitioning from a worldwide system to a territorial system requires a mandatory, one-time, repatriation tax – also known as a “toll charge.”
How is the tax imposed? No one escapes. The Act imposes a one-time toll charge on U.S. taxpayers who own an interest in certain foreign corporations. The toll charge is levied on undistributed, non-previously taxed post-1986 earnings and profits (“E&P”) of certain U.S.-owned foreign corporations. Lacking guidance from the IRS, it was initially believed that the toll charge might apply to corporate shareholders only. Upon further analysis and a March 14, 2018 IRS document, the toll charge indeed does apply to individual shareholders as well.
How much is the toll charge? It depends. The calculation is complex and includes all post-1986 E&P, through 2017, as a new Subpart F category. Foreign tax paid and dividend distributions may reduce the amount of E&P included in the calculation. A participation exemption, which factors in your tax rate, also reduces the E&P subject to tax. The toll charge applies in 2017 and generally must be paid by April 17, 2018. No, you didn’t misread – the tax is due soon and without regard to extension according to the recently released IRS document. But wait – there is some consolation; the tax payment can be made all at once or can be paid over an eight-year period.
If you own an interest in a foreign corporation, you are potentially subject to this tax. Consult with your tax advisor, as soon as possible, regarding how to proceed.
For more information, please contact International Tax Principal, Suzanne Kane.