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With the new Tax Act becoming law, taxpayers with international
activities must plan to reduce their tax due. The purpose of this
alert is to discuss issues that must be evaluated these last few
days of 2017 and to consider possible planning for 2018.
Deemed Repatriation for 2017
Every U.S. owner of a foreign subsidiary must include the
accumulated earnings of the foreign subsidiary as income in
2017.
This deemed repatriation regime applies to all types of U.S.
owners, with varying impacts. C corporations can receive a
partial foreign tax credit. S corporation owners can defer
paying the tax indefinitely until they sell their
S corporation's shares. LLCs and individuals must include
the accumulated earnings as income without the benefit of either
the foreign tax credit available to C corporations or the
indefinite deferral available to S corporation owners.
If an individual or an LLC owns shares in a foreign subsidiary,
it should consider implementing a deferral strategy before the
start of 2018. If this applies to you, please contact us for a
discussion about your alternatives.
IC-DISCs and Other Exporters
The IC‑DISC remains a viable tax planning technique for a
U.S. manufacturer that exports. By implementing an IC-DISC, a U.S.
manufacturer can convert ordinary income taxed at marginal rates
into qualified dividends taxed at the 20% capital gains rate.
A new provision, oddly called the Foreign‑Derived
Intangible Income deduction, will allow C corporations to
incur tax on exports at only 13.125% in 2018 (a 35.7% reduction
compared to the future 21% rate applied to C corporations).
Combining the Foreign‑Derived Intangible Income deduction
with the IC‑DISC will create tremendous tax savings on
exports.
However, if you are a U.S. manufacturer who pays foreign taxes
and takes a foreign tax credit, you may want to consider
restructuring your foreign operations. A little-publicized
provision in the Tax Act will effectively eliminate the foreign tax
credit by treating all the export income as U.S.‑source
income. Eliminating the foreign tax credit will result in double
taxation. To the extent that a U.S. manufacturer can accelerate
exports into the few remaining days of 2017, it can reduce double
taxation in 2018. Moreover, if a U.S. manufacturer sells abroad
through a disregarded foreign entity (e.g., a
check-the-box election), it should consider restructuring the
foreign operation for 2018.
Participation Exemption for 2018
Although not requiring immediate action, the centerpiece of the
new Tax Act is the participation exemption. Starting in 2018,
C corporations—and C corporations only—will be
able to receive dividends from their foreign subsidiaries on a
tax‑free basis. Unfortunately, the participation exemption
does not apply to pass‑through entities or individuals.
Pass-through entities or individuals with profitable foreign
subsidiaries should consider contributing or selling their foreign
subsidiaries to C corporations.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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