This is the second in a series of weekly alerts about the what, why, who, and when of the new international tax provisions, along with action items that we believe should be considered. This alert provides a summary of key provisions relating to intangible property and related income; in the coming weeks, we will provide more bite-sized information and action items or dive deeper into specific areas.
1. Global Intangible Low-Taxed Income ["GUILTI" tax]. The GUILTI tax applies to the excess of a US shareholder's net tested income from a controlled foreign corporation ["CFC"] over a net deemed [10%] tangible income return. This discourages the off-shoring of intangible assets. Impacted are US shareholders of CFCs that derive high [more than 10%] returns from intangible assets, for tax years beginning after 12/31/2017.
Action items - analyze the projected GUILTI tax and calculate the available but reduced foreign tax credits. Also, study possibilities for business and entity restructuring to reduce the GUILTI tax impact.
2. Foreign-Derived Intangible Income ["FDII" deduction]. Whereas the GUILTI tax applies to discourage a CFC's foreign intangible income, the FDII deduction does just the opposite; it encourages this type of income for a US corporation by providing a tax deduction incentive. This is effective on the same starting tax year as the GUILTI tax, with a reduction in deductions after year 2025.
Action items - same as for the GUILTI tax, but from the opposite perspective.
3. Intangible Property Transfers. The definition of "intangible property" is clarified and the authority of the Treasury Secretary to require certain valuation methods is confirmed. This reduces controversies for these property transfers and the commensurate income shifting that occurs. Effected are transfers of intangibles for tax years beginning after 12/31/2017; however, no inference of correctness is intended for valuation methodologies utilized before 2018.
Action item - work with valuation professionals and have reports and transfer pricing agreements drafted using the sanctioned methodology.
We have developed tools to help our clients analyze these and other action items. If you have questions about how you or your business may be impacted, please contact
Daniel Won at DWon@SingerLewak.com or dial 310.477.3924 and ask for an International Tax Specialist.