Summary Of Changes for Offshore Companies After Trump’s Tax Reform
The Trump’s Tax reform created a few tax benefits and tax charges for individual and companies doing business offshore. The benefits are aimed to encourage the repatriation of earnings accumulated in offshore companies and promote the investment at home. These are the tax changes enacted after the tax reform:
- Repatriation tax (Section 965)
- Taxation of global intangible low-taxed income (GILTI) –Section 951A and Section 250
- Foreign derived intangible income (FDII) deduction – Section 250
- Dividends received deduction (DRD) – Section 245A
- Base Erosion and Anti-Abuse Tax
- The act includes a one-time transition tax based on the accumulated deferred foreign earnings of a specified foreign corporation
- An election may be made to spread the payment of the transition tax over an 8-year period
- S corporation shareholders may elect to defer payment of the tax until a triggering event occurs
- When a triggering event occurs generally an election to spread the payment of the transition tax over an eight year period following the triggering event is available
- A triggering event occurs when the corporation’s S election ends
- A liquidation or sale of substantially all of the assets of the corporation, a cessation of business by the corporation, the corporation ceasing to exist, or any circumstances
- A transfer of any share of stock in the S corporation by the taxpayer (only with tax attributable to the stock transferred)
- Read the details: click here.
- Any 10% U.S. shareholder of a CFC is subject to a new anti-deferral regime starting with the CFC’s first tax year beginning in 2018
- The U.S. shareholder must include in gross income its GILTI
- GILTI means all net income of all CFCs, with limited exceptions for certain types of income over and above a deemed fixed return (10%) on all CFC’s tangible assets
- U.S. C corporation shareholders are eligible for a deduction equal to 50% of the GILTI inclusion and the resulting 10.5% tax cut can be further reduced by 80% of the foreign tax credits on the CFC’s underlying income
- i The deduction is not allowed to an S corporation or its shareholders
- Individuals can elect to be taxed as corporations to obtain the benefit of foreign tax credits on GILTI
- GILTI once included in income can be actually repatriated to the U.S. shareholder without further tax, subject to foreign exchange gain or loss
- Read the details: click here.
- If a U.S. Corporation earns FDII directly from foreign market transactions it is allowed a 37.5% deduction that results in a 13.125% tax rate.
- FDII is calculated in a manner similar to GILTI; it is the U.S. Corporation aggregate foreign market income to the extent it exceeds a fixed return on tangible assets.
- To qualify as foreign market income the U.S. C corporation must earn it from the sale, exchange, lease or license of property to foreign persons for a foreign use or from services provided to foreign persons or with respect to foreign property
- The FDII deduction is not available to an S corporation or its shareholders
- A US C corporation is entitled to a 100% DRD for dividends it receives from any 10 percent-or-greater owned foreign corporation
- To qualify for the DRD the US corporation must own the dividend-paying stock for 366 or more days during the 731-day period beginning 365 days before the stock becomes ex-dividend
- The deductions is disallowed for hybrid dividends (dividends for which the foreign corporation received a deduction or other tax benefit)
- No credit or deduction is allowed for foreign taxes (e.g. withholding taxes) with respect to dividends qualifying for the 100% DRD or hybrid dividends
- The DRD is not available to an S corporation or its shareholders
Base Erosion and Anti-Abuse Tax
- The Introduction of BEAT (Base Erosion and Anti-Abuse Tax) requires U.S. companies to include any payments made to and received from their foreign subsidiaries or branches in the calculation of their tax liability.
- It’s not clear whether those payments should be counted as net or gross. Gross payment count can be damaging to banks as they move money frequently between branches locally and abroad.
- The overall tax liability of foreign banks may be increased.
- Read more details: click here.
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