Agility and planning are king in the world of taxes. As 2024 wraps up and a number of tax provisions potentially sunset in 2025, it is critical that tax teams are thinking ahead and checking the boxes for a successful tax year in 2025 and beyond.
Into the sunset
While the Tax Cuts and Jobs Act permanently reduced the corporate tax rate from 35% to 21%, a number of provisions were temporary and may sunset in 2025. The most notable changes impacting U.S. multinationals include:
- A decrease in the Foreign-Derived Intangible Income deduction from 37.5% to 21.875%;
- A decrease in the Section 250 deduction against a U.S. multinational's Global Intangible Low-Taxed Income from 50% to 37.5%; and,
- An increase in the Base Erosion and Anti-Abuse Tax rate from 10% to 12.5%.
Based on the sunsetting provisions, U.S. multinationals are expected to pay more U.S. taxes on their foreign activities. For example, a U.S. corporation with foreign sales is currently eligible for an FDII deduction of up to 37.5%, which reduces its effective tax rate on the export income from 21% to 13.125%. In 2026, assuming Congress does not extend the current incentive, the decrease in deduction increases the effective tax rate to 16.405%.
Similarly, if a U.S. multinational holds a 10% or more ownership interest in a controlled foreign corporation, it must currently include its portion of the income as GILTI on its U.S. return. With the current Section 250 deduction on GILTI, the effective tax rate can be as low as 10.5%. However, with the decrease in deduction in 2026, GILTI will be taxed at 13.125%.
While it is currently uncertain whether the expiring provisions will be extended, tax departments should consider these changes in their forecasts, as the current incentives will sail into the sunset without action from Congress.
Transfer pricing enforcement: The IRS brings the hammer
On Oct. 20, 2023, the Internal Revenue Service
In addition, the IRS is taking swift action to close gaps created by decades of budget cuts. Large foreign-owned and U.S.-owned corporations should be prepared for a more aggressive approach from the IRS and work with industry experts who understand the ins and outs of audit-ready compliance deliverables. Furthermore, the IRS has noted that some foreign-owned companies are reporting losses or exceedingly low margins, which can be driven by transfer pricing. Foreign-owned distributors should be prepared for audits and implement internal procedures to monitor intercompany pricing.
Global minimum tax (yes, we are still talking about it)
While you're likely tired of discussing the
As countries prepare to implement these concepts in their local tax regulations, tax professionals must navigate the complexities of compliance, including determining effective tax rates and understanding how the global minimum tax interacts with local tax laws. The adoption of a global minimum tax could reshape corporate tax planning strategies, requiring tax advisors to rethink approaches to cross-border transactions, transfer pricing and risk assessment—while staying attuned to ongoing legislative developments and the implications for their clients' international operations.
Using technology to ensure accurate data, identify planning opportunities and maintain compliance are a few strategies that can set your company up for success. Continually assessing and monitoring these complex, evolving tax concepts will be critical as companies move into 2025.
The IRS GLAM on financial transactions
On December 29, 2023, the IRS issued General Legal Advice Memorandum AM 2023-008, titled "Effect of Group Membership on Financial Transactions under Section 482 and Treas. Reg §1.482-2(a)."
This GLAM provides nonbinding legal guidance with respect to the effects of group membership on related party financial transactions under Section 482. It aligns with the IRS's position in various controversies in this area and highlights the importance of obtaining outside technical advice.
Transfer pricing and sustainability go hand in hand
When it comes to sustainability and transfer pricing, there is no one-size-fits-all approach. Partnering with an experienced transfer pricing team that can advise on models reflecting sustainable practices, such as eco-friendly production processes or ethically sourced materials, is a valuable way to build a company's sustainability hub, or microbusiness, within an organization.
Furthermore, regulatory developments in transfer pricing are increasingly emphasizing transparency and accountability. This shift encourages companies to disclose more information about their environmental impact and consider how their pricing strategies affect local communities and ecosystems. As a result, businesses that proactively integrate sustainability into their transfer pricing practices may enhance their reputation, mitigate risks and create long-term value, while appealing to a growing base of environmentally conscious consumers and investors.
As your tax team prepares for 2025, it's essential to plan for the challenges and opportunities presented by the elements above. Establishing strategies that meet regulatory requirements as well as your organization's needs will serve your team well as it navigates the international tax landscape.
(This article was updated on Jan. 2, 2025.)
