Tax repatriation refers to the tax imposed by the U.S. on the return of money that multinational corporations make overseas. Before the Tax Cuts and Jobs Act, the IRS required corporations to pay taxes on all domestic and foreign income. However, companies were not required to pay taxes on their foreign earnings until that money was repatriated, or returned, to the U.S. As a result, corporations have deferred paying taxes on their international earnings by setting up subsidiaries overseas and housing their money there.
The latest tax reform update has since amended this tax, giving companies more incentive to repatriate income. Read on to see how the Tax Cuts and Jobs Act has changed taxes and the way tax repatriation works.
What Is Tax Repatriation and How Does It Work?
Tax repatriation applies when a multinational corporation brings back profits from overseas to the U.S. A company’s foreign earnings are considered taxable income once it is returned to the U.S.
Repatriation Before the Tax Cuts and Jobs Act
Prior to the Tax Cuts and Jobs Act, companies had to pay a 35 percent corporate tax to repatriate their foreign income.
For example, say a company had a subsidiary in a country that charges a 10 percent corporate tax rate. If the subsidiary made $1 million in that country, it would pay $100,000 in taxes to that country, leaving the company with $900,000 to invest in its business.
If the company then sent that $900,000 back to the American parent company, the company must include the entire $1 million of pretax income on its U.S. tax return. With the old U.S. tax rate of 35 percent, it would have owed $350,000 in taxes with no additional deduction or credit.
Repatriation After the Tax Cuts and Jobs Act
Under the Tax Cuts and Jobs Act, the corporation tax dropped from 35 percent to 21 percent. But companies will not have to pay the full 21 percent when repatriating income. Rather, any company that made money by deferring taxes on foreign income is subject to a one-time tax on that income. The tax is 15.5 percent on liquid assets and 8 percent on noncash assets that are treated as if the companies repatriated cash prior to 2018.
For example, Apple is sitting on $252.3 billion in overseas cash alone, according to Fortune. With the new tax law in place, the tech giant announced its plan to pay $38 billion in repatriation taxes.
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How Companies Shift Income to Foreign Subsidiaries
Thanks to the cut in the repatriation tax in 2018, shifting income to foreign subsidiaries might not be as common for companies. However, corporate America still might benefit from shifting income to foreign subsidiaries. Companies often shift profits to favorable tax jurisdictions by selling intangible assets, such as patents, to their foreign subsidiaries incorporated in those tax havens. For example, a pharmaceutical company might have a foreign subsidiary own its patents. That way, when drugs relying on those patents are sold, a large portion of the profits can be recorded in the foreign jurisdiction because the patent is owned by the foreign subsidiary.
Click through to read more about the most and least tax-friendly countries.
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- Watch: How to Legally Cheat your Tax Bracket
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Michael Keenan contributed to the reporting for this article.