International Taxpayers and Businesses
As the IRS implements this major tax legislation, check this page for updates and resources to learn how the Tax Cuts and Jobs Act (TCJA) affects international businesses.
Income (including Gains and Losses)
Under the law, a U.S. person that owns at least 10 percent of the value or voting rights in one or more controlled foreign corporations will be required to include its global intangible low-taxed income as currently taxable income, regardless of whether any amount is distributed to the shareholder.
Notice 2019-46 (PDF) announces that the Department of the Treasury and the Internal Revenue Service intend to issue regulations that will permit a domestic partnership or S corporation that is a U.S. shareholder of a controlled foreign corporation to apply proposed §1.951A-5, related to the treatment of domestic partnerships and S corporations for determining the amount of the global intangible low-taxed income inclusion, for taxable years ending before June 22, 2019. The notice also addresses the applicability of penalties for a domestic partnership or S corporation that acted consistently with proposed §1.951A-5 on or before June 21, 2019, but files a tax return consistent with the final regulations under §1.951A-1(e). In order to apply the rules in proposed §1.951A-5 or for penalties not to apply under the notice, a domestic partnership or S corporation must satisfy certain notification and reporting requirements described in the notice. Prior to the issuance of the regulations described in the notice, domestic partnerships and S corporations may rely on the notice, provided they satisfy the requirements described therein.
The new law enacts a participation exemption system for the taxation of certain foreign income. New proposed regulations are intended to ensure the application of section 956 is consistent with this new system and reduce the amount determined under Internal Revenue Code section 956 with respect to certain domestic corporations and stock they own (or are treated as owning) in controlled foreign corporations (CFCs).
The Tax Cuts and Jobs Act extended the holding period with respect to certain carried interests (i.e. applicable partnership interests) to three years.
Carried interests are ownership interests in a partnership that share in the partnership’s net profits. Carried interests often are issued to investment managers in connection with the investment manager’s services. These interests often result in the holder receiving capital gains which are taxed at a lower rate, rather than ordinary income.
Deductions and Depreciation
Newly amended section 163(j) of the Internal Revenue Code imposes a limitation on deductions for business interest incurred by certain large businesses. For most large businesses, business interest expense is limited to any business interest income plus 30 percent of the business’ adjusted taxable income.
Businesses can immediately expense more under the new law. A taxpayer may elect to expense the cost of any section 179 property and deduct it in the year the property is placed in service. The new law increased the maximum deduction from $500,000 to $1 million. It also increased the phase-out threshold from $2 million to $2.5 million.
Section 162(m)(1) generally limits the allowable deduction for a taxable year for remuneration by any publicly held corporation paid with respect to a covered employee. The Tax Cuts and Jobs Act made significant amendments to § 162(m), and also provided a transition rule applicable to certain outstanding arrangements (commonly referred to as the grandfather rule). The notice provides guidance on the amended rules for identifying covered employees and the operation of the grandfather rule.
REG–104352–18 (PDF) includes proposed rules implementing sections 245A(e) and 267A, which were added to the Code by the Tax Cuts and Jobs Act. The regulations generally affect taxpayers that would otherwise claim dividends received deduction for hybrid dividends paid by certain foreign corporations, and taxpayers that would otherwise claim interest or royalty deductions involving hybrid transactions or hybrid entities. The regulations deny the dividends received deduction, and deductions for interest and royalties, in connection with such hybrid arrangements. In addition, the proposed regulations prevent the same deduction from being claimed under the tax laws of both the United States and a foreign country.
The new law provides a domestic corporation with a deduction (“section 250 deduction”) for its foreign-derived intangible income (“FDII”) and its global intangible low-taxed income (“GILTI”) and the amount treated as a dividend under section 78 which is attributable to its GILTI.
Proposed Regulations 245A of the Internal Revenue Code disallows a deduction to United States shareholders that receive dividends from specified 10-percent owned foreign corporations that are also controlled foreign corporations (“CFCs”) in certain circumstances.
Under Section 13503 of the TCJA, the loss limitation rule of § 704(d) was amended to take into account deductions for charitable contributions and foreign taxes. A special rule is provided for charitable contributions where the fair market value of the property contributed exceeds its tax basis.
Among other changes made by the TCJA, new section 59A imposes a tax equal to the base erosion minimum tax amount for certain taxpayers beginning in tax year 2018. This new provision will primarily affect corporate taxpayers with gross receipts averaging more than $500 million over a three-year period who make deductible payments to foreign related parties.
Many U.S. corporations elect to use a fiscal year end and not a calendar year end for federal income tax reporting purposes. Due to a provision in the Tax Cuts and Jobs Act (TCJA), a corporation with a fiscal year that includes Jan. 1, 2018 will pay federal income tax using a blended tax rate and not the flat 21 percent tax rate under the TCJA that would generally apply to taxable years beginning after Dec. 31, 2017.
Newly enacted section 965 of the Internal Revenue Code imposes a transition tax on untaxed foreign earnings of foreign subsidiaries of U.S. companies by deeming those earnings to be repatriated. Foreign earnings held in the form of cash and cash equivalents are taxed at a 15.5 percent rate, and the remaining earnings are taxed at an 8 percent rate. The transition tax generally may be paid in installments over an eight-year period.
- News Releases: IR-2017-212, IR-2018-09, IR-2018-25, IR-2018-53, IR-2018-79, IR-2018-131, IR-2018-158, IR-2019-128, IR-2020-16
- REG-104226-18 (PDF)
- RP 2018-47 (PDF)
- Notices: Notice 2018-07 (PDF), Notice 2018-13 (PDF), Notice 2018-26 (PDF), Notice 2018-78 (PDF), Notice 2019-01 (PDF)
- TD REG-104226-18 (PDF)
- FAQs: Questions and Answers about Tax Year 2018 Reporting and Payments Arising under Section 965, Questions and Answers about Reporting Related to Section 965 on 2017 Tax Returns, General Section 965 Questions and Answers (Including Transfer and Consent Agreements)
- Publication 5292 (PDF)
- Comparison of changes to rules for global intangible low-taxed income under TCJA
The new law treats a foreign taxpayer’s gain or loss on the sale or exchange of a partnership interest as effectively connected with the conduct of a trade or business in the United States to the extent that gain or loss would be treated as effectively connected with the conduct of a trade or business in the United States if the partnership sold all of its assets.
In this circumstance, the new law also imposes a withholding tax on the disposition of a partnership interest by a foreign taxpayer.
The Treasury Department and the Internal Revenue Service issued Notice 2018-14 and Publication 15, Employer's Tax Guide to help businesses apply law changes to withholding. These materials are designed to help employers and employees with a variety of withholding matters during and after the transition to new, reduced tax rates and updated withholding tables.
The new law modified the foreign tax credit rules, which allow U.S. taxpayers to offset their taxes by the amount of foreign income taxes paid or accrued, in several important ways to reflect the new international tax rules.