The international tax reform provisions in the Tax Cuts and Jobs Act (the “Act”) present both challenges and opportunities for many clients with investments and businesses overseas. The U.S. has moved to a hybrid territorial system in an attempt to encourage repatriation and investment in the U.S. economy in light of the reduction in the US corporate tax rate to 21%. Some of the more important international provisions of the Act include the deemed repatriation rules, the 100% dividends received deduction, the taxation of “global intangible low-taxed income” and the modification of the Subpart F rules.
The deemed repatriation tax imposes a one-time tax on accumulated, not previously taxed earnings of foreign corporations at the rate of 15.5% for cash or cash equivalent holdings and 8% for its other holdings. These earnings are determined as of November 2, 2017 or December 31, 2017, whichever is greater, and are included in the income of the US shareholder on the last day of the taxable year that began before January 1, 2018. The US shareholder may elect to pay the tax in eight installments over eight years. The repatriation tax applies to all US shareholders who own 10% or more of the stock of a foreign corporation if the foreign corporation is a controlled foreign corporation (“CFC”) or the foreign corporation has a US corporate shareholder. S corporations that are US shareholders are allowed to defer the tax.
US corporations that own 10% or more in a foreign corporation are now allowed a 100% dividend received deduction on dividends paid from foreign corporations. The dividends that qualify for the deduction must be paid from foreign source earnings. This provides a tax-free way to repatriate earnings for taxpayers with a tiered corporate structure; however, the US shareholder must reduce its basis in the foreign corporation’s stock by the amount of the dividend for purposes of determining its loss (but not gain) upon disposition. No foreign tax credit is allowed against the excluded income.
The Act also provides a new tax on “global intangible low-taxed income” (“GILTI”) and is intended to reduce the incentive to relocate CFCs to low-tax jurisdictions. The GILTI inclusion is equal to the full amount of a US shareholder’s share of CFC gross income (subject to certain exclusions, such as income effectively connected with a US trade or business and subpart F income); reduced by the excess of (i) 10 percent of the CFC’s aggregate adjusted bases in depreciable tangible property used in its trade or business, over (ii) the CFC’s net interest expense. A 50% deduction of the GILTI is allowed to US corporations as well as a foreign tax credit of up to 80% of the amount of foreign taxes deemed paid.
Modifications to the Subpart F rules include (i) expanding the definition of US Shareholder to include value and not only voting power; (ii) expanding the constructive ownership rules to include certain foreign shareholders; and (iii) eliminating the 30 day rule with respect to CFC’s for Subpart F inclusions.
For more information on how any of these changes might impact you or your business, please contact your tax advisor or Christopher Galuppo, International Tax Practice Leader, at firstname.lastname@example.org.