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Global Restructuring

A CPA-firm partner approach our team to review a Form 5471 for their automotive client. Although a form review is a simple request, our Global Business Services team uncovered that the company’s structure was inefficient from a U.S. tax perspective. Specifically, the new Global Intangible Low Taxed Income “GILTI” requires an income inclusion for controlled foreign corporation (“CFC”) current year earnings and a foreign tax credit against U.S. tax on the GILTI inclusion is allowed in the case of direct taxes paid or indirect taxes in a C-corporation tax structure.

Approach

Under our client’s structure, they would not be allowed a foreign tax credit under either unless further planning was implemented. To rectify this situation, we elected (check-the-box election, after converting the foreign entity to an eligible legal entity) to treat the foreign corporation as a disregarded entity for U.S. tax purposes. A check-the-box election is treated as an inbound liquidation with all the accumulated earnings and profits (“E&P”) being subject to U.S. taxation. However, in this case, the deemed repatriation tax under section 965 recharacterized the E&P, as of 12/31/2017, to previously taxed income and therefore not subject to U.S. taxation a second time. The check-the-box election avoids the GILTI regime as the foreign entity was no longer treated as a CFC, but rather the foreign entity would be treated as a branch for U.S. tax purposes. Under this structure, a foreign tax credit would be allowed to reduce the U.S. tax on the foreign income included, subject to the foreign tax credit limitation rules.

Results

After the planning was completed, the client was able to utilize a foreign tax credit against the foreign income included, thereby reducing their overall global effective tax rate.