Page 3 - Tax Cuts And Jobs Act Of 2017 Introduces Major Reforms To The International Taxation Of U.S. Corporations

THE PARTICIPATION EXEMPTION DIVIDEND PROVISION’S INTERACTION WITH THE REPATRIATION OF FOREIGN SOURCE ACCUMULATED EARNINGS AND PROFITS
Adopting a similar set of mechanical rules that run parallel to the rules pertaining to the participation exemption deduction under new Section 245A,4 as is discussed below, 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 U.S. share- holder’s pro rata share of the post-1986 foreign accu- mulated earnings and pro ts 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 de cits in earnings and prof- its of speci ed foreign corporations.5 The amount of the deduction is equal to: (i) the U.S. shareholder’s eight percent 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 percent rate equivalent per- centage per Section 965(c)(2)(B).6
The “aggregate foreign cash position” is de ned 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 speci ed foreign corporation of such U.S. share- holder 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 measure- ment date.”
The term “cash position” is de ned in Section 965(c) (3)(B) as the sum of a speci ed foreign corporation’s (i) cash; (ii) net accounts receivable; plus (iii) the fair mar- ket value of certain assets, including actively traded property, certi cates of deposit, short-term obliga- tions, 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 speci ed for- eign corporation and there would be at least one U.S. shareholder if such entity were a foreign corporation.7
For Section 951 inclusion amounts not allocable to the taxpayer’s aggregate foreign cash position, the allow- able deduction under Section 965(c) is the amount included in gross income of the U.S. shareholder equal to the eight percent rate equivalent percentage, i.e., the amount of the deduction required from the high- est tax rate set forth under Section 11 that would result in an eight percent rate of tax.8 This substantially lower tax rate for non-cash or cash equivalent inclusions has already inspired and will continue to motivate taxpay- ers subject to the inclusion in 2018 to have moved out of their cash and cash-equivalent positions before the applicable Section 951 inclusion amount date.9 The resulting tax stakes were the IRS to challenge this cash position reduction maneuvers will be quite high.
Where a U.S. shareholder sells stock of a CFC at a gain which results in dividend income in accordance with Section 1248, the deemed dividend recharacterization quali es for the participation exemption under Sec- tion 245A.10
DFICS AND ACCUMULATED POST-1986 DEFERRED FOREIGN INCOME
As to any U.S. shareholder, a DFIC is any speci ed for- eign corporation of such U.S. shareholder that has post-1986 (positive) accumulated post-1986 deferred foreign income (as of a measurement date).11 Accu- mulated post-1986 deferred foreign income is the post-1986 E&P of a speci ed foreign corporation but reduced by: (i) income of the speci ed foreign corpo- ration which is e ectively 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 969.12 Post-1986 accumulated foreign source E&P is determined in accordance with Code Sections 964 and 986, provided, however, that it only takes into account periods when the foreign corpora- tion was a speci ed foreign corporation and without reduction of dividends distributed during the inclu- sion year other than dividends distributed to another speci ed foreign corporation.
The required income inclusion is reduced by the por- tion of aggregate foreign E&P de cit allocated to that person’s interest in an “E&P de cit foreign cor- poration.” The de cits of a foreign subsidiary accumu- lated prior to its acquisition by a U.S. shareholder may be taken into account in determining the aggregate
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MAJOR REFORMS TO THE INTERNATIONAL TAXATION OF U.S. CORPORATIONS | 45