Global Impact of Tax Reform

GLOBAL IMPACT OF TAX REFORM

by Shawn Burman, CPA

Deemed Repatriation (§965)

Previous law:

US shareholders owning greater than a certain percentage of a Foreign Corporation with a well-designed international business structure was able to defer income until distributed to US shareholders unless includable under Subpart F.

Tax reform update:

Certain US shareholders of Specified Foreign Corporations (SFC) are required to repatriate deferred foreign earnings and will be subject to a 15.5% tax on foreign cash & equivalents and an 8% tax on illiquid assets.

Good news:

Tax reform includes provisions which allow a deduction at the shareholder level against repatriated earnings.  IRC 965(c)

Taxpayers may elect to make an installment payment period of 8 years on the ultimate repatriated earnings tax. IRC 965(h)

Domestic S-Corporation shareholders are eligible for an election to defer the one-time tax until certain triggering events occur. IRC 965(i)

Bad news:

Dividends paid by a SFC to its US shareholders during the mandatory repatriation year fail to reduce the E&P available for mandatory repatriation (although such E&P may be converted to previously taxed income and thus not taxed upon receipt).  IRC 965(d)(3)

Why is this important? 

Deemed repatriation has already been in the news and is affecting earnings of publicly traded corporations and their shareholders.  Tax planning over the past few decades has allowed corporations of all sizes to defer income in offshore Corporations so that repatriation will impact small and large taxpayers alike.

Deemed Repatriation

Taxpayers are required to repatriate deferred foreign income but are entitled to certain deductions against the overall repatriated amount.  Read more to see why this is important for individuals and businesses who own specified foreign corporations.

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Foreign Tax Credit (FTC)

With the new repatriation requirements, Global Intangible Low Tax Income (GILTI) tax, and repeal of certain FTC statutes see how you can offset your global tax with foreign tax credits.  Additionally, what planning steps should you be taking to ensure you maximize future use of FTCs with the reduced corporate tax rate?

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Base Erosion

The base erosion provisions affect intangibles in your controlled foreign corporation. MKS&H will show how the GILTI tax may impact your business.

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Foreign Tax Credit (§901)

Previous law:

US shareholders with certain foreign earnings are required to include “Subpart F” income on their US tax return. Foreign tax paid on the taxpayer’s share of subpart F income is allowed as a credit against US tax.

Additionally, the FTC is allowed on dividends received by domestic corporations that own 10% or more of the voting stock of a foreign corporation.

Tax reform update:

Tax reform kept the FTC for subpart F income but repealed the ability to claim a FTC on deemed paid dividends received by US corporations who own greater than 10% voting stock of a foreign corporation.

Good news:

The new legislation permits a reduced foreign tax credit for Corporate US shareholders on repatriated earnings. IRC 965(g) Legislation does not address whether there are restrictions for US taxpayers to utilize foreign tax credit carryforwards to offset deemed repatriation tax, therefore, taxpayers can look to utilizing their FTC carryforwards against the mandatory inclusion.

Bad news:

No foreign tax credit or deduction is allowed for any taxes paid or accrued with respect to a dividend that qualifies for the Dividends Received Deduction. (Repeal of IRC 902)

Foreign taxes paid with respect to the new GILTI (discussed below) are limited to an 80% FTC and are not allowed to be carried back or forward to other tax years. IRC 960(d)

Why should you care? 

Prior to tax reform, the US Corporate rate was higher than most countries which typically allowed US corporations to use all foreign tax credits available.  The new lower US corporate tax rate of 21% means corporations engaged in foreign operations in other countries with higher tax rates may start to see an accumulation of foreign tax credit carryforwards.  With a limitation of 10 years for FTC carryforwards, taxpayers will need in-depth tax planning to ensure maximization of their FTC.

Base Erosion

Previous law:

Corporations completing outbound transfers of certain intangibles such as goodwill, going concern value, or workforce in place generally received favorable tax treatment.

Tax reform update:

Intangibles now include goodwill, going concern value, and workforce in place, or anything not attributable to tangible property or services by an individual.

New: Global Intangible Low-Taxed Income (GILTI) and Tax on GILTI income of US shareholders of CFCs.

There is also an allowable deduction of 37.5% for foreign derived intangible income plus 50% GILTI.

Good news:

The GILTI tax only applies to Multi-national corporations with at least $500 million in the consolidated US connected gross receipts.

The new 21% corporate tax rate and 100% dividends received deduction greatly reduces the incentives for corporations to keep intangible assets in foreign corporations.

Domestic corporations are allowed a deduction for including global intangible income on their US income tax return.

IRC 250(a)(1)  This is another incentive for corporations to keep their intangibles in the United States as opposed to offshore.

Bad news:

Corporations that have a significant amount of intangible assets in controlled foreign corporations and defer their intangible income for US tax purposes will be subject to this new GILTI tax on an annual basis. IRC 951A(a)

Deductions for including foreign intangible income on a US tax return do not apply to individual shareholders of CFCs. IRC 250(a)

What does this mean?

Yes, the new tax reform is aiming to keep derived corporations from using creative tax planning to keep income from intangibles from being subject to US tax.  However, the new tax rates and deductions available for corporations will lessen the overall impact and burden of the new regulations. Individual shareholders of CFCs with GILTI should consider electing tax treatment as a corporation to qualify for the IRC 250(a) deduction.

Take Aways

The three pieces of legislation discussed in this newsletter are a small part of the total impact this legislation will have on US businesses and their shareholders.  Executives should start working with their tax advisors immediately to identify the impact of repatriation, foreign tax credits, and base erosion provisions on their businesses.

Consult a tax advisor that has the proper experience with international tax planning to help minimize your global effective tax rate while maximizing use of foreign tax credits in the United States.

MKS&H specializes in advising small to medium sized businesses on how to reduce the impact of tax reform on your global operations.

Shawn M. Burman, CPA
Senior Int’l Tax Advisor

410-296-6200
shawnb@mksh.com

Kathleen M. Davis, CPA
Partner

410-296-6200
kathyd@mksh.com

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