International Tax Reform: Where Do We Stand?
By: Anita Anand, JD
From the time proposed legislation on tax reform was initially introduced, discussions surrounding those proposals and their impacts began and have continued since. Almost seven months after the enactment of the Tax Cuts and Jobs Act (TCJA), one would think that we would have reached a decent level of clarity and certainty. Unfortunately, that has not been the case, especially in the context of the international tax provisions contained in the TCJA.
One of the most talked about international tax provisions in the TCJA has been the mandatory deemed repatriation of accumulated, untaxed foreign earnings of certain foreign corporations owned by certain U.S. shareholders, commonly referred to as the “toll tax” or “transition tax.” This law requires various taxpayers who have such earnings to pay a tax on those earnings as if they had been repatriated to the United States, whether repatriated or not.
Transition Tax Impact
Unlike most provisions in the TCJA that went into effect beginning in 2018 (and therefore impacting 2018 tax returns), the transition tax can—and for many taxpayers did—impact their 2017 tax returns. As such, much uncertainty involving compliance surrounds this new provision. Though the Internal Revenue Service has released several notices and other guidance pertaining to the transition tax, many open issues still remain that tax practitioners are seeking guidance on.
The transition tax was intended to tax accumulated, untaxed foreign earnings in an effort to transition to a quasi-territorial system. To achieve the transition from a worldwide tax system toward a territorial tax system, the TCJA included a 100% dividends-received deduction for the foreign source portion of dividends, which applies to distributions made on or after January 1, 2018, which means that foreign sourced dividends received by certain domestic corporations may be “exempt” from U.S. taxation by virtue of this dividends received deduction.
Other Notable Changes
Other notable changes included the creation of some new income buckets and taxes that can have an impact on those taxpayers with international operations and activities—namely, the Global Intangible Low-Tax Income (GILTI), Foreign Derived Intangible Income (FDII), and Base Erosion and Anti-abuse Tax (BEAT). Apart from the actual legislative language, statute, and Conference Committee Report, we are still awaiting additional guidance on these new provisions. Without guidance, it remains difficult to not only assess the full impact these new provisions will have on taxpayers and businesses with an international footprint, but it remains challenging to formulate appropriate tax planning strategies to account for these new provisions.
So, it has been over six months since President Trump signed into law the TCJA, and where do we stand? We have heard that IRS intends to issue guidance on these international tax provisions throughout the year. Specifically, a senior IRS attorney has stated that rules implementing the transition tax will be released sometime this summer, likely August, (most likely in the form of regulations). Proposed guidance on GILTI is expected in September and proposed rules on the BEAT tax are expected in October.
Although IRS officials assure us that guidance implementing the various international tax provisions of the TCJA remain a top priority for the Service, many unanswered questions remain along with much uncertainty, which we are hopeful will be cleared up as the IRS issues additional guidance. Until then, we’re still in a “wait-and-see” period.
Questions about international tax reform? Contact Brady Ware’s International Tax Team.