United States Begins Move to a Territorial Tax System

2018 Whole Ball Of Tax

Wolters Kluwer Reports on International Tax Reform

(NEW YORK, NY, January 2018) — With the passage of the 2017 Tax Cuts and Jobs Act, Congress has enacted significant international tax reform that will alter how U.S. multinationals are taxed in the United States. These changes are intended to impact the way in which multinationals do business in the United States and abroad. One of the most significant changes is the beginning of a move from a worldwide tax system to a territorial tax system.

A participation exemption system for the taxation of foreign income has been established, which replaces the prior system of taxing U.S. corporations on the foreign earnings of their foreign subsidiaries when the earnings are distributed. The exemption, which is provided in the form of a participation dividends received deduction (DRD), is intended to encourage U.S. companies to repatriate their accumulated foreign earnings and invest them in the United States.

Previously, a U.S. C corporation had to pay U.S. tax to the extent that the U.S. tax rate was higher than the tax rate of the foreign subsidiary and a credit was granted for the foreign tax that was paid. This deemed paid foreign tax credit has been eliminated because the participation exemption eliminates double taxation.

Additionally, the foreign income of foreign subsidiaries that are owned by U.S. corporations will not generally be subject to income tax in the United States at the shareholder level.

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