IRS releases more guidance on transition tax for foreign earnings

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The Treasury Department and the Internal Revenue Service have released a new notice giving multinational companies some extra guidance to help them calculate the “transition tax” on untaxed foreign earnings of foreign subsidiaries of U.S. companies under the Tax Cuts and Jobs Act.

Late last month, after passage of the new tax law, the Treasury and the IRS offered some initial guidance on computing the transition tax in Notice 2018-07.

The new Notice 2018-13, which the IRS and the Treasury released Friday, discusses the regulations the Treasury and the IRS plan to issue, including rules addressing the computation of earnings under the transition tax, along with other rules to clarify some other aspects of the law.

The notice also makes a modification to the notice that was issued last month pertaining to the repatriation of earnings subject to the transition tax. The new notice also gives taxpayers targeted relief from some of the unintended regulatory and reporting consequences that come from a change to existing stock attribution rules in the new tax law.

The Treasury and the IRS are asking for comments on the rules in the notice along with suggestions on any extra guidance that should be issued to help multinational taxpayers figure the transition tax. The Treasury and the IRS anticipate they will be issuing more guidance on the subject in the future.

“The new notice provides another tranche of urgently needed guidance on the application of the transition tax,” said David Noren, a partner at the law firm McDermott Will & Emery LLP in Washington, D.C., a former legislation counsel to Congress’s Joint Committee on Taxation. “While many unanswered questions and problems remain, Treasury and the IRS should be applauded for moving so fast to answer so many important questions that taxpayers are encountering in trying to apply the statute. Hopefully additional rounds of guidance will be in the works.”

He pointed out that the notice provides taxpayers an election to determine earnings subject to the transition tax using data available as of more conventional month-end dates, in order to deal with the statute’s "impractical instruction" to determine earnings in part as of Nov. 2, 2017. “However, the notice does not solve all of the problems presented by the use of a non-year-end determination date, particularly with respect to expenses that accrue at the very end of a taxable year,” he added. “Hopefully future guidance will allow ratable accrual of such amounts over the entire year for purposes of the transition tax.”

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