In my Whitepaper “United States Entity Considerations in the Trump Era”I discussed the opportunities that will exist for companies that wish to headquarter themselves in the US and in my last two blogs I addressed how the recent changes to the CFCs rules and the introduction of GILTI were reshaping corporate groups. I also flagged the preposterous possibility that that the tax profession may now recommend that a client establishes a US company as a holding company for a global operating business. Reflecting on that view in July some short 4 months later has me asking myself whether I had consumed two much fine Australian wine in Q1 2018.
One of the biggest selling points of the Trump Tax Changes was the cut to the corporate tax rate to a flat rate of 21% and the removal of US taxation on the repatriation of foreign sourced profits by way of dividend to the US. This was hailed as the movement of the US tax system from an extra-territorial tax system to a territorial tax system. The argument being that the US should not tax foreign sourced profits twice by taxing foreign sourced dividends paid to US corporations and by making this adjustment the US tax system would join a significant part of the developed world by not taxing the repatriation of foreign sourced profits.
What the foreign business owners did not expect was the one two punch of cutting the corporate tax rate, moving to a territorial tax system, and subjecting anything else to attribution under the CFC rules through the classification of GILTI.
What is GILTI and how does it impact you? GILTI stands for Global Intangible Low Tax Income. The measures target CFCs and the income that will be subject to tax is non Subpart F net income of the CFC in excess of a 10% return on depreciable tangible assets. A deduction of up to 50% is generally allowed (until 2026) and may reduce the effective US tax rate on GILTI to 10.5% if the GILTI is being attributed to a US Corporation. The rate of tax would be higher than that if it was being attributed to a US Shareholder.
If GILTI is heads FDII is tales. GILTI is an increase in tax on items of income that were not previously taxed or taxed at low rates and FDII is a limit on deductibility on expenses associated with income that has not be taxed or been taxed at low rates. FDII or foreign-derived income attributable to intangibles is a limitation on a US Shareholders deductions associated with payments made with respect to foreign intangibles. Ie, if you are trying to reduce you US tax via foreign deductions, you may be capped under the FDII rules. Again it only applies to taxable income in excess of a 10% return. The rules apply a deduction of 37.% from income (until 2026) meaning that the end result is an effective tax rate of 13.125%.