Jen: This is the PKF Texas Entrepreneur’s Playbook. I’m Jen Lemanski and I’m back again with Frank Landreneau, one of our International Tax Directors. Frank, welcome back to the Playbook.

Frank: Thanks, Jen. It’s great to be back.

Jen: Last time we talked about the GILTI tax. Remind our viewers, if they didn’t watch last time, what does it stand for?

Frank: What GILTI stands for – it’s an acronym for Global Intangible Low Tax Income, and the whole idea is that some level of foreign earnings should be taxed on a current basis in the U.S.

Jen: How does GILTI actually work?

Frank: First of all, you take a look at the foreign corporations’ earnings in its totality. And then, there are a bunch of carve outs, which you take a look at, and then that is the income that would be subject to the GILTI tax.

In theory, it’s supposed to work where a routine return, a normal operating return from normal operations, would be not taxed under GILTI. Any return so called “excess returns,” this would be returns earned through the fact that you’ve got special processes, intellectual property – that type of thing would be subject to the GILTI tax. That’s where the name comes from. There’s a lot of gyrations and calculations needed to get to that amount.

Jen: Are there particular industries that are impacted by this more so than others?

Frank: That’s a great question. Because of the way the Congress decided to spell out this legislation, it’s a mechanical test in how the computation works. Industries with very little or few fixed assets, such as service industries or distributing companies, would be hit more hard than manufacturing companies.

Jen: Would this be something that a company would consider maybe restructuring to a different structure?

Frank: There are some planning ideas. One thought would be for companies that are owned by individuals outright, or what’s common in the U.S. is ownership through pass through entities. Those entities are thinking perhaps putting a domestic corporate blocker entity between the individual owner and the form corporation. There’s some special considerations that are beneficial if you do that structure.

Jen: And does this take in effect already, because of the new tax reform?

Frank: Absolutely. It took effect technically from January 1, because the legislature was signed into law back in December.

Jen: Perfect. Well, we’ll get you back to talking a little bit more about some international tax reform.

Frank: Thank you. There’s plenty to talk about it.

Jen: All right, great. To learn more about other international topics, visit pkftexas.com/internationaldesk. This has been another Thought Leader Production brought to you by PKF Texas The Entrepreneur’s Playbook. Tune in next week for another chapter.

Jen: This is the PKF Texas Entrepreneur’s Playbook.  I’m Jen Lemanski, and I’m back again with Frank Landreneau, one of our international tax directors. Frank, welcome back to the Playbook.

Frank: Thank you. It’s great to be back.

Jen: So last time we had you here, you were talking a little bit about tax reform, how it impacts international companies. There’s a territorial tax system now. What is that?

Frank: That’s right. With tax reform we’ve replaced the worldwide tax system with what really is called a quasi-territorial tax system. And what that means is that while corporate shareholders can get dividends from specified core corporations tax free, there still are some hurdles that they have to go through such as dealing with this so-called GILTI tax that’s now in the law.

Jen: GILTI. So, I assume that’s not like “guilty,” but it’s probably an acronym?

Frank: It is, guilty as changed. It’s an acronym for Global Intangible Low Taxed Income, and the idea is that corporations will be taxed on foreign earnings when they operate in low tax jurisdictions.

Jen: So, what happens if they operate in high tax jurisdictions? Will they be taxed in that?

Frank: That’s actually a great question, because the name is deceiving that you’d only be taxed in lox tax jurisdictions. The interesting thing is that for corporate tax payers, they may still pay some tax if they’re in high tax jurisdictions, because of the fact that there’s certain business expense rules and you can only offset this GILTI income tax against 80% of foreign tax credits. So, you never really know where you end up. Now, for individuals, you don’t get this type of treatment for corporations, so that the actual tax bite is higher.

Jen: Okay, well I definitely have some more questions. We’ll get you back to talk a little bit more about the GILTI tax next time. Does that sound good?

Frank: Sounds great. Thank you.

Jen: Perfect, thank you. To learn more about other international topics, visit PKFTexas.com/internationaldesk. This has been another Thought Leader production brought to you by PKF Texas The Entrepreneur’s Playbook.

Russ: This is the PKF Texas Entrepreneur’s Playbook. I’m Russ Capper, this week’s guest host, and I’m here once again with Frank Landreneau, a Director and one of the faces of the International Tax team here at PKF. Frank, welcome back to The Playbook.

Frank: Thank you.

Russ: Our last time together, we got into the Tax Cut and Jobs Act, and of particular interest to me was how the interpretation of how you handle certain things from that Act has sort of evolved and matured and maybe even changed over time now that we’re in it two years. There was one particular—I had asked you to give me an example of how that rolls out, and you said, “Yeah, there’s this one part of running an international business, where there’s, like, three options that have evolved, really.” Mainly, from international tax people like you. One was literally to create a corporation and, correct me if I’m going down this path wrong, but one was to create a corporation.

Frank: That’s correct.

Russ: The second one was to actually elect a holding company that would play like it was the company.

Frank: That’s right.

Russ: And the third, mostly I guess for SMEs, was to actually create something that you’re just treated like a foreign company. Was I even close on those three?

Frank: Very close, actually. In tax law there is a lot of elections that create a tax treatment that may not be in line with legal structuring and so forth.

Russ: Yeah, you want to avoid that legal stuff, don’t you?

Continue Reading Three Structuring Options for International Business

Russ: This is the PKF Texas Entrepreneur’s Playbook. I’m Russ Capper, this week’s guest host, and I’m here with Frank Landreneau, Director and one of the faces of the International Tax team. Frank, welcome back to the Playbook.

Frank: Thanks, Russ. Thanks for having me; always a pleasure.

Russ: You bet. Next time you’re on I am going to count to see how many times have you been on, because I’m sure it’s more than anybody else.

Frank: Okay, great.

Russ: But our topic today is primarily going to be the Tax Cut Jobs Act that I think was passed in 2017, started in 2018, and it’s mind boggling to me, because we’re still sorting that thing out. Is that right?

Frank: That’s exactly right. And it’s been a little bit over two years, but we’re still getting guidance even now and even there’s pending guidance that we’re anticipating on getting even this year as we speak.

Russ: How does a business person make decisions based upon this thing playing out over such a long period of time?

Continue Reading Restructuring Strategies for Small- to Medium-Sized Businesses

Jen: This is the PKF Texas Entrepreneur’s Playbook. I’m Jen Lemanski, and I’m back again with Frank Landreneau, one of our International Tax Directors. Frank, welcome back to The Playbook.

Frank: Thanks, Jen. It’s great to be back.

Jen: So, last time we talked about international tax baskets with the new tax reform. What are some issues that business owners are finding with that?

Continue Reading Opportunities and Traps in the International Business Space

Jen: This is the PKF Texas Entrepreneur’s Playbook. I’m Jen Lemanski, and I’m back again with Frank Landreneau, one of our International Tax Directors. Frank, welcome back to The Playbook.

Frank: Thanks, Jen. Thanks for having me back.

Jen: We’ve talked about GILTI and FDII in previous episodes, and now I know there’s some more foreign impacts with the new tax reform. Is there anything else you can share with us about that?

Frank: Yes, in response to the Tax Reform Act, Treasury has had to come up with new rules for four tax credits. For example, previously, we had two types of foreign tax credit baskets. Continue Reading Foreign Tax Baskets – What to Know

Jen: This is the PKF Texas Entrepreneur’s Playbook. I’m Jen Lemanski, and I’m back again with Frank Landreneau, one of our International Tax Directors. Frank, welcome back to The Playbook.

Frank: Thank you. It’s good to be back with you.

Jen: In a previous segment we went over transfer pricing, and we touched on it just a little bit, but I know we want to do a deeper dive. So, with tax reform and transfer pricing, what else do folks need to know?

Continue Reading A Closer Look at Transfer Pricing and the International Space

Jen: This is the PKF Texas Entrepreneur’s Playbook. I’m Jen Lemanski, and I’m back again with Frank Landreneau, one of our international tax directors. Frank, welcome back to the Playbook.

Frank: Well, thank you, Jen. It’s great to be back.

Jen: I’ve heard some headlines about transfer pricing. Can you give our viewers a little bit of an overview of what that actually is?

Frank: Yes, essentially when a multinational company is organized in a number of jurisdictions. So, for example – a simple example would be a company based in the U.S. with a U.K. subsidiary. It’s common for those entities to buy and sell goods from each other or perform services on behalf of one another. And so, it really is a concept to capture the arm’s length price of those transactions as if those transactions were taking place with a third-party as opposed to related parties.

Jen: Interesting. So, now we’ve talked about tax reform in previous segments; how is tax reform affecting transfer pricing?

Frank: There were a few additions in the Tax Jobs Act – otherwise known as Tax Reform – that impacted transfer pricing. Probably the most important was expanding the definition of intangible property so that the emotional thing of intangible property as IP or intellectual property developed from R&D activities for example. But there’s also intellectual property developed from things such as goodwill, customer base or a force in play.

Jen: Interesting.

Frank: So, for example, if you have a company that is – the synergies it has with its workforce, the training, the goodwill of the company – that’s also intellectual property.

Jen: Interesting.

Frank: And they include it in that definition.

Jen: Okay, so it really expanded the scope a little bit.

Frank: That’s right.

Jen: Now, how does transfer pricing affect some of the other international things we’ve talked about in other segments?

Frank: The definition of transfer pricing and some specifics within transfer pricing didn’t change per se, but there are some concepts that we’ve talked about that really kind of play towards some of that. For example, some of the provisions we’ve talked about, like GILTI – that’s the global taxed intangible income – uses concepts in transfer pricing, such as residual or routine activities and non-routine activities to perform computations. So, there is a little bit of a linkage with some of those tax reforms along with transfer pricing.

Jen: Great, well, we’ll get you back to talk some more about some international tax matters.

Frank: Thank you. I would love to come back.

Jen: Perfect. To learn more about other international topics, visit PKFTexas.com/internationaldesk. This has been another Thought Leader production brought to you by PKF Texas The Entrepreneur’s Playbook. Tune in next week for another chapter.

Jen: This is the PKF Texas Entrepreneur’s Playbook. I’m Jen Lemanski, and I’m back again with Frank Landreneau, one of our international tax directors. Frank, welcome back to the Playbook.

Frank: Well, thanks for having me back.

Jen: So, we’ve been covering international tax reform. What else do people need to know? What haven’t we covered yet?

Frank: I think other than the Toll Tax, which is getting more immediate attention because of the timing of it, there’s also other aspects of international tax reform that tax payers need to be aware of.

For example, that there’s disparate treatment between individuals and corporate tax payers when it comes to certain provisions, such as GILTI, and we’ve talked about FDII in previous segments – the Foreign Derived Intangible Income. And so, with respect to GILTI, for example, the top individual rate is 37%, and if there’s any amount to be included from a foreign corporation that’s taxed immediately as GILTI, that’s also taxed at 37%. However, for corporate tax payers any income inclusions from GILTI is taxed at 10.5%. That’s quite a rate differential between the two.

Jen: Wow, that’s huge. I know we’ve also talked about middle market entrepreneurs. Should they stop doing business as flow-through entities? We’ve talked about that in several different videos.

Frank: That’s a great question. In fact, that’s a big question that you see the international tax community or the tax community as a whole should ask, “Is this the death of limited liability companies?” And I think the answer is, I think, companies need to really start to think about where do they want their cash; do they want it back home? Do they want to keep it offshore? Where do they need it for their operational needs?

Once you determine that then you can kind of say then maybe we can do some things like some structuring options, like doing business as a C corporation for international operations, but not for your domestic operations. I think we talked a little bit about that in previous segments. That way you can minimize the GILTI tax and also take advantage of the special 13.125% of FDII. So, those are the kinds of things tax payers need to be aware of.

Jen: Okay. Now is there an advantage though to still being an LLC at all?

Frank: There is. For domestic business the tax law does provide for LLCs – taxes, partnerships – this 20% deduction, which kind of gets individual tax payers closer to a corporate tax rate – not entirely. And then, of course, passers still avoid double taxation once the funds are admitted to the ultimate owners. So, I wouldn’t give up on your LLC yet, just examine what operations are done under the LLC and what might need to be done in another way.

Jen: Sounds good. Well, we’ll get you back to talk a little bit more about that.

Frank: Thank you. Appreciate it.

Jen: Perfect. To learn more about other international topics, visit PKFTexas.com/internationaldesk. This has been another Thought Leader production brought to you by PKF Texas The Entrepreneur’s Playbook. Tune in next week for another chapter.

Jen: This is the PKF Texas Entrepreneur’s Playbook. I’m Jen Lemanski, and I’m back again with Frank Landreneau, one of our International Tax Directors. Frank, welcome back to the Playbook.

Frank: Well, thank you. It’s great to be back.

Jen: So, we’ve done a series – we talked about GILTI, we’ve talked about FDII, we’ve talked about how it’s impacted federally – but what about state income taxes?

Frank: Right. I’m glad you asked me that, because a lot of the focus on the provisions, because they are rather complicated, has been on the federal tax liability. In other words, how does that affect my 1040, my Form 1120 if I’m doing business as a corporation, but very little has been talked about as to how does that impact state taxes.

In Texas, the questions would be things like: will the state include that income in taxable income? Will it exclude it? There’re certain cases where foreign income is excluded. For Texas, probably the more straightforward, if the income is sourced outside of Texas, as what you would typically find with foreign income, it would be included in the tax base but not in the apportionment factor. So, that would have the effect of effectively excluding it.

For other states, I think the regime might be a little bit more complicated in they may use it as, you know, if you get tax relief for some of these provisions, they may add them back, because they don’t want to give state tax relief alongside of federal tax relief. Most states begin their tax base coupled with the federal tax base, and so you’ll see some decoupling from the federal provisions in that states will add back some of these deductions of federal tax.

Jen: In a previous episode you also talked about flow-through entities. How does the flow-through tax planning work with the international businesses?

Frank: That’s not gotten a lot of attention. One of the things to keep in mind is that when we talk about flow-through entities, keep in mind we’re talking about S corporations, entities that do business as partnerships, or they may be owned by a trust or something like that. Those types of entities don’t pay tax, per se, but the owners do, such as they’re high net-worth individuals, or business owners, and that’s where the tax is paid, so that’s the first thing to kind of keep in mind. The tax law came out with a provision trying to get similar results under tax reform that the regular corporations got. So, for example, if you recall, tax reform gave regular corporations a 21% tax break. Individuals doing business as a flow-through entity said, “Hey, what about me? Where’s my tax break?”

Jen: Like, “Hi, I’m here.”

Frank: Exactly. And so, they came up with a deduction called a Qualified Business Deduction under a provision called Section 199A. That provides a 20% deduction that flows through to individuals. The thing to keep in mind if those flow-through entities are doing business internationally, let’s say, through the extension of their U.S. entity, such as in the form of a branch or something like that, that income is not subject to a special tax rate. It would be taxed at 37% tax rate, as individuals are all taxed at that rate. There are some implications that that income would not get favorable treatment any different—in other words, the 20% deduction that I talked about would not apply to that foreign income.

Jen: Okay, so you’ve really got to pay attention to that. Now, we’ve talked about how this impacts middle market businesses, but what about small businesses and the tax reform and that kind of thing?

Frank: That’s a good question, because a lot of times people think the tax reform affected just big business, and only big business has to worry about the changes in tax reform. One of the things is that because small businesses kind of segue on the last question you asked me, and the last discussion we talked about, is that small businesses typically do business as a flow-through entity. The things to keep in mind is the special 20% deduction to mirror the tax break that corporations got does not apply to foreign income.

So, the question becomes, “Should I restructure for doing business internationally that’s a different structure than what I have for doing business domestically, or within the United States?” The answer we found is that it all depends on where you want that foreign income to end up. Where do you want the cash? And that’s the fundamental questions small business owners need to be asking. Not to automatically be saying, “We need to restructure,” but where is the cash going to end up at the end of the day?

Jen: And what are your ultimate business goals and how do you want to grow and that kind of thing.

Frank: That’s right, because you want to optimize that.

Jen: Perfect. Well, we’ll get you back to talk some more about that.

Frank: That’d be great. Thank you.

Jen: Thank you. To learn more about other international topics, visit pkftexas.com/internationaldesk. This has been another Thought Leader Production brought to you by PKF Texas The Entrepreneur’s Playbook. Tune in next week for another chapter.