Tax Planning Under the New US Tax Reform

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.