10 things international groups need to know about U.S. tax reform

The recently enacted Tax Cuts and Jobs Act of 2017 (TCJA) is the most comprehensive U.S. tax legislation in over 30 years. The changes to U.S. international tax law are far-reaching.

  • 21% corporate tax rate - Now in force and more in line with international norms but still not enough to make the U.S. an attractive holding company jurisdiction, given other aspects of U.S. tax law.
  • New 10.5% tax on "global intangible low taxed income" (GILTI) of CFCs - But GILTI doesn't need intangibles or low taxes! Just needs profits greater than a 10% return on the CFC's tangible assets.
  • Not a full participation exemption - Dividends from subsidiaries are now exempt if paid to U.S. corporate shareholders but capital gains on the sale of subsidiaries are not.
  • Transition Tax - Accumulated overseas earnings of subsidiaries taxed at 15.5% on cash or cash equivalents; 8% on the rest (at higher rates if the U.S. shareholder is an individual). This applies if the subsidiary is a CFC or if it has a 10% or more U.S. corporate shareholder. It also applies whether or not the subsidiary actually repatriates the earnings. Pre-U.S. acquisition earnings excluded.
  • 100% expensing of business assets - Covers any asset depreciable over 20 years or less. Big incentive to have asset rather than stock acquisitions.
  • Limit on interest deductibility - 30% x tax adjusted EBITDA limit.
  • Base erosion and anti-abuse tax (BEAT) - The new tax on large multinationals making sizeable deductible payments (with some exceptions) to foreign affiliates. Complex and currently unclear in a number of respects. Supply chains need to be carefully analysed as economically similar transactions can give different results.
  • NOLs less valuable - Post-2017 NOLs can be carried forward indefinitely BUT can only offset 80% of income and no carry back.
  • Non-U.S. subsidiaries now the better option - The new dividend exemption means non-US subsidiaries (even with GILTI) are more tax efficient than disregarded entities and branches for U.S. groups.
  • U.S. businesses may benefit from sales to non-U.S. customers - U.S. corporations get reduced rates on "foreign derived intangible income" (FDII), a move which is causing international controversy.

Click here for a more detailed look into selected reforms to the international tax system and how U.S. corporations and individuals should start to consider adapting their tax planning.

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