IRS eases tax rule on foreign stock buybacks

From Allianz to Zara, foreign companies with US subsidiaries breathed a sigh of relief last week after the IRS proposed a rule that would not automatically subject them to a forthcoming stock buyback tax.

If adopted, the new proposed regulation would mean that a foreign company would not be on the hook for the 1% excise tax just because it bought back shares after receiving payments from a US subsidiary. An earlier proposal treated US payments to the mothership abroad as attempts to dodge the tax even if the money was for something else, the Wall Street Journal reported, but the new rule will let companies prove to the IRS that the payment and buyback were unrelated.

The 1% tax, which became law in 2023, won’t be collected until the government finalizes regulations, but that collection will be retroactive. Under the rule, companies would also have to report (on IRS Form 720) and pay what they owe at the end of the first full quarter once the regulations are final.

Public comments for the proposal on when companies would have to report are due before May 13. The public has until June 11 to comment on the proposal for when foreign companies would have to pay the tax.

Congress’s Joint Committee on Taxation projected in January that the tax would bring in $74 billion through FY 2031. President Joe Biden has proposed hiking its rate to 4%.

It will take time to learn for sure if the original 1% tax will discourage stock buybacks as intended, but we do know that S&P 500 companies spent nearly 14% less on buybacks in 2023, the first year for which they’ll have to pay the excise tax.

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