International Tax: Strategies for cross-border investing after tax reform

Transcription

1 International Tax: Strategies for cross-border investing after tax reform

2 Today s Presenters Brittain Cunningham, CPA Senior Manager, International Tax Services brittain.cunningham@weaver.com Matt Martina, CPA Director, International Tax Services matt.martina@weaver.com

3 Today s Topics U.S. Outbound International Taxation before Dec 22, 2017 U.S. Outbound International Taxation after tax reform Overview of Patent Box Objectives Global Intangible Low Taxed Income (GILTI) Derived Intangible Income (FDII) 3

4 Business Entities and Definitions Corporation Branch Partnership Disregarded Entity 4

5 US Outbound International Taxation

6 Outbound International Tax before Dec 22, 2017 U.S. 35% Tax Rate U.S. Corporation U.S. persons taxed on worldwide income 39.5% Tax Rate Branch CFC Branch CFC US taxation at 35%, branch income consolidated with U.S. corporation income. Section 901 direct FTC US taxation at 35% US tax deferred until dividends paid or subject to deemed dividend under Subpart F or 956. Section 902 indirect FTC US taxation at individual rates, Schedule C business income. Section 901 direct FTC US taxation of qualified dividends at 20% + 3.8% net investment tax. Non-qualified dividends taxed at individual rates. US tax deferred until dividends paid or subject to deemed dividend under Subpart F or 956. Section 902 Indirect FTC NOT AVAILABLE 6

7 Outbound International Tax in 2018 and Beyond U.S. 21% Tax Rate U.S. Corporation U.S. persons taxed on worldwide income 37% Tax Rate Branch CFC Branch CFC US taxation at 21%, branch income consolidated with U.S. corporation income. Section 901 direct FTC US taxation at 21% US 965 Transition tax on earnings + PTI US 100% DRD on dividends from CFCs after Jan 1, 2018 Subpart F and Section 956 convert nontaxable into taxable income GILTI - separate basket, 50% US corporate deduction available FDII Incentive Section 960 indirect FTC available for Subpart F, 956 & GILTI. US taxation at individual rates, Schedule C business income. Section 901 direct FTC US taxation of qualified dividends at 20% + 3.8% net investment tax. Non-qualified dividends taxed at individual rates. US 965 Transition tax on earnings + PTI US tax deferred until dividends paid or subject to deemed dividend under Subpart F or section 956. GILTI - separate basket (50% deduction not available) Section 960 Indirect FTC NOT AVAILABLE 7

8 Key Takeaway Corporation = 2 layers of tax and, MAYBE, deferral US individuals invested in an entity that is treated as a Corporation, for US tax purposes are subjected to 2 layers of tax, whether the entity is foreign or US. Deferral may be available but beware of Subpart F, 956 and GILTI. LAYER 2 - Dividend Income 20%-23.8% U.S. LAYER 2 Qualified Dividend Income (if treaty) 20%-23.8% or individual rates 21% Tax Rate DRD 960 FTC U.S. Corporation LAYER 1 - Country Income Tax Corporation LAYER 1 - Country Income Tax Corporation 8

9 Overview of US Patent Box (GILTI & FDII) Incentive Objective of Congress was to encourage taxpayers to locate intellectual property in the United States through a carrot and stick approach. The provision, however, is a purely mechanical calculation that does not track any particular type of income despite the use of intangible in the name. The calculation isolates profits that are in excess of a 10% return on the adjusted basis of depreciable assets. Global Intangible Low Taxed Income (GILTI) STICK Applies to CFCs owned by US persons. If a CFC achieves >10% return on the net basis of its depreciable assets, profits that would not otherwise be taxed are included in the taxable income of US shareholders of the CFC. US shareholder s CFC shareholdings are aggregated. Derived Intangible Income (FDII) CARROT Applies to US Corporations with foreign sales or services. If the US Corporation achieves >10% return on the net basis of depreciable assets and has foreign sales or services income, an FDII deduction may be available. 9

10 Global Intangible Low Taxed Income (GILTI) - Formula Net Deemed Tangible Income Return GILTI US shareholder s Net CFC Tested Income: Gross income of each CFC (not including certain items of gross income) minus properly allocable deductions = - 10% of Qualified Business Asset Investment (QBAI)** **QBAI equals the aggregate of each CFC s adjusted basis of specified tangible property (any tangible property used in the production of tested income) during the taxable year (measured quarterly). Must use the alternative depreciation system (ADS) under Section 168(g) to calculate adjusted basis. 10

11 Global Intangible Low Taxed Income (GILTI) Section 951A Section 951A provides that a US shareholder of any CFC for any taxable year must include its Global Intangible Low Taxed Income (GILTI) for such tax year. GILTI equals the excess (if any) of: US shareholder s net CFC tested income for the taxable year, over US shareholder s net deemed tangible income return for the taxable year GILTI inclusion is operationally similar to Subpart F income inclusion Effective for tax years of foreign corporations beginning after December 31, 2017, and for tax years of US shareholders in which or with which such tax years of foreign corporations end. 11

12 Global Intangible Low Taxed Income (GILTI) Section 951A (cont d) Net CFC Tested Income The excess (if any) of: The aggregate of the US shareholder s pro-rata share of the tested income of each CFC with respect to which such shareholder is a US shareholder for such taxable year of such US shareholder, over The aggregate of such shareholder s pro-rata share of the tested loss of each CFC with respect to which such shareholder is a US shareholder for such taxable year of such US shareholder. Deemed Tangible Income Return The excess (if any) of: 10% of the aggregate of such shareholder s pro-rata share of the qualified business asset investment (QBAI) of each CFC, over The amount of interest expense allocable to net CFC tested income for the taxable year to the extent the interest income attributable to such expense is not taken into account in determining net CFC tested income. 12

13 Global Intangible Low Taxed Income (GILTI) Section 951A (cont d) A CFC's Tested Gross Income excludes the following: (1) the corporation's ECI under section 952(b) (2) any gross income taken into account in determining the corporation's subpart F income (3) any gross income excluded from foreign base company income or insurance income by reason of the high-tax exception under section 954(b)(4) (4) any dividend received from a related person (as defined in section 954(d)(3)), and (5) any foreign oil and gas extraction income as defined in section 907(c)(1) 13

14 Global Intangible Low Taxed Income (GILTI) Section 951A (cont d) Qualified Business Asset Investment (QBAI) QBAI equals the CFC s average aggregate adjusted basis of specified tangible property during the taxable year. Aggregate adjusted basis measured on a quarterly basis Must use the alternative depreciation system (ADS) under Section 168(g) to determine adjusted basis. Depreciation is allocated ratably to each day during the period in the taxable year to which such depreciation relates. Specified tangible property Any tangible property used in the production of tested income. Must be used in a trade or business of the corporation. Deduction under Section 167 must be allowable for such property. Use the ratio of tested gross income to total gross income produced by a piece of property to determine how much of the property is treated as specified tangible property. 14

15 Global Intangible Low Taxed Income (GILTI) Section 951A (cont d) If the CFC holds an interest in a partnership at the close of the CFC s taxable year, the CFC includes as part of its QBAI its distributive share of the partnership s aggregate adjusted bases in tangible property. Property must be used in a trade or business of the partnership. A deduction under Section 167 (depreciation) must be allowable for such property. Property must be used in the production of tested income A CFC s distributive share of the adjusted basis of any property shall be the CFC s distributive share of income with respect to such property. The Treasury Department was granted broad authority to issue regulations or other guidance to prevent the avoidance of the purposes of this subsection, including for the treatment of property transferred, or held, temporarily. U.S. U.S. Shareholder CFC 60% Partnership 15

16 Global Intangible Low Taxed Income (GILTI) Section 960(d) & 904(d) New Section 960(d) provides that domestic corporations are deemed to have paid foreign income taxes equal to 80% of: The domestic corporation s inclusion percentage (GILTI divided by the aggregate of its pro-rata shares of the tested income of its CFCs); multiplied by The aggregate tested foreign income taxes (foreign income taxes paid or accrued by a CFC properly attributable to tested income taken into account by the domestic corporation) Section 78 gross-up equals 100% of deemed paid taxes (except for purposes of Sections 245 and 245A). New Section 904(d) limitation basket for non-passive GILTI; Excess foreign taxes related to GILTI cannot be carried back or carried forward. There is no high-tax exception for GILTI. Expenses should be allocated/apportioned against GILTI. GILTI inclusion is allocated back to CFCs. Results in a pooled foreign tax credit amount. 16

17 Global Intangible Low Taxed Income (GILTI) Example U.S. GILTI does not apply 21% Tax Rate Branch U.S. Corporation >50% CFC U.S. persons taxed on worldwide income Branch CFC Tested Income = $300 QBAI = CFC s average quarterly adjusted basis of fixed assets (using ADS Depreciation) = $1,000 Deemed Tangible Income Return 10% x $1,000 = $100 GILTI = $300 - $100 = $200 GILTI is a separate FTC Basket US Corporation gets 50% deduction US Corporation gets 80% of FTCs ETR on GILTI income = % If foreign tax rate > %, no additional US tax on GILTI Income 37% Tax Rate >50% CFC CFC Tested Income = $300 QBAI = $0 Deemed Tangible Income Return 10% x $0 = $0 GILTI = $300 - $0 = $300 No FTCs available ETR on GILTI income = individual tax rate Section 962 election may be available 17

18 Global Intangible Low Taxed Income (GILTI) Observations For a US corporation, the US tax rate on GILTI income may be lower than the tax rate on US source income (21% corporate rate versus % GILTI effective rate). For a US corporation, a local income tax rate on its CFCs in excess of % eliminates any additional tax liability related to GILTI. However, US tax compliance is not eliminated. No GILTI exposure exists if the aggregate net tested income from CFCs is equal to or less than 10% of the qualified business assets regardless of the foreign tax rate. GILTI inclusion generates PTI that can be distributed tax free thereafter. Section 962 election may be available allowing individuals to elect to be taxed on GILTI income as a corporation. 18

19 Global Intangible Low Taxed Income (GILTI) Compliance Considerations Proper calculation of CFC s earnings & profits (CFC tested income) is now mandatory. Tax compliance (forms 5471, 8858, 8865) will take more time. Even though DRD eliminates taxation of foreign dividend income for US corporations, it will still be necessary to calculate the amount of the dividend and present the offsetting DRD. Due to implementation of the foreign dividend received deduction for US Corporations, GILTI, Subpart F and 956 are no longer anti-deferral provisions. They turn non-taxable foreign sourced income into taxable income. 19

20 Derived Intangible Income (FDII) Section 250 US corporations are allowed a new deduction equal to the sum of: 37.5% of Derived Intangible Income (FDII), and 50% of Global Intangible Low Taxed Income (GILTI) and the corresponding Section 78 Gross-up on GILTI For taxable years of domestic corporations beginning after December 31, 2025, the percentages are changed to % for FDII and 37.5% for GILTI. The deduction is capped at the taxable income of the US corporation (can t go negative). 20

21 Derived Intangible Income (FDII) Section 250 A domestic corporation s FDII is the amount that bears the same ratio to the deemed intangible income of such corporation as the foreignderived deduction eligible income of the corporation bears to the deduction eligible income of the corporation. The calculation of deemed intangible income is the same as the GILTI calculation but applied to the US corporation instead of a foreign corporation. FDII = -derived deduction eligible income Deduction eligible income x Deemed Intangible Income 21

22 Derived Intangible Income (FDII) Formula FDII -Derived Deduction Eligible Income: Gross income from property sold to non-us persons for use outside the US, or services provided to any person not located in the US (not including certain items of gross income) Deduction Deemed Tangible Income Return = x Eligible - 10% of QBAI Deduction Eligible Income: Gross income (not Income including certain items of gross income) minus properly allocable deductions Ratio Deemed Intangible Income 22

23 Derived Intangible Income (FDII) Section 250 Deduction Eligible Income equal to the excess of the domestic corporation s gross income (determined without regard to certain amounts) over the deductions properly allocable to such gross income. Items excluded from gross income: 1. Any amount included in gross income under Section 951(a)(1) tradition Subpart F income 2. GILTI income 3. Financial services income 4. Dividends from CFCs of the domestic corporation 5. Domestic oil and gas extraction income 6. branch income 23

24 Derived Intangible Income (FDII) Section 250 -derived deduction eligible income Deduction eligible income which is derived from either: property sold (or leased, licensed, or exchanged) to non-us persons for use, consumption, or disposition outside the US; and Services provided to any person, or with respect to property, located outside the US. There are special rules for related party transactions Property or services provided to unrelated domestic intermediaries do not qualify, even if a foreign sale/use ultimately arises. 24

25 Derived Intangible Income (FDII) Section 250 Deemed Intangible Income Equals the excess of deduction eligible income over the deemed tangible income return of the corporation. Deemed tangible income return Equals 10% of the corporation s QBAI QBAI is determined under the same rules as GILTI except: It includes QBAI that produces deduction eligible income, instead of tested income ; and It is determined without regard to whether the corporation is a CFC. 25

26 Derived Intangible Income (FDII) Example Key Considerations & Opportunities: The lower the fixed assets of the C Corporation, the higher the tax benefit. It doesn t matter where the assets were manufactured. Tax planning and modeling may identify opportunities to enhance the deduction. FDII follows in a long line of export incentives that have been challenged by the WTO and eventually modified by the US. It appears likely foreign governments will challenge the law. Some already have. It is not clear whether the US will yield to pressure and make modifications as it has done in the past. Fixed Assets TBV = $1,000 C Corporation (US) Deduction Eligible Income = $300 Deemed Tangible Income $1,000 x 10% = $100 Deemed Intangible Income $300 - $100 = $200 Other Assets TBV = $1,500 Sales or Services Income = $150 Total TBV of Assets = $3,500 Derived Income Ratio $150/$300 = 50% FDII 50% x $200 = $100 Deduction $100 x 37.5% = $

27 QUESTIONS AND ANSWERS

28 Today s Presenters Brittain Cunningham, CPA Senior Manager, International Tax Services brittain.cunningham@weaver.com Matt Martina, CPA Director, International Tax Services matt.martina@weaver.com