09 Dec How will foreign tax credit changes affect US expats?

Many changes are being proposed within domestic US by the Biden administration and on an international basis that will impact worldwide income for global US citizens working at home and abroad.

Tom Griffiths is a US expat tax consultant considering what impact these proposed reforms could have on US citizens working abroad.

Many people turn to a US foreign tax credit expert to help them navigate the maze that the US tax system seems. It’s a somewhat more challenging puzzle than usual with proposed changes to that system but no concrete information about the actual outcomes.

These proposed changes have been brought forward by Ron Wyden, the Senate Finance Committee Chair, and could impact the GILTI (Global Intangible Low-Taxed Income) and the Foreign Tax Credit for those

working abroad or running businesses with an international presence.

The Wyden Proposal tax changes

The alterations to the international tax regime would bring about changes to the 2017 Tax Cuts and Jobs Act; this could have a notable the foreign tax credits availability and impact tax treaties.

There’s much to be discussed, confirmed, and implemented, so it’s doubtful anything will happen within the coming weeks; however, it will pay to make provisions for when it does.

Proposed changes to the Global Intangible Low-Taxed Income

The GILTI is an amount of income roughly determined by the taxable income/loss of a CFC as if it were a US citizen. Derived from a CFC (controlled foreign corporation) in which a US citizen is a 10% (direct or indirect) shareholder.

Each country will decide whether income is considered high taxed, and all of these tax rate decisions are still up in the air because everything so far is just proposed.

Higher taxed income and foreign tax credits

Foreign taxes submitted as a higher taxed income would not be deducted or credited, and the new tax proposal creates a placeholder for GILTI timing issues. This may include considering foreign Net Operating Loss (NOL) carryovers and any differences between the US and foreign legal processes.

Changes to the GILTI will likely apply to the taxable years of foreign corporations beginning after the date of enactment (meaning 2022 for calendar year CFCs). Although, there is no formal date as of this time.

Exclusion rule for high tax foreign branches

The proposals by Wyden suggests that “foreign branch” means a branch whose activities are carried out by the taxpayer (directly or indirectly) or not a tested unit of a CFC having a taxable presence in its country.

These tax changes would result in a higher tax exclusion rule being imposed, so income would be 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.

Allocation and appointment relief for US companies

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.

There are also proposed changes to the Base Erosion and Anti-Abuse Tax (BEAT) which serves to deter anyone planning to shift profits out of the US and avoid their domestic tax liabilities.

The Wyden proposal seeks to revise this tax with modified liability seeing taxpayers go from 80% of general business credits used to permitting all.

Will international changes impact Foreign Tax Credit for US citizens?

According to Wyden, these proposals are a starting point and in line with the new Biden tax proposals 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.”

These tax reforms will certainly impact US citizens living and working abroad, but the uncertainty lies around when and how they will be implemented.

It will be wise to keep informed of changes and seek the professional support of an expat tax advisor to help smooth the transition and meet deadlines 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.