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Monday, April 29, 2019

TCJA: The Impact of Deemed Repatriation on U.S. Multinationals


Whenever a significant tax law like the Tax Cuts and Jobs Act of 2017 (TCJA) is enacted, businesses and tax advisors typically focus first on the impact on their tax obligations, and any new incentives or penalties that might affect them. For U.S.-based multinationals with profits held in offshore subsidiaries, one of the first issues that needed to be addressed was the deemed repatriation of those profits.

U.S. Tax on Overseas Profits

For some time now, policy experts have argued that the U.S. misses out on significant revenues from multinationals because the tax impact of transferring profits back to the U.S. is prohibitive. The TCJA imposed a one-time tax on pre-2018 profits held in those foreign affiliates. The rates are low by corporate tax standards: Cash and other liquid assets are taxed at 15.5 percent, while non-cash assets are taxed at 8 percent. Some credit is allowed for foreign taxes already paid on these amounts. The law also allows for payment of this tax in installments over eight years.

Many calendar-year businesses began calculating and paying this tax on the 2017 returns that they filed in 2018. While the transition rules permit payment of the tax over eight years, it is considered part of a taxpayer’s 2017 liability. This rule has caused an unusual situation related to overpayments and refunds. Any overpayments related to 2017 non-repatriation taxes are neither refundable nor creditable toward 2018 estimates until the transition tax — including installments due through 2025 — is paid in full.

Audited Financial Statements and the Income Tax Provision

Businesses that prepare audited financial statements need to move quickly into a second phase of analysis: the effect of new laws on how they account for taxable income. Because these provisions went into effect before 2018, the repatriation rules have also been among the first sections of the TCJA to affect corporate tax provisions.

The “Indefinite Reinvestment Assertion”

For multinationals, one key component of the reconciliation between financial statement income and taxable income is the “indefinite reinvestment assertion.” This is a statement that management makes when it plans to hold financial statement income from a foreign subsidiary in that subsidiary and reinvest it in that subsidiary for the foreseeable future. Given the TCJA’s provision that deems accumulated foreign earnings as automatically repatriated for taxable income purposes, affected businesses need to ask: Should the accounting assertion be modified? If not, how does the assertion change the tax provision?

As with any tax or accounting question, you should consult a professional who is familiar with the specific details of your situation. Here are a few items to consider as you prepare for that discussion:

  • The TCJA did not change existing accounting guidance with respect to financial statement accounting and disclosures of the tax effects of foreign investments.
  • If your business plans to continue making the indefinite reinvestment assertion, you should document your reinvestment plans to support the assertion.
  • You should work with your advisor to determine if and how your deferred tax calculation is affected by the relationship between the new tax law and your financial statement assertions regarding reinvestment.
  • If your public company has reached conclusions about how it will treat unremitted foreign earnings, but has not evaluated the effect of the assertion on its financial statements, SEC rules may require that you disclose the status of the evaluation.

The plans for reinvestment should be evaluated and updated every period. To the extent that the indefinite reinvestment assertion changes, the business should disclose the information in the appropriate period and reflect the impact of the change in the financial statements.

For support in evaluating risks and opportunities facing your multinational business, or to learn more about how the TCJA’s deemed repatriation rules could affect your business, contact your Armanino tax professional.

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