International Tax Monthly – February 2018 Issue

New Tax Law Includes Loophole that lets Taxpayers Trim Tax on Repatriated Income

A loophole in the Tax Cuts and Jobs Act (TCJA) could allow multinational corporations like Apple to avoid paying billions of dollars in taxes on profits stashed overseas.

The TCJA imposes a transition tax on untaxed foreign earnings of foreign subsidiaries of U.S. companies by deeming those earnings to be repatriated. But the law contains a loophole that allows taxpayers to convert income that would otherwise be taxed at 15.5% (cash holdings) into income that is taxed at 8% (more illiquid investments).

And multinationals could have leeway to shift foreign earnings into the 8% tax bracket.

Calculating the Deduction

A U.S. shareholder of a deferred foreign income corporation is allowed a deduction equal to the sum of:

    • The U.S. shareholder’s 8% rate equivalent percentage of any excess of: (a) the amount included as gross income, divided by (b) the amount of the U.S. shareholder’s aggregate foreign cash position, plus
    • The U.S. shareholder’s 15.5% rate equivalent percentage of the amount described in item (b) above that doesn’t exceed the amount described in item (a) above.

The loophole that allows bracket-shifting involves a formula for calculating the amount of foreign earnings that are subject to the higher tax rate. The benchmark is a company’s foreign cash position, calculated as the greater of either the average of the past two tax years, or the cash balance at the end of the last tax year begun before January 1, 2018.

Companies would pay the 15.5% rate on amounts up to their foreign cash position. Anything over that would be subject to the 8% rate.

How It Works

So, by reducing their foreign cash balances between now and the end of their last tax year that began before January 1, 2018, U.S. shareholders can convert what otherwise would be 15.5%-taxed income into 8%-taxed income. The converted amount is dollar for dollar of reduced foreign cash if:

The aggregate of such U.S. shareholder’s pro rata share of the cash position of each specified foreign corporation of such U.S. shareholder determined as of the close of the inclusion year exceeds the average of that aggregate for the shareholder’s past two tax years. A lower amount would be converted if B exceeds A.

Timing of Conversions

Because the deemed repatriation tax applies for the last tax year of a deferred foreign income corporation that began before January 1, 2018, calendar year corporations would have had to make such conversions before that date. But, fiscal year corporations can make such conversions now.

IRS Issues Guidance on Denying Passports to Delinquent Taxpayers

In Notice 2018-1, the IRS has provided guidance on the federal government denying passport applications for individuals who are certified to have “seriously delinquent tax debt.”

Once the IRS notifies the U.S. Department of State of taxpayers owing large amounts of debt, the department is generally required to deny those individuals a passport or revoke or limit already-issued passports. The relevant section of the code allowing this was added by the Fixing America’s Surface Transportation (FAST) Act, which was signed into law in 2015.

Note: Passports are handled by the State Department, not the IRS. This new provision effectively authorizes disclosure of certain tax information from the IRS to the State Department, which in turn will use this information in making passport-related determinations.

The Definition

A seriously delinquent tax debt is generally defined as exceeding $50,000 (adjusted for inflation for calendar years beginning after 2016) and for which a notice of lien has been filed. However, a “delinquent” certification doesn’t include debt for which:

    • There’s an agreement in place to repay the debt,
    • There’s a collection due process hearing (collection is then suspended), or
    • Innocent spouse relief is requested or pending.

In addition, certification of a seriously delinquent tax debt will be postponed while an individual is serving in an area designated as a combat zone or participating in a contingency operation.

The FAST Act provides procedures for, and restrictions on, the IRS’s disclosure of the return information for purposes of passport revocation. It also provides procedures for how an individual who was certified by the IRS as having a seriously delinquent tax debt can have that certification reversed (for example, if an error was made).

New Guidance

If, after the State Department has been notified of a seriously delinquent tax debt and the IRS Commissioner (or a delegate) determines that the debt shouldn’t have been certified, the IRS will notify the State Department that the certification has been reversed. The law then requires the State Department to remove the certification from the individual’s record.

The certification of a seriously delinquent tax debt will be reversed if the tax debt no longer qualifies as seriously delinquent. Thus, taxpayers who have been told that certification has been sent to the State Department should consider:

    • Paying the tax owed in full,
    • Entering into an installment agreement with the IRS, or
    • Arranging an “offer in compromise” with the IRS to lower the amount owed.

When a passport applicant has a significantly delinquent debt, the State Department generally will allow a 90-day window to resolve the delinquency before denying the application. Taxpayers who need to travel outside the country within those 90 days must resolve the matter with the IRS within 45 days from the date of the passport application.

Only One Remedy

Filing a civil action in court is the sole remedy available for a taxpayer who believes that a certification is in error, or that the IRS has incorrectly failed to reverse a certification because the tax debt is either fully satisfied or ceases to be a seriously delinquent tax debt. The taxpayer can’t make a challenge with the IRS Appeals Office.


U.S. Taxation of a Mexican Foreign Retirement

Persons that have worked outside of the United States may be wondering how their foreign pension or social security will be taxed in the United States. The rules will differ depending on the type of retirement plan and the country in which the work was performed. This article will focus on the treatment of retirement plans for people that have worked in the United States and Mexico based on Article 19 of the United States-Mexico Income Tax Convention (US-Mexico Tax Treaty).

Social Security

For Social Security benefits received either from the United States or Mexico, the funds will only be taxable in the country from which they originated. A Mexican social security benefit will be exempt from tax in the United States even if the beneficiary is a resident or citizen of the United States.


Pension benefits will be taxed based on the Country of residency. If a person receiving a pension from a foreign employer in Mexico, such as from a Retirement Fund Administrator (AFORE in Mexico), is residing in the United States, those funds will be taxable in the United States.

Depending on the type of retirement plan and the location of residency, the rules regarding the taxability of the benefits will differ. We suggest that you contact your CPA for more information if needed. Feel free to contact us if you have any questions.