The U.S. House of Representatives has just passed the Tax Cuts and Jobs Act bill, H.R. 1, by a margin of 22 votes. The Senate Finance Committee is still working on its own version of the Tax Cuts and Jobs Act.
There has been a lot of talk on national media about various individual and business provisions of the proposed bills, such as changes to the individual tax rates, the repeal of certain popular deductions, and reductions in the corporate tax rates. However, there are also a number of provisions that, if they become law, could specifically impact individuals and businesses with foreign activity.
Some of these provisions are aimed at easing the current roadblocks to bringing foreign profits back into the United States—an attempt to spur investment in the United States. Other provisions seek to increase U.S. taxation on the profits of foreign subsidiaries. There would be changes to the existing corporate foreign tax credit rules as well as revisions to what are referred to as the Subpart F rules (the existing rules for when a U.S. shareholder pays tax on a foreign corporation’s profits.) In addition, a 20% excise tax has been proposed for certain payments by U.S. corporations to affiliated foreign entities.
The House bill introduces a new concept: foreign high returns. If the aggregated net income of a U.S. parent’s foreign subsidiaries exceeds what the government feels would be a normal operating profit based on the subsidiaries’ tangible depreciable assets (the routine return), then the U.S. parent would owe tax on 50% of the subsidiaries’ net income in excess of that routine return. Since the routine return would be based on tangible depreciable property, this could severely impact those corporations whose subsidiaries’ profits are earned from intangibles, such as software licenses or other intellectual property.
We don’t know what will shake out in the end, and certainly, the devil is always in the details. However, if you are someone who has foreign business activity, it is important to be aware of what is being proposed. Even if the final bill looks different than the current version recently passed by the House, some semblance of what is in this version will probably survive.
Stay tuned as the House and Senate try to work out final legislation.
By Linda Bruckner, CPA