2019 Year-End Tax Guide

THE MARCUM 2019 YEAR-END TAX GUIDE | www.marcumllp.com

NOTABLE PROVISIONS AFFECTING INTERNATIONAL TAX

The Tax Cut and Jobs Act of 2017 (“TCJA”) continued to have a profound impact in the international tax arena in 2019. The year brought forth IRS notices and regulations (both final and proposed), that expanded on the TCJA and provided much needed clarity on various topics. Two of the major provisions of the TCJA as they relate to international taxation are the Global Intangible Low- Taxed Income (GILTI) and Foreign-Derived Intangible Income (FDII) regimes. Following is a brief discussion of these provisions, as well as planning points taxpayers should consider for 2019 and future years.

GLOBAL INTANGIBLE LOW-TAXED INCOME (“GILTI”) Originally introduced under TCJA, the IRS has since enacted a host of additional regulations concerning Global Intangible Low- Taxed Income (“GILTI”), in hopes of providing clarity to those U.S. taxpayers that fall under the ambit of the TCJA’s revamped multinational tax regime. Designed to deter the offshoring of IP intellectual property (IP) and other intangibles, GILTI effectively functions as a current income inclusion on undistributed foreign earned income, equal to the income earned by certain foreign corporations with U.S. shareholders that exceeds 10% of that foreign corporation’s depreciable tangible property. Currently, domestic corporations are generally allowed a deduction of 50 percent of their GILTI inclusion, under Internal Revenue Code (“IRC”) §250, and can additionally claim a foreign tax credit of up to 80 percent of foreign income taxes paid or accrued on GILTI inclusions. Note: A GILTI high -tax exception was proposed in June of 2019 and, if finalized, may provide relief to taxpayers conducting business in foreign high-tax jurisdictions in future tax years. Under this proposed exception, income subject to tax in a foreign country at a rate greater than 18.9 percent would not be included in GILTI, at the election of the taxpayer.

Notably, however, many of the aforementioned means by which taxpayers can minimize the effect of the GILTI inclusion (i.e., application of foreign tax credits or the §250 deduction) are generally only available to domestic C corporations. For individual taxpayers, who would otherwise be subject to ordinary tax rates on their GILTI inclusions, §962 provides an avenue through which they might not only mitigate the effect of their GILTI inclusion, but also lower their effective tax rate on the whole. §962 ELECTION Often overlooked historically, §962 has recently risen to prominence with the advent of the TCJA. Section 962 allows certain U.S. individuals to elect to be treated as a domestic C corporation for federal income tax purposes with respect to GILTI income. In the context of GILTI, treatment as a domestic C corporation through a §962 election allows U.S. individual shareholders to be taxed at corporate rates on their GILTI inclusions, and to take advantage of §250’s 50% GILTI deduction, while granting the ability to utilize foreign tax credits. The election can mitigate the U.S. tax on GILTI inclusions if the foreign income tax rate on such income is at least 13.125%. This result can be achieved by election, without the need to interpose a corporation in the structure.

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