The Internal Revenue Service and the Treasury Department announced changes Tuesday in the procedures for changing the accounting period of foreign corporations owned by U.S. shareholders subject to the transition tax under the Tax Cuts and Jobs Act.
Late last year, the Treasury and the IRS offered initial guidance on computing the transition tax in Notice 2018-07 in the wake of the passage of the tax overhaul. Last month, the Treasury and the IRS spelled out additional guidance in Notice 2018-13.
The new revenue procedure, Rev. Proc. 2018-17, prevents changes to the annual accounting periods of certain foreign corporations in 2017 under either the existing automatic or general procedures if the change could result in the avoidance, reduction or delay of the transition tax. It also modifies the circumstances under which the IRS grants approval of certain requests by certain foreign corporations for changes in annual accounting periods filed under Rev. Proc. 2002-39, 2002-22 I.R.B. 1046, and Rev. Proc. 2006-45, 2006-45 I.R.B. 851.
The tax laws generally provide that a taxpayer seeking to change its annual accounting period and use a new taxable year needs to get the approval of the IRS. A change in the annual accounting period will be approved when a taxpayer agrees to the IRS's prescribed terms, conditions and adjustments.
In general, the newly enacted section 965 of the tax code that was included in the Tax Cuts and Jobs Act imposes a transition tax on untaxed foreign earnings of foreign subsidiaries of U.S. companies by deeming those earnings to be repatriated. Foreign earnings held in the form of cash and cash equivalents are taxed at a 15.5 percent rate, and the remaining earnings are taxed at an 8 percent rate. The transition tax generally may be paid in installments over an eight-year period. The new revenue procedure was issued to prevent the avoidance of the purposes of section 965 through changes in the taxable years of certain foreign corporations, such as controlled foreign corporations that are effectively subsidiaries of U.S. corporations.