The Tax Cuts and Jobs Act (P.L. 115-97) that President Trump signed into law on December 22, 2017, affects many areas of U.S. domestic and international tax planning. The international changes were portrayed as a move to a territorial tax system (implying foreign-derived business income would no longer be subject to U.S. taxation) with reduced tax rates. In fact, for many individual taxpayers with non-U.S. operations, the new rules result in both increased tax rates and the end of any meaningful ability to defer U.S. taxation until profits are actually paid into the United States.
This article illustrates the authors understanding of the new global intangible low-taxed income (GILTI) rules, highlights uncertainties and potential inequalities between the treatment of individual and corporate taxpayers, and considers potential planning techniques to mitigate the consequences of these rules for U.S. individual shareholders.
Under the GILTI rules in new section 951A, U.S. shareholders in a controlled foreign
corporation must annually include in income their share of the CFC’s net CFC-tested income, regardless of whether the CFC actually distributes any cash to the U.S. shareholders. While U.S. shareholders of CFCs have long been subject to a similar inclusion under the subpart F rules on specific passive and related-party income earned by the company, the GILTI rules greatly expand the scope of income on which U.S. CFC shareholders are subject to immediate U.S. tax. Based on the authors’ experiences with clients, GILTI includes nearly all active and operating income that before 2018 would not have been subject to U.S. tax until actually paid to the U.S.
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