One of the major changes under the Tax Cuts and Jobs Act is the shift to a more territorial tax system. While most of the world is already on a territorial tax system, the United States has been doing its own thing taxing U.S. corporations on their worldwide income. Under the previous law, the U.S. would tax worldwide income when brought back home to the U.S. The old law discouraged these taxpayers from bringing earnings back to the U.S. Under the new law, corporations are not going to be taxed on income earned abroad in the same way. This new law will apply to corporations after December 31, 2017.
To transition to the new law, there will be a one-time tax for the accumulated earnings and profits (E&P) in non-flow through type corporations. The transition tax will be 15.5% on the portion of E&P comprised of cash and cash equivalents and 8% tax on the remaining E&P. This tax will be applied in the last taxable year beginning before January 1, 2018, however, the taxpayer may elect to pay this tax over an eight-year period.
Whilst there will be exceptions to a United States shareholder having to pay U.S. tax on offshore earnings under the new law, the new act will force many U.S. owners of foreign corporations to pay tax on certain foreign income even though such income was not repatriated. The U.S. wants to prevent multinational corporations from going to a low or no-tax jurisdiction for purposes of avoiding tax, so a few provisions have been put into place. One piece of this will be a minimum tax on global intangible low-taxed income (GILTI). Second, there will be another new tax called BEAT, or the base erosion and anti-abuse tax. The BEAT is essentially an AMT-type tax meant to discourage large corporations from using related party transactions to pass profits out of the U.S.
The new law will allow a deduction for foreign-derived intangible income (FDII), which is meant to encourage domestic corporations to produce more locally and export property or services for consumption abroad.
There are many moving parts to the new law. This is only a brief overview, so be sure to consult with a qualified tax advisor on all your tax compliance needs.
Jill A. Helm, CPA