Key Changes for Individuals:
The new tax law changes will not affect the 2017 personal income tax return filings. The new laws go in effect for the 2018 personal income tax return filings.
For individuals, there are still seven tax brackets but the rates have changed. The new rates for the brackets are: 10%, 12%, 22%, 24%, 32%, 35% and 37%. The following table compares the individual tax rates applicable for 2017 and prior (“Current Law”) to the individual tax rates under the new law (“Conference Agreement”):
Many changes have occurred with respect to deductions. The most significant being the doubling of the standard deduction, the elimination of personal exemptions, a cap on certain itemized deductions, and changes to the estate tax exemptions.
Key Changes for Corporations:
It is important to note that most of the tax reform changes under the Tax Cuts and Jobs Act of 2017 were to the corporate taxation system that is currently in place. The way that multinational companies, like Xcerra, are taxed is about to change. The corporate tax rate has been cut from 35% to 21% starting as of 1/1/18 and the alternative minimum tax (AMT) for corporations has been eliminated.
The U.S. is also switching to a territorial system of taxation, which is supposed to mean that companies won’t owe federal taxes on income they make offshore. As such, companies will be able to repatriate future foreign source earnings without attracting U.S. tax by providing for a 100% dividend received deduction for dividends paid after 12/31/17. In light of this change, companies will be required to pay a one-time low tax rate (15.5% or 8%) on their accumulated overseas profits called the transition tax. Additionally, there is a new category of foreign income, Global Intangible Low-Taxed Income (GILTI), with an effective tax rate of 10.5%. There is also a 13.125% tax on certain directly earned foreign income, Foreign Derived Intangible Income (FDII) which is intended to provide a tax incentive to U.S. companies to earn income from sale, lease or license of goods and services abroad in the form of a deduction for FDII. There is also a new minimum tax, Base Erosion Anti-Abuse Tax (BEAT), which is meant to prevent certain deductions of specified payments to a foreign related person such as royalty payments.
In light of these changes, the immediate impact to most U.S. multinational companies, including Xcerra, is the one-time mandatory transition tax to be imposed on post 1986 accumulated and unremitted foreign earnings earned through December 31, 2017. The transition tax will amount to hundreds of billions of dollars in tax on profits multinationals made overseas in the last 30 years. The intent of the transition tax is to no longer allow U.S. companies to avoid paying tax on past international profits by keeping money outside the United States so that companies must pay tax whether they bring cash back to the U.S. or not. The good news is that we are currently estimating that Xcerra will not be subject to this transition tax.