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wiki:contents:us_tax:cfcs [2018/11/30 13:15] – [Numerical Examples] karen | wiki:contents:us_tax:cfcs [2019/03/16 17:40] (current) – [Subsequent Distribution] added YouTube link karen | ||
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====== §965 Transition Tax ====== | ====== §965 Transition Tax ====== | ||
- | For a description | + | The 2017 tax reform bill added section 965 to the Internal Revenue Code. This section was written overly broadly, and affects the local corporations |
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+ | [[http:// | ||
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+ | IRS Guidance: | ||
+ | * [[https:// | ||
+ | * [[https://www.irs.gov/ | ||
+ | * [[https:// | ||
+ | * [[https:// | ||
+ | * [[https:// | ||
+ | * [[https:// | ||
+ | * [[https:// | ||
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====== GILTI ====== | ====== GILTI ====== | ||
- | This section serves as a technical appendix to the blog post Explaining GILTI - Measurement | + | This section serves as a technical appendix to the blog post [[http:// |
GILTI is found in [[https:// | GILTI is found in [[https:// | ||
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* Local tax rate on dividends = 15% | * Local tax rate on dividends = 15% | ||
- | Assume that the CFC has no US source income and no subpart F income (all active business income). Also assume that only one CFC is owned and that the corporate shareholder has no domestic expenses that must be allocated to foreign source income under the FTC rules. | + | Assume that the CFC has no US source income and no subpart F income (all active business income). Also assume that only one CFC is owned and that the corporate shareholder has no domestic expenses that must be allocated to foreign source income under the FTC rules. |
| ^ Corporation ^ | | ^ Corporation ^ | ||
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^Plus Foreign Tax Paid (§78) | ^Plus Foreign Tax Paid (§78) | ||
^Gross GILTI Inclusion | ^Gross GILTI Inclusion | ||
- | ^§250 deduction | + | ^§250 deduction |
- | ^Net GILTI increase to taxable income | + | ^Net GILTI increase to taxable income |
| | | | | | | | | | | | | | ||
- | ^Tax (21% for corporation, | + | ^Tax (21% for corporation, |
- | ^FTC (smaller of Tax or 80% FTC limitation) | + | ^FTC (smaller of Tax or 80% FTC limitation) |
| | | | | | | | | | | | | | ||
- | ^Net Increase to Tax | 0| 259| 9| 0| | + | ^Net Increase to Tax | 0| 259| 0| 0| |
| | | | | | | | | | | | | | ||
- | ^Increase in PTI | + | ^Increase in PTEP |
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* **Foreign Tax Paid (§78)** represents the " | * **Foreign Tax Paid (§78)** represents the " | ||
* **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:// |
* **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, | * **Tax** is computed at 21% for corporations and individuals making a §962 election, and at 37% for individuals not making a §962 election. Technically, | ||
* **FTC** is the lower of Tax on GILTI or the 80% FTC limitation (zero for individuals not making a §962 election) | * **FTC** is the lower of Tax on GILTI or the 80% FTC limitation (zero for individuals not making a §962 election) | ||
* **Net Increase to Tax** is US tax paid //in addition// to foreign tax. Note that the foreign tax rate //exceeds// the US corporate tax rate of 21%, but an individual not making a §962 election will still pay an additional $259 in tax to the US over the $250 already paid by the CFC. | * **Net Increase to Tax** is US tax paid //in addition// to foreign tax. Note that the foreign tax rate //exceeds// the US corporate tax rate of 21%, but an individual not making a §962 election will still pay an additional $259 in tax to the US over the $250 already paid by the CFC. | ||
- | * **Increase in PTI** is the increase to " | + | * **Increase in PTEP** is the increase to " |
- | 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. | ||
+ | ==== Subsequent Distribution ==== | ||
- | ^Subsequent Dividend: | + | 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. |
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+ | This example has been re-written to account for the [[https:// | ||
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+ | Yeah, it's confusing. Here's the Cliff Notes version of how to compute FTC: | ||
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+ | - 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)) | ||
+ | - The deductions in your return are allocated (if related to a specific type or types of income) or apportioned (if not related to any specific type of income) between the baskets. | ||
+ | - The net difference in each basket is your US Taxable Income for that basket (US Source Taxable Income, General Foreign Source Taxable Income, etc.). | ||
+ | - Total US tax is apportioned among the baskets proportional to US taxable income in each basket. For the Foreign Source baskets (including GILTI), this is the MAXIMUM foreign tax credit allowed for each basket. | ||
+ | - Next you add up all creditable foreign taxes paid or accrued. This needs to be allocated between the foreign source baskets. | ||
+ | - Foreign taxes are allocated to the various baskets as a proportion of foreign taxable income. For income other than CFC dividends, allocating foreign taxable income is fairly straight forward. Salary would go into the general basket, dividends and interest would go into the passive basket. | ||
+ | - For CFC dividends you look through to the earnings and profits (E&P - essentially retained earnings computed under US tax rules) of the CFC. E&P that was generated by active business income and has not been previously taxed by the US would normally go into the general basket. But, if some of the E&P of the CFC has already been taxed by the US, you need to follow the ordering rules in [[https:// | ||
+ | - After allocating foreign taxable income into the various FTC baskets, Foreign tax paid or accrued (step 5 above) is allocated to the baskets in proportion to the foreign taxable income in each basket. | ||
+ | - Then, basket by basket, you compare foreign tax paid with the US tax paid (step 4 above) - the smaller of the two numbers is your allowed FTC for that basket. | ||
+ | - Except for the GILTI basket, any excess foreign tax paid can be carried back one year or forward 10 years. | ||
+ | |||
+ | The takeaway from this is that where timing differences mean that GILTI is taxed in the US in a different year than the foreign tax on the distribution of that income, there could be an excess foreign tax credit that will disappear - and the individual shareholder is essentially double taxed on that income. Since GILTI is an ongoing tax - it is possible to offset the US tax on GILTI in year X2 with foreign tax on distributions of GILTI from previous years. But, if distributions are not matched to GILTI every year, there will be double taxation at some point. | ||
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+ | Furthermore, | ||
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+ | ^Subsequent Dividend | ||
| ^ Corporation ^ | | ^ Corporation ^ | ||
| ^::: | | ^::: | ||
^Income to distribute | ^Income to distribute | ||
- | ^PTI | + | ^PTEP |
- | ^§245A deduction and/ | + | ^§245A deduction and/ |
- | ^Net taxable | + | ^Net taxable |
- | ^Tax at 20% (assume qualified dividend) | + | ^Tax at 20% (assume qualified dividend) |
- | ^Less FTC @ 15.00% | + | ^Less FTC (see below) |
- | ^Net tax | 0| 0| 36| 38| | + | ^Net tax | 0| 2| 37| 37| |
^NIIT | | 29| 29| 29| | ^NIIT | | 29| 29| 29| | ||
- | ^Total US Tax Payable on Dividend | + | ^Total US Tax Payable on Dividend |
- | ^Total tax on Dividend | + | ^Total tax on Dividend |
+ | | | | | | | | ||
+ | ^FTC Computation: | ||
+ | ^Foreign Tax Paid at 15% | | 113| 113| 113| | ||
+ | ^FTC Allocated to GILTI Basket (Limit=0) | ||
+ | ^FTC Allowed - GILTI | | 0| 0| | | ||
+ | ^FTC Allocated to General Basket | ||
+ | ^FTC Allowed - General | ||
| | | | | | | | | | | | | | ||
- | ^Total Tax Div + GILTI + Corporate | + | ^Total Tax Div + GILTI + Corporate |
- | ^Effective Tax Rate (US + Foreign) | + | ^Effective Tax Rate (US + Foreign) |
| | | | | | | | | | | | | | ||
^Total Tax if not US taxpayer | ^Total Tax if not US taxpayer | ||
- | ^Cost of CBT | | 288| 73| 66| | + | ^Cost of CBT | | 290| 66| 66| |
- | ^Percent of pre-tax corporate income | | 28.75%| 7.35%| 6.60%| | + | ^Percent of pre-tax corporate income | | 29.00%| 6.60%| 6.60%| |
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Line by line explanations: | Line by line explanations: | ||
* **Income to distribute** - after paying foreign taxes, the CFC has $750 in retained earnings available to distribute as a dividend. | * **Income to distribute** - after paying foreign taxes, the CFC has $750 in retained earnings available to distribute as a dividend. | ||
- | * **PTI** - the portion of the distribution that has already been taxed under US tax rules. | + | * **PTEP** - the portion of the distribution that has already been taxed under US tax rules. We are assuming that ALL of this is due to the GILTI inclusion above. |
- | * **§245A deduction and/ | + | * **§245A deduction and/ |
- | * **Net taxable** is computed by subtracting | + | * **Net taxable** is computed by subtracting |
* **Tax at 20%** - it is assumed that the CFC is incorporated in a country with a US tax treaty and therefore the dividend is a " | * **Tax at 20%** - it is assumed that the CFC is incorporated in a country with a US tax treaty and therefore the dividend is a " | ||
- | * **Less FTC** - it is assumed that the effective local tax rate on dividends is 15%. For corporate shareholders a rate of zero is used as this is the rate that applies when an Australian corporation pays dividends to a US resident that owns 80% or more of the corporation (Article 10(3)). The current US Model Tax Treaty imposes a 5% rate on dividends paid to a corporation in the other country that owns 10% or more of the corporation paying dividends. | + | * **Less FTC** - For corporate shareholders a foreign tax rate of zero is used as this is the rate that applies when an Australian corporation pays dividends to a US resident that owns 80% or more of the corporation (Tax Treaty |
* **Net tax** is tax payable to the US before the application of NIIT | * **Net tax** is tax payable to the US before the application of NIIT | ||
* **NIIT** is Net Investment Income Tax - payable at 3.8% by individuals above certain income thresholds. The tax code states that FTC cannot offset NIIT, but there are those who [[http:// | * **NIIT** is Net Investment Income Tax - payable at 3.8% by individuals above certain income thresholds. The tax code states that FTC cannot offset NIIT, but there are those who [[http:// | ||
* **Total US Tax Payable on Dividend** is Net tax plus NIIT. | * **Total US Tax Payable on Dividend** is Net tax plus NIIT. | ||
- | * ** Total tax on Dividend** is US tax plus any foreign tax. | + | * **Total tax on Dividend** is US tax plus any foreign tax. |
+ | * **Foreign Tax Paid** is assumed to be paid at a flat rate of 15%. | ||
+ | * **FTC Allocated to GILTI Basket** is computed as (PTEP/ | ||
+ | * **FTC Allowed - GILTI** is zero because we have assumed that the distribution occurs in a year with zero GILTI inclusion. This is the worst case. | ||
+ | * **FTC Allocated to General Basket** is computed as ((Distribution-PTEP)/ | ||
+ | * **FTC Allowed - General** is the lower of US tax at 20% or FTC allocated to General Basket. In this case, as the US tax rate of 20% exceeds the foreign tax rate of 15%, the amount will be equal to foreign tax allocated to the General Basket. | ||
* **Total Tax Div + GILTI + Corporate** aggregates all taxes paid on the original $1000 of pre-tax income. | * **Total Tax Div + GILTI + Corporate** aggregates all taxes paid on the original $1000 of pre-tax income. | ||
* **Effective Tax Rate (US + Foreign)** measures the total tax burden as a percentage of the $1000 of pre-tax income. | * **Effective Tax Rate (US + Foreign)** measures the total tax burden as a percentage of the $1000 of pre-tax income. | ||
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* **Percent of pre-tax corporate income** measures the cost of CBT as a percentage of the original $1000 of pre-tax income. | * **Percent of pre-tax corporate income** measures the cost of CBT as a percentage of the original $1000 of pre-tax income. | ||
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+ | Another numerical example is [[https:// |