Tax Law Changes - International

So you have a business and are thinking about taking some of its operations to nations other than the United States. It could also be that your business is already operating internationally. There are tax ramifications to that, and in general, once a business is operating overseas, there are a whole lot of new things to consider regarding how those international operations are taxed.

The "One Big Beautiful Bill Act" OBBBA changed some of the different ways that international operations are taxed. We will go over the changes below.

It is important to note that some parts of international taxation only apply to very large businesses. These include country by country reporting, Pillar Two compliance, and BEAT.

In general, BEAT applies to multinational entities with $ 500 million or more in revenue, country by country reporting applies to multinational businesses with $ 850 million or more in revenue, and Pillar Two applies to multinational businesses with 750 Euros or more in revenue.

The OBBBA only changed BEAT, and did not at all modify country by country reporting, nor did it make or change any Pillar Two compliance rules. It did, however, change the BEAT tax rate from 10.0 % to 10.5%.

There are also parts of the U.S. tax code that impact companies with any level of revenue. These include subpart F taxation, what was known as GILTI taxation, what was known as FDII taxation, and transfer pricing requirements.

Transfer Pricing

Transfer pricing can generally be described as the tasks required by U.S. tax law that are intended to ensure that cross border tax benefits do not take place by a business artificially creating unreasonable intercompany pricing to reduce their global tax bill. Measures have been built into the law to require that all intercompany transactions have an "arm's length" price.

The OBBBA did not change any of the transfer pricing rules.

Subpart F

Subpart F rules are set up to create an artificial repatriation of some types of income from a foreign owned CFC back to its U.S. owner for immediate taxation. CFC stands for controlled foreign corporation. Controlled foreign corporations are typically taxpaying foreign entities of which their owners have limited liability for their ownership stake.

The OBBBA did not change on of the subpart F rules.

What was GILTI and now is "Net CFC tested income"

The OBBBA renamed what was known as GILTI to net CFC tested income. Net CFC tested income is generally what is left over after effectively connected income, subpart F income, and certain other income is accounted for. Net CFC tested income is artifically repatriated to its U.S. owner and taxed.

The section 250 deduction and foreign tax credit can reduce the impact of required net CFC tested income taxation. The section 250 deduction for net tested income was reduced by the OBBBA, from 50% to 40%. The reduction in the section 250 deduction effectively increases the tax rate on net tested CFC income.

The OBBBA also reduced the somewhat cumbersome net deemed tangible income return and QBAI calculations. This would increase the tax base for the GILTI tax calculation. However, the OBBBA also increased the amount of foreign tax credit that can be taken against net CFC tested income, by reducing the exclusion from 20% to 10%.

What was FDII and is now "Foreign derived deduction eligible income"

What was FDII is a tax benefit that was intended to help companies that sell goods and services overseas that were created using certain U.S. based intangible assets. The section 250 tax deduction that reduces the tax rate on such activity was changed by the OBBBA from 37.5% to 33.34%. This slightly increases the tax payable on FDII activity.

Again, there is a lot of content in this article.

If you are thinking about expanding your business overseas, or are already an international business (Canada counts for this!) and wish to ensure that you taking the right steps to be in compliance with the tax laws and regulations that are in place for international businesses, consider reaching out to us here at Cloud Financial Solutions today. Adam Ausperk, the owner of Cloud Financial Solutions, has experience and expertise in these matters and is well qualified to lead your business to optimal compliance with the existing international tax laws.