Strategizing International Tax Best Practices – by Keith Brockman

Posts tagged ‘global low-taxed intangible income’

US GILTI; a confused state

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.

GILTI: Shareholder test

The global intangible low-taxed income (GILTI) provision in the US Tax Cuts and Jobs Act (Tax Act) was legislated based on the principal of each relevant US, or relevant, shareholder.  This contrasts with the US consolidated group approach for the Sec. 965 repatriation tax, thus will/should both be consistent?

Currently, a planning review of the US/relevant shareholders may be dictated based on the types of controlled foreign corporation (CFCs) in that particular shareholder chain.  However, there has been acknowledgment of this mismatch for ownership tests, and a possibility that the GILTI provisions may also conform to a US consolidated group approach.

Pending further guidance, it may be prudent to calculate the GILTI effect on both approaches and take advantage of the 1-year SEC measurement period for public companies for more definitive rules.  However, US public MNE’s should review the potential guidance to be issued for Q1, with clarity as to whether a reasonable amount will be calculated as part of the Annual ETR process, or omitted therefrom.

Based on the complexity of this provision, additional challenges are present if the current shareholder chain approach is not changed.  Notwithstanding this aspect, there are many complexities involved with this calculation to derive a reasonable amount or a number which is ultimately final and certain.

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