VIDEO: Some Individuals Are Unexpected Participants in New Tax Code

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By Sony Kassam

A significant unintended consequence of the new tax law is the impact on U.S. individuals who own foreign corporations and will owe U.S. tax even though they aren’t based in the U.S.

“I think Congress was considering very heavily the impact of large corporations holding assets and holding income abroad, and not considering the average person who might have a foreign corporation—especially a U.S. citizen who might live and work abroad, have a foreign corporation, have no tie whatsoever with the U.S.,” Dianne C. Mehany, a member at Caplin & Drysdale, Chartered, in Washington, told Bloomberg Tax.

Mehany, whose practice areas cover international tax, private client, and tax controversy issues, said her clients are largely high-net worth individuals. They are caught up by the new tax regime’s international changes and will pay the repatriation tax under the 2017 tax act at a higher rate, she said.

New tax code Section 965 added by the tax law requires companies to pay a one-time tax on income they have overseas since 1986. The law deems the repatriation to have taken place before Jan. 1, 2018, and imposes a tax of 15.5 percent on cash or cash equivalents and a tax of 8 percent on illiquid assets.

See video interview here:

The 2017 tax act changes “really point to entities,” Mehany said Feb. 8 at the American Bar Association Section of Taxation meeting in San Diego.

Provisions, such as a deemed participation deduction, offer benefits to corporations, but aren’t available to individuals, she said.

Mehany also said the interplay between the tax law’s provisions on global intangible low-taxed income (GILTI) and foreign-derived intangible income (FDII) isn’t quite clear.

GILTI might lead companies to stop holding their intangibles offshore, in lower-tax jurisdictions, because to it applies a tax to income derived from intangible sources; but the FDII provision offers a deduction that may incentivize exporting from the U.S., she said.

For a U.S. multinational that exports services from intangibles abroad, the question is whether the FDII and GILTI “operate in concert or are they a little bit in contention with each other?” Mehany asked.

“I think that’s yet to play out, when we have people plan their operations in years to come,” she said. Companies will have to see whether they might need to “increase their intangibles to offset income from intangibles,” Mehany said.

She also discussed how the new tax system is “quasi-territorial” rather than a complete territorial tax system and identified tax code provisions where multinational companies need the most guidance.

To contact the reporter on this story: Sony Kassam in Washington at

To contact the editor responsible for this story: Kevin A. Bell at

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