While significant current developments in international tax are evolving (potential U.S. tax reform, adoption of OECD’s Pillar One and Two, recently issued foreign tax credit regulations, etc.) companies and individuals with multi-national operations or interests should assess how they are positioned globally from a tax efficiency standpoint for what might be coming in potential tax reforms not only in the U.S. but globally if applicable. There should also be an evaluation as to if existing U.S. export and international tax centric incentives and strategies are being utilized to the greatest extent possible.
This FGMK International Tax article provides a high-level outline that reflects tax topic areas that can help identify where planning opportunities could be implemented to increase U.S. and global tax efficiency.
1) Mitigate Adverse GILTI (Global Intangible Low-Taxed Income) Impacts
- Minimize “dry” GILTI income inclusion for all controlled foreign corporations (“CFCs”) owned by U.S. shareholders.
- Consider planning to mitigate GILTI inclusions such as utilizing “High-Tax Exception,” Section 962 Election at the individual level or other mechanisms if unavoidable.
2) GILTI High-Tax Exception (GILTI HTE)
- Tested income items qualify for the GILTI HTE if the effective foreign tax rate on such items is greater than 90 percent of the federal tax rate.
- Currently 18.9 percent threshold (21 percent x 90 percent).
- Effective foreign tax rate = USD foreign income taxes paid or accrued with respect to tentative tested income / (USD tentative tested income + taxes included in the numerator).
- Foreign income taxes paid or accrued = Current year taxes only.
- Disregarded payments are regarded for purposes of calculating gross tested income and/or tentative tested income for each tested unit.
- Consistency requirements provide that, if so elected, the GILTI HTE applies to all CFCs that are members of a controlling domestic shareholder group (“CFC Group”).
- The controlling U.S. Shareholder of a CFC Group that makes or revokes a GILTI HTE election has an obligation to inform any non-controlling U.S. shareholders of those CFCs of such election or revocation.
- Procedure: The HTE election is made by the controlling domestic shareholders by attaching a statement to an original or amended income tax return for the inclusion year.
3) Section 962 Election
- U.S. individual tax election made on a year-by-year basis for all CFC’s owned by the U.S. Shareholder.
- Provides for individual taxpayers to utilize corporate tax advantages on GILTI income.
- Three specified effects of the election:
- Federal corporate tax rate applies to GILTI;
- Sec. 250 deduction (50 percent) reduces effective tax rate to 10.5 percent currently; and
- Sec. 960 indirect FTC allowed (as if the GILTI were received by a domestic corporation).
Note that future CFC distributions are generally taxable under Sec. 962(d) to the extent that the distribution exceeds the tax previously paid under 962, rather than being tax-free previously taxed income distributions in the context where no Section 962 was made. Therefore, modeling of tax impacts is recommended.
4) C-Corporations with Export and/or Sales and Services to Non-U.S. Customers
- Foreign Derived Intangible Income (“FDII”) Deduction: Identify sales of goods and services to foreign end users which are entitled to a deduction for U.S. C corporations, reducing the effective rate on this income to approximately 13 percent.
- Utilization of an IC-DISC: Provides for a deduction for qualifying export sales as a means to get cash out of the company. Can be an efficient tool in the following contexts:
- A supplement for wage of owners (individual dividend rate vs. ordinary wage rate); and
- Provides a corporate level deduction for what would essentially be a dividend to stockholders.
5) FDII Deduction
- Provides that a domestic corporation (excluding RICs, REITs, and S corporations) is allowed a deduction equal to 37.5 percent of its foreign-derived intangible income (“FDII”), plus 50 percent of its global intangible low-taxed income (“GILTI”) and Section 78 amounts, with a limit based on taxable income (referred to as the Section 250 FDII deduction).
- The Section 250 FDII deduction results currently in an effective tax rate (“ETR”) of 13.125 percent on export income and then increases to 16.41 percent after 2025.
- Identify all ultimate foreign customers (regardless of title passage or place of manufacture);
- Note that tangible products sold do not need to be manufactured in the U.S. to qualify;
- Evaluate if additional opportunities exist to restructure supplier contacts for existing customers of foreign parent or related companies whereby the U.S. becomes seller/supplier; and
- Review transfer pricing considerations.
- Service Providers
- Capture all services that benefit foreign customers, even if service is performed in the U.S.;
- Identify all services provided to foreign parent or related non-U.S. companies ;
- Identify any services performed during or after manufacture but before export to non-U.S. customers; and
- Identify all Non-U.S. onsite services, installation, calibration, repairs, etc. revenue.
6) Foreign Tax Credit (“FTC”) and Check-the-Box (“CTB”) Planning
- Evaluate global foreign taxes and related FTC utilization in the U.S.
- Review entity classification and strategize on CTB options related to foreign entities in the structure to position for and optimize long-term tax efficiency.
- CTB planning can reduce unutilized foreign taxes in the global structure (potential cash tax savings, reduced overall global effective tax rate).
- CTB planning can reduce related party payments subject to BEAT (discussed below).
7) BEAT (“Base Erosion and Anti-Abuse Tax”)
- BEAT is an additional minimum tax imposed on certain corporations (other than RICs, REITs or S corporations) that make certain “base erosion payments” to foreign related parties.
- This tax is in addition to any other tax imposed on “applicable taxpayer.
- The BEAT from 2022-2025 is 10 percent and is set to increase to 12.5 percent starting in 2026.
- An “applicable corporation” (other than a RIC, REIT, or S corporation) is a corporation that has average annual gross receipts for the three-taxable year period ending with the preceding tax year of at least $500 million and has a “base erosion percentage” of 3 percent or more for the tax year.
- This 3 percent base erosion percentage relates to deductions on payments to foreign related parties, which is commonly the focus and area for planning.
- BEAT and Outbound Payments to Related Parties
- Review operating model for opportunities to reduce or eliminate related party payments where services are provided to customers from foreign related parties that could otherwise not be reimbursed from the U.S. company.
- Settlement on a net basis where possible is permissible so to reduce the gross basis amount for purposes of the 3 percent threshold calculation.
- BEAT and Cost of Goods Sold
- Cost of goods sold is generally excludible for purposes of what constitutes a base erosion payment subject to the 3 percent threshold; thus, correct classification of expenses can be critically important.
- Capitalized costs under Section 263A would generally be excluded from the 3 percent calculation; thus, properly identifying items includible in the Section 263A exercise could help reduce expenses otherwise applicable in the 3 percent calculation.
For additional information regarding these planning opportunities and/or new and potentially forthcoming legislation, as well as analysis of its application to your entity's and your personal income tax situation, please contact Michael Pearson or Jack Millhouse.
Specialty Tax Practice, International Tax
Specialty Tax Practice, International Tax
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