Repatriation after TCJA
Author: William J. Seeger
||1 hour for CPAs
1 hour Federal Tax Related for EAs and OTRPs
1 hour Federal Tax Law for CTEC
Historically the United States possessed a global system of taxation. Under a worldwide system, all income earned worldwide by an MNE was included in the U.S. tax base for corporate tax purposes. Income earned in the U.S. was classified as U.S. source income. Income earned offshore was classified as foreign-sourced income. Under a territorial system, all income earned in a country is taxable, but any income earned outside that country is not.
To avoid double taxation, local income taxes paid on foreign-sourced income by an MNE were generally creditable on the U.S. tax return, i.e., up to the pre-TCJA U.S. corporate rate of 35%. For example, imagine a U.S. company with a subsidiary in France. The French subsidiary paid the French’s marginal corporate tax of 28% on its earnings. When the U.S. parent company repatriated these earnings, it would owe the U.S. Treasury an additional 7 percent tax on those earnings, i.e., the difference between the French 28 percent rate and the pre-TCJA 35 percent corporate tax rate earnings.
No U.S. tax was due on foreign-sourced income until dividends were paid, i.e., offshore earnings repatriated. This deferral of taxes on income earned offshore was of obvious benefit on a present value basis. Thus, companies held gains offshore and deferred U.S. tax liability.
The TCJA enacted reforms that arguably created a territorial taxation system except for introducing the GILTI regime (Global Intangible Low-Tax Income). GILTI, akin to subpart F, expanded the current tax on income earned by companies (CFCs) controlled by U.S. shareholders. In effect, the TCJA moved the U.S. international tax system from one that allowed almost unlimited deferral of tax on foreign earnings to one that now imposes a type of minimum tax on those earnings.
Until 2018, much of U.S. international tax planning was focused on making sure that the earnings of CFCs didn’t fall within the definition of subpart F income.
The incentives of the old system of worldwide taxation and deferral created a buildup of cash offshore. To transition to the brave new world of GILTI and address the buildup of offshore earnings that occurred under the old worldwide tax system, the TCJA imposed a one-time tax to recognize a one-time deemed repatriation (also called a “transition tax”) of post-1986 deferred income. IRC section 965 provides a tax of 15.5%, to the extent the foreign corporation has cash and other liquid assets, and 8% for accumulated deferred earnings above the cash and liquid assets.
Publication Date: September 2021
Essential for all practitioners who deal with cross-border tax compliance and planning issues — and is especially important today as the IRS has aggressively increased scrutiny and enforcement activity in the international tax area. Professionals in public practice and industry will benefit from this program. Business tax and finance executives, directors, managers and staff; CPAs; Enrolled Agents; tax preparers and staff; accountants, attorneys, and financial advisors who work with and advise businesses and individuals with cross-border operations, activities and issues.
- Worldwide, Territorial, and Quasi-worldwide tax systems
- Deferral and Anti-deferral
- Subpart F
- The effect of the repatriation tax (transition tax) on tax liability
- Addressing pre-TCJA earnings deferral — IRC Section 965
- Post-TCJA — GILTI and Section 951
- How the composition of overseas funds affects repatriation
- The potential impact of repatriated funds due to TCJA on firm financing patterns and investment decisions
- Biden administration changes to TCJA
- Identify the notion of deferral
- Differentiate worldwide vs. territorial taxation
- Recognize the basics of the one-time transition tax
- Recognize how IRC Section 965 "transition tax" works
- Recognize how IRC Section 951 on global intangible low-taxed income eliminated U.S. shareholder deferral of earnings in CFCs
- Recognize what percent of GILTI is the full amount is included in a U.S. shareholder's income, but corporate shareholders are allowed a deduction equal to
- Identify what kind of system one of the proposals of the Biden administration is to move GILTI to
NASBA Field of Study
Taxes (1 hour)