Shareholders in foreign businesses could find themselves hit with an immediate tax on offshore earnings under the recently passed “Tax Act,” officially known as “An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018.” Before the Tax Act, most foreign income earned by US shareholders through foreign corporations would only be subject to US taxes when the foreign income was paid to those US shareholders as dividends. The Subpart F rules were a way for the United States to capture some of this offshore income in the US tax base, but careful planning meant many US shareholders with foreign companies could keep money offshore and out of the US tax system for years. Some estimates put the amount of this offshore money at nearly $3 trillion, so any change to how the United States treats foreign taxes would look into how best to address these offshore earnings.
The Tax Act will look to capture some of this offshore income through a one-time immediate increase in the Subpart F income of certain US persons investing in foreign corporations. The amount of income immediately taxed by the United States will increase by the greater of (i) accumulated post-1986 deferred foreign income determined as of November 2, 2017, or (ii) the accumulated post-1986 deferred foreign income determined as of December 31, 2017. The tax rate on this deferred foreign income will be 8 percent for non-cash E&P and 15.5 percent for cash E&P. This one-time tax has been referred to as a “Toll Charge” for how it may allow offshore income to flow back into the United States.
The Toll Charge is not a routine E&P calculation for US shareholders of foreign corporations. Year-by-year ownership percentages, whether E&P is cash or non-cash, and the availability of certain foreign tax credits will all affect the final tax due. The Tax Act has allowed for the payment of the Toll Charge in installments if sufficient cash to make payments is unavailable.
For more information regarding the Tax Act, please see our recent related blog posts linked below:
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- Rethinking Large 2017 Year-End Charitable Gifts
- 2017 Year-End Planning for Art, Equipment, and Other Non-Real Estate 1031 Exchanges
- Should You Reform Your Business for Tax Reform?
- What’s in the Tax Reform Bill?