TCJA Favors Corporations With Outbound Tax Planning – Part 2

discussed that The Tax Cuts and Jobs Act (“TCJA”) imposed international tax law changes which relate directly to U.S. corporations doing business outside the United States.

 

Despite these shifts toward partial territoriality, the new law retains the Subpart F rules that apply to tax currently certain income earned by CFCs (i.e., foreign corporations that are more than 50% owned by 10% U.S. shareholders (under the new law, both the 10% and 50% standards are measured by reference to either vote or value), as well as introducing a new category of income puzzlingly called “global intangible low-taxed income” (GILTI), though it has almost nothing to do with income from intangibles.

GILTI will include nearly all income of a CFC other than ECI, Subpart F income (including Subpart F income that is excludible under the Section 954 (b)(4) high-tax exception), or income of taxpayers with very significant tangible depreciable property used in a trade or business.The GILTI tax, imposed under Section 951A, applies to U.S. shareholders (both corporate and individual) of CFCs at ordinary income tax rates.

U.S. C corporations that are shareholders of CFCs, on the other hand, are entitled under new Section 250 to deduct 50% of the GILTI inclusion, resulting in a 10.5% effective tax rate on such income.

Additionally, such corporate shareholders are permitted to claim foreign tax credits for 80% of the foreign taxes paid by the CFC that are attributable to the relevant GILTI inclusion.  Accounting for the 50% deduction and foreign tax credits, if any, a corporate U.S. shareholder’s GILTI inclusion that is subject to a rate of foreign income tax of at least 13.125% should result in no further U.S. federal income tax being due.

In addition to the above GILTI provisions, Section 250 also permits U.S. corporations to deduct 37.5% of “foreign-derived intangible income” (FDII), resulting in an effective U.S. federal income tax rate of 13.125% on such income. FDII is the portion of the U.S. corporation’s net income (other than GILTI and certain other income) that exceeds a 10% rate of return on the U.S. corporation’s tangible depreciable business assets and is attributable to certain sales of property (including leases and licenses) to foreign persons or to the provision of certain services to any person located outside the United States. 

 

Now as reported by Reuters, the corporate tax cut enacted in the Tax Cuts and Jobs Act (TCJA; P.L. 115-97, 12/22/2017) was in part designed to help dissuade U.S. companies from moving profits overseas, but may instead make the practice a lot more rewarding. Take AbbVie Inc. is a case in point.  Its Chief Executive, Richard Gonzalez, told investors earlier this year that because of the change to a territorial system, whereby only profits reported by domestic subsidiaries face U.S. tax, the U.S. drugmaker expects its tax rate to fall to 9% this year from around 22% in recent years.