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IRS Regulations Would Ease Complexity of Calculating “GILTI” Offshore Profit Tax

Posted by Allan Peiser, CPA on Oct 12, 2018 8:37:19 AM

The Tax Cuts and Jobs Act of 2017 included several international tax reform provisions, one of which introduced a tax on a new category of income called global intangible low-taxed income, better known as “GILTI.” Recognizing the need to provide some relief to international taxpayers, the IRS has proposed regulations to help ease the burden of the new tax.

Background

Under former law, U.S. shareholders were not required to recognize income earned by a foreign corporation until the income was distributed to the U.S. shareholder as a dividend. Now there is a requirement for certain multinational U.S. corporations to recognize – and pay tax – on a percentage of previously deferred foreign earnings. GILTI income only applies to foreign corporations owned 10 percent or more (directly or indirectly) by a U.S. shareholder, or a controlled foreign corporation.

The new provisions are meant to motivate U.S. companies to hold their intellectual properties in the U.S. rather than low-tax countries.

IRS Clarifications Allow for Consolidation

The GILTI calculation is quite complicated. The IRS-proposed rules provide guidance to affected taxpayers on how to calculate GILTI tax, which effectively sets a 10.5 percent rate to apply to a company’s excess profits earned overseas through foreign subsidiaries.

The new rules would allow large multinational corporations to consolidate and calculate the tax one time for all of their entities instead of numerous calculations for individual subsidiaries. The consolidation of returns was the major issue looming once GILTI was included in new tax reform. With the ability to pay the tax on a consolidated basis, many multinational companies will be able to take advantage of foreign tax credits to offset the GILTI tax.

According to U.S. Treasury Secretary Steven Mnuchin, the rules also close loopholes that previously allowed for “inappropriate international tax planning and shifting profits overseas.”

What’s Ahead

The new regulations fall short of providing specificity about how to assess the tax owed. For example, how will the new tax treat business expenses and foreign tax credits? According to Treasury officials, those rules will be issued before the end of the year. The fact that GILTI guidance is coming in stages speaks to just how complex this new international tax provision is. Additionally, many publicly traded companies are waiting to understand how the new tax law affects them.

Questions about the GILTI revisions or other international tax matters? Contact Allan Peiser, CPA, at 214-635-2503 or use our contact form below. 

Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.

Topics: General Business