International Tax - Weaver · December 31, 2017, and for tax years of US shareholders in which or ... any gross income excluded from foreign base company income or insurance income

International Tax:Strategies for cross-border investing after tax reform

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Today’s Presenters

Brittain Cunningham, CPASenior Manager, International Tax Services

Matt Martina, CPADirector, International Tax Services

[email protected] | 832.320.3461


https://www.linkedin.com/in/brittain-cunningham-55256a18/

https://www.linkedin.com/in/matt-martina-452a5b18/

mailto:[email protected]


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► U.S. Outbound International

Taxation before Dec 22, 2017

► U.S. Outbound International

Taxation after tax reform

► Overview of Patent Box

Objectives

► Global Intangible Low Taxed

Income (GILTI)

► Foreign Derived Intangible

Income (FDII)

Today’s Topics

Business Entities and Definitions

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Partnership

Corporation Branch

Disregarded Entity

US Outbound

International Taxation

Outbound International Tax

before Dec 22, 2017

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U.S. Corporation

Foreign Branch

ForeignCFC

U.S.

Foreign

Foreign Branch

ForeignCFC

U.S. persons taxed on worldwide

income35%

Tax Rate39.5%

Tax Rate

• US taxation at 35%, branch income consolidated with U.S. corporation income.

• Section 901 direct FTC

• US taxation at 35% • US tax deferred until

dividends paid or subject to deemed dividend under Subpart F or 956.

• Section 902 indirect FTC

• US taxation at individual rates, Schedule C business income.


• US taxation of qualified dividends at 20% + 3.8% net investment tax.

• Non-qualified dividends taxed at individual rates.

• US tax deferred until dividends paid or subject to deemed dividend under Subpart F or 956.

• Section 902 Indirect FTC NOT AVAILABLE

Outbound International Tax

in 2018 and Beyond

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U.S. Corporation

Foreign Branch

ForeignCFC

U.S.

Foreign

Foreign Branch

ForeignCFC


income21%

Tax Rate37%

Tax Rate

• US taxation at 21%, branch income consolidated with U.S. corporation income.


• US taxation at 21% • US 965 Transition tax on earnings + PTI• US 100% DRD on dividends from CFCs after

Jan 1, 2018• Subpart F and Section 956 convert non-

taxable into taxable income• GILTI - separate basket, 50% US corporate

deduction available• FDII Incentive• Section 960 indirect FTC available for

Subpart F, 956 & GILTI.

• US taxation at individual rates, Schedule C business income.


• US taxation of qualified dividends at 20% + 3.8% net investment tax.

• Non-qualified dividends taxed at individual rates. • US 965 Transition tax on earnings + PTI• US tax deferred until dividends paid or subject to

deemed dividend under Subpart F or section 956.• GILTI - separate basket (50% deduction not

available)• Section 960 Indirect FTC NOT AVAILABLE

• US individuals invested in an entity that is treated as a Corporation, for US tax purposes are subjected to 2 layers of tax, whether the entity is foreign or US.

• Deferral may be available but beware of Subpart F, 956 and GILTI.

Key TakeawayCorporation = 2 layers of tax and, MAYBE, deferral

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U.S. Corporation

ForeignCorporation

U.S.

Foreign

ForeignCorporation

21% Tax Rate• DRD• 960 FTC

LAYER 1 -Foreign Country

Income Tax

LAYER 1 -Foreign Country

Income Tax

LAYER 2 -Dividend Income –

20%-23.8%

LAYER 2 – Qualified Dividend Income

(if treaty) – 20%-23.8% or individual rates

• Objective of Congress was to encourage taxpayers to locate intellectual property

in the United States through a “carrot and stick” approach.

• The provision, however, is a purely mechanical calculation that does not track any

particular type of income despite the use of “intangible” in the name.

• The calculation isolates profits that are in excess of a 10% return on the adjusted

basis of depreciable assets.

– Global Intangible Low Taxed Income (GILTI) – “STICK” – Applies to CFCs owned by US

persons. If a CFC achieves >10% return on the net basis of its depreciable assets, profits that

would not otherwise be taxed are included in the taxable income of US shareholders of the

CFC. US shareholder’s CFC shareholdings are aggregated.

– Foreign Derived Intangible Income (FDII) – “CARROT” – Applies to US Corporations with

foreign sales or services. If the US Corporation achieves >10% return on the net basis of

depreciable assets and has foreign sales or services income, an FDII deduction may be

available.

Overview of US “Patent Box”

(GILTI & FDII) Incentive

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Global Intangible Low Taxed Income

(GILTI) - Formula

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GILTI

US shareholder’s Net CFC Tested Income: Gross income of each CFC

(not including certain items of gross income) minus properly

allocable deductions

= - 10% of Qualified Business Asset Investment (QBAI)**

Net Deemed Tangible Income Return

**QBAI equals the aggregate of each CFC’s adjusted basis of specified tangible property (any tangible property used in the production of tested income) during the taxable year (measured quarterly). Must use the alternative depreciation system (ADS) under Section 168(g) to calculate adjusted basis.

• Section 951A provides that a US shareholder of any CFC for any

taxable year must include its Global Intangible Low Taxed Income

(GILTI) for such tax year.

• GILTI equals the excess (if any) of:

– US shareholder’s “net CFC tested income” for the taxable year, over

– US shareholder’s “net deemed tangible income return” for the taxable

year

• GILTI inclusion is operationally similar to Subpart F income inclusion

• Effective for tax years of foreign corporations beginning after

December 31, 2017, and for tax years of US shareholders in which or

with which such tax years of foreign corporations end.


(GILTI) – Section 951A

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• “Net CFC Tested Income” – The excess (if any) of:– The aggregate of the US shareholder’s pro-rata share of the “tested income” of

each CFC with respect to which such shareholder is a US shareholder for such taxable year of such US shareholder, over

– The aggregate of such shareholder’s pro-rata share of the “tested loss” of each CFC with respect to which such shareholder is a US shareholder for such taxable year of such US shareholder.

• “Deemed Tangible Income Return” – The excess (if any) of:– 10% of the aggregate of such shareholder’s pro-rata share of the qualified business

asset investment (QBAI) of each CFC, over

– The amount of interest expense allocable to net CFC tested income for the taxable year to the extent the interest income attributable to such expense is not taken into account in determining net CFC tested income.


(GILTI) – Section 951A (cont’d)

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• A CFC's Tested Gross Income excludes the following:

(1) the corporation's ECI under section 952(b)

(2)any gross income taken into account in determining the corporation's

subpart F income

(3)any gross income excluded from foreign base company income or

insurance income by reason of the high-tax exception under section

954(b)(4)

(4)any dividend received from a related person (as defined in section

954(d)(3)), and

(5)any foreign oil and gas extraction income as defined in section 907(c)(1)



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• “Qualified Business Asset Investment (QBAI)” – QBAI equals the CFC’s average

aggregate adjusted basis of specified tangible property during the taxable year.

– Aggregate adjusted basis measured on a quarterly basis

– Must use the alternative depreciation system (ADS) under Section 168(g) to determine adjusted basis.

– Depreciation is allocated ratably to each day during the period in the taxable year to which such depreciation relates.

• “Specified tangible property” – Any tangible property used in the production of

tested income.

– Must be used in a trade or business of the corporation.

– Deduction under Section 167 must be allowable for such property.

– Use the ratio of “tested gross income” to total gross income produced by a piece of property to determine how much of the property is treated as “specified tangible property”.



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• If the CFC holds an interest in a partnership at the close of the CFC’s taxable year, the CFC includes as part of its QBAI its distributive share of the partnership’s aggregate

adjusted bases in tangible property.– Property must be used in a trade or business of the partnership.

– A deduction under Section 167 (depreciation) must be allowable for such property.

– Property must be used in the production of tested income

• A CFC’s distributive share of the adjusted basis of any property shall be the CFC’s distributive share of income with respect to such property.

• The Treasury Department was granted broad authority to issue regulations or other guidance to prevent the avoidance of the purposes of this subsection, including for the treatment of property transferred, or held, temporarily.



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U.S. Shareholder

ForeignCFC

U.S.

Foreign

Foreign Partnership

60%

• New Section 960(d) provides that domestic corporations are deemed to have paid foreign income taxes equal to 80% of:– The domestic corporation’s inclusion percentage (GILTI divided by the aggregate of its

pro-rata shares of the tested income of its CFCs); multiplied by

– The aggregate tested foreign income taxes (foreign income taxes paid or accrued by a

CFC properly attributable to tested income taken into account by the domestic

corporation)

• Section 78 gross-up equals 100% of deemed paid taxes (except for purposes of Sections 245 and 245A).

• New Section 904(d) limitation basket for non-passive GILTI; Excess foreign taxes related to GILTI cannot be carried back or carried forward. – There is no high-tax exception for GILTI.

– Expenses should be allocated/apportioned against GILTI.

– GILTI inclusion is allocated back to CFCs. Results in a “pooled” foreign tax credit amount.


(GILTI) – Section 960(d) & 904(d)

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(GILTI) – Example

U.S. Corporation

Foreign Branch

ForeignCFC

U.S.

Foreign

Foreign Branch

ForeignCFC


income21%

Tax Rate37%

Tax Rate

GILTI does not apply

• CFC Tested Income = $300• QBAI = CFC’s average quarterly adjusted basis of fixed assets (using

ADS Depreciation) = $1,000• Deemed Tangible Income Return• 10% x $1,000 = $100• GILTI = $300 - $100 = $200• GILTI is a separate FTC Basket• US Corporation gets 50% deduction• US Corporation gets 80% of FTCs• ETR on GILTI income = 13.125%• If foreign tax rate > 13.125% , no additional US tax on GILTI Income

• CFC Tested Income = $300• QBAI = $0• Deemed Tangible Income Return• 10% x $0 = $0• GILTI = $300 - $0 = $300• No FTCs available• ETR on GILTI income = individual tax rate• Section 962 election may be available

>50% >50%

• For a US corporation, the US tax rate on GILTI income may be lower than the tax rate on US source income (21% corporate rate versus 13.125% GILTI effective rate).

• For a US corporation, a local income tax rate on its CFCs in excess of 13.125% eliminates any additional tax liability related to GILTI. However, US tax compliance is not eliminated.

• No GILTI exposure exists if the aggregate net tested income from CFCs is equal to or less than 10% of the qualified business assets regardless of the foreign tax rate.

• GILTI inclusion generates PTI that can be distributed tax free thereafter.

• Section 962 election may be available allowing individuals to elect to be taxed on GILTI income as a corporation.


(GILTI) – Observations

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• Proper calculation of CFC’s earnings & profits (CFC tested income) is now mandatory.

• Tax compliance (forms 5471, 8858, 8865) will take more time.

• Even though DRD eliminates taxation of foreign dividend income for US corporations, it will still be necessary to calculate the amount of the dividend and present the offsetting DRD.

• Due to implementation of the foreign dividend received deduction for US Corporations, GILTI, Subpart F and 956 are no longer anti-deferral provisions. They turn non-taxable foreign sourced income into taxable income.


(GILTI) – Compliance Considerations

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• US corporations are allowed a new deduction equal to the sum of:– 37.5% of Foreign Derived Intangible Income (FDII), and

– 50% of Global Intangible Low Taxed Income (GILTI) and the corresponding Section 78

Gross-up on GILTI

– For taxable years of domestic corporations beginning after December 31, 2025, the

percentages are changed to 21.875% for FDII and 37.5% for GILTI.

• The deduction is capped at the taxable income of the US corporation (can’t go negative).

Foreign Derived Intangible Income

(FDII) – Section 250

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• A domestic corporation’s FDII is the amount that bears the same ratio to the “deemed intangible income” of such corporation as the “foreign-derived deduction eligible income” of the corporation bears to the “deduction eligible income” of the corporation.

• The calculation of “deemed intangible income” is the same as the GILTI calculation but applied to the US corporation instead of a foreign corporation.



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FDIIForeign-derived deduction eligible income

Deduction eligible incomeDeemed Intangible Incomex=


(FDII) – Formula

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FDII

Foreign-Derived Deduction Eligible Income: Gross income from property sold to non-US persons for use outside the US, or services

provided to any person not located in the US (not including certain items of gross income)

Deduction Eligible Income: Gross income (not including certain items of gross income) minus

properly allocable deductions

Deduction Eligible Income

x= - 10% of QBAI

Deemed Intangible IncomeForeign Ratio

Deemed Tangible Income Return

• Deduction Eligible Income – equal to the excess of the domestic corporation’s

gross income (determined without regard to certain amounts) over the

deductions properly allocable to such gross income.

• Items excluded from gross income:

1. Any amount included in gross income under Section 951(a)(1) – tradition Subpart F income

2. GILTI income

3. Financial services income

4. Dividends from CFCs of the domestic corporation

5. Domestic oil and gas extraction income

6. Foreign branch income



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• Foreign-derived deduction eligible income – Deduction eligible income which

is derived from either:

– property sold (or leased, licensed, or exchanged) to non-US persons for use, consumption,

or disposition outside the US; and

– Services provided to any person, or with respect to property, located outside the US.

• There are special rules for related party transactions

• Property or services provided to unrelated domestic intermediaries do not qualify, even if a foreign sale/use ultimately arises.



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• Deemed Intangible Income – Equals the excess of deduction eligible income

over the “deemed tangible income return” of the corporation.

• Deemed tangible income return – Equals 10% of the corporation’s QBAI

• QBAI is determined under the same rules as GILTI except:

– It includes QBAI that produces deduction eligible income, instead of “tested income”; and

– It is determined without regard to whether the corporation is a CFC.



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Fixed AssetsTBV = $1,000

Key Considerations & Opportunities:

• The lower the fixed assets of the C Corporation, the higher the tax benefit.

• It doesn’t matter where the assets were manufactured.

• Tax planning and modeling may identify opportunities to enhance the deduction.

• FDII follows in a long line of export incentives that have been challenged by the WTO and eventually modified by the US. It appears likely foreign governments will challenge the law. Some already have. It is not clear whether the US will yield to pressure and make modifications as it has done in the past.


(FDII) – Example

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C Corporation (US)Deduction Eligible

Income = $300

Foreign Sales or Services

Income = $150

Other AssetsTBV =

$1,500

Total TBV of Assets = $3,500

Deemed “Tangible Income”$1,000 x 10% = $100

Deemed “Intangible Income”$300 - $100 = $200

“Foreign Derived” Income Ratio$150/$300 = 50%

FDII50% x $200 = $100

Deduction$100 x 37.5% = $37.50

QUESTIONS

AND

ANSWERS

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Today’s Presenters

Brittain Cunningham, CPASenior Manager, International Tax Services

Matt Martina, CPADirector, International Tax Services



https://www.linkedin.com/in/brittain-cunningham-55256a18/

https://www.linkedin.com/in/matt-martina-452a5b18/



Documents

International Tax - Weaver · December 31, 2017, and for tax years of US shareholders in which or ... any gross income excluded from foreign base company income or insurance income