With 2019 coming to a close, it’s a good time to start thinking about your tax planning and savings strategies.
Your plans should include reevaluating existing structures and modeling the impact of other options in light of all the international tax changes from tax reform.
Below are six of the most significant considerations for multinational companies during the upcoming tax season and where scenario modeling could help you plan for year-end and beyond. For the latest updates for international companies, you can also visit our pages for tax planning, tax reform and international tax.
Explore Tax Planning Opportunities
A lot changed this year when it comes to entity structures and the resulting US tax liabilities for each. Consider modeling different options to forecast the outcomes so you can carefully consider which alternative is the best course of action.
1. Foreign-Derived Intangible Income (FDII)
The FDII deduction is a new benefit for C corporations that make sales from the United States to foreign persons. The deduction is based on qualifying foreign sales made or services provided and is reduced by profit deemed attributable to tangible production assets located in the United States.
For more information about FDII, read this article or watch this on-demand webcast.
- Are you a C corporation or a partnership with a C corporation direct or indirect partner that makes sales or provides services to foreign persons?
- Do you make sales through a foreign branch or other related party? If so, have you revisited its transfer pricing? There might be other options available to increase the amount of the FDII deduction.
- Have you previously claimed a domestic production activities deduction? If so, do you have export sales that are eligible for an FDII deduction?
You should consider FDII in your year-end tax planning for 2019. Depending on your operations, it may take a significant amount of time and effort to obtain documentation that shows sales are qualifying for the FDII deduction. By planning in 2019, you’ll be ahead of the game for 2020 with this documentation.
Another consideration: Beginning January 1, 2020, documentation requirements will greatly expand with specific requirements for different types of sales. If you’re eligible for an FDII deduction, consider establishing processes now to gather the information needed so you’re ready when the new documentation requirements come into effect.
You typically have a FDII benefit if you’re in the United States and making sales from here to foreign persons in a foreign country—and that product is used in a foreign country. Go through your sales and first identify if any customers are foreign persons. If there are significant sales in that category, it might be beneficial to explore if you’re eligible for the FDII deduction.
2. Global Intangible Low-Taxed Income (GILTI)
GILTI affects US persons who own 10% or more of a controlled foreign corporation (CFC). These US shareholders may be required to include in their taxable income all or a portion of the foreign corporation’s taxable income in each year. This tax is especially relevant to technology companies, which often are less capital intensive.
Keep in mind that individuals and corporations are treated very differently when it comes to GILTI. Corporations may claim a 50% deduction and a foreign tax credit in relation to GILTI, whereas individuals can’t absent certain US tax elections. Given this, individuals may be more negatively impacted by GILTI than corporations, so you should consider tax planning strategies to mitigate the impact of an inclusion.
For more information about GILTI, read this article.
- Will GILTI impact your current year taxable income? Has that impact been accounted for in estimated payments?
- Have you evaluated your current company structure and entity classifications? Are options available to reduce your tax liability resulting from GILTI?
- Do you have sufficient detail of the CFC’s tangible property to not only prepare depreciation reports using alternative depreciation system lives and methods but also determine its qualified business asset investment?
Consider GILTI’s impact as you make estimated tax payments for 2019, and conduct tax planning prior to year-end.
Scenario modeling could help outline your options and outcomes. In particular, look at how you’re owning the CFC—as an individual or as a corporation—and assess through modeling if there’s a better way to structure ownership of the CFC.
Here are three planning options for individuals to consider:
- Check the box election. It may be possible to make an election to convert your CFC to a disregarded entity. GILTI doesn’t apply to a disregarded entity, and individuals may be eligible to claim a foreign tax credit on foreign income.
- Create a C corporation holding company. If you create a C corporation that then owns your CFC, the C corporation is eligible to claim the 50% deduction and foreign tax credit against GILTI. However, creating a C corporation will create an additional layer of taxation.
- Consider making a Section 962 election. Individuals who make a Section 962 election are eligible to claim a 50% deduction and foreign tax credit against GILTI. However, making this election will create an additional layer of taxation, because income is deemed to be received by a corporation under a Section 962 election.
3. Individual Elections Under Section 962
A Section 962 election allows an individual who owns 10% or more of a CFC to elect to be taxed on GILTI and Subpart F income as if the individual was a C corporation. This allows the individual to utilize the 21% corporate income tax rate, deemed paid foreign tax credit, and Section 250 deduction.
The election can be made by an individual US shareholder who owns at least 10% of the stock directly in a foreign corporation or indirectly through a partnership or S corporation. The impact of the election to other tax attributes should be evaluated prior to making the election.
For more information read this article.
- Are you a 10% direct or indirect shareholder in a CFC?
- If you’re considering making a Section 962 election, have you considered the impact of the election to other tax attributes?For instance, will the foreign corporation be making distributions in the near future?
Consider the impact of these planning opportunities as you make estimated tax payments for 2019, and conduct tax planning prior to year-end.
If you’re an individual who owns a CFC, consider modeling the outcome of a Section 962 election and certain future tax events such as distributions and dispositions of the stock.
4. CFC Determination Requirements
Tax reform changed certain stock attribution rules that determine if a foreign corporation is a CFC. A foreign corporation that wasn’t previously considered a CFC may now be treated as such. US persons that own at least 10% of a CFC are subject to Subpart F and GILTI.
Learn more in the New Subpart F section of this article.
- Is your corporation owned by a foreign person or is it part of a multinational group with foreign headquarters?
- Do you have an ownership interest in a foreign entity that owns a US company?
You should consider these rules when filing your 2018 tax return and while tax planning for 2019. If you’re a US person who’s planning on investing in a foreign entity, assess if that foreign entity owns any US entities that may result in the foreign entity or its subsidiaries being treated as CFCs.
If you have an ownership interest or are considering obtaining an ownership interest in a foreign entity that owns a US company, evaluate if its ownership in that US company makes other foreign entities owned by that foreign entity CFCs. If you’re a US person, your ownership interest in the foreign entity may result in GILTI or Subpart F income.
5. Dividends Received Deduction (Section 245A)
Tax reform expanded the dividends received deduction by adding Section 245A. It allows C corporations that own 10% or more of a foreign corporation to take a 100% deduction for the foreign-sourced portion of dividends received.
Taxpayers must meet holding-period requirements to claim the deduction. Additionally, the Department of Treasury released proposed regulations November 5, 2018, stating that the Section 245A deduction may apply to reduce a C corporation’s deemed inclusions under Section 956.
You can find more details in this article.
- Are you a C corporation that expects to receive dividends from a 10%-owned foreign corporation? Have you evaluated if you meet the holding-period requirement to be eligible for the Section 245A deduction?
- If you aren’t a C corporation and are currently unable to utilize the Section 245A deduction, have you evaluated your current company structure and entity classifications to determine if there are options available to reduce your future tax liability?
If you’re expecting to receive a dividend from a CFC, conduct tax planning to understand if you could claim a dividends received deduction.
As with GILTI, consider conducting scenario modeling to understand your options and outcomes. In particular, look at how you’re owning the CFC—as an individual or as a corporation—and assess through modeling if there’s a better way to structure ownership of the CFC. Planning opportunities for individuals may include making a Check the Box election or creating a C corporation holding company.
6. 987 regulations
If your company operates outside the United States through a branch, it may be time to revisit your tax positions and consider planning opportunities.
Section 987 regulations effective on January 1, 2020, create new requirements for calculating foreign currency exchange gain or loss on certain foreign branch transactions. Taxpayers are required to separate the assets of their foreign branches into two categories as part of the calculation: marked and historic. Special foreign currency exchange rates must be applied when translating income statement amounts related to historic assets.
Learn more in this article: New Guidance May Affect Tax Standing of Companies with Foreign Branches.
- Do you own a foreign branch? Have you evaluated the impact in 2020 of the Section 987 regulations that are effective January 1, 2020?
- Would early adoption of the Section 987 regulations be beneficial for you?
- Do you have information available to determine marked and historic assets to comply with the new regulations?
There’s still time to plan in 2019 for the impact on your tax liability in 2020 and to determine if early adoption may help reduce your tax liability in 2019.
These rules for foreign branches shouldn’t be viewed in isolation; rather, they should be considered as part of your overall international tax planning strategy. Continue preparing for implementation of these regulations in 2020, and consider evaluating these new regulations now to determine whether early adoption might be advantageous.
We’re Here to Help
There’s plenty of opportunity to consider scenarios prior to 2020. To learn more about tax strategies and how they might affect or benefit your multinational organization, contact your Moss Adams professional.
You can also visit our dedicated tax reform and tax planning pages for a deeper dive, and you can read more about tax requirements in our article Top 5 Tax Changes for Multinationals to Tackle Before 2020.