The Tax Cuts and Jobs Act (TCJA) led to major tax reform that likely impacted every taxpayer. Provisions throughout the law change everything from the basic to the complex. One of the more complex matters changed by this law: taxation of foreign assets.
The Internal Revenue Service (IRS) has acknowledged that the changes are difficult to navigate. In an attempt to provide some clarification, the IRS recently released a publication with information about the transition tax for untaxed foreign earnings.
What is the transition tax?
The TCJA requires companies with untaxed foreign earnings to pay a tax to repatriate the assets — essentially paying a tax as if bringing these assets back to the United States in full compliance with tax obligations. The tax rate will fall between 8 and 15.5%.
Taxpayers may have two options. In some cases, a lump sum, immediate tax payment is due. In others, taxpayers may receive approval to pay the tax over a span of eight years.
Is the transition tax effective?
So far, a recent publication by Accounting Today notes this provision has had a “limited impact.” In 2018, companies repatriated an estimated $776.51 billion. Although this seems like a large sum, the government has expected companies to repatriate trillions, not billions, in earnings and profits.
What is causing the delay?
Some companies may be confused as to how the law applies. Others may hope to avoid the additional tax obligation. A word of caution to those who find themselves aligned with the latter group: a failure to pay tax obligations can result in allegations of tax fraud. Prison time is not uncommon if these allegations include accusations the failure was willful.
Avoid additional issues. Contact an attorney experienced in foreign tax law to discuss your options and protect your business interests.