Tax Tip TCJA
The enactment of the 2017 Tax Cuts and Jobs
Act (TCJA)) brought significant changes to the international tax world for U.S.
taxpayer including, among other provisions, an expanded definition of a “United
States shareholder”, the repatriation tax of IRC §965 and the global low tax
intangible income (GILTI) under IRC §951A.
We have discussed these provisions in earlier Tax Tips.
As many non-resident U.S. taxpayers are now
filing their 2018 U.S. personal tax returns (due October 15, 2018 on extension)
many are seeing, for the first time, new Form 5471, “Information Return of U.S. Persons With Respect to Certain Foreign
Corporations”. What becomes clear,
once more, is that the U.S. Congress did not consider the impact on United
States citizens living abroad. The new
form is clearly aimed at the large U.S. multi-national enterprises (MNE) who
have both the expertise and resources to accurately complete these forms.
One IRS estimate states that it takes, on average, 38
hours to prepare Form 5471, 82.5 hours to do the appropriate book and record
keeping and 16 hours to learn about the Form. Someone who has little or no experience with
U.S. international compliance will spend significantly more time. If the financial statements have been
prepared by a professional accountant we are still looking at an average
estimate of 38 hours just to prepare the Form!
Using an estimated hourly rate of $200 per hour (which is probably on
the lower side given the expertise that is needed) we are looking at a
potential fee of approximately $7,500 to complete each Form 5471. One thing is for certain, compliance fees
will be going up. Increasing compliance
costs are a factor that many U.S. citizens, abroad, are considering when
determining whether they want to renounce their U.S. citizenship.
The IRS may impose a penalty of US $10,000
on a late filed or INCOMPLETE form. As such
taxpayers cannot ignore this form or take a light hearted approach to complete
it. In the past the IRS would not have,
automatically, imposed a late filing penalty on individual United States
shareholders. This, however, may be
changing. The Large Business and
International (LB&I) division of the IRS has a number of programs in place
and foreign compliance, in general, is on their target list.
Some significant changes include
- A new classification for a Category
1 filer. There are now 5 (again)
classifications of filers.
- Schedule B, Part II is new
- Schedule C, line 8a and 8b are
new. These lines report foreign currency
transaction gain or loss
- Schedules E and H are now
- Schedule E has been greatly
- An expanded Schedule G – Other
information – may additional questions have been included.
- Schedule I-1 is new. This schedule is used to report information
with respect to GILTI
- An expanded Schedule J
- Schedule M has new lines, and
- New Schedule P
Schedules E, H, I-1, J and P must be
completed separately for each applicable category of income. For example schedule E-1 has 13 different
columns for the tracking of taxes, 9 columns alone for “Taxes related to
previously taxed E&P”. The same
level of detail is required for Schedule H, “Current Earnings and Profits”, Schedule J, “Accumulated Earnings and Profits (E&P) of Controlled Foreign
Corporation” and Schedule P, “Previously
Taxed Earnings and Profits of U.S. Shareholder of Certain Foreign Corporations”.
Schedule I-1, “Information for Global Intangible Low-Taxed Income” is almost a
duplicate of new Form 8992, “U.S.
Shareholder Calculation of Global Intangible Low-Taxed Income”.
What is abundantly clear is that the level
of compliance complexity has dramatically increased. Smaller, less sophisticated taxpayers are
going to have a difficult time complying or are going to have to incur
additional compliance costs.
Congress and the IRS really need to
consider the impacts on taxpayers other than the Apples, Starbucks and Amazons
of this world.
Cadesky U.S. Tax is a full service advisory
and compliance firm. We monitor U.S. tax
news that may be of interest to our readers and share our thoughts in U.S. Tax
Tips. If you require our assistance
please do not hesitate to reach out to us.
The Tax Cuts and Jobs Act of 2017 (“TCJA” P.L. No. 115-97) significantly changed the interest deductibility rules for business interest expense for tax years beginning after December 31, 2017. As many businesses are coming to the close of their taxation year, it may be prudent to review how these changes will impact current year taxable income.
On November 27, 2018, Treasury and the IRS released proposed regulations (REG-106089-18). These proposed regulations addressed the business interest expense limitation under IRC §163(j) as amended. The proposed regulations provide guidance as to the application of IRC §163(j) to C Corporations, consolidated groups, pass-through entities (partnerships, LLCs and S-corporations), and foreign corporations.
IRC §163(j) sets a limitation on the amount of business interest that may be deducted in computing taxable income. The amount, allowed as a deduction, shall not exceed the sum of:
- The business interest income of such taxpayer for such taxable year,
- 30 percent of the adjusted taxable income of such taxpayer for such taxable year (which shall not be less than zero), plus
- The floor plan financing interest of such taxpayer for such taxable year.
Adjusted taxable income as defined means “the taxable income of the taxpayer
(A) computed without regard to
- Any item of income, gain, deduction, or loss which is not properly allocable to a trade or business,
- Any business interest of business interest income,
- The amount of any net operating loss deduction,
- The amount of any deduction for qualified business income (IRC §199A),
- For taxable years beginning before January 1, 2022, any deduction allowable for depreciation, amortization or depletion, and
(B) computed with such other adjustments as provided by the Secretary.”
Business interest expense would not include any other interest expense that is permanently disallowed as a deduction pursuant to another provision of the Internal Revenue Code. Any business interest expense which is not, currently, deductible, will be carried forward and treated as business interest expense paid or accrued in the succeeding taxable year.
Small businesses, however, are excluded from this limitation. IRC §163(j)(3) specifically provides that paragraph (1) does not apply to such taxpayer for such taxable year if they are under the gross receipts test of IRC §448(c). In general, a corporation or partnership will meet the gross receipts test, for any taxable year, if the average annual gross receipts of such entity for the 3-taxable year period ending with the taxable year, preceding the current year, does not exceed U.S. $25,000,000.
Many small private business (for example Canadian controlled private corporations) will be under this gross receipts test threshold. As such, IRC §163(j) will have little or no impact on them and their shareholders. For larger businesses, however, these new limitations need to be considered in terms of both computing taxable income and the potential after-tax cost of financing additional investments in the company (I.e., fixed asset additions, etc.)
Given all the changes, and their respective implementation dates, taxpayers need to be cognizant of all the changes that the Tax Cuts and Jobs Act encompassed.
We at Cadesky U.S. Tax strive to keep our clients up to date on all relevant U.S. tax issues. If you have any questions or needs please do not hesitate to reach out to your Cadesky U.S. Tax team member.
The Tax Cut and Jobs Act (TCJA) has significant implications for United States persons who own shares in a Controlled Foreign Corporation (“CFC”), which is a non-U.S. corporation that is more than 50% owned (votes or value) by “United States” shareholders. In determining whether a corporation is a CFC, for U.S. tax purposes, it is necessary to review the corporation’s share register to determine who the ultimate U.S. shareholders are.
One, however, does not only look at shares directly held by a United States person. One must also look at shares indirectly owned and shares constructively owned. This is true in a U.S. domestic context but even more so in the case of a foreign corporation.
The constructive ownership rules, however, do NOT attribute income. These rules are only used to determine the status of the foreign corporation for U.S. tax purposes.
Internal Revenue Code (IRC) section 318 provides the basic rules in determining constructive ownership. The provisions address ownership to or from family members, to or from partnerships, estates, trusts and corporations and where a person holds options. In context of foreign corporations, IRC section 958 modifies section 318 as required.
Members of family
In general, an individual shall be considered as owning the stock owned directly or indirectly by his spouse, children, grandchildren and parents. A legally adopted child is treated as a child. Note that the definition does not include siblings, nieces or nephews. The general provision is modified such that an individual is NOT considered as owning stock if the family member is a nonresident alien. Constructive ownership only applies from a U.S. person to another U.S. person.
From an estate
Property of a decedent shall be considered as owned by his or her estate if such property is subject to administration by the executor or administrator. The term “beneficiary” includes any person entitled to receive property of a decedent pursuant to a will or pursuant to laws of descent and distribution.
From a trust
Any stock owned directly, or indirectly, by or for a non-grantor trust will be considered as being owned by its beneficiaries only to the extent of the interest of such beneficiaries in the trust. Accordingly, the interest of income beneficiaries, remainder beneficiaries, and other beneficiaries will be computed on an actuarial interest. In computing a beneficiary’s actuarial interest the “factors and methods” prescribed in the Estate Tax regulations shall be used in determining a beneficiary’s actuarial interest for these purposes.
Any stock owned directly, or indirectly, by a grantor trust are treated as being owned by the grantor or owner of the trust.
From a corporation
If 50 % or more in value of stock in a corporation is owned, directly or indirectly, by or for a person, such person shall be considered as owning the stock owned by or for such corporation, in that proportion which the value of the stock which such person owns bears to the value of all the stock in such corporation.
For example assume Albert owns 70% of Holdco and Robert owns the remaining 30%. Holdco owns 50% of Opco while Albert owns, directly, the remaining 50% of Opco. Since Holdco owns 50% or more in Opco it will be deemed to own 100% of Opco . In addition, Albert will be considered as owning 85% in Opco – 50% directly and 35% indirectly (70% x 50%).
The U.S. constructive ownership rules can be complicated, especially in a foreign corporation context. Cadesky U.S. Tax can assist in determining the status of your foreign corporation for U.S. tax purposes. If you require our assistance please do not hesitate to reach out to us.
TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.
The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.