Within a two-week period in July, the IRS and Treasury issued final regulations for Section 951A and Section 250, which have a significant impact on international tax. Join Charles Edge, an international tax partner with DHG, as he discusses potential tax savings for U.S. taxpayers from utilizing the now finalized GILTI inclusion and FDII deduction.
[00:00:09] JL: Welcome to today's edition of DHG’s GrowthCast. I'm your host, John Locke. At DHG, our strength lies in our technical knowledge, our industry intelligence, and our future focus. We understand business needs and are laser-focused on company goals. In this ever-changing world, DHG's GrowthCast provides insights and thought-provoking conversations on topics and trends that address growth opportunities and challenges in the current and future marketplace. Thanks for joining us as we discuss tomorrow's needs today.
[00:00:42] ANNOUNCER: The views and concepts expressed by today's panelists are their own and not those of Dixon Hughes Goodman LLP. Always consult the advice of your legal and financial professional before taking any action.
[00:00:58] JL: Hello and welcome to DHG’s GrowthCast. I'm your host John Locke, and today I will be speaking with Charles Edge of DHG’s Tax Advisory Group about a few recent final regulations issued regarding international taxes. Charles has more than 26 years of experience in advising clients on all aspects of cross-border income taxation. He has extensive experience with international tax planning and compliance, including international tax treaty analysis, mergers, acquisitions, restructurings, and foreign tax credit planning. Charles works out of the DHG office in Asheville, North Carolina. Welcome, Charles.
[00:01:38] CE: Thank you, John. Glad to be here.
[00:01:40] JL: Charles, I understand that there had been some significant new regulations pertaining to international tax laws released in just the last few weeks. Can you tell me a little bit more about that?
[00:01:51] CE: Yeah. Absolutely, John. Within a two-week period back in July, IRS and Treasury released over a thousand pages of highly anticipated final and proposed regs dealing with two of the most significant parts of international tax reform; the GILTI tax, the payment under section 951A, and the FDII deduction under section 250. The most significant regulations to be released in this package fits on the GILTI, global low-taxed income provisions, that were introduced as part of the Tax Cuts and Jobs Act from 2017. The GILTI regime is essentially designed to penalize companies that ship profits out of the US and into low-taxed jurisdictions. Under the GILTI regime, we’ve seen US shareholders of the US corporations that become subject to US tax on earnings from the foreign corporation that exceed a 10% return on the asset used in that foreign country to produce the income. The file regulations that were issued in July allowed taxpayers to exclude income earned [inaudible 00:03:06] from the GILTI calculation to the extent that that income is subject to a rate of tax of at least 90% of the US corporate tax rate. That means that currently under current tax rates, any income that’s taxed at at least 18.9% offshore can potentially be excluded from the GILTI calculation.
Previously before these regs came out, there was no exclusion for high-taxed income at all. The big news coming out to the regulations was that this exclusion can be now applied retroactively. The taxpayers can now potentially get a refund of taxes that had been paid in 2018 and 2019 by filing amended return.
[00:03:56] JL: This is really interesting. What types of taxpayers should be looking into this exclusion to determine that they can reduce taxes and claim refunds?
[00:04:07] CE: Any US shareholders of a foreign control corporation and that could be a corporate or an individual shareholder that had a GILTI inclusion amount in 2018 or 2019 that ended up resulting in an increased tax liability or reduction of a net operating loss should be looking into utilizing this new exclusion. We should note that the exclusion, while it's good news to many taxpayers, it won’t benefit everybody, and that is due to the interplay between the GILTI inclusion and other tax attribute such as foreign tax credit, the section (163)j interest limitation, etc. For this reason, taxpayers must look at modeling out that specific pattern at some depth before they can determine if using this exclusion is going to be beneficial.
At DHG, we’ve been identifying clients that could possibly benefit from the exclusion and conducting a preliminary analysis to see if there was a benefit to be achieved. If it is, then we can go back and amended returns as needed for a client.
[00:05:22] JL: What else should our listeners know about the GILTI exclusion?
[00:05:28] CE: Well, under the proposed regs that were issued in 2019, shareholders will going to have to – If they wanted to make a high-taxed exclusion, they will going to have to make an election that’s going to be binding for five years. That was going to be very difficult for people to use that looking glass to see what the tax attributes are going to look like for the next five years. But fortunately, under the final regs, this election now can be made on an annual basis. That allows for a lot more flexibility and makes planning a lot easier.
It's also important to note that this election to exclude high-taxed income is made by controlling domestic shareholder, and it’s binding on all other shareholders. If you are not the majority shareholder, somebody else might be making that election for you, and you may have to go back and file many returns based on elections that the controlling shareholders made.
[00:06:28] JL: Now, at the top of our time together today, you mentioned that there were two sets of final regulations issued recently that impact international tax. What was the other one?
[00:06:38] CE: Going back to the Tax Cuts and Jobs Act of 2017, Congress laws are decided to provide a tax incentive for US corporations that sell goods and services or intellectual property to foreign customers by allowing a deduction for eligible income that effectively lowers the tax rate on this income from the standard rate of 21% to about 13%, so significant preferential rate. Congress really wanted to motivate US companies to export more goods and services, while at the same time protecting the US tax base by providing incentives to develop and retain intellectual property in the US. The proposed regulations included some very stringent documentation requirements regarding substantiation of the foreign use of whatever goods or services are sold that created real challenges for taxpayers.
We had some clients, quite honestly, that felt like the requirements were just too difficult to comply with, and they chose not to claim the deduction. But fortunately, the final regs relaxed those documentation requirements quite significantly, so taxpayers really might want to consider revisiting the benefits of claiming the deduction just to make sure they’re not overlooking a very significant prominent tax savings opportunity.
[00:08:09] JL: Wow, that sounds like a great opportunity to save tax dollars. Can you give me an example of the kind of income would be eligible?
[00:08:16] CE: Yeah. Sure, John. Examples of foreign derived intangible income sales and services include things like property, general sales of property. But that also includes electronic transfers of digital content. As long as whatever is being sold is sold to a foreign person and it’s going to be used outside the US. It can also include services that are performed by US corporation to any person that’s not located in the US or services with respect to the property that’s not located in the US. Sales also include things like leases, licenses, and outbound company transfers.
[00:08:59] JL: What about related party sales and services? How does that factor in?
[00:09:05] CE: That’s a good question. It gets a little bit more complicated when you’re selling to a related party. Basically, you need to look through to what that related party does following the sale. If you sell to a related party, and that related party just uses those goods or services in their business and don’t unsell them to anybody, then it would not be eligible for the deduction. But to the extent you sell something to a related party who then sells it to another unrelated customer and used outside the US, then that is ineligible sale.
[00:09:44] JL: Now, you mentioned that both the GILTI inclusion and the FDII deduction came out of that 2017 TCGA. Is there a connection between the two?
[00:09:55] CE: Sure. Well, when taken together, the GILTI inclusion and FDII deduction do serve as kind of a carrot and stick for US taxpayers that have foreign activities with the goal of protecting the US taxpayer. Taxpayers who had for many years [inaudible 00:10:13] valuable intangible assets and profitable operations to low-taxed jurisdictions and achieve very low tax rates outside of the US are now going to be penalized on the GILTI regime, whereas taxpayers who keep their assets and activities in the US are going to be rewarded with a significantly lower tax rate on revenue coming from foreign customers.
[00:10:39] JL: Charles, this is great information, and we really appreciate your time today. One last thing though, if anyone wants to know more about the GILTI or FDII, how can they get in touch with you?
[00:10:50] CE: Yeah, sure. They can email us at firstname.lastname@example.org, and somebody from our tax team will help you with any questions you have or any additional information you may need.
[00:11:03] JL: Great.
End of Interview
[00:11:05] JL: Well, you’ve been listening to DHG GrowthCast with Charles Edge, a partner in DHG’s International Tax Advisory Group. We hope that you have a better understanding of the new IRS international tax regulations that were issued this summer. I’m your host, John Locke, and I look forward to reconnecting with you again soon on an upcoming episode of DHG GrowthCast.