Here’s What You Should Know About the Latest International Tax Guidance

Summertime is often associated with long vacations, lazy days, and afternoons by the pool sipping lemonade. This summer, however, has been anything but relaxing for the folks working at the Treasury Department and IRS. These organizations continue to issue the necessary guidance related to the major tax reform package enacted in December 2017—the Tax Cuts and Jobs Act.

The Tax Cuts and Jobs Act made significant changes to corporate taxation, including a new transition tax, global intangible low-tax income (GILTI) tax, foreign derived intangible income (FDII) deduction, and a base erosion and anti-abuse tax. The new statutory rules require multinational companies to comply with a whole new set of international tax provisions and, therefore, require clear and authoritative guidance from the Treasury Department to ensure such rules are being applied correctly.

In mid-June, the Treasury Department and IRS issued final and proposed regulations tied to global intangible low-taxed income (GILTI), the foreign tax credit, the treatment of domestic partnerships for purposes of determining the subpart F income of a partner, and the treatment of income of a controlled foreign corporation subject to a high rate of foreign tax under section 951A.

Pause here to take a breath.

Four weeks later, in mid-July, the IRS provided additional information to help taxpayers meet their filing and payment requirements for the Section 965 transition tax on untaxed foreign earnings. The Section 965 provisions bridge the gap between the old and new rules for taxing foreign income.

Under the old rules, U.S. corporate shareholders were taxed on their worldwide income, but income earned abroad by a foreign corporation could benefit from deferral of tax until the time such earnings were repatriated. As a result, U.S. shareholders of foreign corporations would reinvest foreign earnings abroad to avoid residual taxation in the United States.

Under the new rules, U.S. corporate shareholders of specified foreign corporations can avoid U.S. taxation on foreign earnings through a participation exemption. Those rules are effective for the first tax year beginning after December 31, 2017.

According to a Joint Committee on Taxation estimate, U.S. companies have around $2.6 trillion of untaxed foreign earnings stockpiled abroad under the old rules.

The transition tax rules deem all untaxed foreign earnings that accrued under the old rules to be repatriated to U.S. shareholders in the last taxable year beginning before January 1, 2018. Cash and cash equivalents are subject to a U.S. tax rate of 15.5% and all other assets are subject to a rate of 8%. These rates are achieved by allowing the U.S. taxpayer a deduction to arrive at the appropriate amount. Certain taxpayers may elect to pay the transition tax over eight years.

The IRS released information related to the transition tax in a question and answer format that addresses certain general issues (i.e., issues that are not specific to the filing of a 2017 or 2018 tax return). The issues addressed include how to make subsequent installment payments when the transition tax is paid over eight years and the filing of Transfer Agreements and Consent Agreements.

With respect to the final GILTI regulations, the rules generally retain the anti-abuse provisions that were included in the proposed regulations and revise the domestic partnership provisions to adopt an aggregate approach for purposes of determining the amount of global intangible low-taxed income included in the gross income of a partnership’s partners under section 951A with respect to controlled foreign corporations owned by the partnership.

The GILTI rules operate as a worldwide backstop to the new territorial-style provisions that provide U.S. corporate shareholders an exemption on certain foreign-source dividends.  Policymakers recognized that the exemption for foreign-source dividends could leave the U.S. system more vulnerable to base erosion and profit shifting and enacted the GILTI rules to curb such behavior.

The GILTI provisions impose a minimum tax on certain low-taxed income of foreign corporations, but allow U.S. corporate shareholders to reduce such income with a deduction. For 2018, the deduction amount is 50% of GILTI. The U.S. taxpayer is also allowed to take an 80% foreign tax credit. This means the GILTI tax should only apply to foreign income with an effective tax rate below 13.125% ((50% x 21 corporate tax rate)/80 percent foreign tax credit)).

The final GILTI regulations provide guidance relating to the determination of a United States shareholder’s pro rata share of a controlled foreign corporation’s subpart F income and global intangible low-taxed income included in the United States shareholder’s gross income.

It’s also worth noting that the final GILTI regulations (released in mid-June) include revisions to the Section 965 regulations issued earlier this year.

Lastly, the Treasury Department and the IRS issued final regulations under sections 78, 861 and 965 relating to certain foreign tax credit aspects of the transition to a territorial-style system for income earned through foreign corporations. These regulations address issues created by the new exemption system and help coordinate the implementation of the new rules across various Code sections.

Are you prepared for tax season? Click here to learn more about tax changes to keep in mind for 2019.

Tara Fisher has been practicing international tax for 20 years. Her professional background includes working for the U.S. Congress Joint Committee on Taxation, the national tax practice of PricewaterhouseCoopers, the University of Pittsburgh, and American University in Washington D.C. She is a licensed CPA and holds both an undergraduate and graduate degree in accounting from the University of Virginia.