2020 Year-End Tax Guide

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THE MARCUM 2020 YEAR-END TAX GUIDE

International Taxation Matters: Potential Impact and Planning Points

Almost three years removed from the enactment of the Tax Cut and Jobs Act (TCJA), the IRS has continued to issue additional notices and regulations as part of its effort to provide clarity to taxpayers uncertain of the ramifications of new international statutory provisions. Mid-way through 2020, the IRS released final regulations concerning the provisions impacting U.S. multinational companies and cross-border transactions. Following is a brief discussion of these rules and their potential tax impact, as well as planning points to consider in 2020 and future years.

GLOBAL INTANGIBLE LOW-TAXED INCOME (“GILTI”) Under the GILTI provisions established by the TCJA, U.S. taxpayers that are shareholders of controlled foreign corporations, or CFC’s, are required to make a current income inclusion on their share of a CFC’s undistributed foreign earned income that is ultimately treated as GILTI income. The GILTI inclusion amount, which is essentially equal to the foreign income earned by the CFC in excess of 10% of that foreign corporation’s depreciable tangible property, was designed to deter the offshoring of intellectual property (IP) and other valuable intangible assets, as well as to discourage the accumulation of offshore earnings in low-tax jurisdictions. Domestic corporations are currently allowed a deduction of 50% of their GILTI inclusion and can additionally claim a foreign tax credit of up to 80 percent of foreign income taxes paid or accrued on GILTI inclusions, subject to certain foreign tax credit limitation rules. The GILTI high-tax exception, initially proposed in June 2019, has since been finalized and may provide relief to taxpayers conducting business in foreign high-tax jurisdictions in future tax years. Under the exception, income subject to tax in a foreign country at a rate greater than 18.9 percent would be excluded from GILTI at the election of the taxpayer. Because electing to apply the GILTI high- tax exception may affect a number of other items included on a taxpayer’s return, including the application of foreign tax credits, the allocation of foreign business expenses, and the 163(j) interest deduction limitation, taxpayers considering making the election are recommended to have a financial analysis conducted in order to determine the exception’s potential tax impact. Additionally, while non-corporate taxpayers would not typically be eligible for the foreign tax credit limitation or the 50% GILTI deduction, final regulations released in 2020 have established that individual taxpayers electing under section 962 to be treated as a U.S. C-Corporation can avail themselves of both of these methods of mitigating the effects of the GILTI inclusion.