December 14, 2017 / North America
With tax reform becoming very likely at the close of the year, taxpayers are at risk for unseen pitfalls. In particular, consider the toll charge on offshore earnings. Many taxpayers have kept the toll charge in the back of their minds, perhaps believing that the calculation would not apply or would be simple to compute. However, the toll-charge rules may surprise many taxpayers. Not only are more taxpayers likely to be affected than expected, but also the nuanced calculations must be completed with a quick turnaround.
Although Congress is still working through reconciliation of the tax bill, we have enough substance from the prior versions to predict the final design of the toll charge. Knowing there may not be enough time to react after passage of the bill, this edition of Tax Advisor Weekly sets forth just a few of the complications and complexities that taxpayers should be considering in the meantime.
Incorrect Calculations or Late Payments Could Result in Forfeiture of Installment Right
For entities and persons expecting a toll charge, the election to pay the charge over an eight-year period makes the cash tax less burdensome upfront. However, if a taxpayer’s calculations are understated or if a taxpayer is late in paying the charge, the ability to continue paying in installments may be voided, and all remaining liability may be due immediately. As we’ll discuss further below, the necessary calculations are not straightforward, and the timing to complete such calculations is limited. For many taxpayers, the first installment will be due on April 15, 2018.
Many U.S. Shareholders Will Be Surprised to Learn They Could be Subject to the Toll Charge
The new rules include a broader group of taxpayers subject to the toll charge beyond the typical U.S. multinational. The new modified constructive ownership rules could, for example, include U.S. shareholders (including individuals) of so-called 902 corporations (including some that are not controlled foreign corporations).
Current Transactions Could Be Affecting the Toll Charge
With multiple measurement dates for determining earnings that are subject to the charge, there are seemingly routine transactions happening now that might affect the final toll-charge amount. Some transactions, for example, could increase earnings and profits (E&P), or increase the amount of cash on hand, and therefore affect the overall income inclusion. Note that some transactions that might be reducing E&P or cash could be disallowed later if deemed to be abusive.
Some Taxpayers Might Be Paying the Toll Charge a Year Later…