International Tax & the TCJA

Transcription

1 International Tax & the TCJA FEBRUARY 22, 2018 TO RECEIVE CPE CREDIT Participate in entire webinar Answer polls when they are provided If you are viewing this webinar in a group Complete group attendance form with Title & date of live webinar Your company name Your printed name, signature & address All group attendance sheets must be submitted to training@bkd.com within 24 hours of live webinar Answer polls when they are provided If all eligibility requirements are met, each participant will be ed their CPE certificate within 15 business days of live webinar 1

2 INTRODUCTIONS Chris Clifton Managing Director International Tax Services TAX REFORM IN GENERAL C Corporations Permanently reduced top marginal rate from 35 percent to flat rate of 21 percent Repealed alternative minimum tax Pass-Through (Individual) Created new pass-through business deduction Only income effectively connected with conduct of trade/business within the U.S. is eligible for the passthrough business deduction 2

3 INT L TAX CHANGES IN GENERAL Untaxed Accumulated Foreign Earnings 15.5 percent for cash & cash equivalents 8 percent otherwise Payable over eight years Future Foreign Earnings Moved to territorial system with base erosion provisions 100 percent of foreign-sourced portion of dividends paid by foreign corporation to U.S. corporate shareholder owning 10 percent or more of foreign corporation s stock is exempt from U.S. taxation No foreign tax credit or deduction allowed for any foreign taxes paid or accrued with respect to any exempt dividend DIVIDENDS RECEIVED DEDUCTION Dividends Received Deduction Example C Corporation Individual/ S Corporation/ Partnership Taxable Income , ,000 Dividend from 10% Owned Specified Foreign Corporation 20,000 20,000 Dividend Received Deduction (20,000) 0 Net Taxable Income , ,000 Tax (FED Only) Ordinary Income 21,000 44,400 Tax (FED Only) Net Investment Income Tax Total Tax 21,000 45,160 3

4 FOREIGN TAX CREDIT (FTC) Indirect FTC repealed due to enactment of foreign dividends received deduction (DRD) Dividends eligible for DRD are not foreign source income C corporations now eligible to claim DRD for qualifying dividends from foreign corporations received after December 31, 2017 S corporation shareholders still subject to tax on foreign dividends under existing deferral regime FOREIGN TAX CREDIT (FTC) Foreign branch income is now in separate FTC basket Sourcing now based entirely on production location Election to recapture overall domestic loss (ODL) in excess of 50% of domestic source income 4

5 GLOBAL INTANGIBLE LOW-TAXED INCOME (GILTI) Applies to all U.S. shareholders, including noncorporate shareholders Exception to new foreign DRD exemption regime with regard to foreign income earned by controlled foreign corporation (CFC) offshored intangible assets GILTI rules employ residual concept whereby extranormal foreign profits are presumed to be attributable to intangibles (vs. identifying offshored intangible assets & foreign income generated therefrom under current regime) Calculation of GILTI tax is complex GLOBAL INTANGIBLE LOW-TAXED INCOME (GILTI) GILTI CFC Income (generally) 10% x Adjusted Basis Fixed Assets Specified Interest Expense C corporations can claim a deduction equal to 50% of the GILTI inclusion plus the foreign tax gross-up C corporations can also claim a deemed paid foreign tax credit for 80% of foreign taxes attributable to GILTI inclusion 5

6 GLOBAL INTANGIBLE LOW-TAXED INCOME (GILTI) Noncorporate shareholders should generally make an election under Section 962 to be taxed on GILTI & subpart F inclusions at corporate tax rates Without a 962 election, noncorporate shareholders would be taxed on GILTI inclusions at ordinary U.S. individual income tax rates with no GILTI deduction or indirect foreign tax credit GLOBAL INTANGIBLE LOW-TAXED INCOME (GILTI) Global Intangible Low-Taxed Income Example Corporation Individual CFC Income 100, ,000 Interest Expense - - CFC Net Income 100, ,000 Fixed Assets Adjusted Basis 120, ,000 Net Deemed Tangible Income Return 12,000 12,000 CFC Net Income 100, ,000 Net Deemed Tangible Income Return 12,000 12,000 Income Inclusion under 951A GILTI 88,000 88,000 GILTI Deduction (44,000) - Net GILTI Inclusion 44,000 88,000 Tax Max Rates 9,240 32,560 6

7 FOREIGN- DERIVED INTANGIBLE INCOME (FDII) Foreign-derived deduction eligible income is profit from property sold or leased/licensed by U.S. corporation or services provided to foreign person or with respect to foreign-located property Applies only to C corporations Deduction for 37.5 percent of FDII Results in effective tax rate of percent Deduction reduced to percent for tax years beginning after December 31, 2025 (effective tax rate increases to percent for FDII) FDII Deduction Formula FOREIGN- DERIVED INTANGIBLE INCOME (FDII) FDII FDII Deduction 37.5% FDII (income) Foreign-Derived Eligible Income Total Income Net Income 10% x Fixed Asset Basis 7

8 BASE EROSION ANTI-ABUSE TAX (BEAT) New minimum tax that applies to certain payments made to foreign-related entities Essentially a new alternative minimum tax having a broader taxable income base but lower tax rate than regular U.S. corporate tax Income base calculated without deductions for foreign-related party expenses, e.g., interest, royalties & management fees to extent such outbound expenses are exempt from U.S. withholding tax Controversy over whether only a markup on certain foreign-related party service fees must be added back or both the cost & markup components BASE EROSION ANTI-ABUSE TAX (BEAT) Rate of tax 5 percent for percent for percent for 2025 & beyond Only applies to corporations with average annual gross receipts of $500 million & base erosion percentage 3 percent (2 percent for banks/securities dealers) other than S corporation Regulated investment company (RIC) Real estate investment trust (REIT) Compute gross receipts & base erosion percentage tests on combined basis for controlled groups 8

9 TOLL CHARGE TAX Deemed repatriation tax imposed on nonpreviously taxed post-1986 accumulated foreign earnings of U.S. shareholders upon transition from existing deferral regime to new participation exemption regime Toll charge is intended to prevent pre-tax reform foreign earnings from escaping the pre-tax reform deferral regime Applies to both S & C corporations; however, S corporation can not claim indirect FTC TOLL CHARGE TAX Tax due can be spread over eight-year period Effective date: last taxable year of the foreign corporation that begins before 1/1/2018 Earnings & Profits are the GREATER of E&P as of 11/02/2017 or E&P as of 12/31/2017 Netting of E&P deficits allowed Applies regardless of movement of cash Ability to claim pro rata foreign tax credits for corporations Same for individuals who make the 962 election 9

10 TOLL CHARGE TAX S corporation shareholder payment deferral election May elect to defer payment of deemed repatriation tax indefinitely until triggering event Election appears to be available on a per- S corporation basis Applies with regard to shareholder s net tax liability with respect to such S corporation determined under with vs. without rules of eight-year installment election as if only 965 subpart F income taken into account were from such S corporation TOLL CHARGE TAX S corporation shareholder payment deferral election Triggering events S corporation election terminated or revoked Liquidation or dissolution of S corporation or cessation of S corporation business Shareholder transfer of S corporation shares of stock Distribution of deemed repatriation previously taxed income & S corporation sale of CFC shares are not triggering events 10

11 TOLL CHARGE TAX Other considerations Section 962 election for noncorporate shareholders available to take advantage of 15.5 percent/8 percent rates & allow for deemed paid FTC Especially consider 962 election if S corporation intends to revoke S election effective 1/1/2018 as DRD may be available on distribution of 962 tainted PTI Pass-through entities treat portion of deemed repatriation subpart F income reduced by rate differential deduction as tax-exempt income that increases basis & S corporation AAA TOLL CHARGE TAX Triggering events Transfer of partial block of S corporation shares is partial trigger to pay proportionate amount of deemed repatriation tax Transfer of S corporation shares not treated as triggering event if transferee enters into agreement with IRS to be liable for payment of deferred tax upon future triggering event Triggered payment of deemed repatriation tax from C corporation conversion or transfer of S corporation shares is eligible for eight-year installment payment election beginning in trigger year 11

12 Deemed Repatriation Toll Charge Tax Example TOLL CHARGE TAX Accumulated E&P 2,000,000 Cash & Cash Equivalents 1,087,500 E&P Subject to 15.5% tax 1,087,500 Tax at 15.5% 168,563 E&P Subject to 8% tax 912,500 Tax at 8% 73,000 Total Taxes DUE 241,563 THINGS TO CONSIDER BEFORE MAKING OR REVOKING AN S ELECTION 20% pass-through deduction is only available for domestic income income from foreign branches & foreign subsidiaries is not eligible FDII export benefit is only available for C corporations DISC is an efficient way to distribute C corporation profits to shareholders without double taxation Participation exemption on foreign subsidiary earnings is available only for C corporations Conversion to C corporation triggers deemed repatriation toll charge payment consider maintaining parent company as S corporation with C corporation subsidiary to preserve shareholder deferral of toll charge payment Be careful of shareholder-level overall foreign loss (OFL) conversion to C corporation can trigger gain on foreign assets to extent of shareholder-level OFL 12

13 RECAP New Concepts Dividends Received Deduction Deemed Repatriation Tax GILTI (Income & Deduction) FDII (Deduction) BEAT (Anti-Abuse Minimum Tax) TAKEAWAYS & PLANNING Takeaways & Planning Opportunities Migration to U.S. corporations for ownership of CFCs (& other foreign entities) Repatriation tax & GILTI Inclusion: Individuals can make 962 election to claim deemed foreign taxes paid Need for E&P studies Entity classification planning strategies for U.S. companies & for U.S. ownership of foreign subsidiaries IC-DISC structures remain attractive 13

14 Questions? CONTINUING PROFESSIONAL EDUCATION (CPE) CREDITS BKD, LLP is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be submitted to the National Registry of CPE Sponsors through its website: The information contained in these slides is presented by professionals for your information only & is not to be considered as legal advice. Applying specific information to your situation requires careful consideration of facts & circumstances. Consult your BKD advisor or legal counsel before acting on any matters covered. 14

15 CPE CREDIT CPE credit may be awarded upon verification of participant attendance For questions, concerns or comments regarding CPE credit, please the BKD Learning & Development Department at Thank You! Chris Clifton

16 The information contained in these slides is for your information only, based on data available as of the date of the presentation & is not to be considered as tax or legal advice. Applying specific information to your situation requires careful consideration of facts & circumstances. We are under no obligation to update these slides if changes occur. Consult your BKD advisor before acting on any matters covered. 16