International Tax Reform: What Should Every CPA Know About It?

Despite the popular focus of tax reform being on changes to deductions and rate cuts, a recent shift has taken place in the treatment of U.S. taxes on companies that do business overseas. What follows is a quick roundup of some of the primary changes to the international tax law that will dramatically impact companies that engage in overseas transactions.

Announcements regarding these changes are still in progress, but CPA candidates can get updates from a CPA prep course. Organizations such as the AICPA manage the distribution of updates.

Repatriation of Offshore Earnings

One of the most immediate and farthest-reaching impacts of the international tax reforms will be the “transition tax,” which deals with the repatriation of earnings held offshore. This is a one-time tax and applies to shareholders who own 10 percent of a specified foreign corporation.

These foreign incomes will be taxed at two different rates, both determined by the earner’s post-1986 income share. This will be taxed at the rate of 15.5 percent of earnings determined by liquid assets such as accounts receivable, CDs, cash, government securities, etc.

These taxes could result in significant sums for individual taxpayers. As a result, the government has allowed for payment of these taxes on an installment basis over eight years or when a triggering event such as a sale, cessation of business, or liquidation occurs. The IRS has not yet determined the methods of payment.

Territorial Tax System

Another significant change to the tax system affects the incomes of U.S. citizens who earn their incomes outside the U.S.. This system brings under U.S. tax jurisdiction the income of any U.S. citizen who lives within the territories of its trading partners.

Expansion of Offshore Income Limits

Until now, foreign-source income has been exempted from U.S. taxes. However, new regulations prevent these incomes from being held offshore long-term and identify them as new categories of income. Today, a new class called “Global Intangible Low-Taxed Income” (GILTI) will be taxed. Further, any income earned by a controlled foreign corporation with more than 10 percent of depreciable tangible property used to generate income is taxable.

Reduction of Tax Rate on Foreign-Derived Incomes

The new tax regulations aim to bring home foreign-earned incomes via an export tax incentive. This is similar to the GILTI, making income eligible for a deduction of 10 percent return on a depreciable tangible property used to generate revenues.

The incomes eligible for this deduction include lease, sale, license, and other dispositions of property by domestic businesses to any person in a foreign country used outside of the U.S. This is deductible at 37.5 percent, with the intent to reduce the applicable tax on these incomes to 13.25 percent. These deductions are only available to C corporations.

Anti-Abuse and Base Erosion Tax

The anti-abuse and base erosion tax is an alternative tax computation. This 10 percent tax applies to any modified taxable income of a C Corporation. It is computed by adding back any base-eroding deductions for any payments made to a foreign affiliate.

These tax reforms aim to replace the previous deferral of some foreign-source incomes by a system of current taxes. There are presently a few incentives that these new deductions are allowed by C Corporations.

Anyone who has questions regarding these new taxes should speak with a CPA or the person conducting the exam review course. These persons are the ones who are best able to determine the applicability of a person’s situation to the new tax standards.