Strategizing Multinational Tax Risks

As multinationals commence to calculate the US Tax Act’s provisions for Global Intangible Low-Taxed Income (GILTI), the literal language of the law and the Conference Report present a myriad of confusion.  The name of this provision is also a misnomer, as the income to be measured is not limited to that sourced from intangibles.

The intent of the provision, as explained in the Conference Report, is to provide a 10.5% (for 2018) tax on low-taxed earnings of foreign affiliates, as reduced by 10% of its tangible personal property measured by US tax principles.  This would be accomplished with an 80% foreign tax credit, thus legal entities in countries with a tax rate not exceeding 13.125% would not be subject to this additional minimum tax on foreign earnings.

Due to the speed of enactment, the technical details of the enacted law does not mirror this intent.  As a result, different US-based multinationals may be taking different approaches for measurement, ranging from the Conference Report intent to the enacted law which may not allow for any foreign tax credits based on the separate foreign basket approach coupled with uncertainty for the allocation of US expenses to such income.

This confused state will also present difficulties in measuring different aspects of this provision for different companies, depending on their interpretation and calculation.

Hopefully, this confusion will be clarified to align the law with the intent of the Conference Report.  Without such guidance, this provision will present undue costs, complexity and subjective interpretation going forward.