What should businesses and individuals with cross-border transactions know as they prepare for year-end tax planning? 

GHJ’s Tax Practice has developed a comprehensive 2024 Year-End Tax Guide to help businesses and individuals navigate key tax considerations before closing out the year. Each installment in this series addresses critical topics that will help taxpayers plan proactively.

With potential changes to U.S. and global tax policies on the horizon, proactive planning is essential. Learn what key international tax planning strategies should be focused on to maximize tax efficiency and prepare for future challenges for 2024 taxes.

 

FOREIGN TAX CREDIT PLANNING

Section 904 limits the utilization of foreign tax credits to the amount of U.S. taxes paid on the income subject to foreign tax. Any unused foreign tax credits are carried back one year and carried forward 10 years. Credits can only offset U.S. tax on foreign source income within specific categories.

To the extent that foreign source income is offset by U.S.-source losses or that U.S.-source income is offset by foreign losses, Overall Foreign Loss / Overall Domestic Loss Accounts must be maintained. Planning options, including transfer pricing, may be utilized to structure foreign and domestic source income efficiently and maximize the utilization of available foreign tax credits.

RECOMMENDED ACTIONS:

  • Analyze foreign source income within each category, and determine whether the amounts are sourced and categorized correctly. 
  • Consider transfer pricing planning opportunities to increase foreign source income in the relevant categories.

 

REPATRIATION STRATEGIES

A multinational taxpayer operating in different countries may have concerns about funding foreign subsidiaries and repatriating cash accumulated abroad.

Thoughtful planning of entity funding, as well as cleaning up prior intercompany balances accumulated over time, can ensure that cash is deployed efficiently where needed and intercompany flows are efficient.

Transfer pricing — including royalty and IP planning as well as a careful analysis of functions, assets and talent employed within the company structure — can help create a structure that: 

  1. Minimizes the accumulation of cash from operating income abroad
  2. Reduces the need for future dividends

A thorough review of the countries and tax treaties involved can further inform the development of an efficient intercompany transaction and funding framework.

 

INDIVIDUALS WITH CROSS-BORDER TRANSACTIONS OR CHANGES IN TAX RESIDENCY (PRE-IMMIGRATION PLANNING)

Once becoming a U.S. tax resident, a foreign national will be subject to tax on their worldwide income. This encompasses earned income as well as investment income, including capital gains. If assets with built-in gains at the time of immigration are sold in later years, the entire gain will be taxable in the U.S., including the portion that was built up while the foreign national was a non-resident for U.S. tax purposes.

Inbound foreign nationals with substantial foreign investments are subjecting their worldwide income to U.S. taxation when becoming a U.S. tax resident. Planning strategies are available to ensure that the future U.S. tax burden on unrealized gains in investment assets is minimized to the extent of built-in gains at the time of becoming a U.S. resident.

A detailed review of cross-border transaction flows and income streams together with a careful Foreign Tax Treaty analysis can help structure investments in a tax-efficient manner.

Residency planning should be carefully conducted, and individuals should consider local residency rules and available tax treaty benefits.

To learn more about how GHJ partners with multinational businesses, please contact GHJ’s International Tax Practice.