Proposed Tax Law Impact on U.S. Taxation of International Earnings
While we don’t know if the tax law changes proposed will pass, we have highlighted the major provisions affecting U.S. taxation of international earnings that are common to both versions from the House and Senate. As Republican congressmen scramble to move the tax bill through the process towards the finish line there will be many changes to the original versions released earlier this month. However, the provisions outlined below are common to both versions and so we anticipate some iteration in a final reconciled bill.
What major changes can we expect to see if some version of the proposed law is actually signed into law?
- A shift from worldwide taxation to territorial taxation. This is achieved through the implementation of a participation exemption in the House version or a dividend received deduction in the Senate version. Effective January 1, 2018, income from a foreign distributed to a U.S. shareholder will be excluded from U.S. taxation. Note: the deemed repatriation of earnings under the various Subpart F income rules remains in place.
- To transition to the territorial taxation system, a one-time mandatory deemed repatriation of all previously untaxed earnings of foreign subsidiaries will occur in the last tax year prior to the year that begins after January 1, 2018. Under the House version, the law accumulated earnings that are held as liquid assets will be taxed at a 12% rate and earnings held as illiquid assets will be taxed at a 5% rate. Under the Senate version, liquid assets deemed repatriated will be taxed at a 10% rate and the illiquid assets deemed repatriated will be taxed at a 5% rate.
- A new category of Subpart F type income will be introduced. This new form of Subpart F takes aim at U.S. parented multi-nationals with offshore Intangible Assets. This provision effectively allows foreign subsidiaries to make a set return on their qualified business assets and treats income over that specific return on the qualified business assets as Subpart F. Both the House and Senate version provides for a reduced tax rate on this form of Subpart F.
- Additional limitations on related party interest expense when the interest is paid to a related non-U.S. party and the U.S. company is thinly capitalized.
- Introduction of tax on perceived base erosion transactions. In the Senate version, this is effectuated by disallowing certain deductions paid to foreign related parties and assessing a 10% flat tax rate on this alternative taxable income base. The House version effectuates this by charging a 20% tax on “applicable” payments to foreign related parties.
If you have any questions or would like to discuss this further, fill out the form below and someone from Withum’s International Tax Services Team will reach out to you.
Ask the Experts
|Chaya Siegfried, CPA, MST, Lead, International Business Tax
T (732) 759 6835
To ensure compliance with U.S. Treasury rules, unless expressly stated otherwise, any U.S. tax advice contained in this communication is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.