On December 22, President Trump signed the “Tax Cuts and Jobs Act” into law. The Law that has changed the face of how US tax reform used to work. The newly added bill was proposed with changes in two main titles of TAX and JOBS, with an effort to reduce taxes and to increase Jobs in the US.
The newly added bill reduced taxes but in a way that it just cuts the corporate tax rates permanently and individual tax rates temporarily. Though the bill has proposed various changes the Territorial Taxation of Corporation provisions is the concern of almost everyone and here’s why.
The Senate’s version of the new US bill “Tax Cuts and Jobs Act” includes several important changes and provisions regarding taxation of multinational corporations that are working in the US. Some main and outlined provisions are:
- Territorial taxation system & Deemed Repatriation of Foreign Income
- 100% Dividend Deductions
- Reduced Tax on Foreign derived income
New Territorial Tax System for Multinational Corporations
The new “Tax cuts and Jobs” bill passed by the Senate focuses on the Territorial taxation of multinational corporations and offers 100% dividend deduction to cover any losses that business incurs during the process.
The deemed repatriation of foreign income is a provision added with a motive to channel the accrued income in foreign back to the US. Something same was done back in 2004, with a purpose that it would boost the US economy and help in jobs generation, on the contrary, US Multinationals started reducing jobs to increase their profits and to deliver higher proportionate dividends to their investors.
Any U.S. shareholder of a deferred foreign income corporation is allowed a deduction for the taxable year that includes the deemed repatriation amount and the deduction is intended to result in tax rate of 15.5% on accumulated post-1986 deferred foreign income invested in cash and similar assets and 8% for other property. The 8% and 15.5% rate equivalent percentage are determined using the highest applicable corporate rate for the taxable year of inclusion, even is the U.S. shareholder is an individual.
Deduction is generally based on a flat 35% tax rate, regardless of whether the affected taxpayer is a domestic corporation – consequently, actual effective tax rate for individuals will differ.
The new foreign dividend exemption applies only to domestic C corporations. Transition tax applies to all U.S. taxpayers and applies in 2017 for calendar year taxpayers with calendar year specified foreign corporations (SFCs). The transition tax is one time charge on deferred foreign income. Taxable income is mandatory and is not elective.
How it affects you
If you are a U.S. shareholder or a corporation and has some ownership in a foreign corporation (directly or indirectly), it is very important and very urgent that you would need to talk to your accountant as soon as possible and ask to help determine whether you are liable for the Deemed Repatriation Tax and if you do, the first installment payment is due on April 16th, 2018 to avoid penalties and interests. Please talk to us if you want to know more.
