TaxProf Blog

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

Tuesday, March 27, 2018

WSJ: New Tax On Overseas Earnings Hits Unintended Targets

Wall Street Journal, New Tax on Overseas Earnings Hits Unintended Targets:

A new tax aimed at overseas income earned by U.S. technology and pharmaceutical firms is hitting unexpected places. ...

In the past, the U.S. taxed corporate profits earned overseas at the domestic rate of 35%. Companies could avoid that tax by booking their income overseas and keeping it there. The new system in theory aims to lighten the overseas tax burden and target it more carefully.

Congress set a minimum tax known as GILTI, for Global Intangible Low-Taxed Income, of roughly 10.5% on a portion of corporate income earned overseas. GILTI is directed at trademarks and patents of technology and pharmaceutical firms, which are easy to transfer to low-tax foreign countries. It was supposed to create a floor on taxing those highly mobile profits, an assurance that companies would pay something while stopping short of the full U.S. tax rate. Without it, lawmakers worried, U.S. companies could have an even larger incentive to move intangible assets and profits offshore. ...

GILTI is hitting ... companies ... because of the way the new tax interacts with other provisions in the tax code, specifically the treatment of foreign tax credits that are supposed to prevent two countries from taxing the same income. When companies calculate the credits they receive for paying taxes overseas, the law typically requires them to assign some of their domestic expenses to foreign jurisdictions. The result for some companies is that, for U.S. tax purposes, their foreign income and foreign taxes look smaller than they actually are, shrinking their credits. That, in turn, could force them to pay the new minimum tax on top of their foreign tax bills.

The quirk particularly affects companies with overseas operations and significant domestic expenses for interest, administrative costs and research. It hits companies with operations in high-tax countries like Mexico, Germany and Japan. ...

Congressional aides are aware of the issue, which could be addressed in legislation or Treasury Department regulations later this year. Part of the challenge, however, is that loosening the rules for some companies could open tax-avoidance strategies for others.

The U.S. Chamber of Commerce included this issue in its list of regulatory priorities for Treasury, arguing that Congress intended to limit GILTI when foreign taxes exceed 13.125%. That is the simple case outlined in the House-Senate conference report—but lawmakers didn’t make changes to other tax rules, such as accounting for foreign tax credits, that make the goal achievable. ...

The system also could encourage U.S. companies to find low-tax foreign countries, rather than operating in high-tax countries and paying GILTI on top of that, said Ed Kleinbard, a tax law professor at the University of Southern California. “It’s a great example of what happens when legislation is rushed,” he said. “There’s a great deal of anxiety about this issue, enormous anxiety.”

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