The IRS has modified the circumstances under which it will approve requests for changes in annual accounting periods made by certain foreign corporations in 2017.
Under Revenue Procedure 2018-17, the IRS won’t approve any change to the annual accounting periods of some foreign corporations under both automatic or general rules if the change could result in the avoidance, reduction, or delay of the transition tax required by the Tax Cuts and Jobs Act (TCJA).
Generally, a taxpayer that wants to change its annual accounting period and use a new tax year must obtain the IRS’s approval. Changes in annual accounting periods are approved only if the taxpayer agrees to IRS terms, conditions and adjustments for putting the change into effect.
The IRS stated that the changes are needed to prevent a Section 965 specified foreign corporation with a taxable year ending on December 31, 2017, from avoiding the purposes of the newly enacted section by changing its taxable year. Sec. 965 was included in the TCJA and imposes a transition tax on untaxed foreign earnings of foreign subsidiaries of U.S. companies by deeming those earnings to be repatriated. Foreign earnings held in the form of cash and cash equivalents are taxed at a 15.5% rate, and the remaining earnings are taxed at a rate of 8%. The transition tax generally may be paid in installments over an eight-year period.
For purposes of applying the new revenue procedure, a tax year of 52 to 53 weeks is deemed to begin on the first day of the calendar month nearest to the first day of that tax year. It is deemed to end or close on the last day of the calendar month nearest to the last day of the 52-53-week tax year (as applicable).
How an Accounting Change Could Alter Taxation
Specifically, the IRS noted: “For example, if a [deferred foreign income corporation (DFIC)] with the calendar year as its taxable year elected, effective for its taxable year beginning January 1, 2017, a taxable year closing on November 30, the election could defer by as much as 11 months a United States shareholder’s inclusion with respect to the DFIC under Section 965. Further, the election could, depending on the facts, reduce the amount of the tax liability of a United States shareholder of the DFIC by reason of Sec. 965, including through the reduction of the post-1986 earnings and profits of the DFIC.” That code section governs the “treatment of deferred foreign income upon transition to [the] participation exemption system of taxation.”
Moreover, the election could, depending on the facts, reduce the amount of the tax liability of a U.S. shareholder, including through the reduction of the post-1986 earnings and profits of the DFIC.
The IRS also has modified Revenue Procedures 2006-45 and 2009-39 to provide that — notwithstanding any other provision in those revenue procedures — neither will apply to a specified foreign corporation as defined in Sec. 965 if:
- The specified foreign corporation’s tax year (determined without regard to the requested change) ends on December 31,
- The requested change was permitted, the first effective year of the corporation would begin on January 1, 2017, and it would end on a date before December 31, 2017, and
- The specified foreign corporation has one or more U.S. shareholders that must include an amount in gross income with respect to the specified foreign corporation or any other specified foreign corporation (with such amount determined without regard to the requested change).
Change Aimed at Annual Periods Ending on December 31, 2017
The modification applies to any request to change an annual accounting period that ends on December 31, 2017, regardless of when the request was filed.
For a no-obligation discussion on the possible impact and steps you should take now, contact Lien Le, the head of our International Tax practice.