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International Tax & the TCJAF E B R U A R Y 2 2 , 2 0 1 8

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INTRODUCTIONSChris CliftonManaging DirectorInternational Tax Servicescclifton@bkd.com

TAX REFORM IN GENERAL

C Corporations

• Permanently reduced top marginal rate from 35 percent to flat rate of 21 percent

• Repealed alternative minimum tax

Pass-Through (Individual)

• Created new pass-through business deduction

• Only income effectively connected with conduct of trade/business within the U.S. is eligible for the pass-through business deduction

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INT’L TAX CHANGES IN GENERAL

Untaxed Accumulated Foreign Earnings

• 15.5 percent for cash & cash equivalents• 8 percent otherwise• Payable over eight years

Future Foreign Earnings

• Moved to territorial system with base erosion provisions

• 100 percent of foreign-sourced portion of dividendspaid by foreign corporation to U.S. corporate shareholder owning 10 percent or more of foreign corporation’s stock is exempt from U.S. taxation

• No foreign tax credit or deduction allowed for any foreign taxes paid or accrued with respect to any exempt dividend

DIVIDENDS RECEIVED DEDUCTION

Dividends Received Deduction – Example

C Corporation Individual/

S Corporation/Partnership

Taxable Income – 2018 100,000 100,000

Dividend from 10% Owned Specified Foreign Corporation

20,000 20,000

Dividend Received Deduction (20,000) 0

Net Taxable Income – 2018 100,000 120,000

Tax (FED Only) – Ordinary Income 21,000 44,400

Tax (FED Only) – Net InvestmentIncome Tax

0 760

Total Tax 21,000 45,160

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• Indirect FTC repealed due to enactment of foreign dividends received deduction (DRD)

• Dividends eligible for DRD are not foreign source income

• C corporations now eligible to claim DRD for qualifying dividends from foreign corporations received after December 31, 2017

• S corporation shareholders still subject to tax on foreign dividends under existing deferral regime

FOREIGN TAX CREDIT (FTC)

• Foreign branch income is now in separate FTC basket

• Sourcing now based entirely on production location

• Election to recapture “overall domestic loss” (ODL) in excess of 50% of domestic source income

FOREIGN TAX CREDIT (FTC)

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• Applies to all U.S. shareholders, including noncorporate shareholders

• Exception to new foreign DRD exemption regime with regard to foreign income earned by controlled foreign corporation (CFC) offshored intangible assets

• GILTI rules employ residual concept whereby extranormal foreign profits are presumed to be attributable to intangibles (vs. identifying offshored intangible assets & foreign income generated therefrom under current regime)

GLOBAL INTANGIBLE LOW-TAXEDINCOME (GILTI)

• Calculation of GILTI tax is complex

• C corporations can claim a deduction equal to 50% of the GILTI inclusion plus the foreign tax gross-up

• C corporations can also claim a deemed paid foreign tax credit for 80% of foreign taxes attributable to GILTI inclusion

GLOBAL INTANGIBLE LOW-TAXEDINCOME (GILTI)

GILTICFC

Income (generally)

10% x Adjusted

Basis Fixed Assets

Specified Interest Expense

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• Noncorporate shareholders should generally make an election under Section 962 to be taxed on GILTI & subpart F inclusions at corporate tax rates

• Without a §962 election, noncorporate shareholders would be taxed on GILTI inclusions at ordinary U.S. individual income tax rates with no GILTI deduction or indirect foreign tax credit

GLOBAL INTANGIBLE LOW-TAXEDINCOME (GILTI)

Global Intangible Low-Taxed Income Example

GLOBAL INTANGIBLE LOW-TAXEDINCOME (GILTI)

Corporation Individual

CFC Income 100,000 100,000

Interest Expense - -

CFC Net Income 100,000 100,000

Fixed Assets Adjusted Basis 120,000 120,000

Net Deemed Tangible Income Return 12,000 12,000

CFC Net Income 100,000 100,000

Net Deemed Tangible Income Return 12,000 12,000

Income Inclusion under §951A – GILTI 88,000 88,000

GILTI Deduction (44,000) -

Net GILTI Inclusion 44,000 88,000

Tax Due @ Max Rates 9,240 32,560

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• Foreign-derived deduction eligible income is profit from property sold or leased/licensed by U.S. corporation or services provided to foreign person or with respect to foreign-located property

• Applies only to C corporations

• Deduction for 37.5 percent of FDII

• Results in effective tax rate of 13.125 percent

• Deduction reduced to 21.875 percent for tax years beginning after December 31, 2025 (effective tax rate increases to 16.40625 percent for FDII)

FOREIGN-DERIVED INTANGIBLE INCOME (FDII)

FDII Deduction – Formula

FOREIGN-DERIVED INTANGIBLE INCOME (FDII)

FDII Deduction 37.5% FDII (income)

FDII

Foreign-Derived Eligible Income

Total Income

Net Income10% x Fixed Asset Basis

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• New minimum tax that applies to certain payments made to foreign-related entities

• Essentially a new alternative minimum tax having a broader taxable income base but lower tax rate than regular U.S. corporate tax

• Income base calculated without deductions for foreign-related party expenses, e.g., interest, royalties & management fees to extent such outbound expenses are exempt from U.S. withholding tax

• Controversy over whether only a markup on certain foreign-related party service fees must be added back or both the cost & markup components

BASE EROSION ANTI-ABUSE TAX (BEAT)

• Rate of tax• 5 percent for 2018• 10 percent for 2019–2024• 12.5 percent for 2025 & beyond

• Only applies to corporations with average annual gross receipts of ≥ $500 million & base erosion percentage ≥ 3 percent (2 percent for banks/securities dealers) other than

• S corporation• Regulated investment company (RIC)• Real estate investment trust (REIT)

• Compute gross receipts & base erosion percentage tests on combined basis for controlled groups

BASE EROSION ANTI-ABUSE TAX (BEAT)

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• Deemed repatriation tax imposed on non-previously taxed post-1986 accumulated foreign earnings of U.S. shareholders upon transition from existing deferral regime to new participation exemption regime

• Toll charge is intended to prevent pre-tax reform foreign earnings from escaping the pre-tax reform deferral regime

• Applies to both S & C corporations; however, S corporation can not claim indirect FTC

TOLL CHARGE TAX

• Tax due can be spread over eight-year period

• Effective date: last taxable year of the foreign corporation that begins before 1/1/2018

• Earnings & Profits are the GREATER of• E&P as of 11/02/2017 or • E&P as of 12/31/2017• Netting of E&P deficits allowed

• Applies regardless of movement of cash

• Ability to claim pro rata foreign tax credits for corporations• Same for individuals who make the §962

election

TOLL CHARGE TAX

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• S corporation shareholder payment deferral election

• May elect to defer payment of deemed repatriation tax indefinitely until triggering event

• Election appears to be available on a per-S corporation basis

• Applies with regard to shareholder’s net tax liability with respect to such S corporation determined under “with” vs. “without” rules of eight-year installment election as if only §965 subpart F income taken into account were from such S corporation

TOLL CHARGE TAX

• S corporation shareholder payment deferral election

• Triggering events• S corporation election terminated or

revoked• Liquidation or dissolution of S

corporation or cessation of S corporation business

• Shareholder transfer of S corporation shares of stock

• Distribution of deemed repatriation previously taxed income & S corporation sale of CFC shares are not triggering events

TOLL CHARGE TAX

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• Other considerations• Section 962 election for noncorporate

shareholders available to take advantage of 15.5 percent/8 percent rates & allow for deemed paid FTC

• Especially consider §962 election if S corporation intends to revoke S election effective 1/1/2018 as DRD may be available on distribution of §962 tainted PTI

• Pass-through entities treat portion of deemed repatriation subpart F income reduced by rate differential deduction as tax-exempt income that increases basis & S corporation AAA

TOLL CHARGE TAX

• Triggering events• Transfer of partial block of S corporation

shares is partial trigger to pay proportionate amount of deemed repatriation tax

• Transfer of S corporation shares not treated as triggering event if transferee enters into agreement with IRS to be liable for payment of deferred tax upon future triggering event

• Triggered payment of deemed repatriation tax from C corporation conversion or transfer of S corporation shares is eligible for eight-year installment payment election beginning in trigger year

TOLL CHARGE TAX

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Deemed Repatriation Toll Charge Tax – Example

TOLL CHARGE TAX

Accumulated E&P 2,000,000

Cash & Cash Equivalents 1,087,500

E&P Subject to 15.5% tax 1,087,500

Tax at 15.5% 168,563

E&P Subject to 8% tax 912,500

Tax at 8% 73,000

Total Taxes DUE 241,563

THINGS TO CONSIDER BEFORE MAKING OR REVOKING AN S ELECTION

• 20% pass-through deduction is only available for domestic income – income from foreign branches & foreign subsidiaries is not eligible

• FDII export benefit is only available for C corporations

• DISC is an efficient way to distribute C corporation profits to shareholders without double taxation

• Participation exemption on foreign subsidiary earnings is available only for C corporations

• Conversion to C corporation triggers deemed repatriation toll charge payment – consider maintaining parent company as S corporation with C corporation subsidiary to preserve shareholder deferral of toll charge payment

• Be careful of shareholder-level “overall foreign loss” (OFL) – conversion to C corporation can trigger gain on foreign assets to extent of shareholder-level OFL

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RECAP

New Concepts• Dividends Received Deduction

• Deemed Repatriation Tax

• GILTI (Income & Deduction)

• FDII (Deduction)

• BEAT (Anti-Abuse Minimum Tax)

TAKEAWAYS & PLANNING

Takeaways & Planning Opportunities• Migration to U.S. corporations for ownership of CFCs

(& other foreign entities)

• Repatriation tax & GILTI Inclusion: Individuals can make §962 election to claim deemed foreign taxes paid

• Need for E&P studies

• Entity classification planning strategies for U.S. companies & for U.S. ownership of foreign subsidiaries

• IC-DISC structures remain attractive

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Questions?

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The information contained in these slides is presented by professionals for your information only & is not to be considered as legal advice. Applying specific information to your situation requires careful consideration of facts & circumstances. Consult your BKD advisor or legal counsel before acting on any matters covered.

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CPE CREDIT

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Thank You!Chris Clifton | cclifton@bkd.com | 317.383.4032

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The information contained in these slides is for your information only, based on data available as of the date of the presentation & is not to be considered as tax or legal advice. Applying specific information to your situation requires careful consideration of facts & circumstances. We are under no obligation to update these slides if changes occur. Consult your BKD advisor before acting on any matters covered.