We are nearly two months into the new tax regime, and we in the tax community are still wrapping our heads around the complex and far-reaching new provisions. The Republicans’ goal of a simplified, territorial system was clearly lost on the drafters, as we now live under an even more complicated set of rules that may be more akin to a pure worldwide tax system, largely thanks to one provision: Global Intangible Low-Taxed Income, or GILTI. Alvarez & Marsal, Taxand USA, reports.
U.S. taxpayers are now subject to current tax on their share of their foreign subsidiaries’ GILTI. GILTI includes any income over and above a 10 percent return on the tax basis of tangible assets, subject to certain exceptions (earnings generating other forms of Subpart F, effectively connected income, etc.). Corporate shareholders of foreign corporations generating GILTI are generally entitled to a 50 percent deduction against such income, lowering the effective rate of tax from 21 percent to 10.5 percent. Further, those shareholders are able to recognise a foreign tax credit for 80 percent of local taxes paid on GILTI income (subject to the foreign tax credit limitation). Therefore, so long as the foreign structure’s average effective tax rate is 13.125 percent or more, the tax associated with GILTI should be fully offset by foreign tax credits. Or so that was the idea. The problem is that most companies will not be able to fully offset the tax, and many will have significant exposures, primarily due to the legacy foreign tax credit limitation rules. In this first instalment in our TAW series on GILTI, we discuss how the expense allocation rules within the foreign tax credit limitations can result in GILTI exposure to many unsuspecting companies.
Discover more: A GILTI trap waiting to spring
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As companies continue to analyse the impact of Tax Reform on their structures, they should be alert for traps for the unwary. GILTI, often advertised as a minimum tax on foreign earnings, could cause cash tax impacts to companies regardless of their foreign tax rates, as a result of expense allocations that cost $0.21 in additional tax for every dollar of allocation.
