Marcum 2021 Year-End Tax Guide

International Taxation Matters: Potential Impact and Planning Points Now four years removed from the enactment of the Tax Cut and Jobs Act (“TCJA”), one year removed from the Coronavirus Aid, Relief, and Economic Security Act (“CARES”), and months away from finalization of the Biden administration’s General Explanations of the Administration’s Fiscal Year 2022 Revenue Proposals (“Green Book”), the IRS continues to issue notices and regulations as part of its effort to provide clarity to taxpayers uncertain of the ramifications of new international statutory provisions. Under the TCJA, the IRS established the GILTI tax regime to (1) disallow deferral of income generated by controlled foreign corporations (“CFC”); (2) deter the offshoring of intellectual property (“IP”) and other valuable intangible assets; and (3) discourage the accumulation of offshore earnings in low-tax jurisdictions. U.S. taxpayers regarded as U.S. shareholders (i.e., U.S. taxpayers that hold more than 10% vote or value of a CFC) are subject to immediate U.S. taxation on their share of a CFC’s undistributed foreign earnings characterized as GILTI inclusion amount. A CFC’s GILTI inclusion amount is the entity’s current year earnings reduced by 10% of its depreciable tangible property (i.e., deemed tangible income return on qualified business asset investment (“QBAI”)). GLOBAL INTANGIBLE LOW-TAXED INCOME (“GILTI”)

Domestic corporations regarded as U.S. shareholders of a CFC may take a deduction of 50% on their GILTI inclusion (i.e., IRC §250 deduction), and can additionally claim a foreign tax credit (“FTC”) of up to 80% for the CFC’s foreign income taxes paid or accrued on the GILTI inclusion amount, subject to certain FTC limitation. Individual U.S. shareholders must make an IRC §962 election to receive the same benefits as the previously mentioned domestic corporation U.S. shareholders. On June 20, 2020, the IRS issued final regulations permitting U.S. taxpayers to make a GILTI high-tax exception (“HTE”) election, which provides U.S. income tax relief to CFCs conducting business in foreign jurisdictions with a corporate income tax rate greater than 18.9%. Making a HTE election may cause changes to a taxpayer’s U.S. income tax return, including the application of FTC, the allocation of foreign business expenses, and the IRC §163(j) interest deduction limitation. Therefore, a financial analysis is recommended prior to a HTE election to determine the HTE exception’s potential tax impact. On September 13, 2021, the House Ways and Means Committee provided an update to the Biden Administration’s Green Book tax proposal issued on May 28, 2021. The following change to the GILTI provisions was proposed: 1. Compute GILTI on a country-by-country basis; 2. Reduce the deemed tangible income return on QBAI from 10% to 5%; 3. Allow for carryover of country-specific net tested losses; 4. Allow a 5-year carryforward of GILTI excess FTCs; 5. Reduce the IRC §250 deduction from 50% to 37.5%; 6. Include in net operating loss IRC §250 deduction that exceeds taxable income; and 7. Increase the FTC inclusion from 80% to 95%.

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