Will Treasury Act to Prevent U.S. MNC Cash Distributions from Reducing Tax Rate on Deferred Foreign Income?

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We welcome back guest blogger Steve Shay who writes about a provision of the new tax law that appears to have a loophole in need of closing in order to prevent a significant windfall to certain multinational corporations. Steve, a colleague at Harvard and well known expert on international issues, has written blog posts for PT before on the Altera case here, here and here. Keith

The international provisions of the Tax Cuts and Jobs Act (TCJA) are full of policy and drafting anomalies that will be explored over time. I focus on one in a brief working paper. As drafted, a U.S. multinationals whose foreign subsidiaries have a non-calendar fiscal year still have time to mitigate their exposure to the higher rate of tax on deferred foreign income that is treated as held in cash (15.5% instead of 8%) unless the Treasury uses an anti-abuse rule to neutralize this planning.

The TCJA’s mandatory inclusion of deferred foreign income bases the inclusion on the greater of the deferred foreign income amount at November 2, 2017 or at December 31, 2017. So far so good. Though note that this will require an interim closing for foreign subsidiaries that do not use a calendar taxable year.) But, the TCJA taxes at a higher rate (again, 15.5% instead of 8%) the portion of the inclusion equal to the aggregate foreign cash position measured by the greater of (i) the average at the end of the two taxable years ending before November 2, 2017 (the November 2 measurement date), or (ii) the end of the last tax year beginning before January 1, 2018 (the second measurement date). Most mature but foreign companies will have more cash on the second measurement date. An anti-abuse rule would allow but not require the IRS to disregard a transaction that has “a” principal purpose of reducing the aggregate foreign cash amount.

I argue in the paper that there is room for a U.S. MNC to sidestep the “greater of” test by distributing cash before the second measurement date without automatically running afoul of the anti-abuse rule. It is not clear from the text what was intended. Why even use the “greater of” rule instead of just relying on the November 2 measurement date or choosing December 31, 2017 as the second date? But, there is no prohibition on distributions and the TCJA provides that a distribution will not reduce the deferred foreign tax amount; Congress also could have said distributed cash is similarly not taken into account but did not. Or, less credibly, this formulation of the aggregate foreign cash position was intended to be a windfall for U.S. MNCs that either do not have a calendar taxable year or, even if they do, stagger their foreign subsidiaries’ tax years as permitted under Section 898 and therefore still have time for self-help.

This seemingly obscure issue can affect billions in revenue. Using public information, I estimate that Apple could reduce its U.S. tax on deferred foreign income by as much as $4 billion (before taking foreign tax credits into account). Treasury can, and I believe should, use its anti-abuse authority to include post November 2, 2017, distributions of cash in the aggregate foreign cash position to the extent they would decrease the applicability of the 15.5% rate.

Treasury will no doubt be confronted with hundreds of cases where the TCJA has policy and drafting anomalies that are within the scope of regulatory authority to adjust. Some will be pro taxpayer like this one and some would inadvertently hurt taxpayers. Given that the TCJA was rushed through the legislative process for political reasons directed at mitigating GOP losses in the 2018 elections, the same political economy calculus might cause prioritizing guidance toward assisting taxpayers over efficiency considerations and revenue protection. This is particularly the case when the Acting IRS Commissioner also is the Treasury Assistant Secretary for Tax Policy, the most senior tax advisor to the Secretary Treasury and the White House. While the IRS has never been wholly immune from taking political calculus into account, it is a remarkably apolitical institution. We can only encourage the Treasury and the IRS to continue to preserve the integrity of the tax system – in this case by denying yet another windfall for U.S. multinationals.


  1. I’m glad someone is watching the store while all of these foreign tax provisions are being implemented. Perhaps that is what inspired IRS and Treasury to issue Notice 2018-07 today (apparently the number is determined by when it is officially published) regarding implementation of Section 965. It can be found at


    Last week’s legislation is being referenced by some as the “Tax Cuts and Jobs Act” or “TCJA,” but we should recall that the Senate Parliamentarian required that title to be removed, so the IRS notice correctly refers to it simply (so to speak) as “An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018,” P.L. 115-97 (the “Act”).

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