International Tax Reform. March 19, 2018 Nicole R. Suk, CPA

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1 International Tax Reform March 19, 2018 Nicole R. Suk, CPA

2 Why International Reform? Shift to territorial system Protect the U.S. tax base from perceived crossborder erosion Incentive for economic investment in the U.S.

3 Agenda Transition Tax Foreign Source Dividends Global Intangible Low Taxed Income Foreign Derived Intangible Income Base Erosion Anti-Abuse Tax (BEAT) Interest Deduction Limitation Anti-Hybrid Rules

4 Transition Tax 965 Treatment of Deferred Foreign Income Upon Transition to Participation Exemption System of Taxation. Effective after December 21, 2017 Report on 2017 tax returns. Deemed repatriation of earnings. Treats deferred foreign income as subpart F income unless already previously taxed.

5 Who is Subject? Transition Tax U.S. persons owning at least 10% of a specified foreign corporation (SFC). Definition of U.S. shareholder changed. Specified Foreign Corporation includes Any CFC Any foreign corporation which has a U.S. corporate shareholder that owns at least 10% of the stock. For 2017 report SFCs on Form 5471.

6 Who is not subject? Transition Tax U.S. individuals owning greater than 10% each, but less than 50% collectively not a CFC or SFC. Shareholders in PFIC corporations, even if own greater than 50%.

7 Transition Tax US Individuals or Corporation 50% Foreign Corporation Required to pay transition tax

8 Transition Tax US Individual(s) 49% Foreign Individuals or Corporation 51% Foreign Corporation NOT Required to pay transition tax

9 Transition Tax US Individual 10% US Corporation 10% Foreign Corporation 80% Foreign Individuals or Corporation Required to pay transition tax

10 Transition Tax S Corporation exception - S corporation owners may elect to defer tax liability until triggering event: Ceases to be an S corporation Liquidates or sells assets Ceases business; or Shareholder transfers shares of stock Any net tax liability payment of which is deferred under the election shall be paid in the tax year of the triggering event.

11 Four Step Process Transition Tax 1. Inventory the entities that must be analyzed. 2. Determine the amount of income (E&P) subject to the transition tax. 3. Compute how much of the E&P relates to cash assets. 4. Calculate the transition tax.

12 Transition Tax Subpart F income inclusion for E&P determined on November 2, 2017 or December 31, 2017 (greater amount). May be reduced by foreign E&P deficits that are properly allocable to that person. E&P reduced by previously taxed income. Not reduced by dividends paid during transition year except to other SFCs.

13 Transition Tax Deduction allowed based on two measurements: the US shareholder s aggregate foreign cash position amount and the aggregate E&P held in other assets. Taxed at shareholder s 2017 rate. Effectively reduces tax rates to 15.5% and 8% respectively for corporations in 35% rate bracket.

14 Transition Tax FTCs otherwise available disallowed in amount of 55.7% for cash portion & 77.1% for noncash portion. May use U.S. NOL against 965 income or elect to forgo use of NOL.

15 Sample calculation Transition Tax CFC1 SFC1 Nov 2 E&P $1,500 $2,400 Dec 31 E&P $1,300 $2,500 Greater of tested amounts $1,500 $2,500 Total US 965 inclusion $4,000 Deductible intercompany payments may be eliminated from E&P under Notice to avoid double counting in E&P.

16 Sample calculation Transition Tax Form 5471 Cash $3,000 A/R $1,500 Inventories $2,000 Net PPE $500 Total Assets $7,000 Liabilities $2,000 Equity $5,000 Accumulated E&P $4, inclusion $4,000 Aggregate cash position $4,500 Exceeds 965 inclusion 965 Inclusion $4, Deduction (55.7%) (2,228) 965 Deduction (77.1%) (0) Net 965 Income $1,772 Tax at 35% $620 Effective Tax Rate 15.5%

17 Sample calculation Transition Tax Form 5471 CFC Cash $2,000 A/R $1,500 Inventories $2,000 Net PPE $1,500 Total Assets $7,000 Liabilities $2,000 Equity $5,000 Accumulated E&P $4,000 CFC 965 inclusion $4,000 Aggregate cash position $3,500 Does not exceed 965 inclusion 965 Inclusion $4, Deduction (55.7%) (1,950) 965 Deduction (77.1%) (385) Net 965 Income $1,665 Tax at 35% $583 Effective Tax Rate 14.6%

18 Transition Tax May elect to pay tax over 8 years 8% first five years; 15% in 6th year; 20% in 7th year; 25% in 8th year. If business is sold all remaining installments must be paid on final tax return.

19 Reporting Transition Tax Required to include an IRC 965 Transition Tax Statement in 2017 return. Elections must be made by due date of return, including extensions. Payment must be made separately from regular tax. Partnership, S corps and other pass through entities must attach statement to K-1s. Amend if a return has already been filed for 2017.

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22 Transition Tax Form 965(a) Income 1040 Net inclusion - Page 1, Line 21 other income write Sec 965 on dotted line 965(c) Deduction FTC Tax Liability Net with income Report on Form 1116 Add total tax to Page 2, Line 44, Tax, Check box c on Line 44 and write 965 to the right of the box. Include as credit in total on Page 2, Line 73 the amount to be paid in installments for years beyond the 2017 year, if applicable. Check box d on Line 73 and write TAX to the right of the box

23 Transition Tax Form 965(a) Income 1120 Do not enter on return only reported on IRC 965 statement 965(c) Deduction FTC Tax Liability Do not enter on return only reported on IRC 965 statement Not reported on Report on IRC 965 Transition Tax Statement Include in total on Page 3, Schedule J, Part I, Line 11 net tax liability under section 965. Include in total on Page 3, Schedule J, Part II, Line 19d the amount to be paid in installments for years beyond the 2017 year, if applicable.

24 Transition Tax Form 965(a) Income 965(c) Deduction FTC Tax Liability 1120S Page 3, Sch K, Line 10 Other Income Page 3m Sch K, Line 12d Other Deductions N/A N/A 1065 Page 4, Sch K, Line 11 Other Income Page 4, Sch K, Line 13d Other Deductions N/A N/A

25 Transition Tax Notice provides additional guidance on: Determining aggregate foreign cash position Determining accumulated post-1986 deferred foreign income Applying basis adjustment to repatriated amounts treated as subpart F income Consolidated group effects Determining foreign currency gain or loss

26 Foreign Source Dividends For dividends paid after December 31, % deduction for foreign-source portion of dividends received from specified 10-percent owned foreign corporations. Specified foreign corporations do not include PFICs. Only available to U.S. C corporations other than RICs and REITS.

27 Foreign Source Dividends Subject to a one-year holding period. No foreign tax credit (or deduction for foreign taxes paid with respect to qualifying dividends) permitted. Deduction would be unavailable for hybrid dividends. Does not apply to income from foreign branches.

28 Global Intangible Low Taxed Income New IRC 951A Imposes a foreign minimum tax on U.S. shareholder s allocable share of GILTI from CFCs. Any 10% U.S. shareholder (individual or corporate) of a CFC must include in gross income its global intangible low-taxed income in a manner similar to a subpart F income.

29 Global Intangible Low Taxed Income GILTI is low-taxed income of a CFC that exceeds 10% return on capital invested in tangible depreciable property used in a trade or business. Does not include amounts otherwise included in subpart F. The GILTI computation is calculated at the shareholder level. Income in one CFC can be offset by losses in another CFC if there is a common shareholder.

30 Global Intangible Low Taxed GILTI Calculation: Income Step 1: Calculate CFC s tested income CFC s total gross income Less: CFC s U.S. ECI Less: CFC s Subpart F Income Less: CFC s dividends from related persons Less: CFC s foreign oil and gas extraction income Less: other deductions including taxes CFC tested income

31 Global Intangible Low Taxed GILTI Calculation: Income Step 2: Calculate the Qualified Business Asset Investment (QBAI) QBAI is the quarterly average tax basis (using SL depreciation) of depreciable tangible property used in the production of the relevant income/loss.

32 Global Intangible Low Taxed GILTI Calculation: Income Step 3: Calculate the Net Deemed Tangible Income Return 10% of QBAI Less: The net amount of interest expense taken into account in determining net tested income Net Deemed Tangible Income Return

33 Global Intangible Low Taxed GILTI Calculation: Income Step 4: Calculate GILTI Tested Income (Step 1) Less: Net Deemed Tangible Income Return (Step 3) GILTI

34 Global Intangible Low Taxed Income Deduction allowed for C corporation U.S. shareholders only. 50% of GILTI creates effective tax rate of 10.5% on GILTI Decreases to 37.5% for years after % effective tax rate Foreign tax credits are available but are limited to the 80% of taxes paid and cannot be carried back or carried forward like other foreign tax credits. Only available for C corporations.

35 Global Intangible Low Taxed Income Example Corp 1 Corp 2 Individual Net income pre tax $1,000 $1,000 $1,000 Foreign tax rate 20% 5% 20% Foreign tax Tested Income Asset tax basis (QBAI) 4,500 4,500 4,500 GILTI: Tested income % QBAI (450) (450) (450) GILTI $350 $500 $350 Inclusion % (GILTI/Tested Income) 43.75% 52.63% 43.75% 78 Gross up (inclusion % * tax) $88 $26 $88

36 Global Intangible Low Taxed Income Example Corp 1 Corp 2 Individual GILTI $350 $500 $ Gross up Total GILTI inclusion % GILTI deduction (219) (263) - Taxable income US tax rate 21% 21% 37% US tax $46 $55 $162 FTC (80%) (160) (40) - Net US Tax $0 $15 $162 Net Global Taxes $200 $65 $362 Global ETR 20.0% 6.5% 36.2%

37 Foreign Derived Intangible Income Known as the FDII deduction. Represents the portion of a domestic corporation s income derived from serving foreign markets. Creates a preferential tax rate for domestic C corporations serving foreign markets. S corporations and individuals are not eligible for the deduction. Creates disincentives for movement of IP outside the U.S.

38 Foreign Derived Intangible Income Includes income derived from the sale of property to any foreign person for a foreign use. The term sale is specially defined for this purpose to include any lease, license, exchange or other disposition. Foreign use is defined to mean any use, consumption, or disposition which is not within the United States. Special rules for sales to related foreign persons.

39 Foreign Derived Intangible Income Eligible C corporations are allowed a deduction equal to 37.5% of FDII for tax years and % for years after. Reduces the effective U.S. tax rate for eligible C corporations on foreign income treated as attributable to IP and other intangible assets to % versus 21%.

40 Foreign Derived Intangible Income Deemed Intangible X Foreign Derived Deduction Eligible Income Income Deduction Eligible Income Deductible Eligible Income = total gross income of the corporation without regard to subpart F income, GILTI, dividends received from 10% owned CFC and foreign branch income; reduced by deductions including taxes allocable to such gross income Foreign Derived Deduction Eligible Income = DEI considered foreign derived if it is connection with property sold to a non U.S. persons for foreign use, or services provided to any person or property outside the U.S.

41 Foreign Derived Intangible Income Deemed Intangible X Foreign Derived Deduction Eligible Income Income Deduction Eligible Income Deemed Intangible Income = DEI reduced by 10% of the qualified business asset investment

42 Foreign Derived Intangible Income Example: Assume U.S. company has: Net taxable income of $1,000,000 Foreign derived portion of $200,000 (20%) Qualified business asset basis of $2,500,000 Deductible Eligible Income (DEI) $1,000,000 Deemed Intangible Income (DII) $1,000,000 ($2,500,000 x 10%) $750,000 FDII $750,000 X ($200,000 / $1,000,000) $150,000 FDII Deduction $150,000 x 37.5% ($56,250) Net FDII Income $150,000 - $56,250 $93,750 Tax on FDII $93,750 x 21% $19,688 Tax on non-fdii ($1,000,000-$150,000) X 21% $178,500 Total U.S. Taxes $178,500 + $19,688 $198,188 Overall ETR $198,188/$1,000, %

43 Foreign Derived Intangible Income Example: Assume U.S. company has: Net taxable income of $1,000,000 Foreign derived portion of $800,000 (80%) Qualified business asset basis of $2,500,000 Deductible Eligible Income (DEI) $1,000,000 Deemed Intangible Income (DII) $1,000,000 ($2,500,000 x 10%) $750,000 FDII $750,000 X ($800,000 / $1,000,000) $600,000 FDII Deduction $600,000 x 37.5% ($225,000) Net FDII Income $600,000 - $225,000 $375,000 Tax on FDII $375,000 x 21% $78,750 Tax on non-fdii ($1,000,000-$600,000) X 21% $84,000 Total U.S. Taxes $78,750 + $84,000 $162,750 Overall ETR $162,750/$1,000, %

44 Base Erosion Anti-Abuse Tax Code 59A (BEAT) Effectively an alternative minimum tax on large multinational corporations. Applies to domestic C corporations part of a group with at least $500M of average annual domestic gross receipts over a three-year period. Applies to foreign corporations engaged in a U.S. trade or business for purposes of determining their effectively connected income tax liability.

45 Base Erosion Anti-Abuse Tax (BEAT) Applies when corporations are making payments to related foreign persons and a deduction is allowed for such related party payment in the U.S. Includes asset acquisitions if depreciation is taken. Excepted payments: Inventory purchases included in COGS. Payments for services under the 482 cost method with no markup component. Any qualified derivative payment.

46 Base Erosion Anti-Abuse Tax (BEAT) Calculated in 2018 as the excess of 5% of the modified taxable income over the regular tax liability. Tax rate will go to 10% after 2018; after 2025 up to 12.5%. Does not apply if the foreign recipient elects to be subject to U.S. income tax on the amounts received or if payments made with full 30% withheld. A foreign tax credit of 80% of applicable foreign credits are allowed against the U.S. tax liability imposed by this provision if an election is made.

47 Interest Deduction Limitation Amend 163(j) to limit interest deduction of any taxpayer for any tax year for net business interest expense to 30% of the taxpayer s adjusted taxable income. Regardless of whether interest paid to related or unrelated parties (foreign or domestic). Exception for taxpayers with average annual gross receipts less than $25M during prior 3 year period.

48 Anti Hybrid Rules A deduction will be disallowed for any disqualified related party amount paid or accrued pursuant to a hybrid transaction or by or to a hybrid entity. Interest and royalty paid if not included in income in the foreign jurisdiction.

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50 Contact Information Nicole Suk, CPA Principal Windham Brannon 3630 Peachtree Road Suite 600 Atlanta, Georgia Main: Direct: Fax: