Yesterday, April 2, 2018, the IRS released Notice 2018-26, the long-awaited additional guidance related to the one-time repatriation tax under new IRC section 965, “Treatment of deferred foreign income upon transition to participation exemption system of taxation.” This tax impacts those United States persons who own interests in specified foreign corporations, which includes an interest in a Controlled Foreign Corporation (CFC). While we are still reviewing the Notice to assess its impact on our clients, we want to timely share one item of relief that the IRS has provided.
As we have mentioned in previous U.S. Tax Tips, an election is available under new IRC Section 965(h)(1) to pay the one-time repatriation tax in instalments over an eight-year period with a payment of 8% of the tax being due this year. Section 965(h)(2) then states that in order for the election to be valid the first payment is required by the due date of the tax return without regard to any extension of time for filing the return. As such many taxpayers were struggling to come up with a realistic estimate of their cumulative E&P in order to make the required payment.
In the Notice the IRS has provided some relief for a subset of taxpayers. In Section 2.18 of Notice 2018-26 the IRS recognizes that United States citizens or residents whose tax homes and abodes, in a real and substantial sense, are outside the United States and Puerto Rico are granted an extension of time for filing income tax returns and for paying any tax shown on the return until the fifteenth day of the sixth month following the close of the taxable year under Reg. 1.6081-(5)(a). For individual taxpayers on a calendar year, this extends the due date of Form 1040 until June 15.
In Section 3.05(e) the IRS addresses the question as to whether the timely payment rule under Section 965(h)(2) negates the extension of time to pay that is available under Regulation 1.6081-5(a). In its response, the IRS states that, “The Treasury Department and the IRS intend to issue regulations providing that, if a specified individual receives an extension of time to file and pay under §1.6081-5(a), then the individual’s due date for an installment payment under section 965(h) is also the fifteenth day of the sixth month following the close of a taxable year.”
Therefore, it appears that those U.S. persons who own shares in a U.S. Controlled Foreign Corporation, and who live outside the United States, will automatically receive a two-month extension for the payment of the Section 965 repatriation tax. Extensions granted under Reg. 1.6081-5(a) do not have to be filed in advance, but instead require a statement attached to the tax return stating that the individual is qualified for an extension under Section 1.6081-5(a)..
We will continue to review the IRS guidance on the repatriation tax and will release U.S. Tax Tips as the information becomes available.