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The Internal Revenue Service is providing some relief for companies facing looming tax bills after they stockpiled trillions of dollars offshore free of U.S. income tax.
A timing quirk in the tax overhaul seemed to give companies such as Apple, Microsoft and Cisco Systems — all of which began their fiscal years before Jan. 1 — the chance to reduce the foreign cash they’ll accumulate this year and lower their taxes. A press release issued by the IRS on Monday indicates that “if done in the ordinary course of business,” the move won’t be considered as tax avoidance, according to Stephen Shay, a tax and business law professor at Harvard Law School.
“The light is green for this planning, not red,” said Shay, a former top Treasury official. “It is great for those whose years beginning before 2018 are still open for the planning.”
While companies taking steps to shift their assets would still owe repatriation taxes, they wouldn’t have as much cash taxed at the higher rate — “a major concession” by the IRS, said independent tax and accounting expert Robert Willens.
The tax law signed by President Donald Trump in December overhauled the international tax system and requires companies to pay a mandatory two-tiered levy on their accumulated foreign income. Cash is taxed at 15.5 percent, while less liquid assets face a rate of 8 percent. Companies have been trying to figure out ways to reduce assets subject to the higher rate.
Another provision in the IRS release also allows multinationals some leeway when calculating their repatriation tax bills. The law appeared to make more foreign entities owned by multinationals subject to the repatriation tax, but the agency said Monday that taxpayers that own less than 5 percent of a foreign entity’s capital or profits won’t be hit by the repatriation tax.
Banks and financial institutions will also see a reprieve following the IRS’s guidance that a company’s accounts receivable and accounts payable that are longer than one year will be exempt from the repatriation tax, said John Warner, a tax partner at Buchanan Ingersoll & Rooney PC. The financial firms had feared the payments under the loans they issue would have faced the 15.5 percent rate, since they’re generally considered accounts receivable, regardless of their maturities.
“This is generally pro-taxpayer,” Warner said.
Still, the agency said it would crack down on some strategies multinationals may use to reduce their offshore tax bills, such as artificially reducing their earnings and profits, cash piles or “pro-rata” share of transactions, for foreign entities they have stakes in, own or control.
Those rules will be a big deal to some companies, said Michael Mundaca, the co-director of Ernst & Young’s Washington National tax practice and a former top Treasury Department tax official.
The IRS also alerted companies not to change their accounting techniques to lower their repatriation bills.