Corporations Receive Tax Clarity for Offshore Profits

The IRS released highly-anticipated clarity for multinational corporations on how U.S. tax will be calculated on foreign income.

Since the 2017 tax reform went into effect, American companies have expressed the ambiguity surrounding taxation on foreign profits, requesting more direction and transparency.

Last month, the IRS responded with a new set of guidelines that lessen the tax burden of American multinational corporations, individual owners of foreign corporations, and others. Under this complex new tax on “global intangible low-taxed income” (GILTI), the rules give corporations more flexibility to allocate only a portion of certain domestic expenses to their foreign subsidiaries and permit them to apply unused foreign tax credits as well.

The IRS implemented these new rules in an effort to thwart larger companies with valuable intellectual property from taking their profits out of the U.S. tax system and into a lower or no-tax system, such as Bermuda, Monaco or the Bahamas.

The solution: Offer a lower tax rate to incentivize multinational companies to keep profits in the states. Accordingly, the IRS implemented the GILTI 10.5 percent tax rate on a company’s “excess” profits made in foreign countries. This means that companies will only be taxed on their domestic profits at the new corporate rate of 21 percent and 10.5 percent on foreign profits.

Not only does GILTI affect large multinational corporations, like big pharma, but it also shapes the tax structure for individuals who own foreign corporations, manufacturers, high tech companies, and many others. Companies with large factories abroad will also be impacted by the global tax.

Luckily, the IRS has already approved the consolidation of multiple entities under multinational companies in an attempt to simplify the calculation complexities for numerous subsidiaries.

In parallel to the GILTI incentive, the IRS is also making an effort to motivate U.S.-based companies to manufacture products in the states by offering a deduction when products are sold oversees. This new provision is known as the “foreign derived intangible income” or FDII, which matches the tax rates for profits on products or services sold abroad.

If you or your company are affected by this new global tax and will need further guidance on how to implement tax planning strategies, please contact me at grodriguez@bpw.com or (805) 963-7811.