International Tax Planning for U.S. Corporations
Get a global view of your tax liability and how key federal and international tax rules impact your bottom line
Tax laws and regulations around the world are constantly evolving. Understanding and managing tax risk within a rapidly changing global tax landscape has become increasingly important to multinational businesses for planning effective tax strategies, maintaining compliance, and ultimately reducing risk. Bloomberg Tax’s international tax planning solutions can help you navigate tax laws and understand your tax position wherever you do business.
Better understand your global tax position
Bloomberg Tax has practice tools and expert guidance to help corporate tax professionals assess the impact of global tax law changes and react quickly when changes occur. Browse our free resources below to understand the latest international tax developments and what you need to know to stay ahead.
An important part of any corporate tax planning strategy is staying ahead of new and changing tax laws around the world and understanding how these laws interact, so you can successfully navigate compliance challenges and manage a business entity’s tax burden. This international tax planning guide highlights several opportunities for U.S.-based multinational corporations, as well as potential pitfalls and compliance risks to be aware of.
Federal taxation of foreign-sourced income
The two key elements of U.S. taxation of foreign income are:
- The worldwide taxation of U.S. citizens and resident aliens, known collectively as “U.S. persons.”
- The status of corporations as separate taxable entities, with different tax rules.
For individuals, U.S. taxation rules aim to tax worldwide income, while also providing mechanisms to reduce the risk of double taxation, primarily through providing a credit for income taxes paid to other countries. Importantly, there are multiple limits placed on the use of these credits.
For corporations, the Tax Cuts and Jobs Act (TCJA) made extensive changes to how foreign-sourced income is taxed, moving to more of a territorial-based system. Income tax planning for multinational corporations includes, defensively, a focus on preserving the full benefit of mechanisms that reduce double taxation, such as the foreign tax credit, and, offensively, working with the new rules to manage the impact of new tax structures, including the global intangible low-taxed income (GILTI) rules.
Foreign tax credit
When a U.S. person or corporation engages in foreign business operations or direct foreign investments, either directly or through U.S.-chartered corporate entities, they may also attract foreign income taxes. Any tax imposed abroad therefore threatens to be a second layer of taxation. The main accommodation of the U.S. tax system to the possibility of income taxation imposed by other countries is the foreign tax credit. The credit is a dollar-for-dollar reduction of U.S. taxes for income taxes paid to foreign countries, up to the level of U.S. taxation.
Base erosion and anti-abuse tax (BEAT)
The base erosion and anti-abuse tax (BEAT) is intended to discourage the use of deductible amounts, paid to foreign related parties, to reduce the U.S. tax base. The BEAT applies to certain corporations with average annual gross receipts of at least $500 million for the three-year period ending with the preceding taxable year. To determine BEAT liability, a specified rate is multiplied by the taxpayer’s modified taxable income. The resulting amount is then reduced by the excess of the regular tax liability over certain credits. The specified rate for 2023 is 10%.
The regulations implementing BEAT are designed to prevent its avoidance, so use caution when planning around your BEAT liability. Taxpayers should review their structure to determine whether they’re subject to BEAT and the reporting obligations that apply. Penalties starting at $25,000 may apply for not complying with reporting requirements.
Global intangible low-taxed income (GILTI)
A U.S. shareholder of any controlled foreign corporation (CFC) is required to include in income (in a manner similar to subpart F inclusions) the shareholder’s GILTI for the taxable year. GILTI is generally an issue when foreign operations are intangible asset-focused, and/or where low income tax rates are in place in that foreign country. However, because the computation of GILTI is based on a percentage of the bases of certain tangible assets, earnings attributable to certain higher-than-routine returns on tangible assets may also be taxed under the GILTI regime.
GILTI is calculated at the U.S. shareholder level. A domestic corporation (or a U.S. shareholder who is an individual making an election to be taxed as a corporation under §962) is eligible for a deduction under §250 with respect to GILTI inclusions, resulting in an effective tax rate of 10.5% on GILTI. A taxpayer may be eligible for 80% of foreign tax credits associated with the GILTI inclusions, but carryback or carryforward of foreign tax credits isn’t permitted.
Foreign-derived intangible income (FDII)
Foreign-derived intangible income (FDII) is a U.S. corporation’s intangible income, determined on a formulaic basis, when earned from serving foreign markets. U.S. corporations are entitled to a reduced tax rate through a deduction against FDII. For 2023, the deduction is 37.5% of FDII. To benefit from this deduction, a taxpayer must establish that income is derived in connection with the sale of property for foreign use, or from the provision of services to a person located outside the U.S. Taxpayers should gather and retain documentation that shows the portion of their income that qualifies as FDII.
Outbound transfers of property used in trade or business
Generally, a U.S. person engaged in an outbound transfer of property to a foreign corporation recognizes gain even though such a transfer, in a purely domestic setting, may enjoy nonrecognition treatment. Therefore, the taxpayer should review its business structure to determine whether making such outbound transfers is economically viable, especially considering the potential impact of new U.S. tax regimes such as GILTI and FDII.
Taxing earnings of foreign corporations
The U.S. tax system generally recognizes the separate identity of corporations, even when they’re owned and controlled by a single person or a small group. The earnings of domestic corporations are taxed twice: one tax is imposed on the income of an entity, and another is imposed on dividend distributions to shareholders.
In international transactions, however, the separate identity of corporations may prevent the U.S. from taxing the earnings of foreign corporations owned by U.S. persons. Because a foreign corporation is a separate foreign person – and hence a separate foreign taxpayer – it’s not immediately subject to U.S. taxation on its income derived outside the U.S.
Dividend received deductions (DRD) from foreign corporations
A U.S. corporation that receives a dividend from a specified 10%-owned foreign corporation with respect to which the domestic corporation is a U.S. shareholder may be entitled to a dividends received deduction (DRD) under §245A.
A specified 10%-owned foreign corporation is a foreign corporation that has any domestic corporation as a U.S. shareholder. And a U.S. shareholder is any U.S. person who owns 10% or more (by vote or value) of stock in the foreign corporation.
The §245A DRD amount is equal to 100% of the “foreign-source portion” of the dividend, but certain holding period requirements apply. Any taxpayer who receives a §245A DRD may not claim a foreign tax credit or take a deduction for any taxes paid or accrued with respect to the dividend for which the §245A DRD is allowed. If you haven’t already, consider reviewing your business structure to determine if your company can benefit from this deduction.
Controlled foreign corporations and subpart F income
U.S. shareholders are generally required to include in income their pro rata share of subpart F income, including the amount of subpart F income of a CFC whose stock they owned on the last day in that year.
However, the final §956 regulations issued in 2019 allow certain corporate U.S. shareholders of CFCs to reduce the amount of income inclusion determined under §956 to the extent the shareholders are eligible for the §245A DRD. It’s important to review the taxpayer’s ownership structure to determine whether these changes apply to them.
Sale of interest in partnerships engaged in U.S. trade or business
A nonresident alien individual or foreign corporation that owns, directly or indirectly, an interest in a partnership that’s engaged in a U.S. trade or business may be treated as deriving gain or loss that’s effectively connected with such trade or business upon the sale or exchange of all or a portion of the partnership interest. A nonresident alien individual or foreign corporation that’s treated as deriving effectively connected gain or loss may be subject to a U.S. withholding tax.
Generally, if withholding is required, the transferee purchasing the partnership interest must withhold 10% of the amount realized on the sale or exchange. Thus, a taxpayer purchasing any such interest from a foreign person may be required to withhold 10% of the amount realized. If the taxpayer fails to withhold the correct amount, the partnership in which the taxpayer owns an interest is obligated to deduct and withhold from distributions to the taxpayer in the amount equal to 10% of the gain realized by the transferor plus interest, if any. However, there is no liability for failure to withhold, or any interest, penalties, or additions to tax, if the person required to withhold establishes that no gain on the transfer is treated as effectively connected with the conduct of a U.S. trade or business.
Transfer pricing, income shifting, and tax havens
The U.S. system of taxing foreign income may seem straightforward at first glance but can become overwhelmingly complex upon closer examination. This complexity is the product of an effort to formalize distinctions in U.S. tax law between legitimate business operations outside the U.S. and maneuvers considered to be tax haven operations.
A tax haven isn’t always immediately obvious. What makes a particular environment a tax haven isn’t invariably a low tax rate, but relations with other tax regimes that permit the ultimate deflection of income to a low-tax environment with which the income may have little economic connection. The U.S. tax system tends to consider international tax shelters to be transactional arrangements structured so that the underlying business activity and taxation occur in different places.
It should be noted that a low-taxed foreign business undertaking is not in itself a tax haven. For example, a resort hotel and casino owned and operated by a Cayman Islands subsidiary of a U.S. corporation wouldn’t be considered a tax shelter from the perspective of the U.S. tax system, even though taxation in the Caymans is beneficial. If, however, ownership of a Miami hotel were structured so that its income was taxed in the Cayman Islands rather than the U.S., that would be a tax haven operation. International tax shelters have been severely constrained by statutes and treaties in recent decades.
An essential pattern in many international tax-sheltering operations is “income shifting,” which consists of arranging for income to be taxed in a country other than the one where it arose as an economic matter. The latter is typically a high-tax environment, while the former is not. A recurring ingredient in income shifting is artificial pricing in transactions between related persons, a problem known generally as “transfer pricing.” There is a battery of provisions in the U.S. tax system aimed at artificial transfer pricing in international transactions.
The mechanics of the transfer pricing rules continue to apply as in prior years. However, the IRS’s authority to require the valuation of transfers of intangibles on an aggregate basis or based on the realistic alternatives to such transfers has been confirmed by statute.
In addition, the definition of “intangible property” has been expanded to include goodwill, going concern value, and workforce in place. Therefore, if a taxpayer engaged in transactions that involved the transfer of intangibles during the year, the taxpayer must keep in mind that the IRS may arrive at a different value.
Bloomberg Tax helps you comply with confidence
Tax laws and compliance requirements across the world are constantly changing, creating uncertainty and adding more complexity to an already complicated field. Take charge of your corporate tax planning with expert analysis and guidance, timesaving practice tools, primary source documents, and more. Learn how Fortune 500 company Avnet uses Bloomberg Tax to save time on international tax research spanning 140 countries.
Bloomberg Tax is your single source for comprehensive international tax news and research. Request a demo to see how Bloomberg Tax can help you better understand your international tax position and develop sound strategies with in-depth research and analysis of how important changes to global tax rules affect the tax liability of multinational corporations.