The Tax Cuts and Jobs Act (the Act) is our first major re-write of the Internal Revenue Code since 1986. In regards to U.S. international tax law, the Act contains significant changes to how U.S. based multinational corporations are taxed.
Below is a brief description of what we perceive to be the four fundamental international reforms:
Move to a territorial system with a participation exemption (or 100% dividend deduction). This puts our tax system in-line with most of our trading partners. Dividends received by U.S. corporate shareholders from 10-percent owned foreign corporations are no longer taxable. In exchange for this deduction, no foreign tax credit is allowed for foreign taxes paid or accrued with respect to the dividend.
Transition tax for the migration from a world-wide to territorial system of taxation. You may have heard about the trillions of dollars U.S. multinationals have offshore. A mandatory tax of 15.5% will apply to post-86 accumulated foreign earnings held in cash or cash-equivalents in foreign countries. An 8% rate applies to offshore earnings held in illiquid assets. Taxpayers may elect to pay this tax over an eight-year period.
Base erosion transactions come under attack. Generally, this is the transfer of assets, or migration of income, to foreign countries.
- The active trade or business exception for the tax-free transfer of property to a foreign corporation is repealed
- A minimum tax is imposed upon global intangible low-taxed income (GILTI). Remember the financial news stories about U.S. technology companies paying 2% tax rates in Europe. A complicated set of rules will impose a U.S. tax on these low-taxed earnings.
- Called the mismatch rules, deductions are denied in related party transactions where the income is not recognized in the foreign jurisdiction typically through use of hybrid entities or hybrid instruments
Reduced tax rate on foreign derived intangible income. This provision reduces, almost in half, the income tax payable on foreign income earned from intangible assets held in the U.S. For multinationals who transferred intangibles offshore, a special tax rule allows them to bring it all back to the U.S. – tax free.
If you have questions or would like to further discuss the new tax law, please contact one of RubinBrown’s Tax Services Group professionals.
Any federal tax advice contained in this communication (including any attachments): (i) is intended for your use only; (ii) is based on the accuracy and completeness of the facts you have provided us; and (iii) may not be relied upon to avoid penalties.
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