New Year Marks New Guidance for International Tax Provision
On December 31, 2017, when the Times Square Ball dropped on New Year’s Eve, the lights that illuminated“2018” ushered in a whole new tax system for U.S. multinationals. Two years later, when that same ball dropped to signal the beginning of a new decade, it also marked the first time taxpayers had a complete set of final regulations to accompany the international provisions that were created by the Tax Cuts and Jobs Act.
This article provides a summary of the IRS and Treasury Guidance issued over the past two years with respect to the transition tax, global intangible low-taxed income tax (GILTI), and the base erosion and anti-abuse tax (BEAT).
The Transition Tax
Proposed Regulations = August 2018
Final Regulations = January 2019
In January 2019, the Treasury Department issued final regulations for the transition tax provisions created by the Tax Cuts and Jobs Act (TCJA). The section 965 provisions bridge the gap between the old and new rules for taxing foreign income.
Under the old rules, U.S. corporate shareholders were taxed on their worldwide income, but income earned abroad by a foreign corporation could benefit from the deferral of tax until the time such earnings were repatriated. As a result, U.S. shareholders of foreign corporations would reinvest foreign earnings abroad to avoid residual taxation in the United States.
Under the new rules, U.S. corporate shareholders of specified foreign corporations can avoid U.S. taxation on foreign earnings through a participation exemption. Those rules are effective for the first tax year beginning after December 31, 2017.
According to a Joint Committee on Taxation estimate, U.S. companies have around $3 trillion of untaxed foreign earnings stockpiled abroad under the old rules.
The transition tax rules deem all untaxed foreign earnings that accrued under the old rules to be repatriated to U.S. shareholders in the last taxable year beginning before January 1, 2018.
Cash and cash equivalents are subject to a U.S. tax rate of 15.5% and all other assets are subject to a rate of 8%. These rates are achieved by allowing the U.S. taxpayer a deduction to arrive at the appropriate amount.
The final regulations focus on the general rules and definitions contained in section 965, guidance on the determination and treatment of deductions, treatment of disregarded transactions, foreign tax credit calculations, and important election processes.
Global Intangible Low-Taxed Income
Proposed Regulations = September 2018
Final Regulations = June 2019
In June 2019, the Treasury Department issued final regulations on the Global Intangible Low-Taxed Income (GILTI) rules under section 951A and section 250. The GILTI rules were created by the TCJA and operate as a worldwide backstop to the territorial-style rules adopted by the tax reform legislation.
The GILTI provisions piggyback on the long-standing anti-abuse regime referred to as Subpart F. After determining a CFC’s Subpart F income, U.S. shareholders have to determine if they are subject to tax on the CFC’s global intangible low-taxed income (GILTI). Foreign income tainted as Subpart F or GILTI is not exempt from U.S. taxation via the new territorial-style participation exemption.
The GILTI provisions impose a minimum tax on certain low-taxed income but allow such income to be reduced by a special deduction. The deduction amount is 50% of GILTI. The taxpayer is also allowed to take an 80% foreign tax credit. This means the GILTI tax should only apply to foreign income with an effective tax rate below 13.125%((50% x 21 corporate tax rate)/80 percent foreign tax credit)).
The final regulations focus on the U.S. shareholder’s pro-rata share for determining the GILTI inclusion amount, relevant aggregation rules, and the interaction of such rules with other code sections.
Base Erosion and Anti-Abuse Tax
Proposed Regulations = December 2018
Final Regulations = December 2019
In December 2019, the Treasury Department issued final regulations on the base erosion and anti-abuse tax (BEAT) under section 59A. The BEAT applies to corporations with at least $500 million in gross receipts. It does not apply to individuals, S corporations, RICs or REITs. There is also a de minimis exception for companies whose foreign related party payments are low relative to overall deductions.
The BEAT is generally calculated by taking 10 percent of modified taxable income. It increases to 12.5 percent for years beginning after 2025.
The final regulations address anti-abuse and recharacterization rules, the treatment of net operating losses and credit carryover limitations, and administrative reporting requirements.
Are you up-to-date on other 2020 tax changes? Read what’s new on Form 1040.