Spring 2018 issue of Horizons

The Tax Cuts and Jobs Act represents the largest tax overhaul in 30 years with the impact not only being felt domestically, but internationally as well.

Congress and the President’s Tax Cuts and Jobs Act of 2017 (the Act) appears to be an attempt to shift the tide of American economic activity back towards U.S. shores. There is an “America First” aroma weaving its way through the Internal Revenue Code changes. The intent of our top four international tax reforms discussed below, and other individual and corporate reforms discussed elsewhere in this publication, appears to be a genuine and likely effective attempt to create an environment that encourages more business investment domestically. Territorial System and the Dividends Received Deduction The most significant international reform is the move from taxing worldwide income to a territorial tax system. Under a worldwide tax system, U.S. companies with foreign operations pay foreign income taxes on offshore earnings and then again when that money is brought back home to the United States. A complicated set of rules helped relieve taxpayers from double taxation. In a territorial system, earnings are taxed where the earnings are generated and repatriations of cash back home to the U.S. are tax-free. A simple set of rules relieve taxpayers from double taxation called the participation exemption. Effective for distributions made after December 31, 2017, the Act implements the participation exemption allowing a 100% dividends received deduction on foreign- sourced dividends. The exemption only applies to dividends coming from foreign corporations and paid to a domestic corporation owning at least 10% of the foreign corporation. The domestic corporation must also hold the stock of the foreign corporation for more than 180 days during the year prior to the dividend. Foreign branch earnings of domestic corporations and capital gains (except section 1248 gains which are tax free) are not eligible for the participation exemption.

Repatriation Tax There is a toll charge or transition tax for our migration to a territorial tax system. The Act introduces a new tax on a mandatory deemed repatriation of foreign earnings.

Spring 2018

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