The Tax Cuts and Jobs Act (TCJA) of 2017 brings about changes to many fundamental aspects of US international taxation, some of which could present significant additional burdens to US taxpayers.
The following is a brief overview of some of the changes to be aware of when dealing with international tax matters under these new tax rules.
The first two taxes will impact applicable US shareholders of controlled foreign corporations (CFC 5471 filers, take note):
- The deemed repatriation tax (known as the Transition or Toll Tax) is a one-time tax imposed on US shareholders of certain foreign corporations. It applies to tax years 2017 or 2018, depending on the foreign corporation’s year end. This will tax post-1986 Foreign Source Earnings & Profits that have not previously been taxed. Earnings in the form of cash and cash equivalents will be taxed at a rate of 15.5%, and all other earnings will be taxed at 8%. This tax can be paid in installments over eight years.
- The tax on global intangible low-taxed income (GILTI) will be annual and ongoing, beginning in 2018. This tax may be significant for some and not others, depending on their size and mix of income—operating, investment, gain/loss—and capital assets. In very general terms, GILTI is a new category of income that is subject to US tax to effectively end the deferral of taxation on a significant portion of foreign earnings.
Included in the TCJA are changes to the definition of controlled foreign corporations that were made retroactive to 2017. As a result, more US shareholders of foreign corporations will be subject to these reporting requirements.
In addition to these changes for individual international filers and corporate filers, the Tax Cuts and Jobs Act also:
- Encourages repatriation of cash back to the US through a 100% dividend received deduction (DRD) for foreign source dividends paid out of foreign source Earnings & Profits. This deduction applies to certain Domestic corporations.
- Provides an incentive in the form of a deduction for certain Domestic corporations exporting goods or providing services outside of the US.
- Requires 10% withholding on the realized amount of the sale of a foreign partner’s interest in a US partnership.
- Limits the 20% Qualified Business Income deduction to US business income. As a result, foreign source business income and rental income from property located outside the US are not eligible for the deduction.
- Establishes a new Base Erosion Anti-Abuse Tax (BEAT) on very large Domestic corporations that is being described as the new Alternative Minimum Tax for businesses with international tax matters.
Remember that this is a very high-level summary of the TCJA’s most important changes. These new tax rules are extremely complex and rely on several technical formulas and testing provisions. We strongly recommend that clients who are shareholders of foreign corporations or who are considering international operations contact our International Tax advisors for consultation to understand the full impact of these new international tax rules.