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Technical terminations Technical terminations are re-
pealed for tax years beginning after December 31, 2017.
Substantial built-in loss in the case of transfer of
partnership interest A reduction in the tax basis of
partnership property following a transfer of a partnership
interest is now required if the transferee partner would be
allocated a loss of $250,000 or more under a hypothetical
liquidation immediately after the transfer.
International Tax
Mandatory deemed repatriation The new tax law
requires all U.S. shareholders U.S. citizens, residents,
partnerships, trusts, and corporations that own 10% or
more of the voting shares of a controlled foreign corporation
(CFC) to include their pro rata share of all CFC accumulated
net earnings and profits (E&P) in their 2017 income. Cash
earnings are subject to a 15.5% tax rate, while non-cash
earnings are subject to an 8% tax rate. The rates are
achieved via a dividends-received deduction, which brings
the effective tax rate to these levels.
In addition, corporate shareholders of CFCs can take
advantage of a modified foreign tax credit that can reduce
the U.S. tax due on the deemed repatriation amount. The
Act also retains the special rule for S corporations that
are shareholders of CFCs, whereby the S corporation
shareholders will not take the deemed repatriation amount
into income until certain triggering events occur. It is clear
that U.S. shareholders of a CFC must, at a minimum, ensure
they have correctly calculated the E&P of their CFC to
determine the impact of the deemed repatriation. Likewise,
C corporation shareholders must calculate the foreign tax
pools available to be credited under the modified foreign tax
credit provisions.
Territorial tax system The Act moves the U.S. to a
modified "territorial tax" system, through which U.S.
C corporations will not pay U.S. tax on certain profits earned
outside the U.S. This change is accomplished by allowing
domestic corporations a deduction (similar to the dividends-
received deduction) whereby a U.S. C corporation that
owns 10% or more of a foreign corporation will not pay any
U.S. tax on the foreign source portion of dividends paid
by the foreign corporation. The deduction is available for
dividends from any foreign corporation other than passive
foreign investment companies (PFICs).
Changes to Subpart F The Act retains existing Subpart F
anti-deferral rules and the Section 956 deemed repatriation
rules, but makes several changes. Importantly, a new
category of Subpart F income will require U.S. shareholders
to include the global intangible low taxed income (GILTI) of
CFCs in current U.S. taxable income. The mechanics of the
GILTI provision are complex, but their effect is to establish
a minimum tax regime that applies to U.S. shareholders of
certain CFCs with income over a so-called routine return on
tangible depreciable business assets.
In addition to navigating the complexity of these calculations,
U.S. shareholders must determine the U.S. tax basis of
assets held by CFCs, which can be a daunting task. In
addition to creation of the GILTI rules, the Subpart F rules
are modified so that a larger class of U.S. shareholders of
foreign corporations are subject to the Subpart F deemed
inclusion rules. This expansion is triggered by expanding
the definition of "U.S. shareholder," subject to the Subpart
F provisions, to include any U.S. person who owns at
least 10% of the vote or value of the CFC, rather than only
including those with 10% or more of the voting power. The
attribution rules, which can require the application of the
Subpart F rules on U.S. persons without a direct interest in
a CFC, have also been expanded. U.S. taxpayers may need
to reevaluate their exposure to the Subpart F provisions
under these expanded definitions.
Base Erosion Anti-Abuse Tax (BEAT) The BEAT provisions
apply to U.S. corporations with an average of $500 million
of gross receipts over the past three years that make certain
deductible payments to related foreign persons exceeding a
threshold defined under these provisions. The goal of these
provisions is to restrict U.S. corporations from eroding the
U.S. tax base by making deductible payments to offshore
affiliates. Any such corporation will pay tax under the BEAT
provisions on the excess of 10% of its taxable income
(modified for this purpose) over its regular tax liability for
the year, reduced by certain credits. Regulated investment
companies (RICs), real estate investment trusts (REITs),
and S corporations are not subject to the BEAT provisions.
The effort to monitor and track the application of BEAT
rules is significant. In addition, the new tax law authorizes
an expanded Form 5472 to capture additional information
on base erosion payments as well as increased penalties
($25,000 per form versus the prior $10,000 per form) for late
filed or incomplete Forms 5472.
Compensation and Benefits
Executive Compensation
Elimination of exceptions to public company $1 million
compensation deduction limit With an exception for
compensation pursuant to a binding contract in effect on
or before November 2, 2017 (and which is not subsequently
materially modified), public companies are not able to
deduct compensation in excess of $1 million for their
principal executive officer, principal financial officer, and
three other most highly compensated officers, due to the
elimination of the performance-based compensation and
commissions compensation exceptions. Public companies
that have been relying on these exceptions may face paying
Federal Tax Reform
Special Section