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The biggest concern for U.S. multinationals regarding the 2017 tax act is a new tax on global intangible low-taxed income (GILTI), a General Electric Co. executive said.
Most multinationals think the tax law is a step in the right direction compared with the old tax system, said Patrick Brown, vice president of tax for GE Power, GE Energy Connections, and GE Renewable Energy. However, “there are elements of tax reform that we don’t feel as a community get to what probably Congress intended, nor do they get to creating the right incentives across the economy”—meaning those that encourage companies to invest and grow in the U.S., Brown said July 10 at an event in Washington sponsored by Emerson Electric Co.
An example at the top of the list of issues for U.S. multinationals is the new international provision requiring U.S. shareholders owning 10 percent or more of the stock of a controlled foreign corporation—by vote or value—to pay tax on global intangible low-taxed income. GILTI is generally the U.S. shareholder’s net income from all such corporations, less a 10 percent deemed return on tangible property such as patents or copyright.
If GILTI isn’t already taxed abroad at a rate of at least 13.125 percent, it faces a 10.5 percent minimum tax in the U.S.
The provision aims to impose a minimum tax where a company wouldn’t owe additional U.S. tax if it met the 13.125 percent threshold, said Brown, a former Treasury Department official. But “mechanically, that’s not how the provision works.”
That’s because instead of creating a separate section of the Internal Revenue Code, Congress wrapped GILTI into the existing architecture for foreign tax credits, he said. Under the foreign tax credit regime, there are provisions, such as expense allocation rules, that limit the amount of credit a company can claim.
Under the FTC rules, a company has to go through a series of complex calculations to determine how much credit it’s allowed to take, “which actually may be significantly less than the foreign taxes” it pays, Brown said. As a result of that, a lot of companies are finding “they’re paying more than 13.125 percent in foreign tax, but they’re nevertheless facing a significant tax liability to the U.S. government under the GILTI regime,” he said.
This result seems contrary to how Congress intended the GILTI provision to operate based on the conference report for the 2017 tax act (Pub. L. No. 115-97), Brown said. It’s unclear whether Treasury has the authority to alleviate the burden of the GILTI provision on U.S. multinationals via regulations, or if the issue will require a legislative fix from Congress, he said.
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