The Internal Revenue Service recently announced it would focus on companies that owe taxes on overseas profits (a Section 965 tax, or as some call it, toll charge or repatriation tax).
The toll charge ---- a one-time tax (payable over eight years) on the existing stock of offshore holdings regardless of whether the funds are repatriated ---- was introduced under the Tax Cuts and Jobs Act (TCJA), which was signed into law December 2017. It was part of the transition to the territorial tax system, which eliminated the tax incentive to keep cash abroad.
A one-time toll charge tax was imposed on non-previously taxed post-1986 foreign earnings and profits of certain U.S.-owned foreign corporations. The toll charge is reduced by a deduction computed in a manner that ensured a 15.5% effective tax rate on earnings represented by cash and an 8% effective tax rate to the extent the earnings exceed the cash position.
Congressional leaders and experts expect that the repatriation levy will generate significant tax revenue over 10 years. Interestingly, and in line with this expectation, the IRS recently included repatriation tax payments as an area of focus for the agency’s auditors, according to a list on the IRS website. Agency officials previously said the area is ripe for abuse because companies could try to minimize their foreign profits in an attempt to reduce their toll-charge-related tax bills.
The IRS also said the audit could expand beyond reviewing taxes paid on offshore profits — it could trigger an exam of other changes companies made to their tax strategies after the 2017 law, which cut the corporate rate to 21% and overhauled the international tax rules.
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