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wiki:contents:us_tax:cfcs [2018/11/30 13:32]
karen [GILTI]
wiki:contents:us_tax:cfcs [2018/12/31 22:42] (current)
karen
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 ====== §965 Transition Tax ====== ====== §965 Transition Tax ======
  
-For a description ​of the Transition Tax see [[http://​fixthetaxtreaty.org/​2018/​02/13/more-on-the-transition-tax/​|this blog post]]+The 2017 tax reform bill added section 965 to the Internal Revenue Code. This section was written overly broadly, and affects the local corporations ​of US expats, not just the intended targets of Apple, Google and Microsoft. 
 + 
 +[[http://​fixthetaxtreaty.org/​tag/​transition-tax/​|Blog posts on the transition tax]]. 
 + 
 + 
 +IRS Guidance: 
 +  * [[https://​www.irs.gov/​newsroom/​irs-issues-guidance-on-transition-tax-on-foreign-earnings|IRS Issues Guidance on Transition Tax on Foreign Earnings]] 27 December 2017 (Notice ​2018-07) 
 +  * [[https://www.irs.gov/​newsroom/​irs-issues-additional-guidance-on-transition-tax-on-foreign-earnings|IRS Issues Additional Guidance on Transition Tax on Foreign Earnings]] 19 January 2018 (Notice 2018-13
 +  * [[https://​www.irs.gov/​newsroom/​irs-issues-guidance-on-changes-in-accounting-periods-related-to-the-transition-tax|IRS Issues Guidance on Changes in Accounting Periods Related to the Transition Tax]] 13 February 2018 (Rev. Proc. 2018-17) 
 +  * [[https://​www.irs.gov/​newsroom/​questions-and-answers-about-reporting-related-to-section-965-on-2017-tax-returns|Questions and Answers about Reporting Related to Section 965 on 2017 Tax Returns]] 13 March 2018  
 +  * [[https://​www.irs.gov/​newsroom/​irs-issues-additional-guidance-on-transition-tax-on-foreign-earnings-0|IRS Issues Additional Guidance on Transition Tax on Foreign Earnings]] 2 April 2018 (Notice 2018-26) 
 +  * [[https://​www.irs.gov/​newsroom/​irs-and-treasury-issue-proposed-regulations-implementing-section-965|IRS and Treasury issue proposed regulations implementing Section 965]] 1 August 2018 ([[https://​www.regulations.gov/​docket?​D=IRS-2018-0019|Public comments on Regulations.gov]]) 
 +  * [[https://​www.irs.gov/​pub/​irs-drop/​n-18-78.pdf|Notice 2018-78]] 
 + 
 + 
  
 ====== GILTI ====== ====== GILTI ======
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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. ​((This example was written before the release of the [[https://​home.treasury.gov/​news/​press-releases/​sm558|proposed regulations on foreign tax credits]], and does not take them into account. As the implications of the proposed regulations become apparent, they will be incorporated into these numbers.))+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 ^ ​ Individual ^^^ | ^  Corporation ^ ​ Individual ^^^
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 ^Net Increase to Tax  | 0| 259| 9| 0| ^Net Increase to Tax  | 0| 259| 9| 0|
 |  |  |  |  |  |  |  |  |  |  |  |
-^Increase in PTI  ​| ​ 700|  700|  9| 0|+^Increase in PTEP  ​| ​ 700|  700|  9| 0|
 |  |  |  |  |  | |  |  |  |  |  |
  
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   * **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 "​Previously Taxed Income", which is relevant because subsequent distributions out of PTI are not taxed by the US. For individuals who make a §962 election, ​PTI is increased by only the amount of tax paid to the US (after FTC).+  * **Increase in PTEP** is the increase to "​Previously Taxed Earnings and Profits", which is relevant because subsequent distributions out of PTEP are not taxed by the US. For individuals who make a §962 election, ​PTEP is increased by only the amount of tax paid to the US (after FTC).
  
-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.  
 + 
 +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 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)) 
 +  - 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://​www.irs.gov/​pub/​irs-drop/​n-19-01.pdf|Notice 2019-01]]. 
 +  - 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. 
 + 
 +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. 
 + 
 + 
 + 
 +^Subsequent Dividend ​(in a year with zero GILTI):  ^^^^^
 | ^  Corporation ^ ​ Individual ^^^ | ^  Corporation ^ ​ Individual ^^^
 | ^:::​ ^ ​ 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|
-^PTI  ​| ​ | 700| 9| 0| +^PTEP  ​| ​ | 700| 9| 0| 
-^§245A deduction and/​or ​PTI  ​| 750| ​ |  |  | +^§245A deduction and/​or ​PTEP  ​| 750| ​ |  |  |
 ^Net taxable ​ | 0| 50| 741| 750| ^Net taxable ​ | 0| 50| 741| 750|
 ^Tax at 20% (assume qualified dividend) ​ | 0| 10| 148| 150| ^Tax at 20% (assume qualified dividend) ​ | 0| 10| 148| 150|
-^Less FTC @ 15.00% ​ | 0| 113| 113| 113| +^Less FTC (see below) ​ | 0| 8| 111| 113| 
-^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 ​ | 0| 29| 64| 66| +^Total US Tax Payable on Dividend ​ | 0| 31| 66| 66| 
-^Total tax on Dividend ​ |  | 141| 177| 179|+^Total tax on Dividend ​ |  | 144| 179| 179|
 |  |  |  |  |  |  |  |  |  |  |  |
-^Total Tax Div + GILTI + Corporate ​ | 250| 650| 436| 429| +^FTC Computation: ​ | | | | | 
-^Effective Tax Rate (US + Foreign) ​ | 25.00%| 65.00%| 43.60%| 42.85%|+^Foreign Tax Paid at 15%  |  |  113|  113|  113| 
 +^FTC Allocated to GILTI Basket (Limit=0) ​ |  |  105|  2|  | 
 +^FTC Allowed - GILTI  |  |  0|  0|  | 
 +^FTC Allocated to General Basket ​ |  |  8|  111|  113| 
 +^FTC Allowed - General ​ |  |  8|  111|  113| 
 +|  |  |  |  |  |  
 +^Total Tax Div + GILTI + Corporate ​ | 250| 653| 437| 429| 
 +^Effective Tax Rate (US + Foreign) ​ | 25.00%| 65.25%| 43.74%| 42.85%|
 |  |  |  |  |  |  |  |  |  |  |  |
 ^Total Tax if not US taxpayer ​ | | 363| 363| 363| ^Total Tax if not US taxpayer ​ | | 363| 363| 363|
-^Cost of CBT |  | 288| 73| 66| +^Cost of CBT |  | 290| 75| 66| 
-^Percent of pre-tax corporate income |  | 28.75%| 7.35%| 6.60%|+^Percent of pre-tax corporate income |  | 29.00%| 7.50%| 6.60%| 
 + 
  
 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/​or ​PTI** - it is not clear how the PTI rules in §959 interact with the deduction ​for dividends paid out of foreign source income in §245A. §951A appears to be clear that the inclusion of GILTI increases PTI, but it is not clear whether subsequent distributions of GILTI are foreign source income excluded ​by §245A, or are taxed as "​hybrid dividends"​. And if they are hybrid dividends, it is unclear whether ​the portion of the dividend that is not PTI ($50) is tainted and therefore taxable. Any interpretation that would create taxable income to corporate US Shareholder from such a distribution would appear to be contrary to Congressional intentFor this table I have assumed that all of the distribution ​is excluded from US taxable income under either §245A or §959.  +  * **§245A deduction and/​or ​PTEP** - For a corporate shareholder, ​the distribution will be allocated between PTEP for GILTI (on which there will be zero US tax) and E&​P ​not previously taxed by the US (which will be eligible for 100% dividend received deduction under §245ANet result ​is zero US tax  
-  * **Net taxable** is computed by subtracting ​PTI from the income distributed.+  * **Net taxable** is computed by subtracting ​PTEP from the income distributed.
   * **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 "​qualified dividend"​ eligible for the reduced tax rate of 20%   * **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 "​qualified dividend"​ eligible for the reduced tax rate of 20%
-  * **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 ​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. For Individual US Shareholders,​ the FTC limitation is computed below.
   * **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://​www.citizenshipsolutions.ca/​2016/​08/​18/​does-article-22-the-u-s-australia-tax-treaty-require-the-united-states-to-allow-u-s-citizens-a-foreign-tax-credit-against-the-3-8-obamacare-surtax/​|argue that this violates the double tax provisions of tax treaties]].   * **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://​www.citizenshipsolutions.ca/​2016/​08/​18/​does-article-22-the-u-s-australia-tax-treaty-require-the-united-states-to-allow-u-s-citizens-a-foreign-tax-credit-against-the-3-8-obamacare-surtax/​|argue that this violates the double tax provisions of tax treaties]].
   * **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/​Distribution)*Foreign Tax Paid. Note that this is assuming that there is no other PTEP except the GILTI inclusion in the table above. 
 +  * **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)/​Distribution)*Foreign Tax Paid. 
 +  * **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.
wiki/contents/us_tax/cfcs.1543548775.txt.gz · Last modified: 2018/11/30 13:32 by karen
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