IRS releases final rules on Section 965 repatriation taxes

The Internal Revenue Service and the Treasury Department issued final regulations spelling out how U.S.-based companies will have to pay repatriation taxes on offshore profits under Section 965 of the tax code.

IRS headquarters
The Internal Revenue Service building in Washington, D.C.

The IRS released proposed regulations on Section 965 in August, and the proposed rules went through a public comment period and hearing to elicit feedback about how the provision of the Tax Cuts and Jobs Act would be implemented before the final regulations were released last week.

In the final version, the IRS mostly kept in place the Section 965 rules for how companies should pay taxes on stockpiled overseas profits, but the final regs did introduce a narrow exception for some commodities and derivatives contracts from the 15.5 percent transition tax.

“It’s a very lengthy document — over 300 pages between the comments and the final regulations — and the bulk of the document is devoted to comments, but the basic takeaway is that very few real substantive changes were made to the proposed regulations,” said Bruce Hood, a partner in the international corporate tax team of the law firm Withers.“They pretty much went through all of the comments and there were many, but they viewed a lot of the comments as just not being permitted by the express language of the statute itself. There were a few comments dealing with cash equivalents, particularly in the case of commodities, where I think they loosened the rules a little bit as to what assets of that type might not fall into the cash equivalent category. But overall I think they must have done a very good job with the proposed regs because there were very few changes.”

He sees few surprises in the final version of the regulations. “The changes that they made, if any, were just tweaks,” said Hood. “The things that a lot of the commenters were asking for couldn’t be addressed by regulations. They would have to have a technical correction to the statute, which may happen down the road sometime, but no time soon.”

Nevertheless, the final regulations do provide some extra clarity for corporations so they know the intentions of the IRS about how to repatriate their foreign profits at a lower tax rate under the tax reform law that Congress passed at the end of 2017. “This is a provision of the law that had some urgency in terms of regulatory guidance just because it kicked in immediately for taxpayers,” said Hood. “They did need guidance because they had to report this on their 2017 tax returns, so I think it was important that they get it out as quickly as possible and that it hew as closely as possible to the statutory language.”

The document indicates that the IRS took the various comments into account before producing the final rules. “They addressed most of the substantive comments in the 100-plus pages of description of the final regs and how they differed from the proposed regs,” said Hood. “The IRS took into account all of those comments and they attempted to describe why they accepted or didn’t accept those comments. They provide guidance to taxpayers who are trying to deal with these new provisions. I don’t think there are any surprises, but they’ve done a pretty good job with the regulations on this new statute.”

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