Under the new tax changes for The Tax Cuts and Job Act (TJCA) there were several new provisions that impact US companies performing business internationally. Below are few selected key provisions.
Under the Foreign Derived Intangible Income, or FDII, a deduction is created for certain foreign income earned by U.S. companies. This only applies to U.S. C-corporations with either a U.S. or foreign parent with an incentive to use U.S. workers. In result, this creates a preferential rate of 13.125% on qualifying foreign income, or QFI. QFI includes income derived from sale of property to foreign sources and, also, includes income from services performed for foreign sources by a U.S. company, not through a foreign branch. For example, if the FDII is $1,000, the tax on the FDII is $131.25 rather than $210.
Global intangible low-taxed income, or GILTI, creates a minimum annual tax on controlled foreign corporations operating in low taxing countries. This applies to all U.S. owners of foreign GILTI companies including C-corporations, S-corporation, LLC, and even individuals. If a foreign country’s tax is above 13.125% then in general there’s no GILTI. However, if a foreign country’s tax rate is below 13.125% then this tax will apply. Assume a country with 0% tax rate then the U.S. parent will pay 10.5% GILTI tax which will be reported and paid with the US tax return. This discourages U.S. companies from operating in low or no tax countries.
Finally under the new territorial tax system a US C-corporation only can exclude income earned by its foreign subsidiaries which is not subject to Subpart F income or GILTI tax. For example, assume a U.S. C-Corporation has 100% ownership in a foreign entity and generates $1,000 profit with taxes of $150. The net cash of $850 can be repatriated back to the U.S. tax free as 100% dividend exclusion. The U.S. C-corporation then distributes the $850 to its individual shareholders who only pay dividend rate tax of 23.8% federal plus state taxes. This 100% foreign owned company dividend exclusion does not apply to U.S. parent companies who are S-corporation or LLC’s as well as individuals.
To discuss more about your international tax situation, please contact Hani Sharestan at (949) 910-2727.