Spring 2018 issue of Horizons

C-corporate taxpayers receive a 50% deduction on GILTI inclusions for tax years beginning after December 31, 2017, and before January 1, 2026, when it is then reduced to 37.5%. For C-corporations, foreign tax credits are allowed to offset U.S. tax on GILTI, but only up to 80%. Without the 50% deduction and ability to use foreign tax credits, a U.S. pass-through entity with foreign corporations in its structure could be hit especially hard. Foreign Derived Intangible Income Converse to the GILTI, the Act provides a 13.125% effective tax rate on excess returns earned directly by a U.S. corporation with income from products manufactured and services provided for consumption outside the U.S. The effective tax rate is achieved by allowing a 37.5% deduction for Foreign- Derived Intangible Income (FDII). A complex set of definitional rules determine the amount of a U.S. corporation’s FDII.

The reduced effective tax rate on FDII is intended to encourage U.S. corporations to keep or relocate service and production activities in the United States. Base Erosion Anti-Abuse Tax The Act added section 59A to the code which institutes a minimum tax on related party payments, which reduce U.S. taxable income. The tax applies to corporations with gross receipts of over $500 million for their previous three taxable-year’s period. This additional tax is called Base Erosion Anti-Abuse Tax (BEAT), and will generally be calculated at a rate of 10% (phased in at a 5% rate beginning in 2018 and increasing up to 12.5% by 2026) of modified foreign taxable income. The BEAT includes within its purview almost every outbound payment except for payments for inventory manufactured outside the United States, certain payments subject to U.S. withholding taxes and the participation exemption mentioned previously.

This 37.5% deduction is reduced to 21.875% starting in 2026.

Spring 2018

17