Changes to the N.Y. international tax system, Glens Falls New York

Some of the most important changes to the New York’ international tax system as part of the tax reform influence the rules governing investments by New York businesses abroad. These changes are particularly important for Canadian businesses with certain investors residing in the New York  and for Canadian businesses that have NY subsidiaries that own operations, assets or subsidiaries abroad. These changes could also have unintended consequences for Canadian companies with subsidiaries in the New York, as described below.

Change in definition of SEC: number of SECs may increase

The policy of implicit ownership under the regime applicable to foreign controlled companies (SEC) have been modified, with effect from the last taxation year opened before 2018, in order to eliminate the rule which, before that, disallowed the attribution to a person in the New York subject to a lower tax rate of shares owned by a foreign person. The application of downward attribution rules) could have unintended consequences. This could, for instance, result in non-NY subsidiaries of a non-NY multinational being treated as foreign companies controlled because of the existence of NY subsidiaries in the group, even if the non-NY subsidiaries do not are not controlled by members of the same NY group and even if members of the same NY group do not have a direct interest in non-NY subsidiaries. If the New York subsidiaries have a direct interest in the non-New York subsidiaries (whether a minority interest or negligible), global intangible low-taxed income), the one-time repatriation tax discussed above, as well as the existing Subpart F tax regime. These alterations could also raise concerns about the structure of multiple SECs and increase the disclosure requirements fr UoS subsidiaries that are part of a multinational. Additionally, the meaning of the term “New York shareholder” has been changed to include shareholders of the New York who own 10% of the voting securities of a foreign corporation or 10% of the value of all of its securities (different from the old definition, which included only 10% of securities with voting rights). This change, combined with the new attribution rule described above, could have a important impact on people in the New York who invest in Canadian companies and multinationals.

Adoption of a “semi” – territorial tax system

As part of the attempt to create a territorial regime that has been discussed so much, new paragraph 245A of the Code stipulates that a national corporation that holds at least 10% of the voting securities of an eligible foreign corporation, or 10% of the value of all of the securities of that corporation, and that is entitled to a dividend of 100%, can deduct the eligible dividends paid to it by this foreign company. This so-called participation exemption system has restrictions. It is applicable to only to the portion of dividends from foreign sources and to shareholders incorporated in the New York and it requires a holding period of at least 365 days over a period of 731 days overlapping the date ex-dividend. Hybrid dividends, for which the foreign company benefits from a deduction in a foreign territory, are not deductible. To estimate the loss (but not the gain) possibly suffered at the time of the subsequent sale of the shares of the foreign subsidiary, the participation of the New York parent company in this share is reduced by the amount of any dividend eligible for the participation exemption. Finally, unlike many European participation exemption systems, paragraph 245A does not commonly make provision for an exemption in respect of proceeds from the direct or indirect sale of a foreign subsidiary.

Single repatriation tax

All through the transition to the “semi” – territorial tax system described above, which allows repatriation tax-free of distributed foreign profits ( distributed future foreign profits ), a single repatriation tax will apply to gains made abroad and deferred previously ( deferred offshore earnings ) by New York taxpayers. Under new section 965, shareholders of the New York, including unincorporated shareholders, holding 10% of the securities of ” specified foreign corporations” are required to include in their income for one year that includes the last taxation year of this foreign corporation opened before 2018 (that is, for U.S. shareholders and foreign corporations whose fiscal year is the calendar year , inclusion falls in 2017) the cumulative deferred earnings of these foreign companies as of November 2, 2017 or December 31, 2017, whichever is greater. “Specified foreign corporations” designate SECs and foreign stock companies in which at least one incorporated shareholder own 10% of their securities. For incorporated shareholders holding 10% of the securities of a foreign SEC or corporation, this deemed repatriation tax will apply at a rate of 15.5% to the portion of the gains that constitutes cash, while the remainder will be taxed at a reduced rate of 8% Various cumulating rules apply to affiliated New York shareholders and to shareholders who are New York shareholders in respect of corporations multiple foreign, including rules allowing deficits to offset cumulative profits. The tax due under this provision can be paid in the form of eight annual payments, with payments increasing until the eighth year.

Low Tax Global Income from Intangibles – A New Type of “Shadow Income”

The proposals for “global intangible low-taxed income” (GILTI) are among the most attractive and destabilizing provisions of the new legislation passed in the United States. In fact, the new paragraph 951A of the Code essentially confines the income earned by a “controlled foreign company” (a SEC, in the sense given to this term in article 957 of the Code) which exceeds an “ordinary” yield of 10% on tangible property and assumes that this “extraordinary” income is attributable to intangible property (whether or not this is actually the case). This excess income, called “low-tax global income from intangibles” (global intangible low-taxed income or GILTI) is treated, essentially, as if it constituted a new category of income covered by subpart F and is deemed to be immediately distributed to shareholders of the New York holding a 10% interest. Although the operation of these provisions is complex, the inclusion of low-tax global intangible income from an annual shareholder in the New York with a 10% ownership interest could be calculated using the following formula: GILTI = “income based on net income” (net income-tested) – “income based on the deemed net profits of tangible property” (net-income deemed tangible return)

According to which:

An New York corporation that has a GILTI is at liberty to claim a deduction (under section 250 of the Code,international tax system ) that reduces the effective NY tax rate applied to GILTI. From 2018 to 2025, it will be possible to deduct 50% of GILTI, which is equal to an effective tax rate in the New York of 10.5%. Starting in 2026, the deduction under GILTI will fall to 37.5% (for an effective tax rate in the New York of 13.125%, international tax system). It is important to note that only joint stock companies benefit from the deduction under GILTI.