Here’s What You Should Know About the Latest International Tax Guidance
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.
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.
to take a breath.
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.
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.
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,
a Joint Committee on Taxation estimate, U.S. companies have around $2.6
trillion of untaxed foreign earnings stockpiled abroad under the old rules.
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.
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
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.
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.
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.
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.