Question

Discussion Topic 1: The Tax Cuts and Jobs Act of 2017 substantially changed how the United States taxes foreign subsidiary operation of United States companies by establishing a participation exemption system for taxing non-Subpart F foreign-source income that a domestic corporation earns through a foreign corporation. How are dividend distributions made after January 1, 2018 treated? How does this create a quasi-territorial system for domestic corporations?

Discussion Topic 2: The reforms enacted by the Tax Cuts and Jobs Act of 2017 had a significant impact on the Subpart F provisions. Starting in 2018, how are foreign-source dividends that a domestic corporation receives from a 10%-or-more-owned foreign corporation taxed? What are the provisions related to paying the “transition tax” referenced under the new law?

Answer 1

Discussion topic -1

The TCJA moved towards a “territorial” tax system by eliminating the additional U.S. tax on foreign profits through what is called a “participation exemption.” Under the U.S. participation exemption, foreign profits paid to U.S. parent corporations in the form of dividends are fully deductible against taxable income.[7] The result is that these foreign profits do not face additional U.S. taxation as they did under previous law.

For corporations to qualify for the participation exemption on their foreign profits, they need to satisfy three general requirements. First, the U.S. corporation must own 10 percent of the vote or value of the controlled foreign corporation’s (CFC) stock. Second, the U.S. parent corporation must satisfy a holding period requirement of 366 days. Lastly, the U.S. corporation cannot deduct a dividend against U.S. taxable income if that dividend received a tax benefit in a foreign country

Discussion topic-2

The Act introduced some new concepts that are aimed at encouraging the repatriation of foreign earnings by U.S. taxpayers; stated differently, it removes an incentive for the overseas accumulation of such earnings.

The keystone provision is the DRD, which allows an exemption from U.S. taxation for certain foreign income by means of a 100% deduction for the foreign-source portion of dividends received from specified 10%-owned FCs by regular domestic C corporations that are U.S. Shareholders of those FCs.

In general, a “specified 10%-owned FC” is any FC with respect to which any domestic corporation is a U.S. Shareholder.

Section 965 was added to the Internal Revenue Code as part of the Tax Cuts and Jobs Act (TCJA) enacted on December 22, 2017, and requires US shareholders to pay a one-time transition tax on the untaxed foreign earnings of controlled foreign corporations and certain foreign corporations that have a US shareholder that is a domestic corporation. The transition tax imposes two different tax rates on post-1986 earnings and profits: (1) 15.5 percent on cash earnings and profits, and (2) 8 percent on noncash earnings and profits.