Andrew Mitchel LLC

International Tax Blog - New and Interesting International Tax Issues


Code §965: Individuals Recognizing the Deemed Repatriation in 2017 vs. 2018

2018-02-14

Pursuant to the new Tax Cuts and Jobs Act, individuals that own at least 10% of the stock of a “specified foreign corporation” will need to include in their gross income their share of the foreign corporation’s deferred foreign income.  Code §965(a).  A specified foreign corporation is any controlled foreign corporation (“CFC”) or other foreign corporation that has at least one U.S. corporation as a 10% shareholder.  Code §965(e)(1). 

The deemed repatriation occurs by way of a Subpart F income inclusion for the last taxable year of the foreign corporation that begins before January 1, 2018.  Thus, for a foreign corporation that has calendar year taxable year, the Subpart F income inclusion will occur on December 31, 2017.  For foreign corporations that use a fiscal year, the Subpart F income inclusion will occur on the last day of the fiscal year ending in 2018.

The deemed repatriation is taxed at preferential rates in the U.S.  U.S. corporations will generally be taxed at a 15.5% rate on their deferred earnings in the form of cash and other liquid assets.  All other deferred earnings will be taxed at an 8% rate. 

The “advertised” rates of 15.5% and 8% are reached by way of a deduction.  The deduction is based on the highest corporate tax rate at the time of the inclusion.  The highest corporate tax rate for 2017 is 35%, and for 2018 it is reduced to 21%.  A corporation that has the inclusion in 2017 would calculate the deduction as [1-(15.5/35)] or 55.71% in the case of cash.  Code §965(c)(2)(B).  Thus, an inclusion of $100 would have a deduction of $55.71, leaving $44.29 to be taxed at a corporate tax rate of 35%.  This makes the effective rate 15.5%.

Inclusion in 2017

Given that the rate equivalent percentages are keyed off of the maximum corporate tax rate, individuals may have effective tax rates on the repatriation that are lower or higher than the 15.5% and 8% advertised rates.

To illustrate, say that a U.S. resident individual owned 100% of a controlled foreign corporation that had $100 of deferred earnings, all in the form in cash.  The controlled foreign corporation used the calendar year as its tax year.  Consequently, the deemed repatriation / Subpart F inclusion would occur on December 31, 2017. 

The individual is subject to the highest tax rate for individuals in 2017, 43.4% (39.6% + 3.8% (net investment income tax)).  The individual would have a $100 Subpart F income inclusion and a deduction of [1-(15.5/35)] or 55.71%.  Thus, $44.29 of income would be subject to a tax rate of 43.4%, resulting in $19.22 of tax due.  The individual’s effective tax rate on the deemed repatriation is 19.22%, which is higher than the “advertised” rate on cash of 15.5%.

Inclusion in 2018

Now assume that the U.S. resident individual’s controlled foreign corporation did not use the calendar year as its tax year.  Instead, the controlled foreign corporation uses a fiscal year of March 31.  In this case, the deemed repatriation would occur on March 31, 2018, which is the last day of the foreign corporation’s tax year that begins before January 1, 2018.  The individual would then include the repatriation inclusion on his 2018 tax return.  We will assume that yet again the individual is subject to the highest rate of tax for individuals in 2018, which is 40.8% (37% + 3.8% (net investment income tax)). 

As in the above example, the individual’s Subpart F income inclusion would be $100.  However, the deduction will be much smaller in 2018.  This is because the deduction is based on the highest corporate tax rate in 2018, which is 21%, and our individual is subject to tax at a 40.8% rate.  Our deduction would be expressed as [1-(15.5/21)] or 26.19%.  The individual’s net inclusion would be $73.81, which would be subject to the rate of 40.8%.  This results in $30.11 of tax being due and is a 30.11% effective tax rate.

It is clear that the individual in our examples is significantly better off if he can recognize the deemed repatriation income in 2017 rather than 2018.  In fact, he can save nearly 10 percentage points on his effective tax rate by recognizing the repatriation income in 2017. 

Achieving the Lower 2017 Rate

The significant difference in effective tax rates for individuals is present at all income levels.  The balance of the foreign corporation’s cash and residual earnings does not matter; any individual that owns a controlled foreign corporation with a fiscal year should consider taking steps to cause the deemed repatriation inclusion to occur in 2017 instead of 2018.  The tax savings can be substantial.  Contact us today to understand your options for accelerating the income and deduction into 2017.

Tags: 965 Transition Tax, Other - Tax Cuts & Jobs Act

Update to Video: Global Intangible Low-taxed Income (“GILTI”)

2018-02-10

We have updated our YouTube video on GILTI, which we originally discussed here.  We had previously believed that GILTI would not apply to a controlled foreign corporation's income that was subject to a foreign tax rate of at least 18.9% (90% of the new U.S. corporate tax rate of 21%).  That was incorrect.  The foreign tax rate is only relevant to a very narrow exception to GILTI.  If a controlled foreign corporation had income that would be Subpart F income, and its U.S. shareholder made the high tax exception election (provided by Code §954(b)(4)), then that income is excluded from GILTI. 

We have updated our YouTube video to reflect this change.  The new version also points out that the impact of GILTI can be mitigated or even eliminated for individual U.S. shareholders by making a Code §962 election or by having the controlled foreign corporation be owned by a U.S. C corporation.

Tags: 951A GILTI, Other - Tax Cuts & Jobs Act, Other - Videos

TCJA Explanatory Video: Global Intangible Low-taxed Income (“GILTI”)

2018-01-02

Global intangible low-taxed income (“GILTI”) is a new type of income inclusion under the Tax Cuts and Jobs Act. Under the new GILTI rules, a U.S. shareholder of a controlled foreign corporation (“CFC”) must include in gross income for a taxable year its GILTI income in a manner generally similar to inclusions of subpart F income. GILTI means, with respect to any U.S. shareholder for the shareholder’s taxable year, the excess (if any) of the shareholder’s net CFC tested income over the shareholder’s net deemed tangible income return (“DTIR”). The shareholder’s net DTIR is an amount equal to 10% of the aggregate of the shareholder’s pro rata share of the qualified business asset investment (“QBAI”) of each CFC with respect to which it is a U.S. shareholder. The formula for GILTI, which is calculated at the U.S. shareholder level, is:

GILTI income = net CFC tested income – (10% x QBAI)

Today we have published a video that discusses how the GILTI income rules will apply in the circumstance of a U.S. citizen that owns 100% of a foreign corporation. The video can be viewed at our Youtube channel.

Tags: 951 Subpart F Income, 951A GILTI, Other - Tax Cuts & Jobs Act, Other - Videos

Tax Cuts and Jobs Act Explanatory Video: Code §965 Deemed Repatriation from Foreign Corporations

2017-12-21

Congress has passed the Tax Cuts and Jobs Act (“TCJA”) and President Trump is expected to sign the bill in the near future.  The TCJA is the most significant piece of tax legislation in the last 30 years, and it makes substantial changes to the taxation of international transactions. 

One key component of the TCJA is a deemed repatriation of earnings held in certain foreign corporations.  Code §965 will generally require “U.S. Shareholders” of “specified foreign corporations” to include in their income their share of the foreign corporation’s earnings that have not been subject to U.S. tax.  Deferred earnings in the form of cash and other liquid assets will be generally be taxed at a 15.5% rate in the U.S. and other earnings will be taxed at an 8% rate.  An election can be made to pay the U.S. tax over an 8 year period.

When the media discusses the deemed repatriation, it often does so in the context of large U.S. multinationals such as Apple and Google.  Consequently, many tax professionals are unaware of the breadth of the deemed repatriation, which will be applicable to many more taxpayers including individuals.  Individuals may need to address the deemed repatriation on their 2017 tax return.

Today we have published a video that discusses how the deemed repatriation will apply in the simple circumstance of a U.S. citizen that owns 100% of a foreign corporation.  The video can be viewed at our Youtube channel.

Tags: 951 Subpart F Income, 965 Transition Tax, Other - Tax Cuts & Jobs Act, Other - Videos