NEW GILTI TAX ON CONTROLLED FOREIGN CORPORATIONS FOR 2018

If you own more than fifty percent of a foreign corporation holding real estate or operating a business

abroad, you now have to plan for the new GILTI tax (acronym)  IRC Section 951A resulting from the Tax Bill enacted in late 2017.   This tax applies to both large and small foreign corporations. In the past unless you had certain types of income, any net profits left in the corporation were not taxed on your personal return (or US corporate return if the foreign corporation is owned by your foreign corporation).  Now it is probable if there is a profit you will have to pay tax on the profits remaining at year end in your foreign corporation.

READ MORE ABOUT THE GILTI TAX  HERE IN AN EXCELLENT ARTICLE BY AN EXPERT - CPA  KYLE LODDER

Contact us at ddnelson@gmail.com if you want to plan for the tax, the impact of the tax, or avoiding it before the end of 2018.  Time is limited and after year end there is nothing you can do.

Deemed Repatriation of Foreign Accumulated Earnings if you own 10% or More of Foreign Corporation- New Tax for 2017

The rules and complex and Congress failed to include in the bill a complete explanation of how it is calculated.  The IRS will publish guidance soon (we hope) so this tax can be calulated correctly. If you are a shareholder in a foreign corporation what is know todate about this tax on Earnings and Profits is stated below:

The new provision states that all taxpayers who are U.S. shareholders of Specified Foreign Corporations (SFC) in 2017 will have an income inclusion to the extent they have allocable undistributed earnings from such corporation. While there is a reduced tax rate applicable to this income, at least a portion of the tax is due in 2017 and the liability must be calculated as part of the 2017 tax filing.

Here are the details of the new provision:

All U.S. shareholders of a SFC must include in their 2017 income their pro-rata share of accumulated post-1986 deferred foreign income. This income will be taxed in a manner that should result in the quoted federal effective tax rate on earnings of:

• 5% on cash and cash equivalents and,
• 8% on illiquid assets

The IRS has  allowed the taxpayer to elect to pay the tax over an 8 year period, starting with the 2017 return, using a specific weighted installment calculation. However, the entire tax liability or the first installment is due by the original due date of the shareholders tax return. 

A taxpayer’s pro-rata share of accumulated post-1986 deferred foreign income is considered Subpart F income. For future taxation purposes, this income generally will be considered previously taxed income. Thus, the future actual cash repatriation of these earnings will not trigger any additional tax consequence as the cash will not be considered taxable income.

What is the definition of a U.S. shareholder for this purpose?

A U.S. person who owns (directly, indirectly, or constructively) 10% or more of the total voting stock.

• A U.S. person includes US citizens and residents, domestic partnerships, corporations, estates and trusts.

What is the definition of a Specified Foreign Corporation for this purpose?

• A controlled foreign corporation (CFC), or
• A noncontrolled foreign corporation that has at least one domestic corporate shareholder.

Calculation of Income Inclusion:

The income inclusion amount is the greater of the shareholders share of the accumulated post-1986 deferred income (Earnings and Profit or E&P) as of November 2* or December 31, 2017.  Thus, for all U.S. shareholders of SFCs the accumulated E&P will need to be calculated. This will need to be allocated to pre and post-1986 deferred income as applicable and/or pre and post date of becoming an SFC.  If there is an accumulated E&P deficit, there are special rules that will allow U.S. shareholders to aggregate their total allocable E&P from all sources for this purpose, but not below zero.

The effective tax rate is achieved via a mechanical calculation. The U.S. shareholder includes the applicable deferred income (E&P) into income but is allowed a deemed dividend, which when the applicable highest corporate tax rate is applied to the income (currently 35%, since this is for the 2017 tax year) the effective federal rate will be 15.5 or 8% on the income inclusion amount. The ultimate tax paid on the income inclusion may be further reduced in certain circumstances due to available foreign tax credits (primarily C Corporations). Given the mechanism of this calculation, should the shareholder be a U.S. individual, the effective federal tax rate may be slightly higher or lower than those applicable to corporate shareholders. Individual shareholders will also need to review the application of net investment income (NIIT) tax to the deemed dividend based on their facts and circumstance. If NIIT is applicable, an additional 3.8% tax will apply at the federal level.olders of 10% or more of foreign corporations to pay a tax on the accumulated earnings in the corporation at year end.

New U.S. tax law for owners of non-U.S. corporations – action to consider by year-end!

Posted on December 22, 2017 

By Kyle Lodder, CPA

President Trump has signed significant U.S. tax legislation into law today, namely the “Tax Cuts and Jobs Act”.

There are many favorable tax provisions that will benefit many taxpayers, for individuals and businesses. But there are also some quite unfavorable international tax provisions which may adversely impact business owners of non-U.S. corporations.

One specific new provision relates to U.S. persons who own an interest in a non-U.S. corporation.

Under prior law, U.S. shareholders generally are taxed on all income, whether earned in the U.S. or abroad. Foreign income earned by a foreign (non-U.S.) corporation generally is not subject to U.S. tax until the income is distributed as a dividend to the U.S. shareholder.

Under this new law, certain U.S. shareholders owning at least 10% of the foreign corporation generally must include in income starting in 2017 the shareholder’s pro-rata share of the net post-’86 historical earnings and profits “E&P” (i.e. accumulated unrepatriated earnings) to the extent it hasn’t been previously taxed in the U.S.  This is a one-time tax as the U.S. attempts to transition from a worldwide tax system to a territorial type of tax system.

The portion of the historical earnings comprising of cash or cash equivalents is taxed at a reduced rate of 15.5%, while any remaining E&P is taxed at a reduced rate of 8% (it works out to a bit higher rate in some cases). The lower tax rate is intended to recognize that non-cash assets are illiquid and/or in productive use in the business. Nonetheless, this could be a significant tax hit for this upcoming tax season, although there is an option to elect to defer the payment over eight years.

Another problem with this tax is that it’s on deemed income. There isn’t an actual dividend. Rather, it’s deemed income for U.S. purposes. In most foreign countries, this deemed income isn’t considered taxable income. The challenge then is that it’s taxed in the current year for U.S. purposes but not in the foreign country. And when the money is distributed in the future, it typically is treated as a dividend in the foreign country, but not in the U.S. It causes a mismatch and often the lack of use of foreign tax credits, resulting in true double taxation.

 
What to do by year-end?

If you have significant retained earnings, it’d be worth contacting us to see if there are some planning moves to be made prior to year-end. Perhaps it makes sense to withdraw money from the company before year-end to trigger an actual dividend in the U.S. and the foreign country. This will trigger income in both countries to allow for utilization of foreign tax credits. Furthermore, simply withdrawing the money by year-end will allow for us to then determine after year-end how to classify the withdrawal (as a dividend, wage or loan for example).

If there remains tax exposure after considering foreign tax credits, it could make sense to gift shares to a non-resident alien spouse before year-end to a smaller ownership percentage level to avoid this tax.

This is a very new tax concept and not a lot of time has been granted to us to plan around this matter.  Yet, it makes sense to look at this before year-end to see if any moves can be made prior to year-end to put you in a better tax position.

If you require additional information on any aspect of these complex rules, please contact Kyle Lodder CPA at 360.599.4340 or kyle@loddercpa.com.  You can also contact Don D. Nelson International Tax Attorney at ddnelson@gmail.com or 949.480.1235. Kyle works with our firm.

The material appearing in this communication is for informational purposes only and should not be construed as legal, accounting, or tax advice or opinion provided by Lodder CPA PLLC. This information is not intended to create, and receipt does not constitute, a legal relationship, including, but not limited to, an accountant-client relationship. Although these materials have been prepared by a professional, the user should not substitute these materials for professional services, and should seek advice from an independent advisor before acting on any information

Singapore is one of Best Places for Your Offshore Business Corporation

Singapore offers low taxes, stability and lots of other benefits if you are looking at where to locate your Offshore Corporation to conduct your business abroad.  This applies both to expatriates living abroad and to US business owners that want to conduct foreign business.

Read more about why Singapore is excellent off Offshore Business Corporations in this article in the PRWEB

There are many US tax concerns and filing requirements when you create a Singapore Company  and you are a US citizen that owns 10% or more of that foreign corporation. Read our website at www.TaxMeLess.com  to learn more about those IRS tax requirements.

US Flow Through Tax Election for Your Foreign Corporation or LLC

You can make an election if you have a foreign corporation or LLC which may (depending on your individual  business circumstances) to treat that entity as a flow through entity for your US tax return. This means all profits and losses from the foreign entity flow through to you tax return. It also means you can offset any foreign taxes paid by the foreign entity against your US tax on that flow through income taking it as a foreign tax credit which will normally offset your US tax on that flow through income dollar for dollar. If the foreign tax rate is higher than your US tax rate, that will mean you will owe no US tax on that foreign entity's income on your US return.

Only certain foreign corporations or business organizations are eligible for the US flow through election. A list of the entities which are not eligible for this election are listed by country and included in the instructions for IRS Form 8832.  It is best to review this list and see what types of foreign entities will be eligible to make the flow through election if it would be beneficial to your US taxes prior to forming a foreign corporation or LLC.

You may have to talk with an International Tax Expert to determine if a flow through election will benefit your business plan.  It does avoid possibilities of double taxation (if you plan to distribute most of the income to yourself) and Controlled Foreign Corporation Subpart F rules as well as other potential US tax problems.  Most foreign attorneys and accountants who help you form your foreign business entity do not know these US tax rules.  It is often difficult after the fact to change the type of entity (depending on the foreign country in which it is formed) if you later discover that you do wish to have the income flow through to your US return.  We have helped well over a hundred expatriate business owners determining which type of foreign entity will be best for them under US tax law.

Costa Rica Banks Will Report US Taxpayers Holdings to IRS

The Tico Times reports that in 2013, Costa Rica Banks will start reporting US Citizen Bank Accounts and holdings to the Internal Revenue Service (read article here). If this applies to your situation as a resident of Costa Rica or property owner, you should immediately begin to report all financial accounts located outside of the US using the IRS FBAR form TDF 90-22.1.  Failure to file this form each year (it is due on 6/30 following the end of each calendar year) can result in IRS penalties of $10,000 or more per year and possible criminal prosecution.

Another IRS requirement is that you report your Costa Rica Corporation, whether active or dormant, using form 5471 attached to your US tax return each year.  Some years you may also have to file form 926 also. There are no exceptions to this rule. The penalty for not filing that form is also $10,000 per year.

In most situations, these forms are just reporting forms, and do not result in any additional tax due. Best to file now to avoid bigger problems in another year when the IRS will get the lists from the Costa Rica Banks. We can help.