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%.
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.
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.
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: