Mandatory Repatriation Provisions in Tax Bills Will Require Immediate Action for US Shareholders

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By CohnReznick LLP

The mandatory repatriation provisions in both the House and Senate Tax bills will require US shareholders of Controlled Foreign Corporations (“CFCs”) to include in their 2017 taxable income their pro rata share of the post-1986 previously untaxed accumulated earnings and profits (“E&P”) of such CFCs. Much of the media coverage around these provisions has focused on the impact for US multinationals such as Apple and Google with billions of dollars of foreign earned cash previously kept outside the US tax net. However, a lesser known but clearly important aspect of these provisions is that, if enacted, the rules will apply to all US shareholders of CFCs. As defined, the term US shareholder means US individuals, domestic partnerships, domestic trusts, and domestic corporations that own 10% or more of the voting power of the shares of a CFC. 

Given that the mandatory repatriation provisions will apply for the 2017 tax year (or the first tax year ending after December 31, 2017 for fiscal year taxpayers), it is critical that impacted US shareholders determine the amount of unrepatriated E&P in their CFCs as soon as possible. In the case of US shareholders that are C corporations, they will also have to determine the accumulated taxes (commonly referred to as tax pools) paid by such CFCs to determine the amount of foreign tax credits that may (partially or fully) shelter the US tax cost on the mandatory repatriation of accumulated E&P.

For US shareholders that have previously asserted in their US GAAP financial statements that they intend to permanently reinvest their earnings outside the US for purposes of their income tax provision, such assertions will no longer be valid. The tax cost of the mandatory repatriation provisions will have to be accounted for in their 2017 (or first applicable FYE thereafter) US GAAP financial statements.

Read our full alert, which provides an overview of key aspects of the mandatory repatriation provisions in both the House and Senate bills and recommended action for affected taxpayers here.