The 2017 Tax Cuts and Jobs Act (TCJA): Transition Tax and GILTI Regimes

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 probably have not been incorporated taking into consideration US tax law.  Some of the individuals subject to the repatriation tax might not have in hand the actual monies needed to pay this tax. ACA made a number of points on the effects of these changes.

ACA wrote to Treasury officials requesting relief from certain the reporting requirements of the Transition tax, including an extension in the filing deadline. In April of 2018, Treasury provided some relief giving an extension for the filing deadlines. On June 5th, the Treasury, after pressure by ACA and other advocates, extended the filing deadline further from June, 2018 to June 2019

ACA submitted extensive commentary to the Treasury on its issuance of regulations.  ACA advocates for relief for taxpayers residing abroad and asks that the reporting requirements under Section 965 should be modified and that a de minimis rule be applied to exempt small taxpayers resident outside the US. ACA testified at public hearings on the subject. ACA’s testimony calls for the adoption of a de minimis ruling and questions Treasury determination that the transition tax regulations do not impose significant economic impact on taxpayers.

In March of 2019, the US Treasury Department provided updated guidance on GILTI regulations that gives some relief to individual taxpayers, including US citizens overseas.  For individuals with businesses that are paying at least modest amounts of foreign taxes (and otherwise are not subject to ‘normal’ Subpart F rules), the use of a Section 962 election will allow the individuals to go back to the old days of only paying tax on income in foreign companies when it is distributed. 

ACA continues its advocacy, ACA writes to Treasury and IRS and reiterates the need for a de minimis Ruling for Transition Tax and GILTI and The Torturous Road Leading to TCJA and Its Progeny, the Transition Tax and GILTI. Click here for full article.