Three International Tax Issues Impacting Healthcare
There are three hot topics in international taxation which may be dismissed as only applying to U.S. corporate taxpayers; however, these laws could reach beyond to U.S. healthcare entities with other foreign operations, including joint ventures and income from rights and royalties.
1) BEPS: Base Erosion Profit Sharing
The Organization for Economic Cooperation and Development (OECD), in a historic, multi-year initiative, issued guidelines for countries and companies regarding international tax schemes and structuring designed to move profits away from where economic value is created or earned and into low-tax jurisdictions. One of the provisions adopted by most OECD members involves country-by-country reporting of specific items and amounts such as revenue, profit or loss, capital and accumulated earnings, business asset location and number of employees. Multinational Business with more than $850 million in revenue are required to complete country-by-country reporting.
Since many countries do not recognize not-for-profit corporations and as such might consider donations (in cash and in kind) and payments for services by insurance companies as revenue, many not-for-profit organizations operating internationally will be required to comply with the OECD’s Country-by-Country Reporting under BEPS. Clearly, the requirements to report cannot be determined in a US-focused vacuum. Not-for-Profit entities will need to review the requirements for each country in which they operate to determine how revenue is defined and determined – leading to a conclusion as to if, when and where country-by-country reporting must be undertaken. In the US, country-by-country reporting was required for business years beginning on or after June 30, 2016, 6 months later than the start date for many other countries.
While not-for-profit entities are likely not involved in Base Erosion or Profit Shifting tax strategies (as they do not actually pay income tax), the reporting burden will still be very real. Additionally, the misinterpretation or disclosure of sensitive information (confidentiality, which is paramount – but hacking could still occur) could lead to unintended consequences: reputational injury if an entity is thought to be “not paying its fair share” of tax in specific jurisdictions.
Thinking forward, many non-OECD counties are considering requiring country-by-country reporting. Additionally, the OECD is likely to reduce the revenue threshold below the $850 million in future years.
2) FDII: Foreign-Derived Intangible Income
Introduced by the Tax Cut and Jobs Act of 2017 (TCJA) Foreign Derived Intangible Income (FDII) is a category of income that is not specifically traced to intangible assets; rather TCJA assumes a fixed rate of return on business assets and the residual income is the income deemed to be generated by the IP. Particularly, FDII is income that is more than 10% of a taxpayer’s Qualified Business Asset Investment or QBAI. A taxpayer’s QBAI are the assets used by the taxpayer in a trade or business that are depreciable under Section 167. Income in excess of 10% of the QBAI is the Deemed Intangible Income of that taxpayer and to the extent this income is foreign sourced it is the taxpayer’s FDII.
FDII earned by U.S. C corporations are taxed at the beneficial rate of 13.125%. This is a great incentive for C Corporations in the Healthcare, other services or technology industries – or any other industry that does not have significant amounts of fixed assets.
3) GILTI: Global Intangible Low-Taxed Income
Also introduced by The TCJA, Global Intangible Low Tax Income (GILTI) is a new category of income that is similar to SubPart F in that the income is deemed repatriated in the year earned. Conceptually it is essentially the opposite of FDII. GILTI is the income of a Controlled Foreign Corporation (CFC), reduced for certain adjustments such as U.S. Effectively Connected Income or other Subpart F income, that exceeds 10% of the CFC’s QBAI.
A corporation with GILTI receives a 50% deduction of GILTI and consequently pays an effective tax of 10.5% on its GILTI. An indirect foreign tax credit is allowed to reduce the GILT Income, but only 80% of the standard deemed paid credit is allowed, while the Section 78 gross is 100% of what the standard deemed paid credit.
GILTI has its own separate foreign tax credit limitation basket. Carrying forward excess foreign tax credits for GILTI is disallowed, consequently credits that aren’t used in the year of inclusion are lost.
Both the GILTI and FDII provisions are effective for tax years beginning after December 31, 2017.
What you can do to benefit from FDII and avoid the impacts of GILTI?
- Consider leaving Intellectual Property and other income-earning non-depreciable assets onshore to generate the beneficially taxed FDII
- Assess the impact of the new GILTI provisions, comparing the income earned by CFCs to the CFCs’ QBAI
- If significant amounts of GILTI are anticipated, restructuring should be considered including but not limited to possibilities such as using a C Corp structure in the U.S. or electing to treat the CFCs as Foreign Disregarded Entities
For questions or assistance regarding international healthcare tax issues, please contact a member of Withum’s International Services Group by filling out the form below.
|Kimberlee S. Phelan, CPA, MBA
International Tax Services Group
(609) 520 1188
|Chaya Siegfried, CPA
International Tax Services Group
(973) 898 9494