Memo on Tax Cut and Jobs Act (TCJA)- Impact on International Transactions
Memorandum
To: CFO
From: Finance and Accounting Department
Date: 11/09/2023
Subject: TCJA Impact on the Taxation of International Transactions
I hope this message finds you well. It is part of our ongoing commitment to keeping key stakeholders informed and prepared for any changes in the regulatory landscape. We want to provide you with essential information regarding the Tax Cuts and Jobs Act (TCJA) and its effect on the taxation of international transactions. The TCJA, enacted in 2017, represents one of the major overhauls of the U.S. tax code in recent history. While it primarily focused on reforms affecting individual taxpayers, it also introduced several critical provisions that have far-reaching implications for the company and how international transactions are conducted (Sirrs). This memo provides a clear and concise overview of the TCJA’s impact on international taxation for Coca-Cola and its stakeholders. It covers navigating these changes and ensuring that our company remains compliant while optimizing its tax position.
Analysis: Key Changes that Took Place for International Tax Purposes and Potential Tax Consequences for the Corporation
The Tax Cuts and Jobs Act (TCJA) of 2017 ushered in a substantial revamp of the U.S. tax code, bringing about numerous changes that significantly impact international taxation. First, TCJA impacts transition tax on deferred foreign income (Section 965). Before TCJA, foreign income gained by foreign holdings of U.S. corporations was usually subject to U.S. tax when exiled as dividends. However, Section 965 introduces a significant change. It imposes a “transition tax” on a one-time basis on the untaxed foreign income of these subsidiaries, essentially regarding those earnings that are to be repatriated. The tax comprises a 15.5 percent rate on cash or cash-equivalent earnings and an 8 percent rate on liquid assets, with an option to pay it over eight years (Atwood et al.). This provision has a consequence on Coca-Cola, which I work for, in that it incentivizes the company to return offshore earnings to the U.S. and stimulate home investment.
Second, TCJA impacts the overall intangible low-taxed income (GILTI – Section 951A). Under prior law, U.S. stockholders were generally taxed on overseas income only when it was distributed as dividends. GILTI introduces a significant departure from this norm by requiring U.S. stockholders to incorporate their portion of a controlled overseas corporation’s (CFC) GILTI in their gross income annually (Luna et al.). As a consequence to our company, this provision targets to prevent profit from changing to low-tax jurisdictions, as it taxed income over a considered return on tangible assets.
Third, anti-abuse tax and base erosion (BEAT – Section 59A) is affected under TCJA. It introduces a new provision, BEAT, which imposes an additional tax on corporations making deductible payments to foreign-related parties, potentially eroding the U.S. tax base. The provision is designed to discourage profit-shifting activities, mainly through intercompany transactions with foreign affiliates. As a consequence, our company will be subject to this tax, and the amount of gross receipts and payments to foreigners will have to be reduced for a reduced tax burden.
Fourth, TCJA introduces changes in Subpart Rules (Section 951 and Section 965). It eliminates the 30-day ownership requirement for U.S. stockholders to be dependent on tax on a CFC’s Subpart F income, making it easier for the IRS to tax certain foreign income. Additionally, the definition of “U.S. shareholder” has been expanded to include those owning 10 percent or more of the gross value of shares in an overseas corporation, further broadening the reach of Subpart F rules (Wagner et al.). Also, the Stock Attribution Rules (Section 958(b) have been affected under the TCJA. The revoke of Section 958(b)(4) expands the reach of stock attribution rules. As a consequence to our company, the shares of our overseas corporations owned by foreign persons are credited to related U.S. persons for determining CFC status, potentially leading to more entities being classified as CFCs and subjected to U.S. taxation.
Fifth, TCJA affects the revised sourcing rules for inventory (Section 863(b)), significantly changing how income from inventory sales is determined. Our company’s income from goods manufactured in the United States and sold abroad is considered 100 percent U.S. source and is thus fully taxed in the United States. Definitely, it will have an impact on our company’s calculation of international tax credits.
Sixth, deductions for foreign-source dividends (Section 245A) are affected. The act introduces a significant change by allowing domestic corporations a 100 percent deduction for the foreign-source part of dividends acquired from identified ten percent-owned foreign corporations. Notably, this positively impacts Coca-Cola as this provision encourages the company to repatriate foreign earnings by providing a more favorable tax treatment for foreign dividends. The act affects the seventh, Deduction for Foreign-Derived Intangible Income (FDII) and GILTI (Section 250). TCJA introduces a deduction equal to 37.5 percent of FDII and 50 percent of GILTI, reducing the effective tax rate on foreign income for qualifying domestic corporations. Essentially, this incentive aims to promote domestic economic activity and make U.S. companies more competitive globally, which is a gain for our company. Lastly, the Hybrid Transactions/Entities (Section 267A) are affected under the act. The act disallows deductions for certain payments that previously resulted in a deduction in one jurisdiction but no inclusion in the recipient’s income in another, thereby closing a tax avoidance loophole. However, this provision has no consequence for our company.
Summary
The TCJA provisions sought a more competitive U.S. corporate tax environment while
combatting profit shifting and base erosion. However, they also introduced complexities and
compliance challenges for multinational corporations, necessitating a thorough understanding of
the new rules and careful tax planning. For our company, Coca-Cola, TCJA has several potential impacts. One of the most significant benefits for Coca-Cola is the decrease in the corporate tax rate from 35% to 21% (Gale et al. 591). Notably, the significant reduction in the federal tax rate has an immediate favorable impact on the company’s bottom line. Additionally, TCJA includes provisions for repatriating overseas profits at a lower tax rate. Essentially, this encourages Coca-Cola to bring back money held in foreign subsidiaries to the U.S. at a reduced tax cost. However, TCJA also introduces limitations on the deductibility of interest expenses and eliminates certain deductions, which could affect our ability to finance various strategies and overall tax planning. Moreover, the global nature of our business means we have to navigate complex international tax provisions within the TCJA, potentially leading to additional compliance and administrative challenges.
Conclusion
TCJA significantly alters the landscape of international taxation, impacting how U.S. businesses conduct their global operations, structure their investments, and plan their tax strategies. A call to action is made to our company to remain vigilant in navigating these changes to optimize our tax position while ensuring compliance with the evolving tax code. Consulting with tax professionals and staying informed of further developments in international tax law is crucial in this evolving landscape. We will continue to delve into the act to ensure no potential gain is left out.
CC: Finance Department Members
Works Cited
Atwood, T. J., et al. “The Impact of U.S. tax reform on U.S. firm acquisitions of domestic and foreign targets.” Available at SSRN 3600978 (2020).
Gale, William G., et al. “Effects of the tax cuts and jobs act: A preliminary analysis.” National Tax Journal 71.4 (2019): 589-612.
Luna, LeAnn, Kathleen Schuchard, and Danielle Stanley. “The impact of CEOs on changes to executive compensation after the TCJA: Initial evidence.” Available at SSRN 3451998 (2020).
Sirrs, Julie R. “The Tax Cuts and Jobs Act and Charitable Giving: Impact and Planning Strategies.” Prob. & Prop. 33 (2019): 30.
Wagner, Alexander F., Richard J. Zeckhauser, and Alexandre Ziegler. The Tax Cuts and Jobs Act: Which Firms Won? Which Lost?. No. w27470. National Bureau of Economic Research, 2020.
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Memo on Tax Cut and Jobs Act (TCJA)- Impact on International Transactions
Memorandum
To: [Audience] C-Suite (CFO/CFO …) Write as if the audience is not in accounting or knows tax; explain in simple terms
From: [Person and/or Department issuing the memo] Accounting/Tax
Date: [Date Sent]
Subject: [Subject of the Memo – TCJA Impact on the Taxation of International Transactions]
[Opening – Get to the point in the opening paragraph. Keep things simple and short. Make it easy and fast to read.]
[Analysis – Provide some in-depth analysis on the key changes that took place for international tax purposes and potential tax consequences for the corporation.]
[Summary – Summarize any historical or contextual information needed to support the opening paragraph.]
[Conclusion – End with a call to action.]
CC: [Send copies to anyone affected by the memo.]
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