[[wiki:contents:us_tax:cfcs]]
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wiki:contents:us_tax:cfcs [2018/12/31 22:37] – [Numerical Examples] karenwiki:contents:us_tax:cfcs [2019/03/16 17:21] – Adjusted example for allowance of §250 deduction karen
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-**Not sure this is right FIXME - don't approve edits FIXME ** 
- 
 This page describes US Tax rules that apply to **Controlled Foreign Corporations** (CFCs) This page describes US Tax rules that apply to **Controlled Foreign Corporations** (CFCs)
  
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 ^Plus Foreign Tax Paid (§78)  | 233|  | 233|  |  ^Plus Foreign Tax Paid (§78)  | 233|  | 233|  |
 ^Gross GILTI Inclusion  | 933| 700| 933|  |  ^Gross GILTI Inclusion  | 933| 700| 933|  |
-^§250 deduction  | 467|  |  |  |  +^§250 deduction  | 467|  |  467|  |  
-^Net GILTI increase to taxable income  | 467| 700| 933|  | +^Net GILTI increase to taxable income  | 467| 700| 467|  |
 |  |  |  |  |  |  |  |  |  |  |  |
-^Tax (21% for corporation, 37% indiv)  | 98| 259| 196|  |  +^Tax (21% for corporation, 37% indiv)  | 98| 259| 98|  |  
-^FTC (smaller of Tax or 80% FTC limitation)  | 98| 0| 187|  | +^FTC (smaller of Tax or 80% FTC limitation)  | 98| 0| 98|  |
 |  |  |  |  |  |  |  |  |  |  |  |
-^Net Increase to Tax  | 0| 259| 9| 0|+^Net Increase to Tax  | 0| 259| 0| 0|
 |  |  |  |  |  |  |  |  |  |  |  |
-^Increase in PTEP  |  700|  700|  9| 0|+^Increase in PTEP  |  700|  700|  0| 0|
 |  |  |  |  |  | |  |  |  |  |  |
  
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   * **Foreign Tax Paid (§78)** represents the "gross-up" required under §78 for foreign taxes paid. The idea is that the US taxes income before foreign tax, then allows a credit for the foreign tax. This is computed as (700/750)*250=233   * **Foreign Tax Paid (§78)** represents the "gross-up" required under §78 for foreign taxes paid. The idea is that the US taxes income before foreign tax, then allows a credit for the foreign tax. This is computed as (700/750)*250=233
   * **Gross GILTI Inclusion** is the gross amount taxable under the GILTI - including the §78 where applicable   * **Gross GILTI Inclusion** is the gross amount taxable under the GILTI - including the §78 where applicable
-  * **§250 deduction** is a deduction of 50% of GILTI allowable ONLY to corporate US Shareholders by §250+  * **§250 deduction** is a deduction of 50% of GILTI allowable ONLY to corporate US Shareholders by §250. However, [[https://www.regulations.gov/docket?D=IRS-2019-0012|proposed regulations]] issued on 4 March 2019 have ruled that individual US Shareholders making a §962 election will be taxed in the same manner as corporations and therefore will be allowed the §250 GILTI deduction.
   * **Net GILTI increase to taxable income** is the gross GILTI inclusion less the §250 deduction where applicable   * **Net GILTI increase to taxable income** is the gross GILTI inclusion less the §250 deduction where applicable
   * **Tax** is computed at 21% for corporations and individuals making a §962 election, and at 37% for individuals not making a §962 election. Technically, the FTC limitation is computed by allocating total US tax based on US source and foreign source income under separate rules that apply only to computing the FTC limitation. These rules could end up allocating more or less income to the GILTI basket  than the net amount of GILTI included in taxable income. These rules are beyond the scope of this simple example.   * **Tax** is computed at 21% for corporations and individuals making a §962 election, and at 37% for individuals not making a §962 election. Technically, the FTC limitation is computed by allocating total US tax based on US source and foreign source income under separate rules that apply only to computing the FTC limitation. These rules could end up allocating more or less income to the GILTI basket  than the net amount of GILTI included in taxable income. These rules are beyond the scope of this simple example.
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-----+==== Subsequent Distribution ==== 
  
 Of course, the initial taxation of GILTI is not the whole picture. At some point the US Shareholder will need to get the income out of the CFC, often by making a dividend distribution. The next table shows how the original taxation of GILTI affects the taxation of that subsequent distribution. The treatment of individual US Shareholders under previous law is included for comparison.  Of course, the initial taxation of GILTI is not the whole picture. At some point the US Shareholder will need to get the income out of the CFC, often by making a dividend distribution. The next table shows how the original taxation of GILTI affects the taxation of that subsequent distribution. The treatment of individual US Shareholders under previous law is included for comparison. 
  
-This example has been re-written to account for  the [[https://home.treasury.gov/news/press-releases/sm558|proposed regulations on foreign tax credits]]. Much of the proposed regulations cover the detail of allocating expenses in affiliated groups - which will not apply to this simple example. However, the simple example had to be re-worked to account for the separate FTC baskets. TCJA added a GILTI FTC basket with no carryover or carryback of associated foreign tax paid or accrued. To the extent that PTEP is allocated to GILTI (that is, the portion of earnings previously taxed as GILTI and now distributed), the allocable foreign tax is placed in the GILTI FTC basket and can only offset current year US tax on GILTI. In addition, the PTEP ordering rules in [[https://www.irs.gov/pub/irs-drop/n-19-01.pdf|Notice 2019-01]] state that if there is //any// PTEP that is allocated to a previous §965 inclusion, then distributions are allocated to that PTEP first (with a haircut based on the §965%%(c)%% deduction). The end result is that Individual US shareholders who have NOT made a §962 election may have difficulty getting any benefit from foreign taxes paid on subsequent dividends. The following numbers assume that there is NO previous year PTEP, so all PTEP is from the table above. The example further assumes that the distribution is made in a year with NO GILTI inclusion - this is the worst case, as the foreign tax allocated to the GILTI basket is lost.+This example has been re-written to account for  the [[https://home.treasury.gov/news/press-releases/sm558|proposed regulations on foreign tax credits]]. Much of the proposed regulations cover the detail of allocating expenses in affiliated groups - which will not apply to this simple example. However, the simple example had to be re-worked to account for the separate FTC baskets. TCJA added a GILTI FTC basket with no carryover or carryback of associated foreign tax paid or accrued. To the extent that PTEP is allocated to GILTI (that is, the portion of earnings previously taxed as GILTI and now distributed), the allocable foreign tax is placed in the GILTI FTC basket and can only offset current year US tax on GILTI. In addition, the PTEP ordering rules in [[https://www.irs.gov/pub/irs-drop/n-19-01.pdf|Notice 2019-01]] state that if there is //any// PTEP that is allocated to a previous §965 inclusion, then distributions are allocated to that PTEP first (with a haircut based on the §965%%(c)%% deduction). The end result is that Individual US shareholders who have NOT made a §962 election may have difficulty getting any benefit from foreign taxes paid on subsequent dividends. //The following numbers assume that there is NO previous year PTEP, so all PTEP is from the table above.// The example further assumes that the distribution is made in a year with NO GILTI inclusion - this is the worst case, as the foreign tax allocated to the GILTI basket is lost.
  
-Yeah, it's confusing. Here's the Cliff Notes version of computing FTC under the new rules:+Yeah, it's confusing. Here's the Cliff Notes version of how to compute FTC:
  
   - All items of gross income in your US tax return are put into baskets - the relevant baskets for most individuals would be: US Source, General Foreign Source Income, Passive Foreign Source Income, GILTI.((There are also baskets for Foreign Branch Income and Income re-sourced by a treaty))   - All items of gross income in your US tax return are put into baskets - the relevant baskets for most individuals would be: US Source, General Foreign Source Income, Passive Foreign Source Income, GILTI.((There are also baskets for Foreign Branch Income and Income re-sourced by a treaty))
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 Furthermore, the actual computations depend heavily on what other types of income are in both your US return and your foreign return. This example is illustrative, but each individual taxpayer **MUST** do the computations based on their own personal situation. Furthermore, the actual computations depend heavily on what other types of income are in both your US return and your foreign return. This example is illustrative, but each individual taxpayer **MUST** do the computations based on their own personal situation.
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-**Not sure this is right FIXME - don't approve edits FIXME ** 
  
  
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 | ^::: ^  No election ^  §962 Election ^  Old Rules  ^ | ^::: ^  No election ^  §962 Election ^  Old Rules  ^
 ^Income to distribute  | 750| 750| 750| 750| ^Income to distribute  | 750| 750| 750| 750|
-^PTEP  |  | 700| 9| 0|+^PTEP  |  | 700| 0| 0|
 ^§245A deduction and/or PTEP  | 750|  |  |  |  ^§245A deduction and/or PTEP  | 750|  |  |  |
-^Net taxable  | 0| 50| 741| 750| +^Net taxable  | 0| 50| 750| 750| 
-^Tax at 20% (assume qualified dividend)  | 0| 10| 148| 150| +^Tax at 20% (assume qualified dividend)  | 0| 10| 150| 150| 
-^Less FTC (see below)  | 0| 8| 111| 113|+^Less FTC (see below)  | 0| 8| 113| 113|
 ^Net tax  |  0|  2| 37| 37| ^Net tax  |  0|  2| 37| 37|
 ^NIIT  |  | 29| 29| 29| ^NIIT  |  | 29| 29| 29|
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 ^FTC Computation:  | | | | | ^FTC Computation:  | | | | |
 ^Foreign Tax Paid at 15%  |  |  113|  113|  113| ^Foreign Tax Paid at 15%  |  |  113|  113|  113|
-^FTC Allocated to GILTI Basket (Limit=0)  |  |  105|  2|  |+^FTC Allocated to GILTI Basket (Limit=0)  |  |  105|  |  |
 ^FTC Allowed - GILTI  |  |  0|  0|  | ^FTC Allowed - GILTI  |  |  0|  0|  |
-^FTC Allocated to General Basket  |  |  8|  111|  113| +^FTC Allocated to General Basket  |  |  8|  113|  113| 
-^FTC Allowed - General  |  |  8|  111|  113|+^FTC Allowed - General  |  |  8|  113|  113|
 |  |  |  |  |  |  |  |  |  |  |  |
-^Total Tax Div + GILTI + Corporate  | 250| 653| 437| 429| +^Total Tax Div + GILTI + Corporate  | 250| 653| 429| 429| 
-^Effective Tax Rate (US + Foreign)  | 25.00%| 65.25%| 43.74%| 42.85%|+^Effective Tax Rate (US + Foreign)  | 25.00%| 65.25%| 42.85%| 42.85%|
 |  |  |  |  |  |  |  |  |  |  |  |
 ^Total Tax if not US taxpayer  | | 363| 363| 363| ^Total Tax if not US taxpayer  | | 363| 363| 363|
-^Cost of CBT |  | 290| 75| 66| +^Cost of CBT |  | 290| 66| 66| 
-^Percent of pre-tax corporate income |  | 29.00%| 7.50%| 6.60%|+^Percent of pre-tax corporate income |  | 29.00%| 6.60%| 6.60%|
  
  
wiki/contents/us_tax/cfcs.txt · Last modified: 2019/03/16 17:40 by karen
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