Taxes are an intricate business—one that only grows more complicated over time. International tax regulations, in specific, require a specialized knowledge to fully understand the opportunities available.
For every multinational corporation within a country, the country itself taxes their income—and the United States is no different. In fact, the United States also requires a minimum tax on multinational income that’s used in low-tax countries—whereas other countries exempt foreign-source income.
What is Foreign-Source Income?
Ever since the TCJA in 2017, the federal government has an established set of rules for the separate categories of income earned by US resident multinational firms. Those physical assets which represent only 10 percent per year on physical assets, deemed a “normal return, are exempt from US corporate income tax. However, all above the 10 percent return—referred to as the Global Intangible Low Tax Income—is subject to an annual tax at a rate of 21 percent on domestic income.
To make things more confusing, GILTI does mean the corporation is subject to an 80 percent tax credit of their foreign income taxes page. This 80 percent credit can wholly eliminate the GILTI tax for US corporations whose income foreign countries tax isn’t less than 13.125 percent. Although beneficial to many US-based multinational countries, it still makes the matter of international taxation a complicated situation to address—and it’s a process that prioritizes earning income in high-tax countries.
Most countries will utilize a system that exempts the majority of “active” foreign income from taxation—and others still employ hybrid systems that can exempt those systems which are similar to the home country’s tax system. This exemption gives an incentive to earn income in low-tax countries, unlike the established US tax system, because this foreign source-income does not require a minimum tax.
The international tax system in the US can seem intimidating—but our experts at Atherton & Associates, LLP are here to provide assistance for even your international tax needs.