International Considerations

What Changed

Global Low-Taxed Intangible Income (GILTI)

Section 951A Global Low-Taxed Intangible Income (GILTI) provisions may negatively affect individuals and other non-C corporations that invest in controlled foreign corporations (CFCs).

The provisions impose a US tax on foreign income in excess of a deemed return on tangible assets of foreign corporations, with the goal to incentivize companies to return these activities to the United States. Anyone who owns at least 10% of a CFC is subjected to current taxation on the earnings and profits of the foreign corporation.

This new provision will impact many taxpayers with foreign entities, unless they own significant depreciable foreign assets. This tax is especially relevant to technology companies, which often are less capital intensive.

In essence, for tax years 2018 through 2025, the profit earned by a CFC will be subject to a US tax unless the CFC pays an effective foreign tax rate of 13.125%. Intangible profit is defined as most CFC earnings reduced by a 10% return on depreciable assets. After 2025, the minimum tax rate increases to 16.406%.

Foreign-Derived Intangible Income (FDII)

To incentivize C corporations to grow their non-US sales, the TCJA introduced foreign-derived intangible income (FDII). FDII creates a US tax deduction based on excess returns from goods and services sold offshore by US C corporations as well as royalties collected.

The FDII deduction is calculated as a ratio of its FDII eligible income over total eligible income multiplied by the eligible gross income. Deduction-eligible income is the overall taxable income less certain excluded items that is in excess of a deemed tangible return. Companies should track these activities to take advantage of this deduction.

Foreign Dividend Income

Under Section 245A, tax reform allows domestic corporations a 100% deduction for the foreign-sourced portion of dividends received from corporations specified as 10% foreign-owned if they are US shareholders of the foreign corporations.

On October 31, 2018, the IRS released proposed regulations under Section 956 to reduce an inclusion of earnings under Section 956 to be equal to what the US shareholder would have qualified for under the Section 245A deduction. Note that Section 956 will continue to apply to US shareholders that aren’t corporations, such as individuals, regulated investment companies, and real estate investment trusts.

Planning Opportunities

Increasing numbers of Americans live, work, and—perhaps most importantly—invest abroad. Understanding the tax implications of cross-border transactions and investments is more critical than ever.

For example, US taxpayers living outside of the United States need to be alert for special issues in estate planning; and US citizens with noncitizen spouses have additional considerations to address. These are activities that may create a host of filing requirements and potential issues for the unwary. Significant and frequently negative tax issues may also be created when individuals immigrate to or expatriate from the United States.

Here are a few steps you can take to help mitigate your tax burden and risk:

  • Consult with your advisor regarding any foreign mutual fund investments. Unless you make certain elections, investing in a foreign mutual fund or passive foreign investment company (PFIC) may essentially double your tax burden. In fact, in some situations, it could create significant tax liability with no real economic gain.
  • Review tax amnesty program options. In 2016, the IRS made several changes to the Offshore Voluntary Disclosure Program (OVDP), the Streamlined Foreign Offshore Procedures, and the Streamlined Domestic Offshore Procedures. While the OVDP program was closed on September 28, 2018, the streamlined programs remain open. These programs are designed for US taxpayers who have unreported foreign income for prior years or who haven’t submitted all the required disclosure forms to the IRS.
  • File a US tax return, even if you’re overseas. Unlike most nations, the United States requires citizens and US green card holders residing outside of the United States to file annual US income tax returns and to pay tax on their worldwide income.
  • Understand the US foreign disclosures requirements. US citizens, green card holders, and US tax residents who make or hold foreign investments may have a number of disclosure requirements even if there aren’t any current tax consequences.

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