Companies that stockpiled trillions of dollars offshore free ofU.S. income tax may get one last break before paying up—providedtheir fiscal years don't follow the calendar year.

A timing quirk in the tax overhaul that President Donald Trumpsigned last month may be good news for companies such as Apple,Microsoft and Cisco, all of which began their fiscal years beforeJan. 1. Firms including Alphabet, Amgen and General Electric—withfiscal years that began on Jan. 1—appear to be shut out of thebenefit.

Apple alone, which disclosed an offshore cash hoard of $252billion as of Sept. 30, may be able to lop more than $4 billion offa future tax bill, according to Stephen Shay, a tax and businesslaw professor at Harvard Law School who wrote about what he calledthe “potential loophole” last month. He characterized the boon as aside effect of the speed with which congressional Republicanspassed their tax bill.

“This bill was passed on a speed train schedule with no time tothink,” said Shay, who was a senior Treasury Department officialduring the administrations of former presidents Barack Obama andRonald Reagan. It's up to Treasury and the Internal Revenue Serviceto create rules to prevent companies from taking advantage, hesaid.

In passing the most extensive tax code revisions since 1986,Congress scrapped the previous international tax system forcorporations—an unusual arrangement that allowed companies to deferU.S. income taxes on foreign earnings until they returned theincome to the U.S. That “deferral” provision led companies tostockpile an estimated $3.1 trillion offshore.

In switching to a new system that's designed to focus ondomestic economic activity, congressional tax writers also imposeda two-tiered levy on all that accumulated foreign income: Cash willbe taxed at 15.5%, less liquid assets at 8%. Companies can pay overeight years.

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Timing Issue

The timing issue that Shay surfaced stems from a provision that,in effect, gives a company until the end of its fiscal year tomeasure what's cash and what isn't for tax purposes. Consequently,companies that began new fiscal years before Jan. 1 get an extrachance to reduce foreign cash they'll accumulate this year whichthey can do by distributing cash dividends to their U.S. parentsbefore tallying up what's left to be taxed, Shay wrote.

Under separate changes that took effect Jan. 1, any suchdividends would be tax-free in the U.S., he noted.

The law actually specifies two dates that companies should usein tallying their offshore cash piles—and they have to pay the15.5% rate on whichever tally is larger. The options: The two-yearaverage of foreign cash as of Nov. 2, the date the House introducedits tax bill; or the end of the firm's current fiscal year—if itbegan before Jan. 1.

Here's how Shay said it could work for Apple, which began itsfiscal year on Oct. 1: Under the Nov. 2 formula, the company'stwo-year average offshore cash stash was $234 billion. Shay saidApple's historical earnings suggest that figure could grow to $289billion by Sept. 30, when its year ends.

Therefore, Shay said, if Apple's foreign subsidiaries operate onthe same fiscal year, they could distribute as much $55 billion totheir parent, taking the overseas cash total down to match the Nov.2 number. And because there's a 7.5 percentage-point difference inthe two tax rates, the company's tax savings thanks to thedistribution could amount to $4.1 billion, he said.

A spokesman for Apple didn't respond to requests for comment;nor did spokesmen for Cisco and Alphabet. Spokesmen for Microsoft,Oracle, Amgen and GE declined to comment.

The IRS didn't respond to a request for comment. One line in thetax bill says that if federal officials determine that a companyhas shifted cash or cash equivalents into other assets with “aprincipal purpose” of trying to reduce their tax bills, thetransaction will be disregarded. But Shay said that line isn'tenough to prevent abuse, and the IRS should produce detailed,concrete guidance for companies.

As it stands now, if companies use the strategy to try to reducetheir tax bills, it would be up to the IRS to challenge themove—and then see whether its position holds up in court, said EricSolomon, a co-director of the national tax practice at Ernst &Young.

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'Going Crazy'

Overall, multinational corporations—including those that don'thave the fiscal year advantage—are weighing different ways tomitigate the effects of the repatriation provision, saidSolomon, who was a top Treasury tax official in formerPresident George W. Bush's administration.

Republican tax writers—who cut tax rates for businesses andindividuals—sought to balance the cuts partly with hundreds ofbillions of dollars from companies paying levies on theirstockpiles of offshore earnings. Setting the rates at 15.5% and 8%would generate almost $340 billion in revenue over a decade,according to estimates by the Joint Committee on Taxation,Congress's official scorekeeper.

“Practitioners have all been going crazy trying to figure outhow to determine and potentially minimize the transition taxburden,” said Itai Grinberg, an international tax law professor atGeorgetown University Law Center.

The IRS issued some guidance on Dec. 29, but companies are stillawaiting additional details on many “pressing questions” related tooffshore earnings, Solomon said.

One major question: How cash and cash-equivalents will bedefined. Treasury Secretary Steven Mnuchin has the authority towrite new rules specifying which assets he identifies as beingeconomically equivalent to cash. The IRS said in its notice thatcommercial paper, foreign currency, certificates of deposit andgovernmental and state securities would all be considered cash andtaxed at the 15.5% rate.

The tax bill's international provisions “were put out in arush,” and the IRS notice “is prime evidence of this and probably abellwether for other problems to come,” said Chris Sanchirico, atax law professor at the University of Pennsylvania Law School.

“Are there planning opportunities?” said Sanchirico. “Yes, mostlikely.”

From: Bloomberg News

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