Navigating the complexities of international taxation requires a comprehensive understanding of evolving regulations and strategic planning. This overview encompasses key aspects of current tax landscapes that are essential for companies operating internationally.
- Taxation on foreign subsidiary income while Subpart F remains in effect.
- Foreign-Derived Intangible Income (FDII): Beneficial tax rate of intangible income, available only to corporations.
- Foreign Tax Credits (FTCs): You can claim a credit only for foreign taxes that are imposed on you by a foreign country – generally only income, war profits and excess profits taxes qualify for the credit.
- Corporate Transparency Act (CTA): Enacted in 2021 and takes effect in 2024. This requires beneficial owner reporting to FinCen to enhance transparency in entity structures and ownership to combat money laundering, tax fraud, and other illicit activities.
Is Your Foreign Income Taxed Under GILTI?
Did You Sell Goods or Services Abroad?
- FDII Deduction: This deduction lowers the U.S. tax rate to 13.125%.
- Indirect Tax Compliance: Non-U.S. registration or VAT or GST collection obligations may be required.
- Withholding Taxes: W8 forms and certificates may be required from non-U.S. persons receiving payments from you.
- Transfer Pricing Documentation: If applicable, be sure to have a robust and updated set of documents.
- Trade Agreements: Certain trade agreements might impact the tariffs applied to exported goods.
Foreign Tax Credit
- The 2022 final foreign tax credits regulations required a detailed analysis of the foreign tax regime to determine creditability, the result of which was onerous and challenging. These regulations had four aspects to determine creditability of a foreign tax: realization, gross receipts, cost recovery and attribution. (Read more about it here: Let’s Talk: Final Regulation Changes to the Foreign Tax Credit - Withum).
- Temporary relief was released in 2023 for determining eligibility of foreign taxes for U.S. credit purposes. No foreign tax whose base is gross receipts or gross income satisfies the net income requirement, except in the case of a foreign tax whose base consists solely of investment income that is not derived from a trade or business, or wage income (or both). Additionally, taxpayers may disregard the rules regarding the jurisdiction to tax excluded income rule and the source-based attribution requirements promulgated in the final regulations, at least through the year-ended December 31, 2023.
- It is important to note the language provided by the relief precludes foreign digital service taxes from being creditable.
Corporate Transparency Act
- Each “Reporting Company” shall submit to FinCEN a report that identifies each “Beneficial Owner”
- Reporting Company: A domestic or foreign corporation, LLC or “similar entity.” Note there are more than 23 exceptions from reporting.
- Beneficial Owner: An individual who, directly or indirectly, exercises substantial control over the entity or owns or controls 25% of the ownership interests of the entity.
- Entities in existence before January 1, 2024 are required to report by January 1, 2025. Proposed rules require entities created in 2024 to report to FinCen within 90 days of formation.
- Substantial penalties for failure to report
2024 Year-End Tax Planning Resources
Now’s the time to review your year-end tax planning options and strategies for the 2024 tax season. Withum’s Year-End Tax Planning Resource Center offers tips, legislative updates, and tax-saving opportunities for individuals and businesses.
Repatriation of Intangible Property
- The U.S. Treasury released final regulations for Section 367(d) on October 9, 2024, providing guidance on the treatment of intangible property that was previously expatriated to a foreign corporation where the transfer was subject to Section 367(d) and subsequently repatriated back to the United States. The final regulations apply to IP repatriations occurring on or after October 10, 2024.
- Section 367(d) applied to outbound transfers of intangibles to foreign corporations deem that the intangible was transferred in exchange for an annual royalty for the useful life of the property, not to exceed 20 years.
- Under the prior regulations, intangibles that were previously transferred to a foreign corporation and subject to ongoing annual royalty inclusions under Section 367(d) would continue to be subject to the annual royalty inclusion even when the intangible is subsequently repatriated back to a U.S. transferee resulting in excessive taxation and prevent taxpayers from repatriating intangibles back into the United States.
- The final regulations generally follow the proposed regulations and provide guidance that would terminate the continued application of the deemed royalty from the repatriated intangible property when the intangible is repatriated back to a “qualified domestic person” (such as the U.S. transferor or a party related to the U.S. transferor) where the income from the intangible would once again be subject to U.S. federal income tax. In addition, upon repatriation, the original U.S. transferor of the intangible property may be required to recognize gain.
- These regulations may provide an incentive for multinational companies who previously expatriated IP to repatriate that IP to extinguish the ongoing 367(d) deemed royalty.
CAMT (Corporate Alternative Minimum Tax)
- On September 12, 2024, the U.S. Treasury and the IRS issued Proposed Regulations (112129-23) to implement the CAMT introduced by the Inflation Reduction Act (IRA) of 2022, effective for taxable years starting after December 31, 2022. These regulations aim to define and establish general rules for determining tax basis and identifying covered taxpayers. Additionally, Notice 2024-66 was issued to provide tax relief for CAMT estimated tax payments until January 1, 2025.
- The IRA introduced a 15% CAMT on Applicable Corporations.
- Applicable Corporations: (i) U.S C Corporations with average annual book income over $1 billion in the last 3 years and (ii) foreign-parented U.S. C Corporations with book income over $100 million if the aggregated foreign group has over $1 billion in book income.
- Tax Basis: 15% on the adjusted financial statement income (AFSE)
- CAMT Liability = Tentative Corporate Minimum Tax – Regular Tax Liability + BEAT Liability.
- Any CAMT Liability due creates credit carryforward against future Regular Tax Liability.
- According to Proposed Regulations (112129-23) and Notice 2024-66, both issued on September 12, 2024:
- A safe harbor for Applicable Corporation status determination is provided, which simplifies the AFSI calculation for most corporations.
- Penalties for an Applicable Corporation’s failure to pay estimated tax with respect to its CAMT are waived for a taxable year that begins after December 31, 2023, and before January 1, 2025.
- Treasury and the IRS request comments on the proposed rules by December 12, 2024.
- A public hearing is scheduled for January 16, 2025.
Transactions With Related Partners
- What should you know in terms of Transfer Pricing?: Businesses are required to prepare and maintain documentation supporting their transfer pricing positions. This documentation should demonstrate that the intercompany transactions are priced at arm’s length.
- Documentation generally includes: Functional, Comparability, and Economic Analysis; Intercompany Agreements; Guidelines and protocols to justify the pricing, risk allocation, and profit level indicators.
- Documentation retention: Keep transfer pricing documentation for about seven years as the IRS may ask for it during audits.
- International tax compliance may be required: You might need to file Form 5471 and related schedules for transactions involving related parties and Controlled Foreign Corporations (CFCs).
- Advance Pricing Agreements (APAs): APAs with the IRS create upfront pricing agreements, reducing transfer pricing dispute risks.
Cash Repatriation
Did Your Organization Adopt a Remote Work Policy?
Employers
- Permanent Establishment Risk: While working remotely, your non-U.S. employees may create a taxable presence for your organization in his or her jurisdiction.
- Visas/Social Insurance/Payroll Withholding: U.S. employees working outside of the U.S. may require VISAs (although some countries offer “Digital Nomad” Visas). U.S. employers to be subject to local Social Insurance Taxes (unless a Totalization Agreement applies). Local income tax withholding and remission may also be required.
Employees
- Work Permits/Digital Nomad Visas: While working remotely, if the host country does not provide a “Digital Nomad Visa” program, which allows you to remain a U.S. employee subject ONLY to U.S. tax, you will be required to obtain necessary working permits and be subject to local Social Insurance tax (unless a Totalization Agreement applies, and local income taxes).
- Foreign-Earned Income Exclusion (FEIE): U.S. employees may be eligible for FEIE up to $120,00 (2023). To qualify, you must meet the physical presence test or the bona fide residence test.
Taxation of the Digital Economy
136 countries agreed to implement a global minimum tax of 15% on October 8, 2021, effectively ending decades of tax competition aimed at luring foreign investment with low-income tax rates.
- The agreement would only impact large multinational companies with $750 million or more in worldwide sales.
- Initially, implementation of the agreement was targeted for 2023. However, few countries have enacted the local legislation required to implement these minimum taxes.
- Many countries have also enacted indirect taxes (VAT/GST) on digital services that are delivered to local customers. Applicability thresholds are generally much lower (e.g., 10,000 Euros of sales), and liability for such taxes may extend to other participants of the service supply chain.
Contact Us
Reach out to Withum’s International Tax Services Team for guidance as year-end approaches.
Disclaimer: No action should be taken without advice from a member of Withum’s Tax Services Team because tax law changes frequently, which can have a significant impact on this guide and your specific planning possibilities.
