TCJA and GILTI regimes: US Businesses Overseas

Businesses and individuals running businesses (or freelancers) abroad can also have tax filing requirements that are costly, poorly regulated, and ultimately informational. These businesses don't have access to the foreign earned income exclusion and are therefore forced into using the more complex foreign tax credits. Oftentimes, these are in "passthrough" entities where another layer of complexity, interpretation, tax preparer, etc. is added before ultimately being reported by the taxpayer.

Complicating the issue are the filing requirements imposed by the 2017 Tax Cuts and Jobs Act (TCJA). The TCJA moves the US from a worldwide tax system to a participation exemption system by giving US (that is, domestic) corporations a 100% dividend received deduction for dividends distributed by a controlled foreign corporation (CFC). To transition to that new system, the measure imposes a one-time deemed repatriation tax, payable over 8 years, on unremitted earnings and profits at a rate of 8 percent for illiquid assets and 15.5 percent for cash and cash equivalents. The dividends received deduction is available only to US corporations that are shareholders in a CFC. The deduction is not available to individuals, nor to foreign corporations, which, for example, are owned by US individuals, including individuals living abroad. On the other hand, the repatriation tax applies to everyone, not merely US corporations.

Accordingly a US citizen overseas, who is a shareholder in a CFC, might be subject to the repatriation tax.  These businesses may be a yoga studio in France, a restaurant in Norway or a consultancy in Thailand.  They can be big or small and have probably not been incorporated taking into consideration US tax law.  Some of the individual who are subject to the repatriation tax might not have in hand the actual monies needed to pay this tax.  

ACA continues its advocacy for the application of a de minimis ruling that would take out from the Transtion Tax and GILTI regimes small businesses run by US citizens living and working overseas.  ACA writes to Treasury and IRS  Click here for full article.