IRS Attack on Repatriation Deals Spells Danger, Attorneys Say

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By Alison Bennett

Dec. 5 — Taxpayers should think twice about deals to bring back overseas cash that the IRS is targeting in new guidance—even though the current administration is drawing to a close, tax attorneys told Bloomberg BNA.

With an incoming president strongly opposed to U.S. companies that do business overseas and don’t pay their fair share, companies shouldn’t take the guidance lightly, they said in a series of interviews.

In Notice 2016-73, issued Dec. 2, the Internal Revenue Service renewed its campaign to stop taxpayers from improperly bringing earnings back to the U.S. tax-free. The agency said it plans to crack down on companies using transactions known as “triangular reorganizations”—structures involving several different business entities—to move foreign cash without paying U.S. taxes.

Despite the fact that the IRS only issued a notice and there’s no telling when it may release promised regulations, companies still shouldn’t take a chance, attorneys said. Even the prospect of tax overhaul that could lift U.S. taxes on foreign income, while tempting, doesn’t take away risk in the near term.

Warning: Danger Ahead

John Harrington, a former Treasury international tax counsel now with Dentons US LLP, told Bloomberg BNA that even with an 80 percent chance the rules won’t materialize, if that 20 percent happens and companies are still doing these deals, “you don’t have a good answer for that. You’re not going to take a chance.”

Treasury’s efforts to curb tax-free repatriation aren’t going away, said Jeff Paravano, managing partner at Baker & Hostetler LLP, who specializes in both domestic and international tax structuring.

At the same time, investors will keep leaning on companies for tax benefits on overseas cash, Paravano told Bloomberg BNA Dec. 5. “Until we have tax reform, this kind of pressure from investors and this kind of reaction from Treasury will continue,” he said.

Paravano stressed that the territorial tax system Congress is expected to consider, which in its purest form would only tax income earned in the U.S., would take away the need for complex deals to shrink U.S. tax bills on overseas cash.

At the same time, he added, the notice “wasn’t unexpected.”

Chains of Companies

In transactions the government is worried about, taxpayers use rules governing corporate reorganizations to move cash through chains of companies in a way that allows the U.S. parent company to bring the money home either tax-free or with minimal U.S. tax.

At its broadest level, the deal involves a U.S. company that owns a foreign company with little earnings and no cash to distribute to the U.S. parent. At the same time, the U.S. company indirectly owns a foreign subsidiary that does have cash.The U.S. company then structures the deal so the subsidiary can move the cash to the foreign parent in a way that allows the company to distribute the cash with no tax.

Joe Calianno, a partner and international technical tax practice leader at BDO USA LLP, said the Dec. 2 notice will have “a chilling effect on these transactions,” and there shouldn’t be comfort on these deals.

“I think you have to assume that the regulations they talk about will be finalized,” he told Bloomberg BNA Dec. 5.

To contact the reporter on this story: Alison Bennett in Washington at abennett@bna.com

To contact the editor responsible for this story: Meg Shreve at mshreve@bna.com

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