The Internal Revenue Service and Treasury Department willgenerally allow existing loans and other related-party transactionsinvolving the overseas affiliates of multinational corporations tobe taxed at the lower of two preferential rates, according to anofficial notice.

The notice, releasedFriday afternoon, said the IRS and Treasury “intend to issue” newregulations clarifying how multinational companies must compute taxbills on the foreign earnings they have accumulated to date.

The tax overhaul bill signed last week by President Donald Trumprequires companies to pay taxes on those earnings at two discountedrates—15.5 percent on income held as cash and cash equivalents and8 percent for illiquid assets. Those rates apply to an estimated$3.1 trillion in earnings stockpiled overseas since 1986.

The 22-page guidance notice from the two federal agenciesdiscusses how authorities plan to define the two types of income.It also addresses how U.S. companies with ownership stakes incertain foreign corporations must tally up the earnings that willbe subject to the tax rates when the U.S. entity and the foreignentity have different taxable years. And the new rules will “avoiddouble counting and double non-counting of earnings” subject to thenew tax rates, according to the notice.

The changes come as the U.S. is transitioning away from itsprevious international tax system as part of the Republicantax-overhaul plan. Previously, U.S. authorities applied a 35percent tax rate to companies' earnings globally, but allowed themto defer paying taxes on offshore income until they returned it—or“repatriated” it—to the U.S. As a consequence, companies haveaccumulated years' worth of profits offshore.

Loans Aren't Cash

Many tax experts have wondered how loans among related foreigncompanies would be treated under the law—as cash or non-cash. Thenotice says that “any receivable or payable” from one foreigncorporation to another will be disregarded if both are owned by aU.S. corporation.

“The guidance clarifies that inter-company loans shouldn't causean increase” in a company's earnings and profits that are “treatedas cash,” said Ray Beeman, co-leader of Ernst & Young'sWashington Council practice. Earnings and profits are the keybenchmarks by which companies must compute the taxes they owe ontheir accumulated foreign income.

Beeman added that the notice “also seems” to treat internalcash-pooling arrangements—in which the balances of separateaccounts are treated collectively—as non-cash for purposes ofdetermining the rate payable under the so-called repatriation tax.By contrast, the treatment of so-called “notional” cash-poolingarrangements—in which a company's cash is held by an outside bankor financial institution, not internally—appears to be less clear,Beeman said.

“There probably is more work that needs to be done” in thatarea, he said.

The tax law changes approved this month cut the overallcorporate tax rate to 21 percent domestically and scrapped theglobal approach in favor of one designed to target U.S. companieswith large amounts of offshore earnings and low foreign tax bills.The discounted repatriation rates were established to deal withstockpiled foreign earnings—thus far untaxed in the U.S.

From: Bloomberg News

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