CALIFORNIA SOCIETY OF CPAS ST ANNUAL TAX INSTITUTE ... Taxation...• Corporate shareholders also permitted to use up to 80% of foreign tax credits against GILTI – §78 gross-up

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CALIFORNIA SOCIETY OF CPASSAN DIEGO 21ST ANNUAL TAX INSTITUTE

DECEMBER 7, 2018

International Taxation UpdateAfter the Tax Cuts & Jobs Act

Jon P. Schimmer, J.D., LL.M, CPAProcopio, Cory, Hargreaves & Savitch LLP525 B Street, Suite 2200San Diego, CA 92101Direct dial: 619.525.3805Direct fax: [email protected]

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1© 2018 Procopio, Cory, Hargreaves & Savitch LLPDOC #3495272

Topics

• Overview

• Corporate Tax Rate

• Participation Exemption for Dividends from Foreign Subsidiaries

• One-Time Tax on Accumulated Offshore Earnings (Section 965 Transition Tax)

• Modified Subpart F/CFC Regime

• Minimum Tax on Foreign Earnings of US-Based Multinationals (GILTI)

• Taxation of Foreign-Derived Intangible Income (FDII)

• Other Important International Tax Changes

• Current Offshore Compliance Options

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Tax Cuts and Jobs Act - Overview

• On December 22, 2017, President Trump signed into law H.R. 1, informally known as the Tax Cuts and Jobs Act

• Most comprehensive tax legislation in a generation, changes key features of U.S. tax law, including sweeping international changes

• Necessitates a careful review of many existing cross-border business structures and financing arrangements

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21% Corporate Tax Rate

• The Act reduces the corporate income tax rate (§11) from 35 percent to flat 21 percent (all brackets and graduated rates eliminated)

• Effective for taxable years beginning after December 31, 2017• The Act also repeals the separate tax rate applicable to personal service

corporations and eliminates the corporate alternative minimum tax • Centerpiece of the tax reform plan and is intended to have significant

beneficial effects on the U.S. economy• The new statutory rate is also designed to be more competitive with the

corporate tax rates of other countries

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Participation Exemption for Dividends from Foreign Subsidiaries (§245A)

• Hybrid territorial system

• 100% percent deduction for dividends received by a U.S. corporate shareholder from a 10%-owned foreign corporation (other than a PFIC)

• Must be paid out of the foreign-source portion of earnings

• 1-year holding period for subsidiary stock

• No foreign tax credits may be taken with respect to amounts for which a deduction is taken

• Reduces basis in subsidiary shares for purposes of determining loss on a disposition, but not for purposes of determining gain

• Applies to CFC sale proceeds recharacterized as dividends under §1248

• Proposed Regs: applies to §956 inclusions (earnings invested in U.S. property)

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Transition Tax (§965)• The Act imposes a mandatory one-time transition tax under §965 on U.S. shareholders of

certain foreign corporations for post-1986 accumulated E&P

• Applies to U.S. persons (individual and corporate shareholders) with respect to foreign corporations: (i) in which they own at least 10 percent of the voting power (directly or through attribution; and (ii) which are either CFCs or have at least one U.S. corporation that owns 10 percent or more of their voting power (directly or through attribution)

• Corporations (and §962 elections): 15.5% rate on aggregate foreign cash positions, and 8% otherwise, and reduced foreign tax credits are available

• Individuals (no §962 election): 17.5% rate on aggregate cash position, and 9% otherwise, and no foreign tax credits

• Election to pay over 8 years (back-loaded), and acceleration events

• Inclusion amount treated as previously taxed income

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Modified Subpart F / CFC Regime

• As a general matter, the Subpart F/CFC rules remain• The Act does not repeal §956• The Act expands the definition of “U.S. shareholder” to include any U.S.

person that owns 10 percent or more of the vote or value of a foreign corporation

• The Act repeals §958(b)(4) so that stock owned by a foreign person may be attributed to a US person (downward attribution) for CFC testing

• The Act eliminates the requirement that a foreign corporation be a CFC for an uninterrupted 30 days before Subpart F inclusions apply

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Minimum Tax on Foreign Subsidiary Earnings (GILTI)

• Pursuant to new §951A, a 10% U.S. shareholder of a CFC must include in income for a taxable year its share of the CFC’s “global intangible low-taxed income” (GILTI)

• The GILTI inclusion applies for taxable years of CFCs beginning after December 31, 2017

• Although the Act refers to “intangible income,” the tax is formulaic and applies to any form of income in excess of a fixed return on certain tangible assets

• GILTI for the year generally equals (i) the aggregate net income of the CFC other than Subpart F income reduced by (ii) 10% of the CFCs’ aggregate adjusted basis in tangible depreciable business assets

• The Act introduces new §250, which provides U.S. corporate shareholders a deduction against taxable income equal to 50% of the taxpayer’s GILTI — results in an effective tax rate of 10.5% on GILTI for corporate taxpayers

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GILTI, cont’d• Corporate shareholders also permitted to use up to 80% of foreign tax credits against GILTI

– §78 gross-up based on 100% of associated foreign taxes

– Unused foreign tax credits do not carry forward or back for GILTI purposes

• The Act creates a separate basket for those taxes to prevent them from being credited against U.S. taxes on the U.S. shareholder’s other income

• Corporate shareholder: generally no GILTI tax liability if CFC tax rate in foreign jurisdiction is at least 13.125%, as 80% of those foreign taxes would fully offset the 10.5% GILTI tax

– Expense allocations to GILTI basket may limit shareholder’s ability to fully use its foreign tax credits, thus GILTI tax may apply

• Individual shareholders subject to GILTI tax at ordinary income rates with no 50% deduction no foreign tax credits

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Taxation of Foreign-Derived Intangible Income (FDII)

• The Act provides a deduction under new §250 for U.S. C corporations of 37.5% of their “foreign-derived intangible income” (FDII)

– Deduction results in effective tax rate on FDII of 13.125%

• Complex calculation, must determine the following:

– Deduction eligible income (DEI), which is gross income without regard to Subpart F or foreign branch income, less allocable deductions;

– Foreign-derived deduction eligible income (FDDEI), which is foreign portion of DEI (sales of products and services abroad);

– Deemed intangible income (DII), which is the excess of DEI over 10% of the aggregate adjusted basis in tangible depreciable business assets;

– FDII, which is DII multiplied by the ratio of FDDEI over DEI

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FDII, cont’d

• Beneficiaries are U.S.-based corporate exporters of goods and services with no CFC ownership

– Particularly for technology company with high margins and limited tangible business assets

• GILTI and FDII rules may create incentive for U.S. corporate taxpayers to minimize U.S. based tangible business property and maximize CFC-owned tangible business property

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Income of CFCs

• Generally speaking, a CFC now will earn three basic categories of income:

– (i) Subpart F income, generally subjecting corporate U.S. shareholders to a 21% tax rate with foreign tax credit;

– (ii) routine returns of CFCs on tangible property, generally exempt from U.S. tax for corporate U.S. shareholders; and

– (iii) GILTI, generally subjecting corporate U.S. shareholders to a 10.5% tax rate

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Other Important Changes

1. Base Erosion and Anti-Abuse Minimum Tax (BEAT) for large C corporations

2. §367 exception eliminated for outbound transfers of active trade or business assets

3. Inventory now sourced solely to location of production activities

4. Statutory override of Grecian Magnesite decision

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Current Voluntary Compliance Programs

• Offshore Voluntary Disclosure Program expired September 28, 2018

• New Voluntary Disclosure Program announced in November 2018• Applies to offshore and domestic

• Applies to taxes other than income taxes (e.g., gift, excise)

• For taxpayers with potential criminal exposure

• Streamlined Filing Compliance Procedures• For nonwillful taxpayers who can make certification

• Delinquent FBAR Procedures

• Delinquent International Information Return Procedures

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STREAMLINED, cont’d

Streamlined Filing Compliance ProceduresCategory U.S. Person Living Outside the United States U.S. Person Living Inside the United States

Eligibility (a) Individuals who are U.S. citizens or lawful permanent residents (, “green card holders”): Individual U.S. citizens or lawful permanent residents (or estates of U.S. citizens or lawful permanent residents filing income tax returns on behalf of the decedent) may be eligible for the Streamlined Procedures if, in any one or more of the most recent three years for which the U.S. tax return due date (or properly applied for extended due date) is past, the individual: (i) did not have a U.S. abodeand (ii) the individual was physically outside the United States for at least 330 full days.

Individual U.S. taxpayers (or estates of individual U.S. taxpayers,) may be eligible for the Streamlined Procedures if: (1) they are not eligible for treatment as an individual living outside the United States; (2) they have previously filed a U.S. tax return for each of the most recent 3 years for which the U.S. tax return due date (or properly applied for extended due date) is past; and (3) they have failed to report the income from a foreign

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Streamlined Filing Compliance Procedures

Eligibility, cont’d (b) Individuals who are NOT U.S. citizens or lawful permanent residents (i.e., “green card holders”): Individuals (or estates of individuals) who are not U.S. citizens or lawful permanent residents may be eligible for his procedure if, in any one or more of the last three years for which the U.S. tax return due date (or properly applied for extended due date) is past, the individual did not meet the “substantial presence” test of IRC section 7701(b)(3)

financial asset and pay tax as required by U.S. law and may have failed to file an FBAR and such failures resulted from non-willful conduct.

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Streamlined Filing Compliance ProceduresRequired filings Original or amended returns (3 years),

FBARs (6 years)Amended returns (3 years), FBARs (6 years)

Taxpayer Certification Taxpayer required to certify that failure to report offshore accounts and related income was due to non-willful conduct

Taxpayer required to certify that failure to report offshore accounts and related income was due to non-willful conduct

Risk assessment No longer subject to an IRS high/low risk assessment; all submissions are subject to existing audit selection criteria

No longer subject to an IRS high/low risk assessment; all submissions are subject to existing audit selection criteria

Penalty terms Delinquency, accuracy-related, and FBARpenalties waived

5% miscellaneous Title 26 offshore penalty imposed; all other penalties waived

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Questions?

Thank you

CALIFORNIA SOCIETY OF CPAS ST ANNUAL TAX INSTITUTE ... Taxation...• Corporate shareholders also permitted to use up to 80% of foreign tax credits against GILTI – §78 gross-up

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