How The New Tax Law Impacts U.S. Businesses With Outbound Operations

U.S. businesses with outbound operations might wonder how the Tax Cuts and Jobs Act changes the complex international tax landscape. Some businesses can expect to pay a new transition tax while learning to navigate a newly established quasi-territorial tax system, in addition to taking a new income category and deduction into account.

Many of the new tax law’s provisions are intended to benefit domestic corporations and discourage U.S. businesses from taking their operations to lower-taxed jurisdictions. U.S. taxpayers may find that structures that were once efficient from a U.S. tax perspective should now be reconsidered under the tax law’s international business provisions.

To help you save time as you research its implications, we selected the top four tax law changes impacting U.S. businesses with outbound operations:

Tax change #1: Quasi-territorial tax system replaces worldwide taxation system

The tax law establishes a new quasi-territorial tax system for U.S. businesses with outbound operations, replacing the former worldwide taxation system taxing business income regardless of where it was generated. This quasi-territorial tax system eliminates or minimizes taxes on offshore earnings U.S. businesses return to the U.S., providing businesses an incentive to bring profits back to the U.S.

Note: The quasi-territorial tax system’s benefits are not extended to Subchapter S corporations, partnerships or individuals.

Tax change #2: New transition tax on accumulated foreign earnings and profits

The tax law imposes a new transition tax on accumulated foreign earnings and profits that were not previously subject to U.S. taxes. This one-time tax is applicable regardless of whether the foreign corporation in question actually distributed funds to the U.S. taxpayer or owner.

The one-time transition tax applies to U.S. shareholders of controlled foreign corporations (CFCs), including partners in partnerships and S corporation shareholders. CFCs with deferred foreign income and non-CFCs with at least one 10% Subchapter C corporation shareholder are also subject to the transition tax.

  • S. C corporation shareholders are subject to a 15.5% tax rate for cash and cash equivalents and 8% tax rate for noncash assets.
  • S. individual shareholders are subject to a 17.5% tax rate for cash and cash equivalents and 9.05% for noncash assets.

Taxpayers subject to this one-time transition tax can elect to pay the transition tax in installments across 8 years:

  • 8% of taxes paid in years 1-5
  • 15% of taxes paid in year 6
  • 20% of taxes paid in year 7
  • 25% of taxes paid in year 8

Subchapter S corporations existing since December 21, 2017 can defer payment of the transition tax free of interest until a triggering event occurs, (i.e., the S corporation ceases business, is sold or liquidated). Once a triggering event takes place, the S corporation can pay the tax immediately or pay in installments across 8 years. In the case of liquidation, this 8-year installment election is only available with special consent from the secretary.

Tax change #3: Global Intangible Low-Taxed Income, the new foreign income category

The tax law also introduces a new CFC foreign income category: Global Intangible Low-Taxed Income (GILTI). GILTI requires U.S. shareholders who own 10% or more of a CFC to pay a minimum tax on income generated by the CFC.

GILTI includes most of a CFC’s business income, reduced by 10 percent of the adjusted tax basis of the CFC’s depreciable tangible personal property (i.e., office furniture, equipment and machinery) and by interest expenses.

GILTI imposes a significantly higher tax rate on individual U.S. shareholders of CFCs than on Subchapter C corporation shareholders. If a Subchapter C corporation owns the CFC, the GILTI inclusion will be subject to a reduced effective rate of 10.5%, where 80% deemed paid foreign tax credit may be claimed. Note that Subchapter C corporation shareholders are entitled to a 50% deduction of the GILTI inclusion. However, if a U.S. individual shareholder owns the CFC, the GILTI inclusion will be taxed at a 37% rate. Individual shareholders can’t claim a foreign tax credit.

Tax change #4: New deduction for foreign-derived intangible income

The tax law introduces the foreign-derived intangible income (FDII) deduction. The deduction applies to income earned from goods sold to non-U.S. citizens for foreign use and services provided to a person or property outside the U.S.  It is only applicable to Subchapter C corporations, and the provisions provide a deduction of 37.5% for FDII.

Please note that this list is not all-inclusive; other tax changes may affect your international business as well. U.S. taxpayers operating outside the U.S. through foreign corporations should consult their tax advisors to take appropriate actions and plan accordingly. Please reach out to me or another Kaufman Rossin professional with questions on how these tax changes might impact you.

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