The Repatriation tax - planning before October 15. (Published in Jerusalem Post)
The Internal Revenue Service (IRS) announced on June 4, 2018 that it will waive the painful sanctions and late-payment penalties relating to the Internal Revenue Code section 965 Repatriation tax, provided that individuals subject to the tax meet certain requirements.
Section 965, enacted in December 2017, imposes a Repatriation tax on accumulated earnings of foreign (e.g. Israeli) corporations owned by U.S. shareholders by deeming those accumulated earnings as being distributed and thus subject to tax. Foreign earnings held in the form of cash and cash equivalents are taxed at a 15.5 percent rate, and the remaining earnings are taxed at an 8 percent rate. The Repatriation tax generally may be paid in instalments over an eight-year period if a taxpayer files a timely election under section 965(h).
In general, the relief states as follows: For individual taxpayers with less that a total Repatriation tax liability of $1 million, and who make the timely section 965(h) election, there is no sanction for missing the June 15, 2018 deadline for making the first of the eight annual installment payments. Absent this relief, a taxpayer who failed to make the first payment by June 15, 2018 would be liable for the entire amount due immediately, with penalties.
Thanks to the June 4 Treasury relief, the vast majority of Americans in Israel (“Expats” or “Olim”) avoided the painful June 15, 2018 deadline for making the first payment under the Repatriation tax. What lays ahead?
The October 15, 2018 deadline.
Assuming the Expat filed an extension by June 15, 2018 allowing the Expat until October 15 to file its 2017 tax return, then the following two items must be added to the return that is filed by that date. If no extension was filed by June 15, then the following was due on or by June 15, 2018
First, election under 965(h) to pay the Repatriation Net Tax Liability in eight instalments. To be entitled to pay the tax liability over eight years, the taxpayer must affirmatively elect to spread the payments over that period. The election is to be attached to the tax return. Under the formal language of the law, failure to make a timely election will result in the immediate acceleration of any Repatriation tax liability, as if the June 4 Treasury fix was not granted at all. In other words, if you fail to make the election, then the entire amount due should have been paid by June 15, 2018.
Does the election have a specific format? It must be signed under penalty of perjury and include the bottom-line amount of tax owed under the Repatriation tax.
Second, IRC 965 Transition Tax Statement. This more detailed statement must also be attached to the 2017 tax return and include information such as:
· Total income to be added to the taxpayer personally as a result the repatriation tax;
· The total amount of the accumulated earnings attributable to cash;
· Participation exemption/deduction amount under IRC section 965(c);
· Allowable and disallowed foreign tax credits;
· Total net tax liability, including amounts to be paid in instalments.
Third, file the 2017 tax return with all the various components of the Repatriation tax properly reported.
These three requirements mean that by October 15, 2018, the taxpayer and its tax professional must have engaged in rigorous number crunching and planning to minimize the amount of tax due.
The taxpayer is also required to keep adequate records to support all the above.
To summarize, Expats and Olim taxpayers in Israel should wisely use the time between now and October 15, 2018 to sit with their Israeli and US tax professionals and prepare.
As always, consult experienced tax advisors in each country at an early stage in specific cases.