International Year-End Planning Considerations for Taxpayers

Have you reviewed and updated your international operational, financial and tax strategies for 2021? With all of the changing regulations and laws surrounding international reporting and compliance, here are a few of items to be aware of as you prepare for your 2021 year-end.

  • Is your non-U.S. income subject to current taxation under the Global Intangible Low Taxed Income (“GILTI”) regime?
    • Have you made an election to exclude “high-taxed” income from GILTI?
    • Have you made an election to be treated as a corporation for purposes of GILTI, thereby potentially increasing the availability of tax deductions and foreign ta credits?
  • Did you sell goods or provide services to non-U.S. end users?
    • Have you explored whether a deduction under the foreign derived intangible income (“FDII”) regime may be available to reduce the effective tax rate on such income to 13.125%?
  • 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 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?
  • Did your organization have to adopt a remote work strategy in response to COVID-19?
    • 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.

Global Impact From TCJA Regulations and Proposed Legislation

  • Under the TCJA, 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). 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.
  • Under the Biden Administration’s Green Book released May 28, 2021, the GILTI tax rate would increase to 21% (assuming a corporate income tax rate of 28%) and the FDII deduction would be eliminated.
  • Under the Senate Finance Committee’s draft legislation released August 24, 2021, GILTI would be calculated on a country-by-country basis and apply only to low-tax countries. The FDII deduction would be based on certain types of domestic income (as opposed to foreign deemed intangible income).
  • Under the House Ways and Means Committee’s reconciliation legislation released September 13, 2021, the GILTI tax rate would increase to approximately 17.4% (assuming a corporate income tax rate of 26.5%). GILTI would be calculated on a country-by-country basis, and losses of foreign subsidiaries could be carried forward to future tax years’ GILTI computation. The FDII deduction would decrease – resulting in an effective tax rate of approximately 20.7%.

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.
  • While implementation of the agreement is targeted for 2023, the October 8 agreement marks a watershed moment in cooperation among countries to equalize global ta rates and shift toward market-based taxation. The agreement should also bring an end to the implementation of unilateral digital services taxes and retaliatory import tariffs.

Year-End Planning Resources

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