Corporate income tax
US taxation of income earned by non-US persons depends on whether the income has a nexus with the United States and the level and extent of the non-US person's presence in the United States.
Prior to the enactment of US tax reform legislation on 22 December 2017 (P.L. 115-97), a non-US corporation engaged in a US trade or business was taxed at a 35% US corporate tax rate on income from US sources effectively connected with that business (ECI). However, P.L. 115-97 significantly revised the federal tax regime. P.L. 115-97 permanently reduced the 35% CIT rate on ECI to a 21% flat rate for tax years beginning after 31 December 2017. Certain US-source income (e.g. interest, dividends, and royalties) not effectively connected with a non-US corporation’s business continues to be taxed on a gross basis at 30%.
Alternative minimum tax (AMT)
AMT previously was imposed on corporations other than S corporations and small C corporations (generally those with three-year average annual gross receipts not exceeding USD 7.5 million). The tax was 20% of alternative minimum taxable income (AMTI) in excess of a USD 40,000 exemption amount (subject to a phase-out). AMTI is computed by adjusting the corporation's regular taxable income by specified adjustments and 'tax preference' items. Tax preference or adjustment items could arise, for example, if a corporation has substantial accelerated depreciation, percentage depletion, intangible drilling costs, or non-taxable income.
P.L. 115-97 repeals the corporate AMT effective for tax years beginning after 31 December 2017, and provides a mechanism for prior-year corporate AMT credits to be refunded by the end of 2021.
Corporations with 100 or fewer shareholders, none of whom may be corporations, that meet certain other requirements may elect to be taxed under Subchapter S of the Internal Revenue Code (IRC or 'the Code') and are thus known as S corporations. S corporations are taxed in a manner similar, but not identical, to partnerships (i.e. all tax items [e.g. income, deductions] flow through to the owners of the entity). Thus, S corporations generally are not subject to US federal income tax.
Gross transportation income taxes
Foreign corporations and non-resident alien individuals are subject to a yearly 4% tax on their US-source gross transportation income (USSGTI) that is not effectively connected with a US trade or business. Transportation income is any income derived from, or in connection with, (i) the use (or hiring or leasing) of any vessel or aircraft, or (ii) the performance of services directly related to the use of any vessel or aircraft.
Base erosion and anti-abuse tax (BEAT)
P.L. 115-97 creates a new US federal tax called the ‘base erosion and anti-avoidance tax,’ or BEAT. P.L. 115-97 targets US tax-base erosion by imposing an additional corporate tax liability on corporations (other than RICs, REITs, or S corporations) that, together with their affiliates, have average annual gross receipts for the three-year period ending with the preceding tax year of at least USD 500 million and that make certain base-eroding payments to related foreign persons during the tax year of 3% (2% for certain banks and securities dealers) or more of all their deductible expenses apart from certain exceptions. The most notable of these exceptions are the net operating loss (NOL) deduction, the new dividends received deduction for foreign-source dividends, the new deduction for foreign-derived intangible income (FDII) and the deduction relating to the new category of global intangible low-taxed income (GILTI), qualified derivative payments defined in the provision, and certain payments for services.
The BEAT is imposed to the extent that 10% (5% for the 2018 calendar year) of the taxpayer’s ‘modified taxable income’ ─ generally, US taxable income determined without regard to any base-eroding tax benefit or the base-erosion percentage of the NOL deduction ─ exceeds the taxpayer’s regular tax liability net of most tax credits. (The above percentages are changed to 11% and 6%, respectively, for certain banks and securities dealers.)
A base-eroding payment generally is any amount paid or accrued by the taxpayer to a related foreign person that is deductible for acquiring property subject to depreciation or amortisation, or for reinsurance payments. The category also includes certain payments to ‘expatriated entities’ under the anti-inversion rules of Section 7874.
The provision is effective for base-erosion payments paid or accrued in tax years beginning after 31 December 2017. For tax years beginning after 31 December 2025, the percentage of modified taxable income that is compared against the regular tax liability increases to 12.5% (13.5% for certain banks and securities dealers) and allows all credits to be applied in determining the US corporation’s regular tax liability. Special rules apply for banks, insurance companies and ‘expatriated entities.’
Mandatory deemed repatriation 'toll charge'
P.L. 115-97 uses the mechanics under subpart F to impose a one-time ‘toll charge’ on the undistributed, non-previously taxed post-1986 foreign E&P of certain US-owned foreign corporations as part of the transition to a new territorial regime. The toll charge, found in revised Section 965, is reduced by a deduction computed in a manner that ensures a 15.5% effective tax rate on earnings represented by ‘cash’ and an 8% effective tax rate to the extent the earnings exceed the cash position.
Local income taxes
CIT rates vary from state to state and generally range from 1% to 12% (although some states impose no income tax). The most common taxable base is federal taxable income, which is modified by state provisions and generally is allocated to a state on the basis of a three-factor formula: tangible assets and rental expense, sales and other receipts, and payroll. State and municipal taxes are deductible expenses for federal income tax purposes.