To transition from a worldwide tax system to a territorial system, the Act imposes a mandatory one-time tax on post-86 accumulated foreign earnings, also referred to as the toll-tax or the deemed repatriation tax. Effective in the 2017 tax year (for calendar-year tax filers), earnings held in cash or cash equivalents will be taxed at approximately 15.5% and those held in illiquid assets at approximately 8%. An election is available for an 8-year installment period.
New Section 245A establishes a participation exemption for taxation of foreign income effective for tax years beginning after December 31, 2017. “In the case of any dividend received … there shall be allowed as a deduction an amount equal to the foreign source portion of such dividend.” The dividends received deduction is available for domestic corporate shareholders only; individual and non-corporate owners of pass-through entities do not qualify.
The Act repeals the indirect foreign tax credit under Section 902. A foreign tax credit is permitted, for subpart F income included in the gross income of a domestic corporation that is a U.S. shareholder of a controlled foreign corporation (“CFC”), without regard to pools of foreign earnings kept abroad.
In addition to existing foreign income inclusions under Subpart F provisions and Section 956, the Act establishes a minimum tax on certain foreign income described as “global intangible low-tax income”, or “GILTI” to discourage income-shifting incentives. United States shareholders of a CFC are subject to current U.S. tax on GILTI income effective for taxable years beginning after December 31, 2017. GILTI is the excess of aggregate CFC net income over “deemed tangible income return” which is 10% of the adjusted basis of depreciable assets within the CFC. Domestic corporations can obtain a deduction equal to 50% of the GILTI inclusion (subject to taxable income limitations).
Effective for tax years beginning after December 31, 2017, U.S. corporate taxpayers are eligible for a preferential tax rate (13.125%) on the eligible foreign portion of earnings. For FDII purposes, foreign earnings include income derived from the sale of property to any foreign person for a foreign use and services provided to any person not located in the United States. The eligible portion is the amount deemed to be related to a return on intangibles.
New Section 59A imposes a tax on base erosion payments of corporate taxpayers with substantial gross receipts. Base erosion payments are generally payments or accruals to a foreign related party that result in a deduction. Applicable corporate taxpayers are those that have annual gross receipts exceeding $500 million and a base erosion percentage of at least 3%.