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Trump Tax Reform Gives Offshore Profits A Lower Tax Rate

According to bloomberg.com US countries might finally get a break when it comes to foreign tax laws.  The IRS might finally be easing up when it comes to the new foreign tax.  Even with the slightly softer blow, it still didn’t go as far as the business community was hoping it would. 

Basically the new guidance states that there are certain ways that businesses can minimize how much they owe for the new levy on their GILTI, when they are calculating the amounts.  It used to be that companies had to allocate all of their domestic expenses to foreign subsidiaries, but now they only have to allocate half.  So the amount they own in GILTI liabilities will be less.  Taxpayers are still bothered though because the new guidance doesn’t do enough to help them account for all of the taxes they have paid to foreign governments.  Because of this,  the IRS is also giving companies some additional leeway to take advantage  of unused foreign tax credits to try and help offset what was paid to foreign governments. 

Apparently the IRS issued more than 150 pages of guidance back in September as corporate America was waiting for guidance on how the GILTI tax would affect their tax returns.  Most of the big questions that people had like how much can a multinational company use foreign tax expenses and credits to offset what they owe, all remained unanswered, which didn’t help.

GILTI usually sets a 10.5% rate for excess profits that are earned overseas through foreign subsidiaries.  In cases where the cumulative overseas tax bill for a company is below 13.125% or 16.4% after 2025, then this GILTI tax rate applies.

There are new limits for foreign tax credits that established new limits, so GILTI confused a lot of different companies about what applied and where.  However, all of the old ways divvying up expenses between foreign subsidiaries and domestic companies all remained unchanged.  The old way of doing things stated that a company had to allocate domestic expenses for interest payments, research, and administration to the foreign entity through which it did business.  These expenses obviously shrink foreign income that would be taxed and diminished the value of the credits given for foreign taxes that had already been paid. 

There is still obviously tax burden placed upon those companies that have high foreign tax rates, which is why people were trying to lobby the Treasury Department to not require expense allocation.  Those who are trying to effect change are frustrated that there isn’t more relief from double taxation through GILTI.  That’s not all though, the burden of reporting alone is estimated at over $52 Billion dollars.  That’s a lot of cash to be paying attorneys and accountants to comply with all of these proposed rules. 

It’s not all horrific though.  Some of the provisions will make it harder to access certain foreign tax credits.   Some of the firms that are most worried about the way foreign tax credits are treated are the banks and technology firms that have an offshore operation but don’t require large factories, equipment or machinery that would effectively reduce their GILTI.

The reason GILTI was even created was to make multinationals pay something on their future profits from overseas. Once Trump slashed the corporate tax rates from 35 to 21% and shifted to a system where we only tax companies on their domestic profits, then something needed to be done.  But doesn’t GILTI incentivize companies to move more and more of their operations off shore?  Critics of GILTI seem to think so.

More and more companies are starting to shift parts of their operations offshore.  If companies move out of the United States they can save almost 50% of the taxes they would owe if they stayed.  If you stay in the US, you’ll be taxed at 21%.  Offshore, GILTI taxes you are 10.5%, assuming you move to a country with no taxes.   The savings are substantial. 

U.S. based multinational companies can be penalized if they pay too little in their quarterly taxes.  That’s why it was crucial that they get further regulations released about GILTI.  Companies are trying to figure out how much they may have been off in the three previous filings.  Even with new regulations released, people are still not sure how they are going to fare or how much they are going to owe.  There is definitely going to be a learning curve.   We will definitely have to wait for further guidance and regulations to come from the powers that be that can help explain how much the next proposed tax reforms are going to change business, as we know it today. 

Do you need to speak with a tax professional regarding this year’s tax return? FAS CPA & Consultants are ready to assist you with all of your offshore tax matters. You can call us or email at support@fascpaconsultants.com and request a free consultation that will answer your most pressing tax questions.

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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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