When the Tax Reform plan was signed, the largest international tax reform since 1962 also achieved liftoff. Specifically, there are several major provisions in the new legislation that will have a large impact on this group of taxpayers.
1. Participation exemption
For distributions made after December 31, 2017, domestic C-Corporation taxpayers will be allowed a 100% dividends-received deduction (DRD), as the new law changes the taxation of domestic C-corporations from a worldwide to more territorial tax system. The deduction is allowed to domestic C-corporations owning 10% or more of a specified foreign corporation that pays out dividends by the foreign corporation from its foreign earnings.
- No foreign tax credit is allowed for which the DRD is allowed.
- A specified foreign corporation is not limited to a controlled federal corporation (CFC) to allow for this deduction.
- The basis of the stock must be reduced by the DRD for purposes of determining its loss (but not gain), if any, on a subsequent disposition of such stock.
2. Mandatory repatriation
Taxpayers who own 10% of a foreign subsidiary must include in income the shareholder’s pro rata share of its accumulated non-previously taxed, post-1986 earnings and profits (E&P) as of 11/2/2017 or 12/31/2017 (whichever is greater). The portion of the E&P comprising cash–or cash equivalents–is taxed at a reduced rate of 15.5% (17.5% for individuals), while any remaining E&P is taxed at a reduced rate of 8% (9.05% for individuals). These rates are achieved by a deduction mechanism in arriving at these reduced effective rates.
- Taxpayers may elect to pay the repatriation transition tax in 8 installments. The election and first installment are due by the time your 2017 tax return is due without extensions. For calendar year corporations and individuals, the due date is 4/17/2018.
- This mandatory inclusion of accumulated E&P applies to all U.S. shareholders—including individuals, partnerships, and trusts.
- S-corporations may defer the repatriation transition tax until a triggering event.
- Foreign corporations with deficits in E&P may reduce the taxable income for inclusion.
3. Global Intangible Low-Taxed Income (GILTI)
In order to reduce the incentive for CFCs to relocate intangibles to low tax jurisdictions, the Tax Reform creates a new type of Subpart F income inclusion—the GILTI. This inclusion applies to CFCs with excess income over a 10% rate of return on certain tangible business assets.
- A deduction of 50% against GILTI is available to corporate shareholders.
4. Other Miscellaneous Provisions
- More companies may have filing requirements as a result of these new provisions since the bill modifies the stock attribution rules—providing “downward attribution” from a foreign person to a related U.S person. Specifically, a U.S entity with a foreign shareholder may be treated as owning stock in a foreign corporation that is owned by its foreign shareholder.
- The bill also eliminates the 30-day requirement for the applicability of Subpart F inclusions. Therefore, taxpayers no longer need to hold the stock of a foreign corporation for an uninterrupted 30 days to be considered a CFC and required to include their pro rata share of Subpart F income.
Call CRI to Launch Your Updated International Tax Plan
The recent Tax Reform implemented many changes. Clearly, each business’ tax planning strategy is unique, so please contact CRI’s international tax team for help evaluating your options.