The landscape of U.S. corporate foreign operations has undergone significant changes due to the Tax Cuts and Jobs Act, bringing forth a host of implications for businesses conducting their affairs through controlled foreign corporations (CFCs). In this comprehensive analysis, we delve into the nuanced alterations, focusing on Subpart F, Global Intangible Low-Taxed Income (GILTI), the Base Erosion and Anti-Abuse Tax (BEAT), the Dividend Exemption/Transition Tax, and the Foreign Derived Intangible Income Deduction.
Subpart F Expansion
Subpart F, designed to counteract profit-shifting to low-tax jurisdictions, saw an expansion in its reach under the Tax Cuts and Jobs Act. The definition of a U.S. shareholder was broadened to include those owning 10% or more of the value of a foreign corporation's stock, not just those with 10% or more of the voting stock. Consequently, this expanded definition subjects a wider range of U.S. persons to the anti-abuse provisions of Subpart F. Ownership tests have also been modified to consider stock owned directly, indirectly, and constructively.
Global Intangible Low-Taxed Income (GILTI)
Upon determining a CFC's Subpart F income, U.S. shareholders now face an additional layer in the form of the tax on Global Intangible Low-Taxed Income (GILTI). This tax imposes a minimum tax on specific low-taxed income, with a deduction of 50% for 2018. U.S. shareholders can also avail themselves of a foreign tax credit up to 80%. This mechanism ensures that only income subject to an effective tax rate below 13.125% results in a GILTI inclusion.
Dividend Exemption/Transition Tax
The Tax Cuts and Jobs Act introduces a significant change allowing U.S. shareholders to claim a 100% dividend received deduction for foreign-source dividends from a CFC. This exemption, however, comes with a transition tax, requiring U.S. shareholders to pay a one-time tax on previously untaxed foreign earnings of the CFC. Cash and cash equivalents are taxed at 15.5%, while other earnings face an 8% tax rate. An election is available to pay the transition tax in eight installments over eight years.
Base Erosion and Anti-Abuse Tax (BEAT)
Another facet of tax law changes is the introduction of the Base Erosion and Anti-Abuse Tax (BEAT). This minimum tax on U.S. corporations pertains to deductible payments made to related foreign entities. The BEAT amount, calculated as a percentage of modified taxable income, mandates corporations to pay the excess amount as the minimum tax if it surpasses their regular corporate tax liability. Deductible payments to a CFC are added back in calculating a taxpayer's modified taxable income.
Foreign Derived Intangible Income Deduction
The Foreign Derived Intangible Income Deduction seeks to incentivize U.S. corporations to retain their intangible assets within the country. This deduction allows U.S. corporations to claim a deduction for a portion of their income derived from exporting products tied to intangible assets held in the U.S. The deduction amount is 37.5% for years preceding 2026 and is exclusive to C Corporations that are not Real Estate Investment Trusts (REITs) or Regulated Investment Companies (RICs).
Navigating the evolving landscape of U.S. corporations' foreign operations demands a comprehensive understanding of the intricate tax implications introduced by the Tax Cuts and Jobs Act. From the expanded reach of Subpart F to the intricacies of GILTI, BEAT, the Dividend Exemption/Transition Tax, and the Foreign Derived Intangible Income Deduction, U.S. shareholders must be cognizant of these changes.
Tara Fisher, with over 15 years of experience in international tax, provides insights into the profound impact of these tax law changes on U.S. persons investing and conducting business abroad. As businesses adapt to this altered terrain, a proactive approach to understanding and addressing these implications is paramount for sustained success in the global arena.