Foreign Earnings and TCJA Transition Tax

Enacted as a key component of the Tax Cuts and Jobs Act, IRC Section 965 has a major impact on 2017 income tax years. All U.S. shareholders of specified foreign corporations are subject to immediate taxation on the deferred foreign income of such corporations. Essentially, they are subject to U.S. income tax on the post-1986 earning and profits (“E&P”). The E&P is sheltered by a dividends received deduction, which is designed to limit the U.S. income tax to 15.5% or 8%, depending upon the mix of assets held by such foreign corporations. Domestic corporations are entitled to a reduced indirect foreign tax credit and may utilize otherwise available foreign tax credits to offset the Section 965 transition tax.

The IRS has released the following guidance after the enactment of Section 965:
• IRS Notice 2018-7
• IRS Notice 2018-13
Questions and Answers About Reporting Related to Section 965 on 2017 Tax Returns

The Securities Exchange Commission has also published SAB 118, allowing registrants an extended measurement period to properly account for the impact of the TCJA.

Forte uses VantagePoint™ to help companies minimize the incremental income tax resulting from Section 965, with a specific focus on the interplay with the transition tax and other tax attributes, including:
• Specified Foreign Deficits
• Net Operating Losses
• Overall Foreign Loss Account
• Overall Domestic Loss Accounts
• Foreign Tax Credit Carryovers
• Section 199 Domestic Production Activities Deduction

VantagePoint has extensive logic with respect to foreign E&P computations and Treas. Reg. 1.861-8, to assist in refining the Section 965 impact while fully considering other valuable tax assets.