How to determine the correct transfer pricing strategy for your business in the new tax environment
On December 22, 2017, the federal Tax Cuts and Jobs Act (“The Act”) was signed into law creating one of the largest tax overhauls in history. Though there were no direct changes to the transfer pricing requirements, certain international provisions implemented through the Tax Act may create an impact on transfer pricing.
These provisions include, but are not limited by, Foreign-Derived Intangible Income (“FDII”), Global Intangible Low-Taxed Income (“GILTI”), Base Erosion Anti-Abuse Tax (“BEAT”), and the definition of intangible property. It is important that companies review their existing transfer pricing policies or take these provisions into consideration when creating a new policy to ensure that they comply and maximize all tax planning opportunities.
Foreign-Derived Intangible Income (“FDII”) & Global Intangible Low-Taxed Income (“GILTI”)
The FDII provision of The Act creates an incentive for U.S. corporations that sell, lease or license intellectual property to retain their assets in the United States by providing a preferential tax rate on that foreign-derived income. Thus, with a special rate of 13.125 percent, a domestic corporation with foreign affiliates might find it advantageous to shift intangible leasing profits into the United States.
As the counterpart to FDII, The Act’s provision on Global Intangible Low-Taxed Income was designed as a safe-guard to combat a U.S. corporation’s attempt to shift profits overseas to take advantage of the new territorial system. Briefly, GILTI imposes penalties on organizations that derive income from foreign intangibles harbored in low-tax jurisdictions. The tax subjected could render a territory less advantageous when contrasted to pre-tax reform.
A U.S. corporation should consider FDII and GILTI in determining which taxing jurisdiction to house its intangible assets. Tax incentives to source profits to the U.S. include lower rates and avoiding penalties which might outweigh the tax benefits of foreign sourcing going forward.
With the above provisions affecting the tax of intangible assets, it is relevant to note that the definition of intangibles has also been amended with The Act to include anything with potential value that is not attributable to tangible property. Further, valuation of intangibles has been challenged with The Act, giving the IRS the authority to value transfers of intangible assets on an individual basis, in the aggregate, or by any other means deemed reasonable. The modification of the definition itself could potentially diminish the reliability of existing transfer pricing policies and the wording of said policies should be reviewed.
Base Erosion Anti-Abuse Tax (“BEAT”)
BEAT is an additional tax that applies to corporations that have average annual gross receipts of $500 million and have foreign deductible related-party payments totaling at least 3% of the sum of all annual deductions. The tax is computed as a multiple of the sum of the corporation’s taxable income and the deducted foreign related-party payments. Although BEAT does not apply to all related-party payments, susceptible corporations should be wary of large base erosion transactions that are material to total deductions going forward. The adverse cost of BEAT could perhaps outweigh the advantages of transacting with foreign affiliates.
Assessing the Impacts on Your Company’s Transfer Pricing Strategies
With all of the above provisions being effective January 1, 2018, now is a good time to assess their impact on your transfer pricing strategy and policies. If you have not done this already, there are still plenty of transfer pricing planning opportunities that can be utilized for the 2018 tax year.
The International Tax team at Freed Maxick CPAs, P.C. has been monitoring these provisions closely and is ready to discuss how your business may be impacted. Connect with us to schedule a Tax Situation Review so we can provide guidance on how to maximize planning opportunities and optimize your transfer pricing strategy.
You can reach us at 716.847.2651 to schedule a review today.