August 2018 / United States

On 1 August 2018, the US Treasury Department and the US Internal Revenue Service (IRS) issued proposed regulations (REG-104226-18) to provide guidance on the transition tax under section 965 of the US Internal Revenue Code (IRC). The Treasury Department released a related Press Release dated 1 August 2018. The IRS also issued a related News Release (IR-2018-158). The transition tax is imposed on untaxed foreign earnings of foreign subsidiaries of US companies under IRC section 965, which treats those earnings as if they had been repatriated to the United States. Foreign earnings held in the form of cash and cash equivalents are taxed at a 15.5% rate. The remaining earnings are taxed at an 8% rate. The lower effective tax rates applicable to section 965 income inclusions are achieved by way of a participation deduction set out in IRC section 965(c). A reduced foreign tax credit (FTC) also applies with respect to the inclusion under IRC section 965(g). Taxpayers may generally elect to pay the transition tax in installments over an 8-year period under IRC section 965(h). The proposed regulations contain information on the calculation and reporting of the section 965(a) inclusion amount, as well as information for making the elections available to taxpayers under IRC section 965.

The US Treasury Department and the US Internal Revenue Service (IRS) issued IRS Notice 2018-67 on 21 August 2018 to provide guidance on the calculation of the unrelated business taxable income (UBTI) for tax-exempt organizations under section 512(a)(6) of the US Internal Revenue Code (IRC). IRS Notice 2018-67 sets forth interim guidance and transition rules, and also solicits comments, regarding IRC section 512(a)(6), which requires an organization subject to the unrelated business income tax under IRC section 511 to calculate the UBTI separately with respect to each trade or business if the organization carries on more than one unrelated trade or business. IRS Notice 2018-67 also provides guidance on the treatment of the global intangible low-taxed income (GILTI) under IRC section 951A for purposes of the unrelated business income tax under IRC section 511. Specifically, IRS Notice 2018-67 provides that:

• an inclusion of the GILTI will be treated as a dividend which is generally excluded from the UBTI under IRC section 512(b)(1); and
• unless otherwise provided in proposed regulations, the UBTI will not include the GILTI that is attributable to insurance income.

The guidance provided in IRS Notice 2018-67 may be relied upon until proposed regulations are published.