If you’re a multinational company with current or planned operations in the United States, you’ve probably heard quite a bit of noise about U.S. tax reform and other developments. With new legislation and a host of acronyms, here are four provisions you need to know to cut through the noise and focus on what matters to your business.
The Tax Cuts and Jobs Act (TCJA) passed on Dec. 22, 2017, made some of the most significant changes to the U.S. tax code in 30 years. Most notably, the TCJA lowered the U.S. corporate tax rate from 35 to 21 percent and took the United States from a worldwide tax system to a hybrid territorial system, giving shareholders with a 10 percent or greater stake, an exemption on future dividends from foreign subsidiaries in exchange for a one-time toll tax on previously unrepatriated earnings. The tax package was a collection of carrots and sticks, meant to incentivize certain activities, such as onshoring of intellectual property, while discouraging others, such as profit shifting through related-party payments.
Let’s take a quick look at some of the key changes likely to impact multinational businesses.
The tax package was a collection of carrots and sticks, meant to incentivize certain activities while discouraging others.
Business interest limitation
This new rule replaces the previously existing U.S. interest-stripping limitations that applied only to interest paid to (or guaranteed by) foreign-related and tax-exempt payees. Under the new law, all interest paid by a U.S. corporation, whether domestic or foreign, related or unrelated, is limited to 30 percent of the U.S. taxpayer’s tax-based earnings before interest, taxes, depreciation and amortization (EBITDA).
Base erosion alternative tax (BEAT)
This new code section applies to corporate inbound investors into the U.S. and multinational organizations, since it specifically targets intercompany payments, such as management fees, royalties, dividends, interest, etc., and calculates an alternative tax on an income base where these payments are not allowed as deductions. Companies with $500 million in total U.S.-based gross receipts should evaluate whether the BEAT will apply to their organizations.
Global intangible low-taxed income (GILTI)
This code section applies to U.S. persons with foreign corporate subsidiaries and amounts to an elimination of the ability to defer income beyond 10 percent of depreciable business assets in that foreign jurisdiction. The impact is more punitive to noncorporate shareholders (U.S. pass-throughs and individuals) but, in a corporate context, GILTI results in about a 10 percent tax on those foreign earnings in excess of the threshold, and the entity receives an offsetting foreign tax credit.
Foreign derived intangible income (FDII)
One of the few carrots in tax reform, FDII is a 37.5 percent deduction for U.S. corporate taxpayers, including U.S. corporate subsidiaries of foreign-based multinationals, that earn income on the sale of goods or services to foreign unrelated parties. So, if your business exports goods or services outside of the United States, it can likely achieve a tax rate of less than 21 percent.
What’s your next move in this new U.S. tax landscape? Check out our tax reform playbook and web-based app. It will take you step by step through the various areas of reform, with detailed explanations and a practical planning approach.
Still have questions? One of our specialists can help you determine what makes sense for your organization, whether you want to ensure U.S. compliance for your current business or you’re planning a future U.S. expansion.