Elation morphed into confusion in the first quarter of 2018 as companies celebrated tax reform, then dug in to figure out what it all means and how to comply.
Especially with respect to the implications for foreign-earned income, public companies are still slogging through details, performing tedious calculations, and looking for more guidance before they can be sure of how to comply with provisions of the Tax Cuts and Jobs Act.
“This was a sea change,” says Lewis Greenwald, a partner at law firm DLA Piper. “A lot is happening, and there are still unanswered questions.”
The Securities and Exchange Commission anticipated it would take time for companies to comply with the financial reporting implications of the new tax law, establishing a transition approach that would allow them to take a full year to fully report the effect—and many are using it, says Greenwald. The Financial Accounting Standards Board is working on tax-reform-related guidance as well. “It really is a matter of getting in there and crunching the numbers, but there are always challenges in resources,” he says. “This has put pressure on tax departments that are generally under-resourced anyway.”
Nearly three-fourths of tax executives in a recent poll said they are still looking for regulatory or other administrative guidance with respect to the 2017 year-end tax reform legislation, and more than 60 percent believe technical corrections to the law itself are in order. The poll by law firm Miller & Chevalier Chartered and the National Foreign Trade Council also revealed no consensus on which aspects of tax reform are most in need of correction, and nearly half of respondents doubted they would see any timely corrections to aid their compliance effort.
The Internal Revenue Service so far has issued a few pieces of guidance on the international provisions of tax reform, along with installments to a document of frequently asked questions. Yet the U.S. Treasury and the IRS have indicated they are still working on more guidance, and tax experts are awaiting it, says Marc Gerson, chair at Miller & Chevalier. “It is hoped this will complement and supplement the guidance that has already been issued to comprehensively address issues and items of concern raised by taxpayers,” he says.
“A lot of banks were having difficulty making those transfers. The guidance said payment had to be made with a specific code, and some banks were not set up to do that. There has been a lot of difficulty getting that done. Most of those have been resolved but there could still be issues for taxpayers that waited until the last minute.”
Curt Wilson, Director, National Tax Practice, KPMG
The international aspects of the tax legislation have proven perhaps most challenging for companies to implement, primarily because of changes to Section 965 of the Internal Revenue Code that no longer allow companies to shield income earned overseas from U.S. tax by keeping it reinvested offshore. The law requires companies to pay a one-time “transition tax” on earnings held offshore, at different rates depending on whether the assets are held in cash or non-cash assets and then tax on foreign earnings going forward as well.
The Section 965 guidance has come in spurts, with IRS Notices 2018-07, 2018-13, and 2018-26, and Revenue Procedure 2018-17, not to mention a series of frequently asked questions with answers. They explain how to compute the transition tax on thus-far untaxed foreign earnings and how to report and make payments of the transition tax.
Guidance so far has covered provisions meant to address avoidance of Section 965 liabilities, procedures related to certain elections under Section 965, relief from certain estimated tax requirements, and penalties that could occur with the transition tax and the change to existing stock attribution rules. Guidance has even promised there will be more guidance.
Guidance on the computation of the Section 965 liability led to a flurry of activity in March and early April as companies sought to comply with IRS requirements to make transition tax payments in forms not normally required or even permitted, says Curt Wilson, a director in the national tax practice of KPMG. Companies typically pay federal taxes through an electronic system specifically designed for tax payments, but the transition tax had to be paid by wire transfer, check, or money order.
“A lot of banks were having difficulty making those transfers,” says Wilson. “The guidance said payment had to be made with a specific code, and some banks were not set up to do that. There has been a lot of difficulty getting that done. Most of those have been resolved but there could still be issues for taxpayers that waited until the last minute.”
An even bigger issue erupted over how the IRS would treat overpayments, says Wilson. Taxpayers were expecting to be able to apply 2017 overpayments of their regular tax liabilities to their Section 965 liabilities, which can be made in installments over eight years. The IRS guidance permitted this, but with an unexpected twist.
Overpayments beyond what was necessary to cover an initial installment would not then be applied to regular tax liabilities going forward into 2018; instead, they would be retained by the IRS to be applied toward future installments of the Section 965 liability.
“Most had anticipated they would be able to use overpayments and would get the excess back,” says Wilson. “People were disappointed at the policy decision not to allow taxpayers to use any overage to pay their first-quarter taxes or get it back.” The American Institute of Certified Public Accountants is even asking the IRS to reconsider its position.
Another head scratcher is contained in IRS guidance that is meant to establish anti-abuse provisions, says Ellen McElroy, a tax partner at law firm Eversheds Sutherland. “I’ve practiced for a long time, and I’m not familiar with anything that looks like this,” she says.
The guidance seeks to prevent companies from making accounting method changes that would reduce the company’s Section 965 liability. It does so, says McElroy, by indicating it will accept some accounting method changes, but not all, depending on their effect on the Section 965 liability.
Companies typically file for method changes to make corrections, which is generally regarded as a positive event for everyone involved, she says. For the IRS to say it will disregard changes that happen to be taxpayer favorable leaves companies uncertain about where to file or not file for method changes, she says. “This is discouraging companies from making corrections,” she says. “It’s an interesting pickle.”
With the guidance issued to date, companies actually have a clearer path forward in terms of calculating liabilities and determining their approach to compliance, says Sue Lippe, a partner at EY in international tax services. “There are definitely a lot of questions being asked, but a lot of clarifications have been made through the notices,” she says. “Now it’s probably more resources and time as it relates to transition tax calculations.”
Even with short-term issues addressed in the early part of 2018, there’s plenty more to come. Companies still need to work out how to comply with the “global intangible low tax income” or GILTI provisions of the law, says Dave Warco, international tax partner at Deloitte. These are anti-deferral provisions, he says, creating a new category of income that recognizes a percentage of previously deferred foreign earnings.
Companies are crunching those numbers, and many are coming up with answers that don’t make sense, says Warco. “This is where a lot of time is being spent,” he says. “We see the vast majority where this rule applies where it will increase their effective tax rate.”
Questions about the “foreign derived intangible income” (FIDI) and “base erosion and anti-abuse tax (BEAT) provisions are also piling on,” says Greenwald. “We still don’t have guidance on any of that,” he says.
The need for more direction and technical detail on these new provisions is “uniquely problematic,” says Mike Dolan, a national director of KPMG’s national tax practice, because some of the rules are retroactive to the 2017 tax return for companies. “People have identified this as prime and principle for additional guidance,” he says, but the guidance machinery does not move swiftly. “There’s going to be a lot of waiting to see what kind of guidance can clarify many aspects of the law before people have to take their positions for the 2018 tax year.”