2024-06-25-KPMG_Global-United_States_–_Supreme_Court_Upholds_Mandatory_Repatriation_Tax_As_Constitutional_4页_205kb

Supreme Court Upholds Mandatory Repatriation Tax as Constitutional

Key Facts

• On June 20, 2024, the U.S. Supreme Court upheld the constitutionality of section 965 of the U.S. Internal Revenue Code, known as the mandatory repatriation tax (MRT), in a 7-2 decision authored by Justice Brett M. Kavanaugh.
• This tax requires U.S. taxpayers owning at least 10% of a controlled foreign corporation (CFC) to pay a one-time tax on their share of the corporation's realized, undistributed earnings, regardless of whether the income was distributed.
• The ruling, in Moore v. United States, affirmed that Congress can attribute an entity's realized income to its shareholders for taxation purposes, based on long-standing precedent and congressional practice.
• The decision specifically applies only to pass-through entities and does not address the broader question of whether income realization is a constitutional requirement for income tax.

Potential Impacts

• If the realization requirement were proven constitutional, it could invalidate other provisions in the tax code that impose taxes on unrealized income, such as those related to international assignments (e.g., passive foreign investment companies), foreign pension taxes, and expatriation tax under section 877A.
• This could also affect the constitutionality of a potential wealth tax, as proposed by the Biden Administration.
• Currently, the tax is valid under the Constitution, providing immediate relief for the MRT, but future litigation may challenge other tax provisions based on this undecided issue.

Unresolved Issues

• The Supreme Court did not resolve whether income realization is a constitutional prerequisite for income tax, acknowledging that such a ruling could render many tax code sections unconstitutional.
• At least four justices appear to hold the view that realization is necessary, creating uncertainty and opening the door for future legal challenges to taxes on unrealized income.

KPMG Insights

• The decision confirms the MRT's constitutionality, but its long-term implications remain uncertain due to the unresolved realization question.
• Businesses should monitor potential future litigation to address impacts on international tax liabilities and other areas.