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
