Republican tax bill will significantly impact US international tax rules

December 2017

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Overview

Congress on December 20 gave final approval to the conference committee agreement for HR 1, clearing the legislation for presidential action. It is unclear at this point whether President Trump will sign the legislation into law before the end of 2017 or in early January 2018.

On December 15, 2017, the House and Senate Conference Committee released an updated version of the ‘Tax Cuts and Jobs Act of 2017’ (the Conference Agreement or the Agreement), which was accompanied by a ‘Joint Explanatory Statement of the Committee of Conference’ (the Joint Explanatory Statement) describing significant differences between prior versions of the Tax Cuts and Jobs Act of 2017.

The Conference Agreement represents the largest overhaul of the US tax code (the Code) since the Tax Reform Act of 1986. It significantly lowers corporate tax rates and reforms US international tax rules. The Senate passed the final version of the Conference Agreement early on December 20, by a 51 to 48 vote. Later on December 20, the House passed the same final Agreement by a 224 to 201 vote.

The Conference Agreement as passed by Congress generally follows the Senate bill’s approach, with some modifications, by moving toward a territorial tax system, imposing a ‘toll tax’ on the undistributed earnings and profits (E&P) of US-owned foreign corporations, eliminating the indirect foreign tax credit (FTC), and modifying the current subpart F anti-deferral provisions. The Agreement also generally adopts the Senate bill’s provisions relating to ‘foreign derived intangible income’ (FDII), ‘global intangible low-taxed income’ (GILTI) as well as the ‘base erosion and anti-avoidance tax’ (BEAT), with certain modifications. Although the passed Agreement adopts a number of other Senate bill provisions, it also drops certain other international provisions.

With a few key exceptions, the Conference Agreement’s provisions will generally impact both US and foreign corporations in tax years ending after 2017. For a high-level overview of the Agreement’s provisions and further discussion of the path to enactment, see: Congress gives final approval to tax reform conference committee agreement. At the end of this Insight is a comparison of the international provisions in the Conference Agreement, House bill, the Senate bill and current law.

The takeaway

The Conference Agreement significantly changes many fundamental aspects of US international taxation. Recapping some of the important highlights, the Agreement:

  • provides for a 100-percent DRD for foreign-source dividends from specified 10-percent owned foreign corporations
  • imposes a one-time ‘toll tax’ on pre-effective date foreign E&P taxed at 15.5% on cash and cash equivalents, and 8 percent on all other E&P
  • expands the stock attribution rule for purposes of determining whether a foreign corporation is treated as a CFC
  • adds a new GILTI income inclusion for US shareholders
  • adds a BEAT tax related to certain deductible intercompany payments
  • adds a deduction for US taxpayers for a portion of the income considered to be derived from the sale of property to a foreign person for use outside the United States, and services rendered to any person, or with respect to property, located outside the United States
  • imposes new rules related to limiting interest expense deduction.

Some of these changes could impose significant additional burdens on both US and foreign taxpayers. Companies should endeavor to understand the provisions within the Agreement.

Contact us

Michael Urse
ITS Leader, PwC US
Tel: +1 (216) 875 3358
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