Foreign tax credit relief
It’s fair to say that, right now, many changes are happening to the taxation systems on a global level. It seems there’s still a great deal to be confirmed both in America itself and for US citizens living abroad.
Tom Griffiths, a tax advisor specialising in US expatriate tax, shares his thoughts on the proposed reforms and the likely impact on Americans living, working abroad and their worldwide income.
The US tax system can seem like a financial maze at the best of times, no more so than now because of the proposed legislation changes by Senate Finance Committee Chair, Ron Wyden whos changes to the Global Intangible Low-Taxed Income (GILTI), the Foreign Tax Credit and more will throw some into disarray.
These tax changes are being considered the Wyden Proposal
Their proposed intention is to overhaul the international tax regime and make significant changes to key areas of the 2017 Tax Cuts and Jobs Act, which would have a considerable impact on the availability of foreign tax credits and may impact tax treaties.
The proposed changes do leave a great deal to the imagination, but it would seem that is the objective as it allows for further changes and flexibility. Not ideal for those who will be impacted by these changes and need to make provisions to implement them.
Likely changes to the Global Intangible Low-Taxed Income
The global intangible low-taxed income or GILTI is a deemed amount of income derived from a controlled foreign corporation (CFC) in which a US citizen is a 10% (direct or indirect) shareholder. It is roughly determined by the taxable income/loss of a CFC as if it were a US citizen.
Whether income is high taxed will be a matter for the individual country to decide. All of these tax rate decisions are still to be determined.
The new tax proposals will be subject to a combination rule similar to the current one under the GILTI HTE rules. Controlled foreign corporation (CFC) tax residents of the same foreign country would be treated as a single tested unit, and partnerships could not be used in this case to break their affiliation.
Foreign tax credits
Foreign taxes placed on higher taxed income would not be deducted or credited, and the new tax proposal creates a placeholder for GILTI timing problems. This may include considering foreign Net Operating Loss (NOL) carryovers and possibly any timing differences between the US and foreign legal processes.
There is no formal date for these proposed changes yet. Still, the changes to GILTI are likely to apply to the taxable years of foreign corporations beginning after the date of enactment, meaning 2022 for calendar year CFCs.
New high-tax exclusion rule for foreign branches
The new tax changes would see a higher tax exclusion rule imposed, which would mean if income is subject to a tax rate greater than the highest individual or US corporate rate. A US company that earned high tax foreign branch income would be exempt from paid foreign tax.
What does foreign branch mean?
The new proposal by Wyden, Brown and Warner suggests that “foreign branch” would mean a branch whose activities are carried out by the taxpayer directly or indirectly or is not a tested unit of a CFC and has a taxable presence in its country.
These changes would also apply to taxable years beginning after the date of enactment.
Allocation and appointment relief for companies who retain R&D and headquarter jobs in the US
The new proposal would give taxpayers relief from certain expenses against foreign source income allocated solely to domestic sources for R&D and stewardship functions. The aim of this is to encourage multinational companies to retain these specific jobs within the United States rather than two countries.
While there may be some winners where these new proposals are concerned, companies eligible to claim high taxed foreign earnings would not be able to claim foreign tax credit, so it would not necessarily be a great advantage compared to the current tax system. Thus far, we don’t know if different rules will apply to foreign countries and which elements they will carry forward.
Changes to the Base Erosion and Anti-Abuse Tax
There are also proposed changes to this tax, also known as BEAT, and this tax serves as a deterrent to those who plan to shift profits out of the US to avoid domestic tax liabilities.
Wyden is seeking to revise but retain this tax imposed on taxpayers with modified tax liability which would see taxpayer’s go from allowing 80% of general business credits used to permitting all.
Will the Wyden Proposal change the Foreign Tax Credit for expats?
Wyden has suggested these proposals are a starting point and in line with the new tax proposals set out by President Biden and the international tax reforms proposed at the G7 Global summit.
As the New York Times reports, “Finance leaders from the Group of 7 countries agreed to back a new global minimum tax rate of at least 15 percent that companies would have to pay regardless of where they locate their headquarters. The Biden administration has been particularly eager to reach an agreement because a global minimum tax is closely tied to its plans to raise the corporate tax rate in the United States to 28 percent from 21 percent to help pay for the president’s infrastructure proposal.”
There is much more to be discovered about all of these tax reforms, and they will certainly impact US citizens living and working abroad.
It will be wise to keep informed of all these changes as they unfold and seek the support of an expat tax consultant to ensure there is a smooth transition when they are finalised, and deadlines are set.
Tom Griffiths is a tax advisor and consultant specialising in US expatriate tax matters. He works with clients to structure and streamline taxes for investment, trading entities and owned businesses.