Broad Scope of “Cash” for Tax on Deferred Foreign Income Impacts Financial Sector
The new provision requiring that U.S. companies pay a 15.5 percent tax on deferred foreign earnings to the extent of cash and cash equivalents and a 8 percent tax on additional untaxed foreign earnings produces complications for the financial sector. Companies are reporting that the repatriation tax imposes a heavier burden on the financial sector because such companies typically hold significant cash assets, which cause a corresponding amount of earnings to be taxed at almost double the rate. Recent IRS guidance states that derivatives, routinely used by banks and broker-dealers, will be characterized as cash equivalents to the extent that the instruments are not bona fide hedging transactions hedging non-cash assets. The IRS is considering whether to exclude derivative financial instruments that are not actively traded. Practitioners have also requested further guidance from the IRS, noting the open questions remaining under the current guidance.
Read more: Repatriation Tax on Derivatives: Hard on Financial Companies?