IRS blocks refund for companies overpaying offshore profits tax
There’s bad news for companies that may have accidentally overpaid this year’s "repatriation" taxes on foreign profits: they won’t be getting a refund.
The Internal Revenue Service said in a legal memorandum dated Thursday that it won’t rebate any such overpayments or credit them toward tax bills not tied to repatriation, such as annual bills for corporate income.
“A lot of taxpayers” who had expected reimbursement “are going to be disappointed,” Robert Willens, an independent tax and accounting expert, wrote in a client note Friday. "No such refund will be forthcoming.”
Multinationals that likely overpaid include those in the pharmaceutical and technology sectors, such as Pfizer Inc. and Apple Inc., because they have the largest stockpiles of foreign profits, Willens said.
Andrew Silverman, a Bloomberg Intelligence analyst, said banks also are likely to be affected. “I can’t think of another industry that is as conservative as banks with their taxes, but if there is, then they’d likely be overpaying, as well,” he said.
Under the Republican tax law enacted in December, companies started making payments for the 2017 tax year on an estimated $3.1 trillion in profits stockpiled overseas since 1986. Companies are required to tally up their foreign earnings and pay a two-tiered levy. The rates are 15.5 percent for cash and 8 percent on non-cash or other illiquid assets.
Companies can elect to pay in interest-free installments over eight years. Along with a cut in the corporate rate to 21 percent from 35 percent, the rules help shift the U.S. away from a system of taxing global profits toward taxing generally domestic income only.
Clinton Wallace, a law professor at the University of South Carolina, said the “overpaid” money isn’t gone, though the use of it is limited to paying the rest of the installments.
“Any extra amounts paid for 2017 by taxpayers electing to pay in installments can only be applied to the next installment,” he said. “It cannot be applied to offset other tax payments.”
Still, companies that overpaid would prefer a refund or a credit against their 2018 overall corporate tax bills. “The last thing you want” is credit against future repatriation installments, because they’re interest-free, Willens said. “You don’t want to pre-pay an interest-free loan.”
The IRS made its announcement in a bulletin that cited a legal memorandum by the agency’s office of chief counsel.
While the tax code authorizes the agency to apply overpayments against outstanding liabilities and to refund any balances, that doesn’t apply to installment payments, the IRS memo said.
But the IRS position may face challenges. “There are a lot of corporations in this boat and they have expressed concerns with the service’s legal basis for this answer,” Willens wrote.
The new tax law created uncertainty among multinationals over how to calculate the tax and at which rate. While the Treasury Department clarified some of those ambiguities this week, that’s too late for companies that overpaid earlier this year.
And more fuzziness remains. The IRS memorandum “is an implicit acknowledgment by the IRS and Treasury that companies don’t know exactly how much to pay in repatriation tax and likely won’t know exactly how to much to pay for some time,” Silverman said.