The US Tax Cuts and Jobs Act, passed on 17 December 2017, has dramatically changed the analysis and available strategies for structuring cross-border operations. Meaning, to realise tax optimisation, business owners must be aware of those changes. For example, in addition to a decreased corporate rate from 35% to 21%, and the full expensing of plant and equipment acquisitions, there is a now a reduced effective rate of 13.125% for domestic companies’ income from selling products or services to foreign customers directly or through related parties.
Also, now available is a 20% deduction on qualified business income of pass-through entities, including sole proprietorships, partnerships, LLCs, S Corporations, estates and trusts. This deduction can reduce the top marginal rate from 37% to 29.6%. Regarding income of controlled foreign corporations (CFCs), most of which is now called “global intangible low-taxed income” (GILTI), US corporate shareholders benefit from an automatic 50% deduction on such foreign income (taxed currently as a deemed dividend) reducing the effective US tax rate to 10.5%. Also, corporate shareholders are allowed an indirect foreign tax credit for 80% of foreign tax paid, which should reduce the US tax to zero where the foreign tax rate is at least 13.125%. This reduced effective rate is not available to US individual or pass-through shareholders. This means that US individuals who earn GILTI through a US pass-through structure pay tax rates as high as 37%.
US corporations are also the only type of shareholder that can benefit from a full tax exemption on certain types of foreign income. This exemption is not available to US individuals or pass-through entities.
Bottom line, it is now possible to consider the US a tax-efficient base for generating foreign income, either directly or via a foreign subsidiary. Sometimes, a corporate structure proves most efficient, other times a pass-through structure may offer the best results.