Supporting Statement

SUPPORTING STATEMENT

Internal Revenue Service

Guidance Regarding the Transition Tax Under Section 965

and Related Provisions

OMB# 1545-2280

1. CIRCUMSTANCES NECESSITATING COLLECTION OF INFORMATION

The Tax Cuts and Jobs Act, Section 14103 (P.L. 115-97), provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018, amended section 965 of the Internal Revenue Code. Because of the amendment, certain taxpayers are required to include in income an amount based on the accumulated post-1986 deferred foreign income of certain corporations that they own either directly or indirectly through other entities.

In general, section 965 of the Internal Revenue Code imposes a transition tax on untaxed foreign earnings of foreign subsidiaries of U.S. companies by deeming those earnings to be repatriated. Foreign earnings held in the form of cash and cash equivalents are taxed at a 15.5 percent rate, and the remaining earnings are taxed at an 8 percent rate. The transition tax generally may be paid in installments over an eight-year period.

Notice 2018-07, published in IRB 2018-04 on Jan. 22, 2018, described regulations that the Treasury Department and the IRS intended to issue, including rules for determining the amount of cash and cash equivalents for purposes of applying the 15.5 percent rate and rules for determining the amount of foreign earnings subject to the transition tax. These rules will assist taxpayers by providing certain additional information needed for computing their transition tax. The IRS issued additional guidance and modifications through Notice 2018-13, Notice 2018-26, and Notice 2018-78.

REG-104226-18, published August 9, 2018 (83 FR 39514), contains proposed regulations implementing section 965 of the Internal Revenue Code (‘‘Code’’) as amended by the Tax Cuts and Jobs Act, which was enacted on December 22, 2017. The proposed regulations would affect United States persons with direct or indirect ownership interests in certain foreign corporations.

RP 2018-47, published September 24, 2018 (2018-39 I.R.B. 518), provides guidance under section 4982 of the Internal Revenue Code (Code) for regulated investment companies (RICs) on the treatment of amounts that section 965 requires to be included in gross income under section 951(a)(1) for the excise tax year ended on December 31, 2017.

TD 9846, published February 5, 2019 (84 FR 1838), contains final regulations implementing section 965 of the Internal Revenue Code (the “Code”). Section 965 was amended by the Tax Cuts and Jobs Act, which was enacted on December 22, 2017. This document finalizes the proposed regulations published on August 9, 2018. The final regulations affect United States persons with direct or indirect ownership interests in certain foreign corporations.

Rev. Proc 2019-40, published October 21, 2019, provides guidance to allow taxpayers to choose to use alternative information for determining a subpart F inclusion amount and Global Intangible Low-taxed Income (“GILTI”) inclusion amount or related recordkeeping or reporting on a Form 5471 with respect to a foreign controlled CFC.

The Form 965-C (OMB# -1545-0123) is used by taxpayers to file a transfer agreement with the IRS pursuant to section 1.965–7(b)(3)(iii)(B) and section 1.965–7(c)(3)(v)(D). The Form can be used in lieu of taxpayers creating their own transfer agreement.

There are no changes being made to the burden previously approved. IRS is making this submission for renewal purposes.

2. USE OF DATA

The information is required to be provided by taxpayers that make an election or rely on taxpayer-favorable rules. The information provided will be used by the IRS for tax compliance purposes. The information will be used by IRS to verify that United States persons are properly reporting the transfer of their 965 net tax liability per 965(h)(3), to establish joint and several liability with the transferee, and for general statistics.

3. USE OF IMPROVED INFORMATION TECHNOLOGY TO REDUCE BURDEN

Many forms used to comply with these regulations can be submitted electronically.

4. EFFORTS TO IDENTIFY DUPLICATION

We have attempted to eliminate duplication within the agency wherever possible and we are not aware of any other information already available that could be used to be provided by taxpayers that make an election or rely on taxpayer-favorable rules.

1. METHODS TO MINIMIZE BURDEN ON SMALL BUSINESSES OR OTHER SMALL ENTITIES

This collection of information will not have a significant impact on a substantial number of small businesses or other small entities.

5. CONSEQUENCES OF LESS FREQUENT COLLECTION ON FEDERAL PROGRAMS OR POLICY ACTIVITIES

Consequences of less frequent collection on federal programs or policy activities, could result in insufficient information provided by taxpayers that make an election or rely on taxpayer-favorable rules. The information provided will be used by the IRS for tax compliance purposes. Failure to verify information will affect proper reporting of tax.

5. SPECIAL CIRCUMSTANCES REQUIRING DATA COLLECTION TO BE INCONSISTENT WITH GUIDELINES IN 5 CFR 1320.5(d)(2)

There are no special circumstances requiring data collection to be inconsistent with Guidelines in 5 CFR 1320.5(d)(2).

8. CONSULTATION WITH INDIVIDUALS OUTSIDE OF THE AGENCY ON AVAILABILITY OF DATA, FREQUENCY OF COLLECTION, CLARITY OF INSTRUCTIONS AND FORMS, AND DATA ELEMENTS

Periodic meetings are held between IRS personnel and representatives of the American Bar Association, the National Society of Public Accountants, the American Institute of Certified Public Accountants, and other professional groups to discuss tax law and tax forms. During these meetings, there is an opportunity for those attending to make comments regarding the various 965 forms related to these regulations.

A Federal Register Notice (87 FR 17138) was published regarding these Revenue Procedures on March 25, 2022, inviting public comments. No comments were received.

1. EXPLANATION OF DECISION TO PROVIDE ANY PAYMENT OR GIFT TO RESPONDENTS

No payment or gift has been provided to any respondents.

9. ASSURANCE OF CONFIDENTIALITY OF RESPONSES

Respondents will not be required to file the collection of information with the Internal Revenue Service, though may be requested to provide the information on audit. If requested on audit, the information is confidential as required by 26 USC 6103.

9. JUSTIFICATION OF SENSITIVE QUESTIONS

A privacy impact assessment (PIA) has been conducted for information collected under this request as part of the “Business Master File (BMF)” system and a Privacy Act System of Records notice (SORN) has been issued for this system under IRS 24.046-Customer Account Data Engine Business Master File. The Internal Revenue Service PIAs can be found at http://www.irs.gov/uac/Privacy-Impact-Assessments-PIA.

Title 26 USC 6109 requires inclusion of identifying numbers in returns, statements, or other documents for securing proper identification of persons required to make such returns, statements, or documents and is the authority for social security numbers (SSNs) in IRS systems.

9. ESTIMATED BURDEN OF INFORMATION COLLECTION

The time burden estimate relates solely to the making of elections, filing of transfer agreements, and reporting of positions concerning the application of anti-abuse rules, which are the collection of information requirements imposed by the regulations.  The IRS believes that the reporting of positions concerning the application of anti-abuse rules is likely to be rare and the time burden minimal relative to that of making an election.  Moreover, the burden of filing a transfer agreement only exists if a taxpayer has made certain elections (elections under section 965(h) and (i)) and certain events have subsequently occurred and thus is expected to affect a very small subset of the taxpayers that made those elections.  In addition, the time for filing an agreement is expected to be minimal.

Thus, the IRS based the time burden estimate on the maximum amount of time that it expected that a taxpayer would expend on making the elections.  The time burden estimate is based on the maximum of five elections (the section 965(h) election, the section 965(i) election, the section 965(n) election, the alternative E&P computation election, and the basis adjustment election) that would potentially be made by a single taxpayer, understanding that that number exceeds the number that the IRS would expect to likely be made by a taxpayer, as it would be uncommon for a taxpayer to make both a section 965(h) election and a section 965(i) election, and many taxpayers will not make a section 965(n) election. 

Moreover, the IRS assumed that that each election would require one hour to complete the election statement, as each election statement is no more than one page long and requires less than a half dozen unique data points. 

The collection of information imposed directly by these regulations is contained in sections 1.965–2(d)(2)(ii)(B), 1.965–2(f)(2)(iii)(B), 1.965–3(b)(2), 1.965–3(c)(3), 1.965–4(b)(2)(i), 1.965–4(b)(2)(iii)(B), 1.965–7(b)(2), 1.965–7(b)(3)(iii)(B), 1.965–7(c)(2), 1.965–7(c)(3)(iv)(B), 1.965–7(c)(3)(v)(D), 1.965–7(c)(6)(i), 1.965–7(d)(3), 1.965–7(e)(2), 1.965–7(f)(5), and 1.965–8(c). The burden estimate is as follows:

Authority	Description	# of Respondents	# Responses per Respondent	Annual Responses	Hours per Response	Total Burden
1.965-2, 1.965-3, 1.965-4, 1.965-7, 1.965-8	transition tax on untaxed foreign earnings of foreign subsidiaries of U.S. companies by deeming those earnings to be repatriated	100,000	1	100,000	5	500,000
Totals				100,000		500,000

The Treasury Department and the IRS anticipate substantially all paperwork burdens related to the final regulations to be incurred only with respect to the inclusion year. Any subsequent reporting (such as in connection with a transfer of a section 965(h) net tax liability or section 965(i) net tax liability) would be negligible burdens that implement elections made and payments calculated in the inclusion year. These burden estimates capture only those burdens imposed by the final regulations and do not include burden estimates for forms associated with the statute.

The following regulations impose no additional burden. Please continue to assign OMB number 1545-2280 to these regulations.

1.965–2 1.965–3 1.965–4

1.965–7 1.965–8

9. ESTIMATED TOTAL ANNUAL COST BURDEN TO RESPONDENTS

A valuation of the burden hours at $95/hour (2017) times the 500,000 hours leads to a PRA-based estimate of the reporting costs to taxpayers of $47,500,000. This is a one-time paperwork burden. IRS anticipates this as a one-time initial cost that most filers have already incurred. IRS does not anticipate any continual operating costs.

The IRS assigns individuals and entities monetization rates based on the respective individual or entity’s observed level of economic activity. The $95.02 monetization rate is the maximum rate the IRS assigns an individual or firm. This rate represents the upper bound of the costs to employ an accountant earning wages at the 90% according to the BLS Occupational Employment Statistics. It also incorporates the cost to provide benefits from the Employer Costs for Employee Compensation Historical Listing (National Compensation Survey) as well a 10% adjustment for overhead.

14. ESTIMATED ANNUALIZED COST TO THE FEDERAL GOVERNMENT

The Federal government cost estimate is based on a model that considers the following three cost factors for each information product: aggregate labor costs for development, including annualized startup expenses, operating and maintenance expenses, and distribution of the product that collects the information.

The government computes cost using a multi-step process. First, the government creates a weighted factor for the level of effort to create each information collection product based on variables such as complexity, number of pages, type of product and frequency of revision. Second, the total costs associated with developing the product such as labor cost, and operating expenses associated with the downstream impact such as support functions, are added together to obtain the aggregated total cost. Then, the aggregated total cost and factor are multiplied together to obtain the aggregated cost per product. Lastly, the aggregated cost per product is added to the cost of shipping and printing each product to IRS offices, National Distribution Center, libraries, and other outlets. The result is the Government cost estimate per product.

The government cost estimate for this collection is summarized in the table below.

Product	Aggregate Cost per Product (factor applied)	Printing and Distribution	Government Cost Estimate per Product
26 CFR 1.965-2, 1.965-3, 1.965-4, 1.965-7, 1.965-8	$ 162,434	0	$ 162,434

15. REASONS FOR CHANGE IN BURDEN

There are no changes being made to the burden at this time. IRS is making this submission for renewal purposes.

	Requested	Program Change Due to New Statute	Program Change Due to Agency Discretion	Change Due to Adjustment in Agency Estimate	Change Due to Potential Violation of the PRA	Previously Approved
Annual Number of Responses	100,000	0	0	0	0	100,000
Annual Time Burden (Hr.)	500,000	0	0	0	0	500,000

16. PLANS FOR TABULATION, STATISTICAL ANALYSIS AND PUBLICATION

There are no plans for tabulation, statistical analysis, and publication.

17. REASONS WHY DISPLAYING THE OMB EXPIRATION DATE IS INAPPROPRIATE

IRS believes that displaying the OMB expiration date is inappropriate because it could cause confusion by leading taxpayers to believe that the regulation sunsets as of the expiration date. Taxpayers are not likely to be aware that the Service intends to request renewal of OMB approval and obtain a new expiration date before the old one expires.

17. EXCEPTIONS TO THE CERTIFICATION STATEMENT

There are no exceptions to the certification statement.

Note: The following paragraph applies to all the collections of information in this submission:

An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the collection of information displays a valid OMB control number. Books or records relating to a collection of information must be retained if their contents may become material in the administration of any internal revenue law. Generally, tax returns and tax return information are confidential, as required by 26 U.S.C. 6103.