The Internal Revenue Service and the U.S. Treasury Department have proposed regulations on how they envision implementing tax reform rules around repatriation of foreign earnings.

The proposed regulations focus on Section 965 of the Internal Revenue Code as amended by the Tax Cuts and Jobs Act, which will affect taxpayers that have ownership interest in certain foreign corporations. The tax reform measure signed into law in December 2017 ushered in significant change in corporate tax rules.

Under tax rules dating back to the 1980s, U.S. companies could escape U.S. federal income tax on earnings in foreign business operations if those earnings were held abroad for investment purposes. That gave companies an incentive to keep those earnings offshore. The Tax Cuts and Jobs Act shifts the U.S. approach to taxation of foreign earnings by taking all foreign earnings, whether repatriated to the United States or not, and it charges a one-time transition tax on earnings that have been held abroad.

Section 965 is focused on determining the one-time transition tax companies must pay to comply with the new taxation approach to earnings from overseas activity. Companies will be allowed to spread the transition tax out over an eight-year period, and they may have to report it with their 2017 tax returns.

Companies with foreign earnings held as cash or cash equivalents generally will be required to pay a tax at 15.5 percent for the 2017 calendar year. Earnings held in instruments other than cash or cash equivalents will be taxed at 8 percent, the IRS says.

The proposed regulations provide information on how U.S. taxpayers should calculate and report the amounts subject to tax under Section 965. It also contains information on making elections that are available to taxpayers under Section 965.

The proposed guidance estimates roughly 100,000 taxpayers will be affected by the amendments to Section 965. It also estimates each taxpayer will commit roughly five hours to the activity required to gather information and report a company’s post-1986 earnings and profits for purposes of complying with the new tax rules. 

The IRS is already sending individual document requests to taxpayers regarding the details of their Section 965 calculations, says Robert Chase, a partner at law firm Eversheds Sutherland. "It will be important for taxpayers to understand the nuances of the regulations and document how they impact the taxpayer's specific calculation,” he says. “Being prepared to respond will be important.”

The proposed regulations will be availble for public review and comment for 60 days after they are published in the Federal Register.