Ten months in and the Tax Cuts and Jobs Act (TCJA) continues to keep tax pros and businesses on their toes. When it comes to international tax provisions and cross-border transactions, there is plenty chew on.
The closure of the Offshore Voluntary Disclosure Program in September has only added to the chaos, says U.S. tax expert Alexey Manasuev—especially with Section 965 hogging the limelight in the wake of the latest IRS guidance. In his Eli Financial webinar, “Key International Tax Provisions of the Tax Cuts & Jobs Act,” Manasuev explains the impact of the 2017 tax bill on how global business owners should be structuring U.S. investments.
4 Provisions to Know
There are a host of international tax provisions get your head around, according to Thomson Reuters’ Tax & Accounting Blog:
- APB 23: If a foreign operation isn’t permanently reinvesting earnings, it may be required to provide a deferred tax liability. A proper APB 23 assertion avoids this, but the blog warns that, because of debt service requirements and covenants, companies may find it “difficult to demonstrate that foreign earnings are not needed in the US to meet current cash demands.” Be sure clients are documenting global cash sources and uses—or auditors and regulators may come sniffing around.
- IRC Section 6501(c)(8): Foreign information reporting is more important than ever. Be sure to complete Forms 5471, 8865, 8858, and 926 properly and completely.
- Permanent Establishment Risk: Check with your clients about their international activities. The business employees conduct outside of their country of employment can create a tax risk for the employer.
- Subpart F: Pay attention to passive income earned by a controlled foreign corporation. Now that section 954(c)(6), which excluded certain passive flows between such organizations, has expired, multinational organizations may no longer be able to manage global cash without a Subpart F inclusion.
Focus on Repatriated Profits
The TCJA maintains a hybrid system for deferring U.S. taxes on the profits of foreign subsidiaries until they are repatriated back into the U.S., Eric Toder from the Tax Policy Center explains.
The bill:
- Eliminates the tax on repatriated dividends that U.S.-based multinationals receive from their foreign subsidiaries;
- Introduces a low rate tax for the intangible profits of U.S. company subsidiaries located in low-tax foreign countries; and
- Enacts a one-time tax on past profits of foreign affiliates of U.S. companies.
“The TCJA’s international reforms are significant,” Toder writes. “Combined with the reduced corporate rate, they largely eliminate the incentive for US firms to accrue assets overseas, while seeking to protect the tax base from avoidance by both US and foreign-based multinationals.”
2 New Categories of Foreign Income
Curtis Best, writing for accountants Marks Paneth, adds that there are two new categories of income associated with foreign corporations:
- Foreign-derived intangible income: Income derived from sales of property to a foreigner for a foreign use; license of intellectual property for a foreign person for a foreign use; and services provided to a person located outside the U.S.
- Global intangible low-taxed income: Income earned by foreign corporations in which an American directly or indirectly owns at least 10 percent.
“Altogether,” writes Best, “this new tax regime creates a whole new tax landscape for foreign corporations, as well as major opportunities for the tax professionals who advise them.”
Clearly, there is a lot for tax pros and business owners to be aware of when it comes to cross-border transactions, says Manasuev. And with the tax year screaming to a close, now is the time to get a handle on those international tax provisions.
