Tax Reform – Changes to International Provisions
With the passage of the Tax Cuts and Jobs Act (TCJA) in December, many individuals and corporations will see significant changes on their tax returns beginning this tax year. Some of the biggest impacts will come for U.S. parented multi-national companies. These corporations and their U.S. shareholders will be impacted by several changes and additions, including a repatriation tax, excise tax and elimination of the tax on reinvestment in U.S. property. These changes will impact how companies manage their international income and the timing of when it is repatriated. To help clients, prospects and others understand the changes, Wilson Lewis has provided a summary of key changes below.
Key International Tax Law Changes
- Repatriation Tax – The new tax bill imposes a one-time deemed repatriation tax at a reduced rate on accumulated, untaxed earnings of foreign corporations for controlled foreign corporations (CFCs) and foreign corporations with at least one U.S. shareholder that owns 10% or more of the foreign corporation. Earnings held as cash or cash equivalents will be taxed at a rate of 15.5%, and all other earnings will be taxed at a rate of 8%. “Cash and cash equivalents” include cash, net accounts receivable, personal property traded on a financial market, commercial paper, certificates of deposit and state, federal and foreign government securities, foreign currency, short-term obligations of less than one year and other assets that the IRS may identify. An exception permits S corporations that are U.S. shareholders of a foreign corporation to defer the deemed repatriation tax until the S corporation liquidates or ceases doing business or the stock of the S corporation is transferred.
- Participation Exemption – The TCJA creates a new participation exemption system, under which certain dividends received by U.S. corporation shareholders from 10% owned foreign subsidiaries would be completely exempt from U.S. tax after a specified holding period. Hybrid dividends and dividends from passive foreign investment companies are not eligible. It’s important to note that REIT and RIC shareholders are not eligible for the exemption. In addition, foreign tax credit is not allowed for qualifying dividends.
- Prevention of Base Erosion (BEAT) – The new law adopts a “Base Erosion Anti-Abuse Tax” (BEAT), which imposes a minimum tax on certain deductible payments made to a foreign affiliate. This includes payments such as royalties and management fees but excludes the cost of goods sold. The BEAT would generally apply to certain payments paid or accrued in tax years beginning after December 31, 2017 for taxpayers that are subject to U.S. net income tax, have average annual gross receipts equal to or exceeding $500 million over a three-year period and have issued certain related party deductible payments (i.e., base erosion payments).
- New Excise Tax – The tax reform law calls for the imposition of a 20% excise tax on otherwise deductible payments to related foreign parties by large U.S. corporations – meaning any group of entities preparing consolidated financial statements and making aggregate annual payments over a three-year period of more than $100 million. Payments (other than interest) to a foreign corporation within the same international financial reporting group that are deductible, includible in the costs of goods sold or includable in the basis of a depreciable or amortizable asset are subject to the new rule unless the related foreign corporation elects to treat the payments as income connected with the conduct of a U.S. trade or business. As a result, the foreign corporation’s net profits (or gross receipts if no election is made) with respect to those payments would be subject to full U.S. tax.
- Elimination of Tax on Reinvestments in U.S. Property – Under previous law, a foreign subsidiary’s undistributed earnings that were reinvested in U.S. property were subject to U.S. tax. The bill eliminates this for tax years beginning after Dec. 31, 2017, removing the previous deterrent to reinvesting foreign earnings in the United States. Because the law also provides a 100% exemption for the foreign-source portion of dividends from the foreign subsidiary of a U.S. corporate shareholder, no U.S. tax will be imposed whether a U.S. parent corporation reinvests its foreign subsidiary’s earnings in U.S. property or elects to distribute them.
The TCJA has ushered in many changes that companies with international operations should carefully review. There are additional tax planning opportunities which when properly leveraged can be very beneficial. If you have questions about these changes or need assistance with an inpatriate or expatriate tax compliance issue, Wilson Lewis can help. For additional information, please call us at 770-476-1004 or click here to contact us. We look forward to speaking with you soon.