The agency issued guidance Wednesday that would in some ways allow businesses to minimise the hit when calculating how much they owe for the new levy on their Gilti, or global intangible low-tax income.
Companies only have to allocate half of certain domestic expenses to foreign subsidiaries, which effectively makes the credits they get for paying taxes in other countries more valuable and lowers their Gilti liabilities, according to the regulations.
The IRS also gave companies some leeway to take advantage of their unused foreign tax credits after they had concerns that the law wouldn’t do enough to account for the taxes corporations pay to foreign governments.
Still, business groups, including the US Chamber of Commerce, had argued that companies shouldn’t have to allocate any expenses in order to reduce their tax bills.
“The IRS met the taxpayer halfway,” said Libin Zhang, a partner at law firm Roberts & Holland.
Corporate America had been anxiously awaiting guidance on how hard it would be hit by the Gilti tax.
The IRS issued more than 150 pages of regulations in September about which assets are subject to the tax and some details on how to calculate it, but the most critical aspect – to what extent multinational companies can use foreign tax credits and expenses to offset the levy – remained unanswered.
Expense allocation
The Gilti levy effectively sets a 10.5% rate to apply to a company’s “excess” profits earned overseas through some of its foreign subsidiaries.
It’s intended to apply only in cases where a company’s cumulative overseas tax bill is below 13.125%, or 16.4% after 2025.
Companies were confused by the tax in part because of new limits established for foreign tax credits that they had used to reduce their US taxes.
But at the same time, the old conventions of how companies were directed to divvy up their expenses between domestic companies and foreign subsidiaries were still in place.
When calculating Gilti, a company has to allocate some of its domestic expenses for administration, research, and interest payments to the foreign corporations through which it does business.
Those expenses end up shrinking the foreign income pile on which the company owes US tax, in turn diminishing the value of credits for foreign taxes they’ve already paid on those units. The result for companies with large expenses can be a higher Gilti bill.
The reporting burden – what taxpayers will pay accountants and lawyers to comply with the proposed rules – is estimated to total US$52 billion (RM218 billion), according to the agency.
‘50% off coupon’
President Donald Trump’s tax overhaul last year slashed the corporate rate to 21% from 35%, and shifted the US to a system of taxing its companies on their domestic profits only.
Those changes required guardrails – like the tax on Gilti – to ensure multinationals pay at least something on their future overseas profits.
Critics of the Gilti levy say it increases the incentives for companies to shift equipment, machinery and factories offshore since those assets can offset some of the income they earn from intellectual property, and ultimately lower their Gilti liabilities.
Senator Sherrod Brown, an Ohio Democrat, said the Gilti tax prodded General Motors Co to move operations abroad.
The automaker announced this week it would cease production at five production facilities, including one in his state.
Companies get a “50% off coupon” on taxes if they move out of the US, Brown said in an interview with Bloomberg Television Wednesday, referring to how Gilti taxes companies at 10.5% – half of the 21% US corporate rate – if they move to a country with no taxes.
Quarterly estimates
For most US-based multinational companies, releasing the Gilti regulations now was crucial since firms can be hit with a penalty if they pay too little in their quarterly tax instalments to the IRS.
Corporations have already made three of four estimated payments this year. The next portion is due Dec 15.
“Companies are going to scramble to learn this and then go back to look at their quarterly estimates to see how far off they were,” said Nicolaus McBee, a senior director specialising in international tax at consulting firm Alvarez & Marsal.
Even with most of the Gilti questions answered, companies will still be trying to figure out how they fare under the new international tax regime.
Treasury officials have said they plan to issue proposed regulations by year’s end on the other two major international provisions in the tax overhaul – a tax break encouraging companies to export US-made goods, known as the foreign derived intangible income deduction, and the BEAT, or base-erosion and anti-abuse tax, on payments corporations make to foreign subsidiaries.
The BEAT rules are undergoing final review. Those will largely affect foreign companies operating in the US, but could also generate large tax liabilities for some US companies.
Tax advisers have been modelling the effects of the new law for their multinational clients, but because many of the provisions are interconnected, and implementation may be governed by old tax regulations still on the books, they’re only able to estimate the amount of tax due.