TCJA Complexities & the Need to Model
The Tax Cuts and Jobs Act (TCJA) has added such complexity to U.S. international tax rules that sophisticated modeling techniques are typically necessary to effectively plan for entity structuring and merger and acquisition activity as well as for income tax provisions and tax return compliance.
Before the TCJA, U.S. international tax planning and compliance largely centered around foreign tax credit, transfer pricing, DISC, Subpart F, and repatriation issues. While retaining the Subpart F and IC-DISC regimes and most foreign tax credit limitation and transfer pricing rules, the TCJA added new complexities to international tax planning and compliance such as:
- Expanded foreign tax credit limitation categories or “baskets” for foreign branch income and Section 951A global intangible low-taxed income (GILTI)
- A new GILTI income inclusion for U.S. shareholders (both corporate and noncorporate shareholders) of controlled foreign corporations (CFC) having deemed intangible income that’s low-taxed1
- 100 percent dividend received deduction for U.S. corporations receiving dividends from CFCs and other 10 percent or more owned foreign corporations
- A new export incentive for U.S. corporations known as the foreign-derived intangible income (FDII) deduction
- Base erosion and anti-abuse tax (BEAT) for U.S. corporations that make deductible payments to foreign-related parties and that have average annual gross receipts of at least $500 million and at least a 3 percent “base erosion percentage”
Many of these new U.S. international tax regimes involve identification of specific classes of gross income along with allocation and apportionment of deductions. Depending on the level of analysis a company feels is necessary, these calculations can involve a significant level of complexity. Automation is needed to simplify the process of completing these calculations.
The exercise of calculating a U.S. shareholder’s §951A GILTI inclusion involves coordination of multiple CFCs’ activity. A U.S. shareholder’s GILTI inclusion and GILTI foreign tax credit are computed on an aggregate method based on all its CFCs’ “tested” items. The GILTI inclusion must then be allocated and pushed down to each CFC for purposes of tracking each CFC’s previously taxed earnings and profits (PTEP). One change in a single CFC tested item can have a domino effect on the aggregate calculations.
In addition, certain elections are available that have an effect on a U.S. shareholder’s GILTI inclusion, such as the new GILTI high-taxed income exception election that allows a U.S. shareholder to exclude income from CFC tested income that’s subject to foreign income tax at a rate of at least 90 percent of the U.S. corporate income tax rate2 and the CFC grouping election available under newly issued §163(j) proposed regulations that permit a U.S. shareholder to determine an interest deduction limitation for its CFCs on a combined basis similar to the rules that apply to consolidated filing return groups.3
Tax return compliance has expanded due to these new international tax regimes with new IRS forms 8991 (BEAT), 8992 (GILTI), and 8993 (FDII and GILTI deductions). Form 5471 has expanded from a typical six-page, per-CFC form in 2017 to more than 25 pages with new GILTI, PTEP, and multiple §904(d) category reporting and a new Subpart F income group Schedule Q report and a distribution Schedule R report coming soon. Domestic partnerships with international activity will soon need to complete Schedules K-2 and K-3 to provide partners (and the IRS) with information necessary to comply with these new U.S. international tax rules.
While helpful, Excel spreadsheets can be difficult to set up with the coordination necessary to perform quick and efficient calculations involving multiple international tax regimes and/or involving multiple CFCs, foreign partnerships, and foreign branches. The ability to produce multiple scenario conclusions in a clearly presented manner is an essential need in effective international tax planning.
Sophisticated software packages such as VantagePoint can be an integral tool in a U.S. multinational enterprise’s arsenal to plan around and comply with these new U.S. international tax complexities added by the TCJA.
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1 A 50 percent GILTI deduction and 80 percent foreign tax credit are allowed to U.S. corporate shareholders of CFC and other noncorporate shareholders who elect to be taxed on GILTI income at corporate tax rates. No carryback or carryover of GILTI foreign tax credits exceeding a U.S. shareholder’s foreign tax credit limit is permitted. ↩
2 As of the date this article is issued, an 18.9 percent foreign income tax rate is necessary to qualify for the GILTI high-taxed exception election. The ability to make the GILTI high-taxed income exception election is retroactive to tax years beginning in 2018. ↩
3 The CFC grouping election allows for a partial roll-up of CFC excess taxable income to the controlling U.S. shareholder’s §163(j) interest deduction limitation calculation. ↩