Tax reform: international planning considerations
Tax reform brought significant changes to how the US taxes foreign source income. As taxpayers start to digest the full range of the consequences of the new tax law, intended and unintended, here are a few high level considerations for international tax planning. These considerations can serve as a baseline for taxpayers as they have discussions with their tax advisors about the full impact of tax reform.
First, with regard to entity planning, taxpayers should consider the classification of any foreign entities in which they have an interest. Tax reform has brought about a switch to a territorial system and structures that used to work under the worldwide system may now cause unintended tax consequences. Taxpayers should be mindful of the consequences of an outbound transfer of U.S. property upon any reclassification of foreign entities. Furthermore, taxpayers should examine any worthless stock deductions that may have arisen prior to the effective date of tax reform.
Next, taxpayers may need to revisit their supply chain structures. Tax reform has brought about a new minimum tax called the base erosion and anti-abuse (BEAT) tax which requires companies that make cross-border payments to perform a completely new income calculation in order to assess the minimum tax. Taxpayers should also review foreign subsidiaries for potential high returns and consider consequences or possible changes to structure or transfer pricing to deal with the new tax on global intangible low-taxed income (GILTI) or foreign-derived intangible income (FDII). Many taxpayers in the technology and software industries with foreign operations are likely to have exposure to the GILTI tax.
Treasury management should be another focus of taxpayers as they evaluate the impact of tax reform. Specifically, the tax bill creates new limitations on the deduction of interest expense. In addition the BEAT tax effectively denies a deductions for payments made to foreign related persons. Thus, taxpayers should review their capital structure to assess whether a change in the proportion of debt to equity is advantageous.
Finally, with regard to the repatriation tax, taxpayers will need to ensure that their earnings and profits and tax pool computations are accurate and consistent with new repatriation rules in section 965. These calculations differ from what taxpayers have historically done in the past so it is likely that significant additional effort will be required to prepare the required calculations for the 2017 year.
With tax reform finalized taxpayers can no longer delay conversations with their tax advisors. Taxpayers with international activities will quickly realize that tax reform has taken the complex world of international taxation and added several additional layers of complexity. Speaking with a tax advisor can provide much needed clarity and help taxpayers meet their immediate compliance obligations.