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Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Monday, November 27, 2017

Future Tax Traps Lurk For Multinationals In Senate Tax Bill

Bloomberg:  ‘Future Tax Traps’ Lurk for Multinationals in Senate's Proposal, by Lynnley Browning:

Senate Republicans tucked some multibillion-dollar tax increases for corporations into the 515-page tax bill they released this week — spring-loaded hikes that would begin after 2024 if the economy doesn’t grow as fast as GOP lawmakers have promised.

Some of the taxes in question aim squarely at companies like Apple and Alphabet, which rely on intellectual property, also known as “intangibles,” that they’ve transferred to overseas subsidiaries, tax experts say. Spokesmen for the two tech giants didn’t respond to requests for comment Tuesday.

“These so-called ‘sunrise’ provisions essentially are future tax traps for unsuspecting multinationals,” said David Sites, a partner in Grant Thornton LLP’s National Tax Office in Washington. In all, changes made by the Senate Finance Committee last week would boost revenue from international provisions aimed at such companies by about $55.6 billion over a decade, to $154.6 billion; most of the increase would come in 2026 and 2027. 

Senate Republicans want permanent changes that will make American companies more competitive globally — while erecting guardrails to shore up the U.S. tax base.

But they’re also under pressure to produce a bill that won’t increase the long-term federal deficit — a standard that would allow them to fast-track their tax legislation over Democrat objections that would otherwise stymie their bill. They’ve argued that their tax cuts would lead to economic growth, making up any lost revenue. Analysts have questioned that claim.

According to the Joint Committee on Taxation, one of Congress’s official fiscal scorekeepers, the Senate’s bill would boost the deficit by $1.4 trillion over 10 years. But — with the help of the latter-year tax increases — it would actually reduce the deficit by $30.6 billion in 2027, the JCT found. On its very last page, the Senate bill sets a revenue trigger designed to keep any revenue losses below the $1.5 trillion level that Congress agreed to in its 2018 budget. ...

[T]he measure also contains three new taxes aimed at preventing companies from sending taxable income overseas to affiliates in jurisdictions with even lower tax rates:

  • A new levy on “global intangible low-taxed income,” or GILTI, would make any such income received by a U.S. company’s offshore unit immediately subject to the new 20 percent tax rate. Companies would be entitled to a 50 percent deduction on that income, resulting in an effective tax rate of 10 percent. After 2025, though, the deduction would be set to shrink, taking the effective rate to 12.5 percent.
  • Another change would create a separate 12.5 percent tax rate on “foreign derived” income from intangibles that comes specifically from trade or business in the U.S., not from overseas sales. After 2025, that rate would be set to grow to 15.625 percent. That rate is designed to give companies an incentive to locate valuable IP in the U.S., tax experts say.
  • And a third new provision, called the “base erosion and anti-abuse tax,” or BEAT, would apply to other payments companies make to their overseas units, such as loan payments. That rate would begin at 10 percent and be set to grow to 12.5 percent in 2026.

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