L.A.-based Technology and Manufacturing businesses – whether owned by U.S. or foreign investors – now have significant international business opportunities intentionally created by recent U.S. tax reform.
Here we give a few examples of how these opportunities can be used.
Brief Overview
These international tax provisions first required a one-time tax, generally payable early in 2018, on many accumulated and previously untaxed foreign earnings and profits of foreign corporations which are owned at least 10 percent by U.S. persons.
On the other hand, beginning generally in 2018:
*Under a quasi-territorial limitation, U.S. corporations will no longer be taxed on many dividends from foreign corporations, but with significant exceptions.
*For example, the global intangible low-taxed income (GILTI) of a Controlled Foreign Corporation (CFC) will be taxed currently to its U.S. corporate and other shareholders. However, U.S. corporations owning CFCs can deduct 50 percent of GILTI in 2018 through 2025 and 37.5 percent of GILTI thereafter. They can also claim an 80 percent foreign tax credit with respect to included GILTI amounts.
*In addition, a U.S. corporation can deduct from its U.S. taxable income 37.5 percent of its foreign-derived intangible income (FDII) in 2018 through 2025 and 21.875 percent thereafter. This is generally income from the sale of property to a foreign person for foreign use, or from services provided to any person (or with respect to property) located outside the U.S.
In contrast to the exclusions and deductions reducing taxation of foreign income of U.S. businesses:
*Additional tax applies to U.S. corporations with annual gross receipts of at least $500 million which make deductible payments to foreign related parties that exceed a threshold amount.
*An outbound transfer of goodwill, going concern value, or in-place workforce to a foreign corporation in an otherwise tax-free transaction will be subject to U.S. taxation.
Top Planning Opportunities
Here are several Top Planning Opportunities in international business for L.A.-based entities:
Participation Exemption
Corporations should model the impact of the 100% dividends-received deduction on foreign source dividends from foreign subsidiaries. Pass-through entities are not eligible for the deduction and may want to consider creating an Interest Charge Domestic International Sales Corporation (IC-DISC) to take advantage of the tax benefit.
Base Erosion Tax
Large corporations with significant payments to foreign related parties should evaluate whether to move operations back to the U.S. The Base Erosion Anti-Abuse Tax (BEAT) applies to C corporations that have annual gross receipts of $500 million or more for the prior 3 years and make deductible, base-eroding payments to foreign related parties in excess of 3% of total deductible payments.
Foreign-Derived Intangible Income
Companies may want to move intangible property to U.S. locations to take advantage of the 37.5% foreign-derived intangible income (FDII) deduction. The deduction drops to 21.875% starting in 2025.
Transition Tax
Businesses should prepare for mandatory repatriation. Offshore earnings of CFCs are required to be included in income by U.S. shareholders and subject to a one-time transition tax at a reduced rate, after which such earnings can be repatriated without any further U.S. tax. Shareholders can elect to pay the transition tax in installments over 8 years. S corporation shareholders can elect to defer payment of the transition tax.
Global Intangible Low-Taxed Income
Companies may want to increase their offshore asset base to reduce their Global Intangible Low-Taxed Income (GILTI). U.S. shareholders must include GILTI in their income annually (even if not distributed), but U.S. C corporation shareholders can take a deduction up to 50% of the GILTI.
Foreign Tax Credits
Projections of the changes to the foreign tax credit rules will be essential. The foreign tax credit on dividends received from foreign subsidiaries is repealed and therefore planning to minimize foreign dividend withholding taxes should be considered. Changes also affect the sourcing rule so that inventory produced entirely in the U.S. will be considered 100% U.S.-source income for foreign tax credit purposes.
John I. Forry is a Managing Director in the tax practice of CBIZ and MHM, a top ten accounting provider. John is a U.S. tax and legal advisor in international taxation, finance and investment. He is also a university professor in those subjects. If you need additional support or guidance please feel free to contact John directly at [email protected].
