Source: https://www.chamberlainlaw.com/us-business-and-international-tax-developments/reforms-to-the-international-taxation-of-u
Timestamp: 2019-04-19 17:19:56+00:00

Document:
The initial impact of the TCJA on the international side of business was the required repatriation of all post-1986 foreign accumulated earnings and profits indirectly held by U.S. corporations having a 10% or greater stock ownership position (by voting) in a foreign corporation (other than a passive foreign investment company as defined under section 1297). It had been reported that the aggregate amount of such offshore pilings of untaxed foreign source earnings was in excess of $3 trillion. In moving to a territorial based income tax system for U.S. corporations conducting business through one or more foreign subsidiaries or 10% or more owned entities, it was necessary to “purge” the existing foreign companies of their positions in foreign accumulated earnings and profits.
Under section 965, U.S. corporations can avail themselves of a repatriation tax rate of 15.5% on subject foreign accumulated earnings represented in the form of cash and cash equivalents, and 8% on excess foreign accumulated earnings represented by non-cash and cash-equivalent assets. The tax on the repatriation can be elected to be paid over 8 years on a back-end loaded series of payments with a special deferral rule for S corporations and their shareholders.
A second and related reform, is the adoption of a participation exemption system with respect to a U.S. corporation’s ownership of a foreign subsidiary. In particular, U.S. corporations owning 10% or more of the stock of a foreign subsidiary are benefitted by a new 100% dividends received deduction under section 245A in moving to a territorial based system through a participation exemption system for foreign dividend income from a foreign corporation other than a passive foreign investment company as defined in section 1297. This change dramatically moved the U.S. for the first time to a territorial based tax system but only with respect to certain domestic corporations.
A fourth major change introduced in the TCJA with respect to the U.S. international taxation of corporations (other than an S corporation, REIT or real estate investment trust) is a base erosion “minimum” tax (“BEATs”). The BEATs prevents U.S. companies from stripping earnings out of the U.S. through deductible payments to foreign. The tax is structured as an alternative minimum tax (even though the corporate alternative minimum tax was repealed in the TCJA) that applies when a multinational company reduces its regular U.S. tax liability to less than a specified percentage of its taxable income, after adding back deductible base eroding payments and a percentage of tax losses claimed that were carried from another year. The tax applies to deductible payments to foreign affiliates from domestic corporations, as well as on foreign corporations engaged in a U.S. trade or business in computing the tax on their effectively connected income (ECI) of 10% (5% for taxable years beginning in calendar year 2018) of the modified taxable income of such taxpayer over an amount equal to the regular tax liability (per section 26(b) of the corporation for the taxable year reduced by certain credits. It is a provision of great complexity and will result in many multinational enterprises re-structuring their supply chains.
Under Subpart F, a U.S. shareholder of a CFC is taxed directly on his or its portion of the earnings and profits of the corporation whether the corporation distributes such earnings or not. A U.S. shareholder for this purpose, is a U.S. person who owns at least 10% of the foreign corporation's voting stock. A foreign corporation is a CFC if more than 50% of its stock, by voting power or value, whichever gives the higher percentage for U.S. shareholders, is owned by U.S. shareholders. Where, for example, a U.S. cororation owns ½ of a foreign corporation’s voting common stock and one share more than one-half of its nonvoting preferred stock with the remainder of the stock of the foreign corporation owned by a nonresident alien, the foreign corporation is a CFC since more than 50% of its stock, measured by value, is held by a U.S. shareholder.  Valuation principles, including discounts for minority ownership stock positions as well as control premiums, are taken into account in determining if the U.S. shareholders’ stock owns or holds more than 50% of the value of a foreign corporation’s stock.  Constructive ownership rules are provided under section 958 in determining whether if U.S. persons owns more than 50% of the corporation’s stock. There are two general classes of CFC earnings which are required to be directly taxed to U.S. shareholders: (i) subpart F income: and (ii) CFC earnings invested in U.S. property. Two categories of CFC earnings are taxed directly to U.S. shareholders: subpart F income and earnings invested in U.S. property.
Section 952 sets forth the general definition of Subpart F income. Subpart F income generally consists of five types of income and payments: (i) insurance income per section 953; (ii) foreign base company income per section 954; (iii) certain income relating to international boycotts and other violations of foreign policy; (iv) passive income; and (v) income that is readily movable from one taxing jurisdiction to another. I shall not endeavor to go into the “weeds” in describing the various categories of Subpart F income in this post.
Several exceptions from the broadly defined subpart F income facilitate the deferral for income from certain transactions, dividends, interest and certain rents and royalties received by a CFC from a related corporation organized and operating in the same foreign country in which the CFC is organized. The same- country exception is not available to the extent that the payments reduce the subpart F income of the payor. As mentioned, a second exception from foreign base company income and insurance income is available for any item of income received by a CFC if the taxpayer establishes that the income was subject to an effective foreign income tax rate greater than 90 percent of the maximum U.S. corporate income tax rate (that is, more than 90% of 35% (pre-TCJA), or 31.5% or 18.9% after TCJA).
A ‘‘CFC look-through’’ rule excludes from foreign personal holding company income dividends, interest, rents, and royalties received or accrued by one CFC from a related CFC (with relation based on control) to the extent attributable or properly allocable to non-subpart-F income of the payor. The look-through rule applies to taxable years of foreign corporations beginning before January 1, 2020, and to taxable years of U.S. shareholders with or within which such taxable years of foreign corporations end.
Another exclusion from subpart F income for certain income of a CFC derived from the active conduct of banking or financing business (‘‘active financing income’’), which applies to all taxable years of the foreign corporation beginning after December 31, 2014, and for taxable years of the shareholders that end during or within such taxable years of the corporation. With respect to income derived in the active conduct of a banking, financing, or similar business, a CFC is required to be predominantly engaged in such business and to conduct substantial activity with respect to such business in order to qualify for the active financing exceptions. In addition, certain nexus requirements apply, which provide that income derived by a CFC or a qualified business unit (‘‘QBU’’) of a CFC from transactions with customers is eligible for the exceptions if, among other things, substantially all of the activities in connection with such transactions are conducted directly by the CFC or QBU in its home country, and such income is treated as earned by the CFC or QBU in its home country for purposes of such country’s tax laws. Moreover, the exceptions apply to income derived from certain cross border transactions, provided that certain requirements are met.
In the case of a securities dealer, an exception from foreign personal holding company income applies to any interest or dividend (or certain equivalent amounts) from any transaction, including a hedging transaction or a transaction consisting of a deposit of collateral or margin, entered into in the ordinary course of the dealer’s trade or business as a dealer in securities within the meaning of section 475.1434 In the case of a QBU of the dealer, the income is required to be attributable to activities of the QBU in the country of incorporation, or to a QBU in the country in which the QBU both maintains its principal office and conducts substantial business activity. A coordination rule provides that, for securities dealers, this exception generally takes precedence over the exception for active financing income.
Income is treated as active financing income only if, among other requirements, it is derived by a CFC or by a QBU of that CFC. Certain activities conducted by persons related to the CFC or its QBU are treated as conducted directly by the CFC or QBU.1435 An activity qualifies under this rule if the activity is performed by employees of the related person and if the related person is an eligible CFC, the home country of which is the same as the home country of the related CFC or QBU; the activity is performed in the home country of the related person; and the related person receives arm’s-length compensation that is treated as earned in the home country. Income from an activity qualifying under this rule is excluded from subpart F income so long as the other active financing requirements are satisfied.
A 10-percent U.S. shareholder of a CFC may exclude from its income actual distributions of earnings and profits from the CFC that were previously included in the 10-percent U.S. shareholder’s income under subpart F. Any income inclusion (under section 956) resulting from investments in U.S. property may also be excluded from the 10-percent U.S. shareholder’s income when such earnings are ultimately distributed. Ordering rules provide that distributions from a CFC are treated as coming first out of earnings and profits of the CFC that have been previously taxed under subpart F, then out of other earnings and profits.
In general, a 10-percent U.S. shareholder of a CFC receives a basis increase with respect to its stock in the CFC equal to the amount of the CFC’s earnings that are included in the 10-percent U.S. shareholder’s income under subpart F. Similarly, a 10-percent U.S. shareholder of a CFC generally reduces its basis in the CFC’s stock in an amount equal to any distributions that the 10- percent U.S. shareholder receives from the CFC that are excluded from its income as previously taxed under subpart F.
CFC earnings other than subpart F income are taxed directly to the shareholders if they are invested in assets located in the United States. Moreover, if a CFC accumulates earnings that are not taxed to shareholders as subpart F income or as earnings invested in U.S. property, a U.S. shareholder is generally taxed on its share of the accumulated earnings as a dividend when it sells its stock as provided in Section 1248.
A central feature of the international tax changes introduced in the TCJA affecting U.S. taxpayers doing business overseas, particularly with respect to domestic corporations, is the elimination of the worldwide income tax system and in its place the adoption of the participation exemption system which has been adopted by many treaty jurisdictions. Prior to the changes made in the new law, a U.S. corporation owning stock in a CFC would be able to defer the second round of income taxation on non-subpart F income until actual cash dividends were declared and paid to the U.S. net of applicable withholding. Add to the mix the lower rates of corporate income tax overseas, the incentive for many years has been for U.S. taxpayers, including domestic corporations, to use “blocker” or C corporation as a foreign subsidiary and defer active foreign business income or income qualifying for an exemption from subpart, e.g., the high-kick out tax rule, same country rule, etc., and retain attributable foreign accumulated earnings and profits overseas in foreign banks or otherwise reinvest offshore earnings in expanding foreign business operations. The new Administration and a majority of the Congress felt the time had come to level the playing field to no longer advantage foreign owned companies and non-resident taxpayers over U.S. companies and other U.S. taxpayers in the global marketplace.
As part of the desired transition to a participation exemption type system for reporting dividends from foreign corporations, Congress found it necessary to recapture all accrued and deferred U.S. income tax liabilities associated with respect to foreign untaxed accumulated earnings and profits. Based on SEC filings and other data, the government estimated that the deferred U.S. income taxes for offshore earnings were excess of $3 trillion. In requiring a full inclusion of the deferred income for tax years commencing in 2017, which this author will refer to as the “stick” provision, Congress also provided such taxpayers a “carrot” provision in substantially reducing the rate of tax on repatriated earnings from as much as 35% (the prior maximum corporate tax rate) to 15.5% or as low as 8% to be paid over an 8 year period.
Section 965, as enacted by the TCJA, generally requires that for the last taxable year beginning before January 1, 2018 (the “inclusion year”), any U.S. shareholder of a "deferred foreign corporation" (DFIC) must include in gross income, as if such income were includible subpart F income under the mechanism of the CFC rules under section 951(a)(1), its pro rata share of the accumulated post-1986 deferred foreign income of the corporation. A U.S. shareholder is defined under section 951(b) as it read prior to the TCJA, i.e., a U.S. person, including a domestic corporation or an individual, owning 10% or more of the voting stock of a foreign corporation. A specified foreign corporation is any foreign corporation, other than a passive foreign investment company defined in section 957. There are still fiscal year specified foreign corporations having foreign accumulated earnings and profits for which U.S. shareholders still have the time to take certain steps to postpone or otherwise mitigate the required income inclusion.
The amount of the deemed subpart F income increase under section 965(a) is the greater of: (i) the accumulated post-1986 deferred foreign income of such corporation determined as of November 2, 2017 or (ii) the accumulated post-1986 deferred foreign income of such corporation determined as of December 31, 2017.  The repatriation inclusion only applies where the stock ownership threshold is met on the applicable date and with respect to a “specified foreign corporation”. The inclusion date is the last day of the taxable year of the foreign corporation ending in 2018. A calendar year domestic corporation owning shares in a fiscal year specified foreign corporation, for example, will be required to report its section 951 inclusion on its 2018 federal income tax return.
Under section 965(b)(4)(A) , the foreign accumulated earnings and profits deemed distribution is treated as previously taxed income in the same manner as under section 959 for “PTI” inclusions under subpart F income. A specified foreign corporation is any foreign corporation that has at least one U.S. shareholder, i.e., a U.S. person owning, directly or indirectly, 10% or more of the voting stock of a foreign corporation. The predicate stock ownership test is obviously met by a CFC. Passive foreign investment companies (“PFICs”) that are not also CFCs may not be a specified foreign corporation.
For domestic corporations that are U.S. shareholders, Section 965(c) permits a deduction of such domestic corporation's pro rata share of foreign earnings. The deductible portion of the repatriation amount depends upon whether or not the deferred earnings are held in cash or cash equivalents or, alternatively, in other assets besides cash. Foreign earnings held in the form of cash and cash equivalents are taxed at a 15.5% rate and the residual untaxed foreign earnings are taxed a rate of 8%. The deduction effectively is determined by "backing into" the amount necessary to reduce the US taxpayer’s repatriation tax rate to 15.5% or, alternative rate of 8%. The tax on the repatriated foreign accumulated earnings and profits may be paid in installments over an 8 year period based on prescribed percentages set forth in the section 965(c)(1).  A corresponding portion of the otherwise allowable foreign tax credit under section 902 (now repealed based on the new participation exemption discussed below), is disallowed thereby limiting the credit to the taxable portion of the included income. The “transition tax” may be paid in installments over an eight-year period. The mechanism for achieving the reduced rates of tax is a dividends received deduction amount under Section 965(c).
Where the repatriation event occurs during 2018 it may still be possible for taxpayers to mitigate the extent of the deemed repatriation amount by first forming a domestic C corporation and contribute all of the specified foreign corporation stock to it. This is to benefit from the 21% flat rate of corporate income tax under TCJA. Another approach would be to transfer the shares to an S corporation, either existing or newly organized, as the shareholder in order to qualify for the indefinite deferral of the repatriation tax as is discussed. Another possibility is for individual US shareholders to elect to be taxed at C corporation rates under section 962. Yet another strategy is to have the CFC file a deemed liquidation election.
Section 965(a) generally requires that for the last taxable year beginning before January 1, 2018 (the “inclusion year”), any U.S. shareholder of a “specified foreign corporation” must include in gross income its pro rata share of the accumulated post-1986 deferred foreign income of the specified foreign corporation. A “specified foreign corporation” includes any foreign corporation that has at least one U.S. shareholder. Specifically excluded is a passive foreign investment company defined under section 1297. In particular, section 965(a) provides that for the inclusion year, the deferred foreign income of each specified foreign corporation in which the US person is a US shareholder, shall include its share of post-1986 foreign accumulated income as subpart F income plus the “section 965(a) earnings amount,” which is the greater of: (i) accumulated post-1986 deferred foreign income as of November 2, 2017; or (ii) the same deferred foreign income amount determined as of December 31, 2017. The section 965 earnings amount is reduced by the amount of such U.S. shareholder’s aggregate foreign E&P deficit allocated in accordance with section 965(b)(2).  The mechanical rule employed for passing through the repatriation amount is based on section 951(a)(1) of the controlled foreign corporation provision.
Adopting a similar set of mechanical rules which runs parallel to the rules pertaining to the participation exemption deduction under new section. 245A, section 965(c)(1) allows a deduction for the taxable year of a U.S. shareholder with respect to a section 965(a)(1) inclusion amount that is included in gross income. The inclusion amount is the US shareholder’s pro rata share of the post-1986 foreign accumulated earnings and profits of the deferred foreign income corporation as of the measurement date, i.e., November 2, 2017, or December 21, 2017. This amount is reduced by a U.S. shareholder’s pro rata share of post-1986 accumulated deficits in earnings and profits of specified foreign corporations. The amount of the deduction is equal to: (i) the U.S. shareholder’s 8% rate equivalent percentage of the excess (if any) of (a) amount included in gross income, less (b) the amount of such U.S. shareholder’s aggregate foreign cash position (per Section 965(c)(3)A); plus (ii) the U.S. shareholder’s 15.5% rate equivalent percentage per section 965(c)(2)(B).
The “aggregate foreign cash position” is defined in section 965(c)(3)(A) as to a U.S. shareholder is the greater of: (i) the aggregate of such United States shareholder’s pro rata share of the cash position of each specified foreign corporation of such US shareholder determined as of the close of the inclusion year, or (ii) one-half of (a) the aggregate of such described in (i) plus (b) the aggregate foreign cash position over a two-year period as of the applicable “cash measurement date”.
The term “cash position” is defined in section 965(c)(3)(B) as the sum of a specified foreign corporation’s (i) cash; (ii) net accounts receivable; plus (iii) the fair market value of certain assets, including actively traded property, certificates of deposit, short term obligations, foreign currency, etc. Under section 965(c)(3)(E), cash positions of certain non-corporate entities, such as a partnership or limited liability company, are taken into account as if such entity were a specified foreign corporation and there would be at least one U.S. shareholder if such entity were a foreign corporation.
Section 951 inclusion amounts not allocable to the taxpayer’s aggregate foreign cash position, the allowable deduction under section 965(c) is the amount included in gross income of the U.S. shareholder equal to the 8% rate equivalent percentage, i.e., the amount of the deduction required from the highest tax rate set forth under section 11 that would result in an 8% rate of tax. This substantially lower tax rate for non-cash or cash equivalent inclusions has already inspired and will continue to inspire taxpayers subject to the repatriation inclusion in 2018 to have moved out of their cash and cash-equivalent positions before the applicable section 951 inclusion amount date.  The resulting tax stakes will be quite high in the event the government considers inter-affiliate movements of cash or asset mixing type strategies to be considered an improper means of circumventing the 15.5% rate.
As to any U.S. shareholder, a deferred foreign income corporation is any specified foreign corporation of such U.S. shareholder that has post-1986 (positive) accumulated post-1986 deferred foreign income (as of a measurement date).  Accumulated post-1986 deferred foreign income is the post-1986 E&P of a specified foreign corporation but reduced by: (i) income of the specified foreign corporation which is effectively connected with the conduct of a trade or business in the U.S. (“ECI”) and thereby subject to US income tax; and/or (ii) as to a CFC, the previously taxed income of a US shareholder under per section 969.  Post-1986 accumulated foreign source E&P is determined in accordance with Sections 964 and 986, provided, however, that it only takes into account periods when the foreign corporation was a specified foreign corporation and without reduction of dividends distributed during the inclusion year other than dividends distributed to another specified foreign corporation.
The required income inclusion amount is reduced by the portion of aggregate foreign E&P deficit allocated to that person’s interest in an “E&P deficit foreign corporation.” The deficits of a foreign subsidiary accumulated prior to its acquisition by a U.S. shareholder may be taken into account in determining the aggregate foreign E&P deficit of a U.S. shareholder. The deficit netting E&P provision further permits intragroup netting among shareholders in an affiliated group where there are one or more U.S. shareholders with a net E&P surplus and another with a net E&P deficit.
U.S. shareholders falling within the scope of the repatriation of foreign earnings rule are required to include in gross income, the section 951 inclusion amount for its taxable year beginning in 2017 and make the required payment of the additional tax, net of applicable deductions by the due date of the return. As discussed below, under section 965(h), each US shareholder realizing income in accordance with section 965, may elect to pay the net tax liability over 8 years under a back-end loaded payment allocation.
The deemed repatriation of accumulated (post 1986) foreign earnings and profits provision applies with respect to any “specified foreign corporation,” which term has two definitions as set forth in section 965(e)(1). A specified foreign corporation includes a “controlled foreign corporation”, i.e., a foreign corporation in which U.S. shareholders ( those U.S. persons owning 10% or more of the Corporation’s voting stock) own, directly or indirectly, more than 50% of the outstanding voting stock or value of the foreign corporation on any day of the taxable year in question. Under the constructive stock ownership rules in section 958, section 958(a)(2) provides that stock owned by or for a foreign corporation, foreign partnership, or foreign trust or estate is considered as owned proportionately by its shareholders, partners, or beneficiaries. Stock treated as constructively owned under section 958(a)(2) is treated as actually owned by such person.
Under section 965(h)(3), an acceleration of the total net tax liability becomes due where: (i) there is a failure to pay timely any required installment; (ii) there is a liquidation or sale of substantially all of the U.S. shareholder’s assets, including in a bankruptcy case; (iii) the US shareholder ceases business; or (iv) any similar circumstance. However, section 965(h)(3) provides that there is no acceleration with respect to the sale of substantially all the assets of the U.S. shareholder where the buyer enters into an agreement with the IRS under which the buyer becomes liable for the remaining installments due under the installment payment election as if the buyer were the US shareholder-taxpayer.
Special Rules for S Corporations.
There are three general types of triggering events: (i) where the corporation ceases to be an S corporation, effective as of the first day of the taxable year that such corporation is not an S corporation; (ii) the liquidation or sale of substantially all the assets of such S corporation, including in a title 11 or similar case, a cessation of business by such S corporation, such S corporation ceases to exist or any similar circumstance; and (iii) a transfer of any share of stock in such S corporation by the taxpayer (including by reason of death, or otherwise). In the event of a transfer of less than all of an S shareholder’s stock in the S corporation, the transfer is a triggering event only with respect to that portion of the taxpayer’s net tax liability as is allocable to such stock.
Where an acceleration event occurs, a shareholder of the S corporation, in general, may still elect to pay the deferred net tax liability in eight equal annual installments in accordance with section 965(h). But there are limitations on the eight year payout. Where the triggering event is a liquidation, sale of substantially all corporate assets, termination of the company or end of business or similar event, the installment payment election in unavailable. In each such circumstance, the entire net tax liability is due upon notice and demand. The installment election, where available after a triggering event, is due with the timely filed return for the year in which the event occurs determined without extensions of time.
Under section 965(l)(1), where a domestic corporation claimed a section 965(c) deduction and the shareholder subsequently becomes an “expatriated entity” under section 7874(a)(2) (but not an 80% entity treated as a domestic corporation under section 7874(b)) at any time during the 10-year period beginning on December 22, 2017 (as to when a surrogate foreign corporation first became s surrogate foreign corporation), then the income tax of the U.S. shareholder is increased for the first tax year in which the taxpayer becomes an expatriated entity by 35% (not the new 21%) of the amount of the deduction allowed under section 965(c) and may not claim any foreign tax credits against the recapture tax.
Under the TCJA, section 245A provides that a domestic corporation which is a “U.S. shareholder” of a specified foreign corporation is permitted to deduct up to 100% of the foreign-source income allocable to its receipt of a dividend from the corporation. A specified foreign corporation is any foreign corporation other than a PFIC that is not a CFC. No foreign tax credit or deduction is allowed for any taxes paid or accrued or deemed paid or accrued for any dividend qualifying for the 100% DRD under section 245A.
Where the domestic corporation, U.S. shareholder, indirectly owns 10% or more of the voting stock of a foreign corporation through a foreign partnership or other fiscally transparent entity, such indirect ownership may qualify for the participation DRD with respect to dividends from the foreign corporation as if the domestic corporation had owned the stock directly. No foreign tax credit (or deduction) is allowed under section 901 for any taxes paid or accrued with respect to any qualifying dividend.There is a special holding period requirement set out in the statute.
The sale of stock by a CFC with respect to a lower-tier CFC described in section 965(e)(1) that generates subpart F income will qualify for a participation exemption deduction under section 245A. Gain from the sale or other taxable disposition of stock in a 10% or more owned foreign corporation, which is recharacterized as dividend income under section 1248, will also qualify for the 100% DRD rule for a qualified U.S. corporation.
The benefits for C corporations due to the enactment of the participation exemption (deduction) in new section 245A are abundantly clear. Domestic C corporations owning 10% or more of the stock of a foreign corporation for purposes of section 951(b) on a go forward basis will, in general, not be subject to U.S. income tax with respect to qualifying dividends made by the specified foreign corporations. Still the CFC rules continue to apply as do the PFIC provisions.
With the 100% dividend deduction enacted into law, the foreign tax credit rule in section 902 could be repealed and it was. Moreover, under the new law, in certain instances, a domestic corporation's rate of tax on foreign source income may be lower than the 21% (flat corporate rate). This outcome will occur with respect to a dividend from corporation organized under the laws of a tax haven jurisdiction such as the Bahamas. Its 0% corporate income rate (actually there is no corporate income tax in the Bahamas) will carry over to the U.S. eligible corporation. Under prior law the tax haven dividend scenario would have still resulted in 35% U.S. income tax to the domestic corporation. It is further important to recognize that taxpayers other than C corporations owning 10% or more of the stock of a foreign corporation may be subject to tax at regular U.S. tax rates which can be as high as 40.8% where the actual taxpayer is an individual who is subject to the net investment income tax under section 1411 is factored into the mix.
The benefits to be derived under section 245A make it necessary for every business entity owning stock in a foreign corporation to give thought to transferring such stock to a domestic corporation prior to the repatriation event occurring during 2018 for a fiscal year foreign specified corporation but also on a go-forward basis to benefit from the participation exemption rule. Only domestic C corporations qualify. .
Prior to the TCJA, U.S. persons owning shares of stock in a foreign corporation which was operating one or more business overseas were, in general, not subject to U.S. income tax until the shareholders received actual or constructive dividends from the corporation. Under the controlled foreign corporation (CFC) provisions however, U.S. person who owns 10% or more of the voting stock of a CFC for more than 30 days and held such stock on the last day in the taxable year of the corporation, was required to include in gross income its pro rata share of Subpart F income whether such income was distributed to such person. Subpart F income is defined in section 952 and includes: (i) insurance income (section 953); (ii) foreign base company income (section 954); (iii) certain illegal payments paid by or on behalf of the CFC and income from foreign boycott countries; and (iv) foreign base company income which includes foreign personal holding company income, foreign base company sales income and foreign base company services income. The annual amount of Subpart F income is limited to the CFC's earnings and profits for the tax year. Accordingly, the active (non-Subpart F ) income of a CFC may have qualified for deferral of income tax to a U.S. shareholder. When dividends from such active income were distributed, in many instances the dividend may be subject to the same rate as long term capital gains as a qualified dividend.
As may be understood from the reading of section 951A, GILTI with respect to any U.S. shareholder, for any taxable year of that shareholder, is the excess, if any, of the shareholder's “net CFC tested income” over the shareholder's net deemed tangible income return for the tax year.  The shareholder's net deemed tangible income return equals 10% of the aggregate of the shareholder's pro rata share of the qualified business asset investment ("QBAI") less interest expense of each CFC with respect to which it is a U.S. shareholder. This provision is effective for taxable years of foreign corporations beginning after December 31, 2017, and for taxable years of U.S. shareholders in which or with which such taxable years of foreign corporations end. There are important terms and definitions to apply under this new GILTI rule in section 951(a) and corresponding deduction rule in section 250. However, section 250 only applies to domestic C corporations.
As to any U.S. shareholder, net CFC tested income is the excess, if any, of the aggregate of the shareholder's pro rata share of the tested income of each CFC over the aggregate of its pro rata share of the tested loss of each CFC with respect to which it is a U.S. shareholder. The tested income of a CFC is the excess of gross income (without regard to certain exceptions to tested income) over deductions (including taxes) properly allocable to such gross income or tested gross income. The tested loss of a CFC is the excess of deductions allocable to the corporation's gross income over the amount of such income.
CFC tested income means the excess (if any) of the gross income of a CFC determined without regard to certain exceptions to tested income, over deductions (including taxes) properly allocable to the gross income. Deductions (including taxes) properly allocable to gross income included in tested income or tested loss with respect to a CFC, are allocated to the gross income following rules similar to the rules of §954(b)(5) (or to which such deductions would be allocable if there were such gross income). The exceptions to tested income are: (i) income of a CFC that is ECI to a U.S. trade or business; (ii) gross income taken into account under subpart F for CFCs; (iii) gross income exclude from foreign base company income (FBCI) and insurance income of the CFC;(iv) dividend income received from a related party;  and (v) foreign oil and gas extraction income per section 907(c)(1).
Under GILTI, a person is treated as a U.S. shareholder of a CFC for a taxable year only if that person owns (per section §958(a)) stock in the corporation on the last day of the year in which the corporation is a CFC. A corporation is generally treated as a CFC for any taxable year if the corporation is a CFC at any time during the taxable year.
The amount of a U.S. shareholder's GILTI is allocated among each CFC with respect to which it is a U.S. shareholder. The portion of GILTI treated as being with respect to a CFC equals zero for a CFC with no tested income and, for a CFC with tested income, the portion of GILTI which bears the same ratio to the total amount of GILTI as the U.S. shareholder's pro rata amount of tested income of the CFC bears to the aggregate amount of the U.S. shareholder's pro rata amount of the tested income of each CFC with respect to which it is a U.S. shareholder. For a CFC with tested income, the following formula expresses how to determine the portion of GILTI treated as being with respect to the CFC.
Section 951A(d)(3) where the CFC is a partner in a partnership generating non-ECI income and such partnership status remains in place at the close of the CFC's taxable year, the CFC will take into account its distributive share of the aggregate of the partnership's adjusted bases (determined as of such date in the hands of the partnership) in tangible property held by the partnership to the extent the tangible property meets the following three requirements: (i) the property is used in the partnership’s trade or business; (ii) the property is depreciable property under section 167; and (iii) the property is used in the production of tested income. For purposes of this provision, the CFC's distributive share of the adjusted basis of any property will be the CFC's distributive share of income with respect to the property.
The TCJA created a new separate foreign tax credit category limitation for GILTI under section 960(c). The separate limitation category for GILTI has not carryforward or carryback for excess credits. Any excess credits for a particular year evaporate into the air.
For amounts of GILTI includible in income of a domestic corporation (U.S. shareholder), the corporation's deemed-paid credit is 80% of the product of the corporation's inclusion percentage, as specifically defined, multiplied by the aggregate tested foreign income taxes paid or accrued as to tested income, by each CFC to which the domestic corporation is a U.S. shareholder. The new GILTI rule for deemed-paid foreign taxes creates a separate foreign tax credit basket for GILTI, with no carryforward or carryback available for excess credits. For purposes of determining the FTC limitation, therefore, GILTI is not general category income, and income that is both GILTI and passive category income is considered passive category income. Under revised section 78, the taxes deemed to have been paid are treated as an increase in GILTI for purposes of section 78, determined by taking into account 100% of the product of the inclusion percentage and aggregate tested foreign income taxes (in lieu of 80% standard used in the determination of the deemed-paid credit).
While the impetus for the set of corporate tax reforms introduced in the TCJA was to stimulate direct investment in the U.S. in terms of a substantial increase in labor and capital, the GILTI provision, when combined with its sibling provision in section 250, which grants a 50% deduction to a domestic corporation in reducing the 21% corporate tax rate to 10.5% (or lower after allocable FTCs are factored), may provide incentives for increased capital investment overseas.
Deduction for Foreign-Derived Intangible Income (“FDII”) and Global Intangible Low-Taxed Income (“GILTI”).
An impressive yet controversial part the TCJA was new section 250, which provides a tax rate bonanza for eligible foreign source income of a domestic corporation either through direct or branch sales of products and services, or indirectly from active business income of a 10% or more owned foreign subsidiary. The operative provision, new section 250, evolved out of the Senate version of the Tax Cuts and Jobs Act. Section 250 allows a domestic corporation substantial deductions with respect to foreign derived intangible income and global intangible low-tax income. These terms are referred to by the new acronyms “FDII” and “GILTI” respectively.
Under section 250(b)(4), the term “foreign-derived deduction eligible income” (FDII) of the taxpayer (U.S. domestic corporation) is any deduction eligible income derived in connection with: (A) property (i) which is sold by the taxpayer to any person who is not a U.S. person, and (ii) which the taxpayer establishes to the satisfaction of the IRS is for a foreign use; or (B) services provided by the taxpayer which the taxpayer establishes to the satisfaction of the IRS are provided to any person, or with respect to property, not located within the United States.
Foreign use means any use, consumption, or disposition that is not within the United States. Special rules for determining foreign use apply to transactions that involve property or services provided to domestic intermediaries or related parties. For purposes of the provision, the terms ‘‘sold,’’ ‘‘sells’’, and ‘‘sale’’ include any lease, license, exchange, or other disposition.
If property is sold to a related foreign party, the sale is not treated as for a foreign use unless the property is sold by the related foreign party to another person who is unrelated and is not a U.S. person and the taxpayer establishes to the satisfaction of the Secretary that such property is for a foreign use. Income derived in connection with services provided to a related party who is not located in the U.S. is not treated as foreign-derived deduction eligible income unless the taxpayer can establish that such service is not substantially similar to services provided by the related party to persons located within the U.S.
A “related party” for this purpose means any member of an affiliated group as defined in section 1504(a) determined by substituting ‘‘more than 50%’’ for ‘‘at least 80%’’ each place it appears and without regard to sections 1504(b)(2) and 1504(b)(3). Any person (other than a corporation) is treated as a member of the affiliated group if the person is controlled by members of the group (including any entity treated as a member of the group by reason of this sentence) or controls any member, with control being determined under the rules of section 954(d)(3).
The FDII of any domestic corporation is the amount which bears the same ratio to the corporation’s deemed intangible income as its foreign-derived deduction eligible income bears to its deduction eligible income. In other words, a domestic corporation’s FDII is its deemed intangible income multiplied by the percentage of its deduction eligible income that is foreign-derived.
Under section 250(b)(3) the term “deduction eligible income” means, with respect to any domestic corporation, the excess (if any) of the gross income of the corporation—determined without regard to certain exceptions to deduction eligible income—over deductions (including taxes) properly allocable to such gross income (referred to in this document as ‘‘deduction eligible gross income’’). The exceptions to deduction eligible income are: (1) the subpart F income of the corporation determined under section 951; (2) the GILTI of the corporation; (3) any financial services income (as defined in section 904(d)(2)(D)) of the corporation; (4) any dividend received from a CFC with respect to which the corporation is a U.S. shareholder; and (5) any domestic oil and gas extraction income of the corporation; and (6) any foreign branch income (per section 904(d)(2)(J)) of the corporation.
The term “deemed intangible income” is the excess (if any) of the U.S. corporation’s deduction eligible income less its deemed tangible income return. The deemed tangible income tax return is an amount equal to 10% of the corporation’s qualified business asset investment or QBAI.
The term QBAI is the average of the aggregate of the U.S. corporation’s adjusted bases, determined as of the close of each quarter of the taxable year, in specified tangible property used in its trade or business and is depreciable under section 167. The adjusted basis in any property must be determined using the alternative depreciation system (ADS) under section 168(g).
Specified tangible property means any tangible property used in the production of deduction eligible income. If such property was used in the production of deduction eligible income and income that is not deduction eligible income (i.e., dual-use property), the property is treated as specified tangible property in the same proportion that the amount of deduction eligible gross income produced with respect to the property bears to the total amount of gross income produced with respect to the property.
As mentioned, for distributions or distributions after December 31, 2017, and before January 1, 2026, section 250 allows the recipient domestic corporation a deduction equal to the sum of 37.5% of the corporation's FDII for the taxable year plus 50% of its GILTI (if any); plus the section 78 gross-up attributable to the GILTI inclusion.1635 For taxable years beginning after December 31, 2025, the deduction reduces to 21.875% of the FDII and 37.5% of the GILTI (if any) included in gross income under §951A.
Section 250 has an important limitation applied annually. The amount of the deduction allowed under §250 is limited to a domestic corporation's taxable income for the taxable year. Where the sum of a domestic corporation's FDII and GILTI amounts exceeds its taxable income (determined without taking section 250 into account), the FDII and GILTI taken into account in computing the deduction must be reduced.  FDII must be reduced by an amount that bears the same ratio to the amount of the excess of the sum of the FDII and GILTI over the taxable income as FDII bears to the sum of the FDII and GILTI.  In other words, the reduction in FDII equals the excess of FDII plus GILTI over taxable income multiplied by a percentage equal to the corporation's FDII divided by the sum of its FDII and GILTI. The GILTI must be reduced by the remainder of the excess.
Evaluating the New U.S. “Patent Box”: The FDII and GILTI Deductions.
Congress did not stop with a 21% flat tax rate on C corporations on worldwide income. No, it allowed repatriation of foreign accumulated post-1986 earnings and profits at rate as low as 15.5% and 8%. It wasn’t finished. The TCJA enacted adopted a participation exemption system in the form of a 100% dividends received deduction for dividends received from a specified foreign corporation under section 245A. Then, it enacted the “U.S. Patent Box” provisions. The law doesn’t call section 250 a “patent box”. But it acts like one. It reduced that rate substantially for foreign based business activities. Section 250 effectively resets the new maximum rate of corporate income tax on qualifying domestic corporations with respect to FDII at 13.75% and 10.5% with respect to GILTI. Foreign tax credits on GILTI can reduce the effective rate of U.S. tax to even 0 %. That would be the case if a foreign country taxes GILTI income at a rate of 18.9% or more. Where the sum of a domestic corporation’s FDII and GILTI amounts exceed its taxable income, the amount of FDII and GILTI for which a deduction is allowed is reduced by an amount determined by such excess. The reduction in FDII for which a deduction is allowed equals such excess multiplied by a percentage equal to the corporation’s FDII divided by the sum of its FDII and GILTI. The reduction in GILTI for which a deduction is allowed equals the remainder of such excess. The provision is effective for taxable years beginning after December 31, 2017.
The impact of the FDII and GILTI provisions will undoubtedly encourage U.S. corporations to continue to invest capital and labor overseas. While the “selling” of the TCJA was its ability to grow and revitalize our manufacturing base and attract foreign based companies to continue to invest in the states, it is also clear that Congress intended to increase the competitiveness of U.S. companies overseas through FDII, GILTI and of course the 100% dividends received deduction from 10% or more owned foreign corporations.
Our treaty partners have noticed this new “bonanza” that Tax Cuts and Jobs Act grants U.S. domestic corporations including domestic groups that are part of a multinational enterprise of corporations. Cries of unfair export subsidies have already been heard from our European country treaty neighbors to the east and our Canadian treaty partner to the north. Looks like another round of WTO litigation may result reminiscent of the FISC and extraterritorial exemption WTO challenges that were previously raised.
The TCJA provided the United States’ with going beyond the BEPS study by the OECD by unilaterally adopting a base erosion anti-abuse tax (BEAT).
Under new section 59A, domestic corporations (but not S corporations) and foreign corporations having effectively connected income in the U.S. with more than $500 million in average annual gross receipts for the three year taxable year period ending as of the preceding year, and over a minimum amount of certain types of related-party payments may be subject to a new 10% (5% for taxable years beginning in calendar year 2018) minimum tax which is effectively a form of add-on tax to the regular 21% corporate tax rate. The computations are made by aggregating affiliated domestic and foreign related parties.
The BEAT is based on the domestic corporation(s) “modified taxable income” which is taxable income determined without regard to any “base erosion benefit” with respect to any “base erosion payment”, or the “base erosion percentage” of any NOL allowed the year. This means, as a practical matter, that taxable income is increased for deductible amounts paid to a related foreign person for services, interest, rents and royalties. It also would include depreciation and amortization of property acquired from related foreign persons for property purchased after December 31, 2017. The BEAT is, in effect, a corporate minimum tax replacement and a anti-base erosion provision applied to international transactions.
There are certain foreign related-party payments that are not subject to the BEAT. This includes payments for cost of goods sold and payments for services provided at cost. In addition, certain tax credits (but not research and development credits, certain energy credits and 80% of low-income housing credits) are added to the minimum tax. While certain foreign based companies having U.S. subsidiaries may fall subject to the BEAT there will certainly be efforts to mitigate this exposure by attempting to allocate if not “dump” many forms of economic payments that would otherwise be characterized as fees, licensing payments, royalties, etc. into cost of goods sold.
After modified taxable income is determined, the BEAT rate of 10% (5% for 2018) is applied. Where the BEAT amount is greater than the regular tax liability of the corporation (taking into account certain tax credits including foreign tax credits that reduce U.S. tax), then the excess amount is imposed as an additional tax on the corporation. The excess tax is not creditable in any subsequent year.
As with the other corporate tax reforms announced in the TCJA, much guidance will be needed with respect to the base-erosion tax on a host of issues including its application to foreign corporations with domestic branches or subsidiaries, or simply effectively connected income in the U.S. I will be commenting on such guidance in additional posts.
Companies engaged in or contemplating being engaged in overseas business operations need consider the major international tax reforms enacted by the TJCA including the repatriation tax. There are additional changes in the tax act that affect sourcing rules such as the sale of a partnership interest by a non-resident and the source of income from the sale of inventory. It is noted that the major reforms that are designed to reduce U.S. income tax on U.S. persons is through the C corporation. For FDII and GILTI taxable income the rates are approximately 1/3 less than the same income realized by non-corporations.
The above is provided as general information and neither is intended or may be relied upon as legal advice. The reader of this post must consult with its tax counsel or tax advisor. You should, of course, feel free to contact your lawyer at Chamberlain Hrdlicka if you have further questions.
 Previously, former §965(a)(1), enacted by P.L. No. 108-357 (2004)(American Jobs Creation Act) provided a repatriation rule by allowing a U.S. shareholder of one or more controlled foreign corporations to elect a deduction of 85% of qualifying “cash dividends” with respect to foreign accumulated earnings and profits received during first taxable year beginning on or after October 23, 2004 through October 22, 2005. The deduction only applied to repatriations in excess of the average repatriation level for the “base period years”, as defined” and further required that the dividend be invested in the U.S. pursuant to a domestic reinvestment plan. Former §965(b)(4). Ironically, the conference report to AJCA noted that “this is a temporary economic stimulus measure, and….there is not intent to make this measure permanent, or to ‘extend’ or enact it again in the future. H.Rept. No. 755, 108th Cong., 2d Sess. 314 (Conf. Rep. 2004). See Giegerich, “One-Time Tax Break for Repatriation of Foreign Earnings: The Clock's Ticking–Summary and Analysis of Guidance,” 108 Tax Notes 547 (Aug. 1, 2005); Yoder, “Notice 2005-64, Section 965 Qualifying Cash Dividends and Tax Computations,”34 Tax Mgmt. Int'l J. 703 (2005).It was reported that 843 domestic corporation (out of 9,700 corporations with CFCs) claimed the section 965 deduction under ACJA. Qualifying dividends were estimated to be $312.2 billion.
 Over the past 30 years, the majority of the U.S.’s largest trading partners have moved to territorial or source based systems of income taxation. The territorial tax system general exempts foreign profits of a resident corporation from being taxed under domestic tax rules.
 See Ozelli and Russell, “Tax Transparency and Its Implications for Multinational Enterprises”, Tax Mngt. Memorandum, 3/6/2017.
 But see, e.g., §911 with respect to qualified service income.
 For background reading as to the policy issues involved in the CFC rules and proposals for reform, which reform was introduced in the TCJA, see Altshuler, Recent Developments in the Debate on Deferral, 20 Tax Notes Int'l 1579 (Apr. 3, 2000); Avi-Yonah, To End Deferral as We Know It: Simplification Potential of Check-the-Box, 74 Tax Notes 219 (Jan. 13, 1997); Fleming, Peroni & Shay, An Alternative View of Deferral: Considering a Proposal to Curtail, not Expand Deferral, 20 Tax Notes Int'l 547 (Jan. 31, 2000), reprinted in 86 Tax Notes 837 (Feb. 7, 2000).
 The definition of a U.S. shareholder for taxable years beginning after 2017 was changed to 10% of voting and value of all classes of stock, not simply 10% of all shares of issued and outstanding voting stock.
 Treas. Reg. §1.957-1(c), Ex. 8. For cases involving whether the more than 50% of voting stock factor was present see Koehring Co. v. US, 583 F2d 313 (7th Cir. 1978) ; Weiskopf v. CIR, 64 TC 78 (1975), aff'd without published opinion, 538 F2d 317 (2d Cir. 1976) ; Kraus v. CIR, 59 TC 681 (1973), aff'd, 490 F2d 898 (2d Cir. 1974) ; Garlock, Inc. v. CIR, 58 TC 423 (1972), aff'd, 489 F2d 197 (2d Cir. 1973) .
 Framatome Connectors USA, Inc. v. Comm’r, 118 TC 32 (2002), aff’d w/o pub. opin., 2004-2 USTC ¶50,364 (2d Cir. 2004).
 §954(c)(3)(A)(i)(requires that the dividend is received from a corporation created or organized under the laws of the same foreign country that the CFC is created or organized and has a substantial part of its assets used in its trade or business located in the same foreign country. Treas. Reg. §1.9054-2(b)(1)9i).
 All references to sections for purposes of this article are with respect to the Internal Revenue Code of 1986, as amended through P.L. 155-97, the Tax Cuts and Jobs Act (TCJA) of 2017 (12/22/2017).
 As disclosed below, the participation exemption system introduced under the TCJA, which particularly favors domestic C corporation ownership of foreign companies, applies for taxable years starting on or after January 1, 2018.
 The definition of a U.S. person under §951 has been amended by the TCJA, §12414, to include any U.S. person who owns 10% or more of the total value of all shares of all classes of stock as well as 10% or more of the voting stock of a foreign corporation. TCJA, §14214.
 §965(a)(1). This coincides with the date that this provision was introduced by Congress.
 The subpart F income of a CFC is determined without regard to §965(a) and a US shareholder’s inclusion under §951(a)(1)(A) by reason of such amount is required to be included in gross income. Therefore the PTI rules contained in §959 with respect to subpart F income that has been passed through to US shareholders continues to apply. See IRS Notice 2018-07, supra. The CFC rules continues to apply independently as well with respect to the global low-taxed intangible income provision contained in §250.
 There is no foreign tax credit permitted for individual US shareholders on repatriation distributions with the possible exception of dividend withholding imposed on the actual payment of a cash dividend by the foreign corporation.
 See §1297(a). A PFIC is any foreign corporation where (i) 75% or more of its gross income for the taxable year is passive income or (ii) the average percentage of assets held by the corporation which produce passive income or are held for the production of passive is at least 50%. See §§1297(e), 965(e)(3).
 See §965(c). Section 965(c)(1) provides that there shall be allowed a deduction for the taxable year of a US shareholder in which a §965(a) inclusion amount is included in gross income of such US shareholder in an amount equal to the sum of (A) the US shareholder’s 8% rate equivalent percentage, per §965(c)(2)(A), plus (B) the US shareholder’s 15.5% rate equivalent percentage, per §965(c)(2)(B) of so much of the US shareholder’s aggregate foreign cash position that does not exceed the §965(a) inclusion amount.
 Shortly after the passage of the TCJA, the Service issued Notices 2018-17 and 2018-13 providing areas for which guidance will be forthcoming under §965 and its integration with the CFC provisions in general. There was also recognition that rules relating to the repatriation tax may lead to efforts to circumvent the 15.5% tax on cash and cash equivalents, by efforts to “strip out” cash and cash equivalents before the applicable measuring date. While there was little time to react to this new rule it is possible that large US multinationals were tracking the legislation very carefully with due regard to what was the language in the final bill that was signed into law on December 22, 2017.
 The foreign tax credit limitation rules under §904 and related provisions continues to apply.
 The determination of the aggregate foreign E&P deficit is set forth in §965(b)(3)(A).
 For many U.S. shareholders, their post-1986 foreign source accumulated E&P were eliminated under the 2004 repatriation rules.
 Under §245A, a participation exemption system is established for foreign income received by a specified 10% owned foreign corporation with respect to any domestic corporation which is a US shareholder under §951(b). The 0% rate is produced by allowing a 100% dividends received deduction (“DRD”) with respect to the foreign-source income portion of dividends received from the foreign corporation. The foreign-source portion of any dividend is based on the ratio of the foreign corporation’s post-1986 undistributed foreign earnings bears to the corporation’s total post-1986 undistributed earnings. Foreign tax credits (or deductions)(“FTCs” are disallowed for any dividend for which a DRD is allowed . The TCJA also repeals §902 effective for taxable years beginning after 2017. Under §960, as amended by the TCJA, a deemed paid FTC will be allowed with respect to §951(a)(1) inclusions, but only to the extent “properly attributable” to the inclusion. Special rules §960(b) apply for FTCs for distributions of previously taxed income. The amendments to §960 are effective for tax years of foreign corporation beginning after 2017 and U.S. shareholders’ tax years in which or with which such taxable years of foreign corporations ends..
 Under §965(c)(3) “aggregate foreign cash position” is as to any US shareholder the greater of: (i) the US shareholder’s aggregate share of the cash position of each specified foreign corporation determined as of the close of the last taxable year of such specified foreign corporation which begins before January 1, 2018; or (ii) one-half of the sum of (a) the aggregate of the sum described in (i) of this footnote; plus (b) the aggregate cash position of the foreign corporation as of the preceding taxable year.
 The applicable measurement dates are November 2, 2017 or December 31, 2017. See §§965(a)(1), 965(a)(2). An anti-abuse provision is contained in the statute where Treasury, presumably by authority granted under regulations or notice, determines that a principal purpose of any transaction was to reduce the aggregate foreign cash position taken into account, in which case such transaction shall be disregarded. §965(c)(3)(F). The IRS recently released Notice 2018-7, 2018-4 IRB (Dec. 29, 2017) describing regulations that Treasury and the IRS intend to issue, including rules for determining the amount of cash and cash equivalents. Undoubtedly one area for coverage by the IRS under the “anti-abuse” rule will be when related-party transactions in accounts receivable and short-term obligations will be disregarded in determining the aggregate foreign cash position.
 See §965(d)(2). Section 951(a) permits the basis of a U.S. shareholder’s stock in a CFC and the basis of property of a U.S. shareholder by reason of which he is considered under § 958(a)(2) as owning stock of a CFC, to be increased by the amount required to be included in gross income per §951(a). A reduction in basis rule is contained in §951(b).
 See §957(a). Treas. Reg. §1.957-1(c), Ex. 8 (so-called “50-50 deadlock” on CFC status. Prior to the TCJA, §951(b) defined a U.S. shareholder is a U.S. person owning 10% or more of the corporation’s voting power. Stock attributions rules are used in making this determination under §958. See, e.g., Framatone Connectors USA, Inc. v. Comm’r, 118 T.C. 32 (2002), aff’d, 108 Fed. Appx. 683 (2nd Cir. 2004).
 Under §965(g)(3), no deduction is allowed for any tax for which a credit is not allowable under §901 by application of §965(g)(1). See also §965(g)(4)(coordination of deemed foreign taxes paid under the repatriation amount for domestic corporation in accordance with §78).
 Section 965(g)(4) coordinates the FTC cutback with the amount of the required foreign tax credit gross-up under §78 based on the amount of FTCs that reflect the amount of foreign source accumulated E&P that were subject to tax. The gross-up amount equals the total foreign income taxes multiplied by a fraction: (i) the numerator is the taxable portion of the increased subpart F income, i.e., the ¶951 inclusion; and (ii) the denominator is the total increase in subpart F income.
 On the other hand a C corporation blocker can qualify the “new” U.S. shareholder for the 100% dividends received deduction under §245A.
 It is uncertain at this time, how the taxpayer is required to notify the Service of making the election especially if the return for 2017 is on extension. Perhaps it is to be made as part of the extension request with payment?
 See §67(g). It is obvious that the Treasury and the Service must address this issue and soon. To disallow the §965(c) deduction would create havoc for individuals making elections to defer the payment of tax. Perhaps the only available shelter, at least temporarily, is to report the repatriation as a domestic C corporation or as a domestic S corporation.
 Of course, a tax “sprinter” so to speak, could have seen this benefit on December 22 and organized a new S corporation and transferred the specified foreign corporation shares to the corporation prior to January 1, 2018.
 A dividend or deemed dividend from a PFIC is not eligible for the participation exemption. §245A(b)(2).
 See §245A(b). It should be noted that a “purging distribution” of a PFIC by a U.S. shareholder under §1291(d)(2)(B) does not qualify for the 100% DRD under §245A.
The TCJA also changed the dividends received deduction percentages for dividends from US corporations other than a 100% owned domestic subsidiary under §243. Under prior law, for example, the 70% DRD for a dividend otherwise taxable at 35% would be reduced to 10.5%. Under the TCJA, the 70% DRD under §243 has been reduced to 50% and the 80% DRD for 20% or more owned corporations is now 65%. See §§243(a)(1), 243(c)(1). The reductions were designed to yield essentially the same outcomes achieved at the corporate maximum tax rate of 35% under the 21% flat rate under the TCJA.
 See §§901, (former) 902, 960, 164.
 See §245A(e). A hybrid dividend for this purpose is an amount received by a CFC as a dividend which would have otherwise qualified under section 245A and with respect to which the CFC received a deduction or other tax benefit with respect to any income or other taxes imposed by any foreign country or U.S. possession. §245A(e)(4).
 §245A(c)(1). The determination of the foreign source portion of any dividend is an amount which bears the same ratio to such dividend as the undistributed foreign earnings of the specified 10% owned foreign corporation bears to the total undistributed earnings of such foreign corporation. See §§245A(c)(2), 245A(c)(3).
 As mentioned, the 30 day requirement has been eliminated by the TCJA. Under §951(c), the CFC rules override, to the extent the PFIC rules would otherwise come into play.
Under the GILTI inclusion under §951(a)(1)(A), a person is treated as a U.S. shareholder of a CFC for any taxable year only if such person owns (per §958(a)) stock in the corporation on the last day, in such year, on which the corporation is a CFC. A corporation is generally treated as a CFC for any taxable year if the corporation is a CFC at any time during the taxable year.
 Each U.S. shareholder reports his or its net positive amount of GILTI. §951A(b). Note that §956 does not technically apply with respect to GILTI. See Sullivan, “More GILTI Than You Thought”, Tax Notes, 2/12/2018.
 See Alison Bennett, Global Intangible Tax Provision a Treasury Priority, 29 Daily Tax Rep. 10 (Feb. 12, 2018).
 See §§951A(b), 951A(c)(net CFC tested income), 951A(b)(2) (net deemed tangible income return).
As a formula, GILTI= Net CFC Tested Income - (10% x QBAI) less interest expenses. See H.R.Rep. No. 155-466 (2017)(Conf. Rep.).
 It is uncertain whether a non-domestic corporation taxpayer receiving GILTI income will require that such income be subject to the net investment income tax under §1411.
 As a formula, Net CFC Tested Income = Sum of CFFC Tested Income-Sum of CFC Tested Loss. A CFC teste loans is the excess of the tested deductions over the tested income. Section 951A(c)(2) prescribes an increase of a CFC’s earnings and profits by the amount of any tested loss of a CFC in order to prevent double benefit losses.
 H.R. Rep. No. 115-466 (2017) (Conf.Rep.).
 H.R. Rep. No. 115-466, 642 (2017) (Conf. Rep.).
 Dual use property , i.e., tangible personal property used for the production of tested income and non-tested income, is treated as qualifying property in the same proportion that the amount of tested gross income produced with respect to the property bears to the total amount of gross income produced with respect to the property. As an if a building produces $1,000x of tested gross income and $250x of subpart F income for a taxable year, then 80 percent (= $1,000/$1,250) of a domestic corporation's average adjusted basis in the building is included in QBAI for that taxable year.
 The share of CFC's Tested Income is the U.S. shareholder's pro rata amount of the tested income of a CFC and Share of Aggregate CFC Tested Income is the aggregate amount of the U.S. shareholder's pro rata amount of the tested income of each CFC with respect to which it is a U.S. shareholder. H.R. Rep. No. 115-466, 643 (2017)(Conf. Rep.).
 As a formula, the Deemed-Paid Credit=80% x GILTI/Aggregate Tested Income x Aggregate Tested Foreign Income Tax. Under new §960(d), any amount included in the gross income of a domestic corporation under §951A, the domestic corporation will be deemed to have paid foreign income taxes equal to 80% of the product of the corporation's “inclusion percentage” multiplied by the aggregate “tested foreign income taxes” paid or accrued by CFCs with respect to which the domestic corporation is a U.S. shareholder.
 As a formula, the Section 78 Gross-Up =100% x GILTI/Aggregate Tested Income x Aggregate Tested Foreign Income.
 See Avi-Yonah, et al., “The Games They Will Play: Tax Games, Roadblocks, and Glitches Under the New Legislation,” Tax Notes Today, 12/13/2017, 12/19, 2017.
 Under §951A(b)(1), the term GILTI means, as to any U.S. shareholder the excess of: (A) such shareholder’s net controlled foreign corporation tested income for such taxable year, over (B) such shareholder’s net deemed tangible income return for such year. The “net deemed tangible income return” is defined in §951A(b)(2)( as the excess of: (A) 10% of the aggregate of such shareholder’s pro rata share of the qualified business asset investment of each controlled foreign corporation with respect to which such U.S. shareholder is a U.S. shareholder over (B) the interest expense taken into account in determining the shareholder’s net controlled foreign corporation tested income to the extent the interest income attributable to such expense is not taken into account in computing such shareholder’s net controlled foreign corporation tested income.
 The term “patent box” has been used to describe the favorable tax consequences of relocating U.S. based intangibles, including patents, outside of the U.S. to a low tax jurisdiction. The outward migration over the past several decades of U.S. intangibles and incremental production of research and development to low-tax jurisdictions has been considered by the IRS and Treasury, as well as by members of Congress, to be exploitative and abusive in certain instances. The term is also used to refer to the preferential tax systems that various countries have adopted to bolster incentives to keep research and innovation activities onshore. See Shanahan, "Is It Time for Your Country to Consider the 'Patent Box'?" PwC's Global R&D Tax Symposium on Designing a Blueprint for Reducing the After-Tax Cost of Global R&D, Dublin, Ireland, p. 3 (May 23, 2011); Kessler and Eicke, "The Emergence of R&D Tax Regimes in Europe," 50-10 Tax Notes Int'l, p. 845 (June 9, 2008).
 See OECD/G20 Base Erosion and Profit Shifting Project, Action 2, Neutralising the Effects of Hybrid Mismatch Arrangements, and Action 4, Limiting Base Erosion Involving Interest Deductions and Other Financial Payments, 2015 Final Report. Over 100 countries are reported as collaborating to implement the BEPS measures which are reflected in an Explanatory Statement and 15 separate Action papers.
 The rate increases to 12.5% beginning in 2025. The BEAT does not apply to individuals, partnerships, trusts, real estate investment trusts or regulated investment companies.
 See 59A(e)(3)(defines “controlled group” as a single employer under §52(a)).

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