First Look at the Tax Cuts and Jobs Act: Questions and Answers about International Taxation

By Siegfried, Chaya; Kess, Sidney | The CPA Journal, May 2018 | Go to article overview

First Look at the Tax Cuts and Jobs Act: Questions and Answers about International Taxation


Siegfried, Chaya, Kess, Sidney, The CPA Journal


Taxation of international activities has always been complex and rife with traps for the unwary. The Tax Cuts and Jobs Act of 2017 (TCJA) has completely changed the landscape of international taxation, but not, as one would hope, in the direction of simplification. Rather, it adds a layer of complexity to what was already an complicated system.

The most discussed provision in the TCJA is likely the "transition tax," which results in a one-time deemed repatriation. The new Global Intangible Low Taxed Income (GILTI) provision may, however, have an even greater impact. In addition, there are several minor tweaks to the existing law that will, for the multinational corporations affected, have significant consequences.

What Is the Transition Tax?

The transition tax is a one-time deemed repatriation of all previously untaxed earnings in foreign corporations that are owned directly or indirectly by U.S. taxpayers. It is referred to as a transition tax because it is intended to purge all of the earnings that were earned by foreign subsidiaries of U.S. companies under a worldwide system of taxation-estimated to amount to trillions of dollars in accumulated earnings. Under this system, when a foreign corporation owned by a U.S. person generated income, the income would generally have been taxed in the local country and then, upon distribution to the U.S. shareholder, subject to U.S. income tax.

Under the new law, the United States has moved to a territorial system of taxation for certain U.S. taxpayers. As such, for qualifying taxpayers with foreign subsidiaries, the income earned in the foreign subsidiary corporation will be taxed in the local country when earned and, upon repatriation to the U.S. shareholder, not be subject to U.S. tax.

Example. A U.S. C Corporation owns 40% of the stock of an Irish company and the remaining stock is owned by a nonU.S. person. Under the worldwide system of taxation, the income earned by the Irish company would be taxed in Ireland when earned and then upon distribution to the U.S. shareholder it would be taxed in the United States as well. Under the territorial system, the same income generated by the Irish subsidiary would be taxed in Ireland when earned and then, upon distribution to the U.S. shareholder, it would not be taxed in the United States.

How Will this Income Be Taxed?

Income that is deemed repatriated under the transition tax provision will be taxed at a very reduced rate. The exact rate will depend on the assets in the foreign corporation and the type of U.S. taxpayer.

What Must Be Disclosed from a Financial Reporting Perspective?

Taxpayers have the ability to elect to pay the transition tax over a period of eight years; however, the tax liability arising from the transition tax must be disclosed for financial reporting purposes.

What is GILTI?

The GILTI provision was introduced to discourage U.S. taxpayers from moving their intangible property (IP) offshore in an attempt to move the high returns associated with that IP outside of the U.S. tax net. This provision is designed to discourage or penalize this type of offshoring of assets.

Because it is difficult to quantify a company's IP and the specific income that is derived from these assets, the GILTI provision assigns a 10% rate of return on fixed assets of a foreign corporation, and any income in excess of this 10% return is deemed intangible. This intangible income is deemed repatriated in the year earned.

This provision applies specifically to controlled foreign corporations (CFCs) or foreign corporations that have more than 50% control or ownership.

Example: ABC USA Inc. owns 100% of ABC Ireland Ltd. ABC Ireland Ltd. has a net income of $1 million, taxed in Ireland at a rate of 12.5%. ABC Ireland Ltd. has $2 million of fixed assets used in trade or business as well as Subpart F income related to royalties of $200,000.

ABC Ireland's profit is $875,000 ($1 million of income minus $125,000 of corporate tax). …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Note: primary sources have slightly different requirements for citation. Please see these guidelines for more information.

Cited article

First Look at the Tax Cuts and Jobs Act: Questions and Answers about International Taxation
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen
Items saved from this article
  • Highlights & Notes
  • Citations
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Search by... Author
    Show... All Results Primary Sources Peer-reviewed

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.