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The new tax law’s provisions on intangibles are proving to be among the most difficult to interpret of the code’s new anti-base erosion measures, said Calum Dewar, co-leader, U.S. integrated global structuring team at PwC.
Understanding global intangible low-taxed income (GILTI) is “generating, I think, most of the challenges, debates, arguments, close to fistfights over how you actually interpret the rules and how they actually work,” Dewar said, to laughs from the audience, at a Feb. 2 conference sponsored by the International Tax Policy Forum and Georgetown Law’s Institute of International Economic Law.
The tax legislation has “provided a framework, but not necessarily enough clarity within the statute” to understand how to apply the old and new rules to that basket of income, he added.
GILTI seeks to entice global companies to keep income in the U.S., while deterring multinationals from housing income offshore. The provision applies to both U.S. and foreign companies’ foreign high returns.
In particular, it isn’t clear how treating GILTI like Subpart F income should interact with the foreign tax credit system, Dewar said.
“Most of the challenges we’re facing in practice in calculating this is, how do you deal with that new basket of income, defined as a basket for foreign tax credit purposes, how do you deal with that and the interaction of expense allocation?” he said.
The tax code aims to encourage multinationals to repatriate intellectual property and other intangible assets through a tax on global intangible low-taxed income (GILTI), and a deduction for foreign-derived intangible income (FDII).
These provisions redefine “intangible”: Where the tax code used to define intangible property through a list of specific types of assets, including intellectual property like patents, the new definition encompasses anything not strictly considered a tangible asset. That is because the provisions assign a standard 10 percent return on tangible assets at a tax threshold above which anti-deferral measures take effect.
The panel’s other speaker, HM Treasury Director of Business and International Tax Mike Williams, said the U.K.’s more territorial system means that the U.K.’s controlled foreign company (CFC) rules focus on preventing diversion of U.K. profits.
“Crucially, in comparison with the GILTI provision in the U.S., there’s no differential between normal and super profits outside the U.K.,” Williams said, because in a “fairly pure territorial system” there would be no reason to do that.
Dewar and Williams also compared the U.S. and U.K. approaches to intellectual property (IP) ownership.
The U.K. has a BEPS-compliant patent box that ignores whether sales come from U.K. customers, Williams said. The U.S.’s new foreign-derived intangible income rules, by comparison, is a deduction that, like GILTI, is based on a calculation of returns from tangible assets.
Because the important number is foreign profits, not sales, Dewar said, the FDII deduction is often smaller than companies expected.
“For some companies it’s a huge benefit,” he said. “For an awful lot of companies, we’re finding it really doesn’t move the needle very much in overall terms.”
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