Tax & Accounting Blog

U.S. Congress Releases Joint Report on Tax Cuts and Jobs Act

BEPS, Blog, Global Tax Planning, International Reporting & Compliance December 21, 2017

On December 15, 2017, the U.S. Congress released the Conference Report on the Tax Cuts and Jobs Act, as well as a Joint Explanatory Statement. The summary below highlights several of the international tax provisions addressed by the Conference Committee.

Deduction for foreign-source portion of dividends received by domestic corporations from specified 10-percent owned foreign corporations (sec. 4001 of the House bill, sec. 14101 of the Senate amendment, and new sec. 245A of the Internal Revenue Code (IRC or the Code))

The conference agreement allows an exemption for certain foreign income through a 100% deduction for the foreign-source portion of dividends received (“DRD”) from specified 10%-owned foreign corporations by domestic corporations that are U.S. shareholders of those foreign corporations. The DRD is available only to C corporations that are not regulated investment companies (RICs) or real estate investment trusts (REITs). No foreign tax credit or deduction is allowed for any taxes paid or accrued with respect to any portion of a distribution treated as a dividend that qualifies for the DRD.

The DRD is not available for any dividend received by a U.S. shareholder from a controlled foreign corporation (CFC) if the dividend is a hybrid dividend. A hybrid dividend is an amount received from a CFC for which a deduction would be allowed under this provision and for which the specified 10%-owned foreign corporation received a deduction (or other tax benefit) with respect to any income, war profits, and excess profits taxes imposed by any foreign country.

The provision applies to distributions made after December 31, 2017.

Treatment of deferred foreign income upon transition to participation exemption system of taxation and deemed repatriation at two-tier rate (sec. 4004 of the House bill, sec. 14103 of the Senate amendment, and secs. 78, 904, 907, and 965 of the Code)

The provision applies to all CFCs. It also applies to all foreign corporations (other than passive foreign investment companies (PFICs)), in which a U.S. person owns a 10% voting interest. However, in the case of a foreign corporation that is not a CFC, there must be at least one U.S. shareholder that is a domestic corporation in order for the foreign corporation to be a specified foreign corporation. The portion of post-1986 earnings and profits (E&P) subject to the transition tax does not include E&P accumulated by a foreign company prior to attaining its status as a specified foreign corporation.

The total deduction from the amount of the section 951 inclusion is the amount necessary to result in a 15.5% tax on accumulated post-1986 foreign earnings held in the form of cash or cash equivalents, and 8% tax on all other earnings.

The provision is effective for the last taxable year of a foreign corporation that begins before January 1, 2018, and with respect to U.S. shareholders, for the taxable years in which or within which such taxable years of the foreign corporations end.

Repeal of treatment of foreign base company oil related income as subpart F income (sec. 4202 of the House bill, sec. 14211 of the Senate amendment, and sec. 954(a) of the Code)

The provision eliminates foreign base company oil related income as a category of foreign base company income.

The provision is effective for taxable years of foreign corporations beginning after December 31, 2017, and for taxable years of U.S. shareholders in which or within which such taxable years of foreign corporations end.

Inflation adjustment of de minimis exception for foreign base company income (sec. 4203 of the House bill, sec. 14212 of the Senate amendment, and sec. 954(b)(3) of the Code)

The conference agreement does not include the House bill or the Senate amendment provision, which would have amended the de minimis exception, which permits a CFC to exclude its foreign base company income if the sum of its total foreign base company income and gross insurance income is the lesser of five percent of its gross income or $1,000,000.

Look-thru rule for related CFCs made permanent (sec. 4204 of the House bill, sec. 14217 of the Senate amendment, and sec. 954(c)(6) of the Code)

The conference agreement does not include the House bill or the Senate amendment provision, which would have made the exclusion from foreign personal holding company income for certain dividends, interest, rents, and royalties received or accrued by one CFC from a related CFC permanent.

Modification of stock attribution rules for determining CFC status (sec. 4205 of the House bill, sec. 14214 of the Senate amendment, and secs. 318 and 958 of the Code)

The conference agreement follows the Senate amendment. The Senate Finance Committee explanation states that the provision is not intended to cause a foreign corporation to be treated as a CFC with respect to a U.S. shareholder as a result of attribution of ownership under section 318(a)(3) to a U.S. person that is not a related person (within the meaning of section 954(d)(3)) to such U.S. shareholder. See BEPS Action 3.

The provision is effective for the last taxable year of foreign corporations beginning before January 1, 2018 and each subsequent year and for the taxable years of U.S. shareholders in which or within which such taxable years of foreign corporations end.

Modification of definition of U.S. shareholder (sec. 14215 of the Senate amendment and sec. 951 of the Code)

The conference agreement follows the Senate amendment, which expands the definition of a U.S. shareholder under subpart F to include any U.S. person who owns 10% or more of the total value of shares of all classes of stock of a foreign corporation.

The provision is effective for taxable years of foreign corporations beginning after December 31, 2017, and for taxable years of U.S. shareholders with or within which such taxable years of foreign corporations end.

Elimination of requirement that corporation must be controlled for 30 days before subpart F inclusions apply (sec. 4206 of the House bill, sec. 14216 of the Senate amendment, and sec. 951(a)(1) of the Code)

The conference agreement follows the House bill and the Senate amendment, which eliminate the requirement that a corporation must be controlled for an uninterrupted period of 30 days before subpart F inclusions apply.

The provision is effective for taxable years of foreign corporations beginning after December 31, 2017, and for taxable years of U.S. shareholders with or within which such taxable years of foreign corporations end.

Current year inclusion of foreign high return amounts or global intangible low-taxed income by U.S. shareholders (sec. 4301 of the House bill, sec. 14201 of the Senate amendment, and secs. 78 and 960 and new sec. 951A of the Code)

The conference agreement follows the Senate amendment provision, but modifies the calculation of net deemed tangible income return for purposes of determining global intangible low-taxed income (GILTI).

The provision is effective for taxable years of foreign corporations beginning after December 31, 2017, and for taxable years of U.S. shareholders in which or within which such taxable years of foreign corporations end.

Base erosion using deductible cross-border payments between affiliated companies (sec. 4303 of the House bill and new secs. 4491 and 6038E of the Code; sec. 14401 of the Senate amendment and secs. 6038A and 6038C and new secs. 59A and 59B of the Code)

The conference agreement follows the Senate amendment with some changes. An applicable taxpayer is required to pay a tax equal to the base erosion minimum tax amount for the taxable year. The base erosion minimum tax amount is the excess of 10% of the taxpayer’s modified taxable income for the taxable year over an amount equal to the taxpayer’s regular tax liability for the taxable year reduced by credits. For taxable years beginning after December 31, 2025, the 10% changes to 12.5%, and the regular tax liability is reduced by the aggregate amount of allowable credits, without any other adjustments.

The Secretary of the Treasury can prescribe additional reporting requirements under section 6038A. The penalties provided for under sections 6038A(D)(1) and (2) are both increased to $25,000.

The provision applies to base erosion payments paid or accrued in taxable years beginning after December 31, 2017.

Certain related party amounts paid or accrued in hybrid transactions or with hybrid entities (sec. 14223 of the Senate amendment and sec. 267A of the Code)

A deduction is denied for any disqualified related party amount paid or accrued pursuant to a hybrid transaction or by, or to, a hybrid entity. A disqualified related party amount is any interest or royalty paid or accrued to a related party to the extent that: (1) there is no corresponding inclusion to the related party under the tax law of the country of which such related party is a resident for tax purposes or is subject to tax, or (2) such related party is allowed a deduction with respect to such amount under the tax law of such country. A disqualified related party amount does not include any payment that is included in a U.S. shareholder’s gross income under section 951(a).

The Secretary shall issue regulations or other guidance with respect to foreign or domestic branches and domestic entities, even if such branches or entities do not meet the statutory definition of a hybrid entity.

The provision applies to taxable years beginning after December 31, 2017.

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