Dallas, Texas, January 2018 – The “Tax Cuts and Jobs Act” (the “Act”) makes significant changes to the U.S. regime for the taxation of international business structures and cross-border transactions. Key aspects of these changes are:
- Deemed repatriation of off-shore earnings. S. shareholders owning at least 10% of a foreign subsidiary must include in income for the subsidiary’s last tax year beginning before 2018 their pro-rata share of the subsidiary’s post-1986 earnings and profits (“E&P”) to the extent such E&P has not previously been subject to U.S. tax. A 15.5% tax is assessed on the portion of this E&P representing cash or cash equivalents, and an 8% tax is assessed on the remaining E&P. The tax can be remitted over a period of up to eight years. S Corp shareholders can continue to defer recognition of the undistributed E&P of their S Corp’s foreign subsidiaries, subject to the occurrence of certain events which will trigger taxation of the deferred income.
- Participation exemption. Foreign source dividends received by U.S. C corporations from greater than 10% owned foreign subsidiaries are exempted from U.S. tax by means of a 100% dividends received deduction. No foreign tax credit (“FTC”) or deduction is allowed for foreign taxes on any dividend subject to the new participation exemption regime.
- Deemed dividends from sale of shares in foreign corporations. Deemed dividends resulting from the sale of a foreign corporation’s shares attributable to the foreign corporation’s E&P are eligible for the participation exemption mechanism discussed above.
- Branch loss recapture. Corporations will be required to recapture as taxable income the previously deducted net branch losses of a foreign branch if the corporation transfers substantially all the assets of the branch to a foreign corporation.
- Current taxation of GILTI. S. shareholders of a controlled foreign corporation (“CFC”) must include in gross income their share of the global intangible low-taxed income (“GILTI”) generated by the CFC. U.S. tax on such GILTI may be reduced or eliminated by up to 80 percent of current FTCs paid with respect to such GILTI.
- Deduction for foreign-derived intangible income and GILTI. S. C corporations are allowed a deduction of 37.5% of foreign-derived intangible income plus 50% of the GILTI amount included in gross income.
- Repeal of the indirect FTC. Corporations are no longer allowed to claim indirect FTCs for any taxes paid or accrued with respect to dividends subject to the new participation exemption regime discussed above.
- Prevention of base erosion. Certain large corporations (those with average annual gross receipts of at least $500 million) will be required to pay a base erosion anti-abuse tax (“BEAT”). The BEAT is calculated based on a formula related to certain deductible payments made to related foreign persons which reduce the paying corporation’s U.S. tax base. Base erosion payments can include deductible interest, royalties, management fees and amounts paid for depreciable or amortizable property.
- Income sourcing for inventory sales. Income from the sale of inventory will be sourced as foreign or domestic based upon where the inventory is produced, regardless of where title to the property transfers.
- Resourcing ODLs. The Act provides greater flexibility in re-sourcing pre-2018 overall domestic losses (“ODLs”) as foreign source income.
- Interest expense allocation. Affiliated group members must apportion interest expense for FTC limitation and other purposes based upon the adjusted tax basis of the members assets rather than their fair market values.
- Foreign base company oil-related income as Subpart F income. Foreign base company oil-related income is no longer considered a Subpart F income component.
- Ownership attribution rules for determining CFC status. The rules are modified which attribute to a related U.S. party the ownership by a foreign owner of a foreign corporation’s stock for purposes of determining the status of the foreign corporation as a CFC.
- Expanded definition of “U.S. shareholder.” The term “U.S. shareholder” is expanded to include any U.S. person who owns more than 10 percent of the value of all classes of a foreign corporation’s stock.
- Minimum 30-day holding period for Subpart F income inclusions. There is no longer a minimum 30-day holding period of a CFC’s stock before a U.S. shareholder is obliged to include in income its pro-rata share of the CFC’s Subpart F income.
- Foreign branch income basket. For FTC calculation purposes, foreign branch income will be segregated into a separate basket.
If you have questions about how provisions of the new law will affect you, please consult the Howard team and we will be happy to walk through your specific situation. Howard aims to share valuable insight that can help you prepare for the months ahead on your personal returns, as well as in businesses so we encourage you to visit the news section of our website where we will continue to post updates and announcements.