This is the fourth in a series of weekly alerts about the what, why, who, and when of the new international tax provisions, along with action items that we believe should be considered. This alert provides a summary of key provisions relating to foreign tax credits (“FTCs) and controlled foreign corporations (“CFCs”).
In the coming weeks, we will provide more bite-sized information and action items or dive deeper into specific areas.
- Foreign Tax Credit Basket for Foreign Branch Income. Foreign branch income must be properly accounted for and allocated to a separate foreign tax credit basket. This results in greater matching of foreign tax credits with branch income, and less co-mingling with other types of foreign income, which will reduce foreign tax credit utilization. This impacts businesses with foreign branches for tax years beginning after 12/31/2017.
- Action item – analyze current and forecasted branch financial statements to determine foreign tax credit limitations, as well as potential advantages of restructuring the foreign business operations.
- Sourcing Income from Inventory Sales. Income from sale of inventory produced partly in and partly outside the US is to be allocated on the basis of where the inventory was produced, regardless of where title passes. This contrasts with the prior rule of having up to 50% of the income being treated as foreign source, for inventory produced in the US but sold outside the US [for purposes of the foreign tax credit computation]. US producers of exports would now receive less FTCs, and US company foreign branch producers of imports would receive more FTCs; this will be effective for tax years beginning after 12/31/2017.
- Action item – study the impact of this provision on utilization and limitations of foreign tax credits and consider tax optimization and relocation of production activities.
- CFC Ownership Attribution. Stock of a foreign corporation owned by a foreign person is attributed to a related US person for purposes of determining whether the related US person is classified as a 10% US shareholder of the foreign corporation; this brings into play various unfavorable tax rules that apply to 10% shareholders of a CFC. The rule makes the ownership attribution rules more consistent between US and non-US owners. It applies to US shareholders of CFCs for the last tax year that begins before 1/1/2018 and subsequent years.
- Action item – compile and review the listing of all CFC shareholders, analyze for relationships, and determine effects.
We have developed tools to help our clients analyze these and other action items. If you have questions about how you or your business may be impacted, please contact us.