International Year-End Planning Considerations for Taxpayers

Continuing Global Impact from Recent Legislation and Regulations

U.S. corporations are generally subject to current taxation of the income earned by its foreign subsidiaries at a 10.5% tax rate (the “GILTI” tax regime)under the TCJA. Individuals are subject to tax on such income at their ordinary marginal tax rate. U.S. corporations are allowed a deduction against sales of goods or services produced in the U.S. to non-U.S. end users (the “FDII” deduction) –resulting in an effective tax rate of 13.125% on such income. This deduction is generally not available to individuals.

The Inflation Reduction Act, which was signed into law on August 16, 2022, authorized spending on green energy and climate change initiatives. The Act anticipates funding this spending through a corporate alternative minimum tax (CAMT), other taxes (e.g., the 1% stock buyback excise tax), and increased IRS enforcement. The Act did not contain any material provisions impacting the taxation of cross-border transactions.

The final foreign tax credit regulations released in 2022 significantly modified the rules around claiming foreign tax credits. The regulations modify the definition of creditable foreign taxes, as well as other items such as qualifying as an in-lieu of income tax.

Outside of the U.S., countries are enacting and implementing rules around “hybrid entities” and “hybrid payments” which may limit the deductibility of expenses in the local countries. These rules should be analyzed and reviewed annually.

Contact a member of Withum’s International Tax Services Team to start planning as year-end approaches.

International Year-End Planning Considerations for Taxpayers

  • Is your non-U.S. income subject to current taxation under the Global Intangible Low Taxed Income (GILTI) regime?
    • Have you considered whether you are eligible to exclude "high-taxed" income from GILTI?
    • If you are an individual, have you considered whether you should make an election to be treated as a corporation for GILTI purposes? An annual "962 election" may potentially decrease your inclusion under GILTI and may make tax credits available to reduce current U.S. tax due on such income.
  • Did you sell goods or provide services to non-U.S. end users, or vice-versa?
    • Have you considered whether your sales to non-U.S. end users qualify for the FDII regime? Current tax law provides a deduction for FDII -effectively reducing the U.S. tax rate on such income to 13.125%.
    • Have you considered any non-U.S. registration requirements or indirect tax (VAT/GST) collection obligations?
    • Have you gathered the appropriate documentation (i.e., Form W-8) from non-U.S. persons receiving payments from you or your company to ensure proper withholding tax has been applied?
  • Did you sell goods or provide services to a related party?
    • Do you have the required transfer pricing policies and documentation in place to support related party pricing?
    • Are you optimizing your global service supply chain to gain tax efficiencies?
  • Did you repatriate cash to the U.S. from a foreign subsidiary?
    • Have you considered whether such repatriation is eligible for the new dividends received deduction available to U.S. corporations?
    • Have you examined the impact of the final foreign tax credit regulations, which changes the definition a creditable foreign tax?
  • Did your organization adopt a remote work policy in response to evolving employee needs?
    • Have you considered whether employees located in non-U.S. jurisdiction(s) have created a taxable presence for your organization in such jurisdiction(s)?
    • Employees may be eligible for foreign-earned income exclusion if they are U.S. persons.
2022 Year-End Tax Planning Resources

Withum’s Year-End Tax Planning Resource Center is a one-stop-shop for annual tax planning tips for individuals and businesses, legislative and regulatory changes, COVID impacts and other tax-saving opportunities.

Taxation of the Digital Economy

On October 28, 2021, 136 countries agreed to implement a global minimum tax of 15% – effectively ending decades of tax competition aimed at luring foreign investment with low-income tax rates.

  • The agreement would only impact large multinational companies with $750 million or more in worldwide sales.
  • Initially, implementation of the agreement was targeted for 2023. However, few countries have enacted the local legislation required to implement these minimum taxes.
  • Many countries have also enacted indirect taxes (VAT/GST) on digital services that are delivered to local customers. Applicability thresholds are generally much lower (e.g., 10,000 Euros of sales), and liability for such tax may extend to other participants of the service supply chain.

From recent legislation and regulation updates to top considerations for international tax planning and the everchanging digital economy, Withum’s International Tax Services can help you with your year-end planning needs.

Contact Us

Reach out to Withum’s International Tax Services Team for guidance as year-end approaches.

Disclaimer: No action should be taken without advice from a member of Withum’s Tax Services Team because tax law changes frequently, which can have a significant impact on this guide and your specific planning possibilities.