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How The Trump Tax Reform Will Affect U.S. Companies With Profits from Offshore Subsidiaries

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One huge change that the Tax Cuts and Jobs Act has made to the tax laws in the US is the “repatriation provision”. This means US corporations must recognize any deferred income from their overseas operations. They have 8 years to do this, and over those same 8 years they are not required to pay taxes on dividends they receive from abroad. 

The Journal of Accountancy has reported that this bill replaces the past system where US companies don’t pay tax on their foreign operations until the profits are sent back as a dividend to the US parent company.

  • These foreign subsidiaries only have to have a 10% US shareholder to qualify.
  • The purpose of the new bill is to change the “lock-out” effect which has previously encouraged US companies to leave their profits outside of the US.
  • The indirect foreign tax credit provision is also changed. That means that no deduction or foreign tax credit is allowed for taxes for any situation where the new bill applies.
  • Foreign tax credits are still allowed for Subpart F income included in US shareholder income for the current year.

The Provision for Deemed Repatriation

Sec 956 will now say that if you are a US shareholder in a foreign company, and you own at least 10%, your share of the income since 1986 that has not yet been taxed in the US is now taxable.

  • Any portion of the earnings and profits that are cash, or equivalents, are taxed at 12%. Anything that you reinvested into the foreign company in the way of property, equipment or other assets, will be taxed at 5%.
  • You can elect to make 8, equal, annual instalments to pay the total of this new tax balance.

Taxes Eliminated on Reinvestments in US Properties

  • The new law allows you to bring your foreign earnings back to the US, invest them in US property or distribute the earnings to shareholders, and pay no US tax.

Limits on Deductions of Loss for foreign subsidiaries that are >10% US Owned

  • A US parent company must now reduce its stock in its foreign subsidiary by the same amount as the exempt dividends, but just for calculating losses loss, not gains.
  • This also applies to transfers from one foreign branch to another.

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Additional Changes

  • Foreign shipping and oil-related income rules are repealed after 2017.
  • An inflation adjustment is added to the de minimis exception for overseas income rules. If the gross income is under $1million or less than 5% of the income of the foreign subsidiary, US parent companies are not required to pay US tax. The $1 million will be adjusted for inflation over time.
  • The “lookthrough” rule is now permanent after 2019. The passive income from one foreign subsidiary to another related foreign subsidiary is not included as taxable income in the US parent company. That is, of course, provided that this income was not already subject to being taxed. These “lookthrough” rules were previously going to expire in 2020.
  • A US company is now being considered to own stock when it owns just 10% of the foreign company. Before it was 50%.
  • The rule that said that the US parent company had to own the foreign company for 30 days before the SubPart F inclusions would apply, no longer holds.

There are other substantial changes made in the Tax Cuts and Jobs Act that affect the Repatriation Provision. The foreign income that US corporations receive, or appear to receive from their foreign subsidiaries is now subject to these new tax rules.

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Fulton Abraham Sanchez, CPA

Fulton Abraham Sánchez, CPA is a Certified Public Accountant, specialized In Tax Planning, International Business, Wealth Management and Offshore Banking. You can email him to fa@fascpaconsultants.com or follow us on Facebook : FAS CPA & Consultants.

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