IRS to Deny Certain Changes to Foreign Corporations’ Accounting Periods
The IRS has modified the circumstances under which it will approve requests for changes in annual accounting periods made by certain foreign corporations in 2017.
Under Revenue Procedure 2018-17, the IRS won’t approve any change to the annual accounting periods of some foreign corporations under both automatic or general rules if the change could result in the avoidance, reduction, or delay of the transition tax required by the Tax Cuts and Jobs Act (TCJA).
Generally, a taxpayer that wants to change its annual accounting period and use a new tax year must obtain the IRS’s approval. Changes in annual accounting periods are approved only if the taxpayer agrees to IRS terms, conditions and adjustments for putting the change into effect.
The IRS stated that the changes are needed to prevent a Section 965 specified foreign corporation with a taxable year ending on December 31, 2017, from avoiding the purposes of the newly enacted section by changing its taxable year. Sec. 965 was included in the TCJA and imposes a transition tax on untaxed foreign earnings of foreign subsidiaries of U.S. companies by deeming those earnings to be repatriated. Foreign earnings held in the form of cash and cash equivalents are taxed at a 15.5% rate, and the remaining earnings are taxed at a rate of 8%. The transition tax generally may be paid in installments over an eight-year period.
For purposes of applying the new revenue procedure, a tax year of 52 to 53 weeks is deemed to begin on the first day of the calendar month nearest to the first day of that tax year. It is deemed to end or close on the last day of the calendar month nearest to the last day of the 52-53-week tax year (as applicable).
How an Accounting Change Could Alter Taxation
Specifically, the IRS noted: “For example, if a [deferred foreign income corporation (DFIC)] with the calendar year as its taxable year elected, effective for its taxable year beginning January 1, 2017, a taxable year closing on November 30, the election could defer by as much as 11 months a United States shareholder’s inclusion with respect to the DFIC under Section 965. Further, the election could, depending on the facts, reduce the amount of the tax liability of a United States shareholder of the DFIC by reason of Sec. 965, including through the reduction of the post-1986 earnings and profits of the DFIC.” That code section governs the “treatment of deferred foreign income upon transition to [the] participation exemption system of taxation.”
Moreover, the election could, depending on the facts, reduce the amount of the tax liability of a U.S. shareholder, including through the reduction of the post-1986 earnings and profits of the DFIC.
The IRS also has modified Revenue Procedures 2006-45 and 2009-39 to provide that — notwithstanding any other provision in those revenue procedures — neither will apply to a specified foreign corporation as defined in Sec. 965 if:
Change Aimed at Annual Periods Ending on December 31, 2017
The modification applies to any request to change an annual accounting period that ends on December 31, 2017, regardless of when the request was filed.
FBAR Filing Extensions Will Become Automatic Starting this Year
The Financial Crimes Enforcement Network (FinCEN), a bureau of the Treasury Department, has explained that starting in 2018 it will automatically grant a six-month extension to October 15 to all taxpayers who miss the April 15, 2018, deadline for filing Reports of Foreign Bank and Financial Accounts (FBARs).
However, this year the filing date is April 17, rather than the traditional April 15. This year, April 15 falls on a Sunday, which would usually move the filing deadline to the following Monday — April 16. However, Emancipation Day — a legal holiday in the District of Columbia — falls on that Monday, which pushes the nation’s filing deadline to Tuesday, April 17, 2018. Under the tax law, legal holidays in the District of Columbia affect the filing deadline across the nation.
The previous due date was June 30 of the following calendar year and no extension was allowed. As part of the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015, the FBAR due date was changed to April 15 to coincide with the federal income tax filing season. That legislation also mandates a maximum six-month extension of the filing deadline.
Who must file an FBAR?
United States persons are required to file an FBAR if:
United States persons include U.S. citizens, U.S. residents, entities — including but not limited to corporations, partnerships, or limited liability companies created or organized in the United States — and trusts or estates formed under the laws of the United States.
There are filing exceptions for certain United States persons or foreign financial accounts, including:
Total Worldwide Income
U.S. citizens and resident aliens are legally required to report any worldwide income, including income from foreign trusts and foreign bank and securities accounts. In most cases, affected taxpayers need to fill out and attach Form 1040, Schedule B, “Interest and Ordinary Dividends,” to their tax returns. Part III of Schedule B asks about the existence of foreign accounts, such as bank and securities accounts, and usually requires U.S. citizens to report the countries where accounts are located.
Certain taxpayers may also have to fill out and attach to their returns Form 8938, “Statement of Specified Foreign Financial Assets.” Generally, U.S. citizens, resident aliens and certain nonresident aliens must report specified foreign financial assets on Form 8938 if the aggregate value of those assets exceeds $50,000 on the last day of the tax year, or $75,000 at any time during the tax year.
Note: FinCEN Form 114 (FBAR) isn’t a tax form and isn’t filed with the IRS. The form must be filed electronically and is only available online through the Bank Secrecy Act E-Filing System website.
IRS Boosts Fees on Advance Pricing Agreements
The IRS is increasing the fee it charges multinational business taxpayers for a unilateral or bilateral advance pricing agreement (APA).
APAs are agreements that companies strike with the IRS to resolve potential transfer pricing disputes ahead of time. With an agreement on the prospective tax treatment of international commerce between related parties, the taxpayer gets greater certainty about its U.S. tax liability.
The increase will take effect in two-stages:
Federal law and policy requires agencies, including the IRS, to charge a fee to recoup the cost of providing certain services to the public that confer special benefit to the recipients. In addition, the Internal Revenue Code authorizes or requires the IRS to charge user fees for other specified services. Generally, a user fee reimburses the IRS for the cost of providing the service.
Periodically, federal agencies must review their user fees to determine whether they are recovering the full cost of providing relevant services and to determine if there are additional services for which the agencies should charge user fees.
The last time APA fees were adjusted was in 2015 in the appendix of Revenue Procedure 2015-41. Apart from the changes above, the agency stated the fees in the appendix remain unchanged. Those fees are:
If multiple APA requests are filed by the same controlled group within a 60-day period, the maximum total fee charged will be $60,000, plus $30,000 for each foreign competent authority involved (if any) beyond the first two.
Small Case APAs
An APA request is eligible for the small case APA user fee only if the following apply: