For the first time, in nearly 30 years, Congress and the President were able to pass a major tax reform. Many were affected by these changes, including U.S. citizens living abroad facing new laws, that would affect the way they do business. At the same time, new opportunities were created on how to conduct future business. The highlights of these changes for both U.S. citizens living abroad, and Non-Resident Aliens are as follows:
Repatriation Tax – Congress has been struggling for years to find a way for U.S. corporations to bring back earnings to the U.S. that were earned in low or no tax jurisdictions abroad. IRC Section 965, finally accomplished that by imposing a one-time tax of either 15.5 percent on cash or 8% on non-cash assets, that make-up retained earnings. This is one of the few provisions that affect people already on their 2017 returns. This tax is imposed on retained earnings as of either November 2nd, 2017 or December 31st, 2017, whichever is greater. We have found there are alternatives to mitigate this tax, despite that fact that the U.S. Treasury has not been generous with guidance.
GILTI & FDII – Congress has come up with some new acronyms that U.S. citizens that own shares in a CFC (Controlled Foreign Corporation) will have to deal with for years to come.
GILTI stands for Global Intangible Low Tax Income, which is new category of Subpart F income. This basically turns principals of U.S. taxation of foreign earned income on its head. For almost 60 years, the U.S. held that if a U.S. citizen owns a foreign corporation that is doing business abroad, there is no U.S. tax until a dividend is paid to it’s U.S. shareholder. GILTI changes this and allows the IRS to tax active income earned by a foreign corporation. While this provision is only effective for calendar 2018, we have already come up with strategies to plan for the tax impact of this provision.
FDII stands for Foreign Derived Intangible Income, which Congress decided is any income that a foreign corporation earns that exceeds 10% of its investment in its Qualified Business Asset Investment (QBAI). While foreign corporations, that are owned by U.S. C corporation, are not negatively affected by this provision, individual owners are. We are working on helping clients restructure their corporate structures and budgets to help deal with this new provision.
Contact us to speak to an associate and see how we can best assist you.