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IRS, Treasury to Issue Guidance Over 'Transition Tax' on Foreign Earnings

In the wake of tax reform enacted by the Trump administration, the Department of the Treasury and its Internal Revenue Service (IRS) said they intend to issue guidance for computing the "transition tax" on untaxed foreign earnings of foreign subsidiaries of U.S. companies, which could affect such partnerships within the energy sector.

According to the IRS, Section 965 of the nation's tax code, in general, imposes a transition tax on earnings that the agency considers headed for repatriation. Foreign earnings held as cash or cash equivalents are taxed at a rate of 15.5%, while any remaining earnings are taxed at 8%. The IRS said the transition tax may be paid in installments over an eight-year period.

In a notice posted last week, Treasury and the IRS said they intend to issue rules for determining how much foreign companies or individuals can claim when applying for the 15.5% tax rate, and rules for determining the overall amount of foreign earnings that should be subject to the transition tax.

Specifically, the agencies said they will, among other things, issue regulations "to clarify the interaction" between rules under Sections 959 and 965 of the tax code in the inclusion year of a deferred foreign income corporation (DFIC), and the taxable year of a U.S. shareholder of the DFIC in which, or with which, such an inclusion year ends. The regulations will describe the steps for determining the Section 965 inclusion amount of a DFIC; the treatment of distributions under Section 959; and the amount of an inclusion under Sections 951 and 965 of the tax code as they pertain to DFICs.

"These rules will assist taxpayers by providing certain additional information needed for computing their transition tax," the IRS said, adding that it plans to publish the notice on Jan. 22 and will accept public comments on the matter.

Last month, Republican lawmakers successfully pushed a $1.5 trillion comprehensive tax reform bill through Congress. President Trump signed the measure into law before Christmas.

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