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How The IRS Will Force U.S. Companies Pay Taxes On Offshore Subsidiaries’ Profits

One of the biggest changes in the Trump Tax Reform is the “Global Intangible Low Taxed Income” – or GILTI.  This change takes taxable income earned abroad, that was deferred before, and applies tax in the current year, starting in 2018.

Accounting Today reports that this newly created Section 951A of the Internal Revenue Code will likely have a huge impact on those American taxpayers who own foreign businesses. This section of the code concerns “non-routine, controlled foreign corporation income” which has been labelled “global intangible low-taxed income,” or GILTI. These new regulations expand Subpart F, so individuals or trusts owning stock within controlled foreign corporations, whether through LLCs or S corporations or directly, are dealing with higher taxes than C corporations shareholders on GILTI.

These are some of the major issues to consider when you develop your strategy that may be affected by the new provisions.

Calculate Your GILTI

How you compute your GILTI on your foreign income will be related to the excess of your “net tested income” over your “net deemed tangible income return”. This calculates on the income of the foreign corporation you own, also called Controlled Foreign Corporation or CFC. In the future, income you earn outside of the U.S. will be subject to U.S. taxes. As of 2018, when you make money in your Controlled Foreign Corporation, now you pay taxes, as a part of the Subpart F income you have.

The calculations can be complicated. Be sure to have an expert, experienced CPA who fully understands the nature of international business structures do your computations. If you report this based on your own understanding, and calculations, if you are audited, the IRS may determine that you earned more than you reported. It is vital to report all of your GILTI as with all income, when the IRS discover your omission, they will be on your doorstep.

How to Deal with the GILTI Changes

The huge changes will take effect on your 2018 taxes, so be sure you are ready. You can’t go back in time to make changes you wish you had made during the tax year.

These are a some key areas to help you through the changes:

  • Confirm your CPA manages GILTI reporting. Very few tax practitioners are specializing in foreign compliance issues.
  • Section 951A is very complex. Don’t just hope they will get it right. Have an in depth discussion about the implications for your situation with your CPA. At FAS Consultants we have the ability to accurately manage the impact on your business taxes.
  • Get your overseas book in order. Get all of the foreign accounting records sorted out to be sure your reporting is accurate and timely moving into the future.

The Time is Now

These Global Intangible Low Taxed Income changes apply now. They apply to your current income in the current year. Now is the time to consult with a specialist in foreign business structures and the impacts of Section 951A for your situation. There are many options to respond to the changes, as long as those options are taken before the end of the tax year.

  • There are choices, like those for individuals and S Corps, that could significantly reduce your tax bill for 2018.
  • Your CFC structure needs to be evaluated in light of the GILTI changes.
  • Moving the company back to the U.S. might be a way to reduce the tax burden.
  • The transfer of income from the CFC may be of benefit, but only to the point that it will not violate the rules for transfer pricing.
  • Establishing pass through entities can provide for additional separate deductions.

If Section 951A applies to you, then you are not a typical U.S. taxpayer. It means that your situation is unique, and requires a specialist in foreign income sources to be certain that your reporting is in compliance with the changes in GILTI.

Please,  contact us with your questions in relation to GILTI and CFCs.

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Fulton Abraham Sanchez, CPA

Fulton Abraham Sánchez, CPA is a Certified Public Accountant, specialized in Tax Planning for Real Estate, Hedge/Equity Funds, Fintech, Crypto, Expats, IRS Debt Resolution and Offshore Strategies. You can email him to fa@fascpaconsultants.com and follow us on Facebook : FAS CPA & Consultants.

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