The document summarizes key changes to international tax law under the new tax legislation. It introduces a hybrid territorial system with a participation exemption and minimum tax on low-taxed foreign earnings. A one-time transition tax imposes a tax on previously untaxed foreign earnings, while GILTI subjects low-taxed foreign income to current U.S. taxation. FDII provides incentives for intangible property developed in the U.S. BEAT aims to curb base erosion, and interest deductibility is limited. Other modifications include changes to subpart F and foreign tax credit rules.

1. INTERNATIONAL TAX REFORM
Presented by:
Kevin Harris
February 21, 2018

4. PRIOR LAW
• Worldwide system of taxation
• Resulted in one of the highest statutory
corporate tax rates
• Provide incentives to keep foreign
earnings offshore because they were
generally not taxed until repatriated to the
U.S.

5. NEW LAW
• Hybrid territorial system
• Participation exemption with current
taxation of certain foreign income
• Minimum tax on low-taxed foreign
earnings
• New measures to deter base erosion and
promote U.S. production

7. PARTICIPATION EXEMPTION
• U.S. corporation is permitted a 100%
deduction for foreign source dividends
– Foreign corporation must be at least 10%
owned by U.S. corporation
– No longer considered for foreign tax credit
– Exceptions for anti-deferral controlled foreign
corporation (CFC) Subpart F rules and passive
foreign investment company (PFIC) rules

9. TRANSITION TAX
• Imposes a one-time transition tax
• Must include in income its pro-rata share of the undistributed,
non-previously-taxed post-1986 foreign earnings of the
foreign corporation, determined as of 11/2/17, or as of
12/31/17, whichever is higher
• Tax on aggregate earnings and profits attributable to cash is
15.5% while the tax attributable to other assets is 8%
• Creates complexity because not a regular reporting cycle
• S corporation shareholders can elect to defer until a
“triggering event”
• Potential to credit certain foreign taxes against the taxable
portion of the mandatory inclusion
• May be paid over an 8 year period and can elect out of using
NOLs to offset

10. GLOBAL INTANGIBLE
LOW-TAXED INCOME (GILTI)
• Creates new category of foreign income applicable to U.S.
shareholders that own 10% or more of a CFC
• Essentially imposes a minimum level of U.S. tax on the foreign
profits
• Excess of U.S. shareholder’s “net CFC tested income” less “net
deemed tangible income return” less net interest expense
– Net CFC tested income = excludes several categories of income,
including income already subject to U.S. tax as Subpart F or as
effectively connected income
– Net deemed tangible income return = 10% of the shareholder’s pro-
rata share of the qualified business asset investment (QBAI) of each
CFC
• QBAI is determined as the average of the adjusted U.S. tax basis in specified
tangible property that is used in the CFC’s trade or business and is subject to U.S.
tax depreciation

11. GILTI EXAMPLE

12. GILTI DEDUCTION
• Full amount is included in a U.S. shareholder’s income,
but corporate shareholders are allowed a deduction
equal to 50% of GILTI
• Effective tax rate is 10.5% on GILTI
• Deduction decreased to 37.5% beginning in 2026
• Can be limited by taxable income

13. FOREIGN-DERIVED
INTANGIBLE INCOME (FDII)
• Incentivize the development of intangibles in the U.S. by providing a
reduced rate of U.S. tax on a domestic corporation’s portion of its
intangible income derived from serving foreign markets
• FDII is the amount of its “deemed intangible income” that is
attributable to sales of property to foreign persons for use outside
the U.S. or the performance of services to persons located outside
the U.S.
• Deemed intangible income generally is its gross income that is not
attributable to a CFC or foreign branch, and which is not financial
services income or domestic oil and gas extraction income, reduced
by related deductions and an amount equal to 10% of the aggregate
adjusted basis of its tangible depreciable assets
• Allows a U.S. corporation a deduction equal to 37.5%, providing
13.125% effective tax rate
• Deduction decreased to 21.875% in 2026
• Rules for determining are very complex, and deduction can be
limited

14. BASE EROSION AND ANTI-ABUSE TAX
(BEAT)
• Designed to curtail excessive base erosion
payments, namely, deductible payments to
foreign affiliates, such as royalties or
management fees, but excluding cost of goods
sold
• Ensure that a U.S. corporation pays at least a
10% tax (5% in 2018 and 12.5% beginning in
2026) on its taxable income after adding back
these base erosion payments
• Tax applies to U.S. corporations, real estate
investment trusts, or S corporations, with
average annual gross receipts of at least $500
million

15. INTEREST DEDUCTIBILITY
• Amount of net interest that can be deducted by any
business with gross receipts of $25 million is generally
limited to 30% of the adjusted taxable income
• Beginning in 2022, depreciation, amortization, and
depletion are added back to calculate adjusted taxable
income
• Any business interest not allowed as a deduction may
be carried forward and used as a deduction in a
subsequent year
• The Act does not include either the House or Senate
version that would have further limited the deduction
of interest by U.S. corporations that are members of an
international group

16. OTHER CHANGES
• Modifications of subpart F provisions
– Eliminate inclusion of foreign base company oil-related income
– Repeal of inclusion based on withdrawal of previously excluded
subpart F income from qualified investment
– Modification of stock attribution rules for determining status as a
CFC
– Modification of definition of U.S. shareholder
– Elimination of requirement that corporation must be controlled
for 30 days before subpart F inclusions apply
• Modifications related to foreign tax credit system
– Repeal section 902 indirect foreign tax credits
– Separate foreign tax credit limitation basket for foreign branch
income
– Determine source of income from sales of inventory solely on
basis of production activities
– Amend section 904(g) to allow increase overall domestic loss
recapture

17. TOP INTERNATIONAL TAX
INCREASES AND TAX CUTS

20. CONTACT INFORMATION
Kevin Harris
Goldin Peiser & Peiser, LLP
214-635-2473
kharris@GPPcpa.com