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Taxpayers may soon see IRS proposed regulations for a new minimum tax on U.S. shareholders of foreign corporations that are majority controlled by U.S. persons now that the Office of Management and Budget has finished its review.
The tax, included in the 2017 tax overhaul (Pub. L. No. 115-97), is one of several recent international changes aimed at preventing multinationals from dodging U.S. tax.
Under new tax code Section 951A, U.S. shareholders owning 10 percent or more of the stock of a controlled foreign corporation—by vote or value—are required to pay tax on their global intangible low-taxed income. GILTI is income in excess of 10 percent of tangible depreciable assets. If GILTI isn’t already taxed at a certain rate elsewhere, it will face a minimum tax imposed by the U.S.
The OMB’s Office of Information and Regulatory Affairs, which was granted more authority to oversee tax regulations in an April agreement with the Treasury Department, said on its website that it completed its review of the GILTI regulations (REG-104390-18, RIN:1545-BO54) on Sept. 7—11 days after receiving them, excluding holidays and weekends. Now that the review is complete, the regulations head back to Treasury, which will send them to the Federal Register for publication. That process could take several days.
“This is a significant development in the ongoing saga that is tax reform,” said Cory Perry, international tax senior manager in the Washington National Tax Office at Grant Thornton LLP. “The GILTI rules were one of the most controversial laws to come out of” the 2017 tax overhaul, “and taxpayers and practitioners are eagerly awaiting more guidance,” he told Bloomberg Tax in an email.
According to the OIRA website, the GILTI regulations weren’t designated for the 10-day expedited review afforded to some rules implementing the tax law. Even so, the office wasted no time in turning them around well before the 45 days it had to complete its assessment.
OIRA took about the same amount of time to review the GILTI rules as it did to review rules implementing the tax law’s one-time tax under Section 965 on income accumulated overseas since 1986—known as the transition tax or repatriation tax, said Michael DiFronzo, a principal in PricewaterhouseCoopers LLP’s International Tax Services practice in Washington. “I think we can expect that most reform related guidance will get similar expedited treatment given the broad impact of the rules and the need to publish guidance,” he said in an email.
Perry said taxpayers are looking for the GILTI regulations to provide guidance and clarification in a number of areas, ranging from the treatment of consolidated groups to expense allocation and apportionment when computing the foreign tax credit limitation.
The expense allocation issue has been an especially hot topic.
Companies are supposed to be able to avoid the GILTI tax if they pay rates in foreign countries of at least 13.125 percent, or 16.4 percent after 2025. But a corporation can end up owing tax on GILTI even though its foreign effective tax rate is above the 13.125 percent level because of how GILTI interacts with existing expense allocation rules, which can limit the amount of foreign tax credits a company can claim to offset taxable foreign source income.
“It will be interesting to see how far Treasury goes with the regulations,” Perry said. “If the Section 965 proposed regulations were any indication, they will not stray far from legislative history and clear grants of authority.”
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