The US Tax Cuts and Jobs Act has introduced various new provisions to counter base erosion and profit shifting by US corporations. These include a base erosion minimum tax, provisions to counter income shifting by intangible property transfers and provisions to counter the use of hybrid entities or hybrid instruments to obtain a tax advantage.
The Act also introduces a new Section 951A requiring a US shareholder of a controlled foreign corporation (CFC) to include in its income the global intangible low-taxed income (GILTI) of the CFC. This would be treated as a deemed dividend. A domestic corporation will be entitled to claim a deduction with respect to this income inclusion, and a domestic corporation will then be taxed on the GILTI at an effective rate of 10.5% (in other words 50% of the US corporate tax rate of 21%).
Under this provision the GILTI is defined as the excess of the US shareholder’s net CFC tested income over a net deemed tangible income return.
The “net CFC tested income” generally refers to the gross income of a CFC, other than any income that is subject to US tax as effectively connected income; Subpart F income and income that would be Subpart F income except for the application of certain exceptions); and foreign oil and gas extraction income, net of allocable deductions.
The “net deemed tangible income return” generally refers to an amount equal to 10% of the aggregate of the US shareholder’s pro rata share of the CFC’s qualified business asset investment over the amount of interest expense taken into account to determine the US shareholder’s net CFC tested income.
The provision permits a domestic corporation to benefit from a foreign tax credit for 80% of its pro rata share of the foreign income taxes attributable to the income of the CFC that is taken into account in computing its net CFC tested income. The foreign tax credit limitation rules apply separately to such taxes. Any taxes that are deemed paid under these rules may not be carried back or forward to other tax years.
This provision takes effect for taxable years of foreign corporations beginning after 31 December 2017 and for taxable years of US shareholders in which the taxable years of the foreign corporations end.