published Nov 29, 2018, 4:17:09 PM, by Laura Davison
(Bloomberg) —

U.S. companies won some concessions from the Internal Revenue Service following proposed regulations that would soften the blow of a new foreign tax — but the rules didn’t go as far as the business community had hoped.

The agency issued guidance Wednesday that would in some ways allow businesses to minimize 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 — instead of all — of certain domestic expenses to foreign subsidiaries, which effectively 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 voiced concerns that the law wouldn’t do enough to account for the taxes paid to foreign governments.

Still, business groups, including the U.S. Chamber of Commerce, had argued that companies shouldn’t have to allocate any expenses to reduce their tax bills.

Read more about how Wall Street is caught in crosshairs of Gilti tax

“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 percent 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 percent, or 16.4 percent 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 U.S. 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.

Prior to the IRS’s rules on Wednesday, a company would have had to allocate all of its domestic expenses for administration, research, and interest payments to the foreign corporations through which it did business. Those expenses would have shrunk the foreign income pile on which the company owed U.S. tax, in turn diminishing the value of credits for foreign taxes they had already paid on those units.

‘Undue Tax Burden’

Even with the 50 percent rule, there will still be “some undue tax burden in place for companies with relatively high foreign effective tax rates,” said David Noren, a partner at law firm McDermott Will & Emery.

Lobbyists had urged the Treasury Department to not require any expense allocation, saying the adjustment was needed to make the tax consistent with the intent of Republican lawmakers who wrote the legislation.

“We are disappointed these rules do not provide sufficient relief from the Gilti double taxation issue,” said Caroline Harris, chief tax policy counsel for the U.S. Chamber of Commerce.

The reporting burden — what companies will pay accountants and lawyers to comply with the proposed rules — is estimated to total $52 billion, according to the agency.

‘50% Off Coupon’

The rules “have some good pieces,” but other provisions will make access to foreign tax credits harder, according to Ronald Dabrowski, a principal in KPMG’s Washington national tax group.

Technology firms and banks are most most concerned about the treatment of foreign tax credits since they tend to have offshore operations but don’t have factories, machinery or equipment abroad that can reduce their Gilti tax bills, said Stow Lovejoy, counsel at law firm Kostelanetz & Fink.

President Donald Trump’s tax overhaul last year slashed the corporate rate to 21 percent from 35 percent, and shifted the U.S. 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 production offshore since assets like equipment 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 percent off coupon” on taxes if they move out of the U.S., Brown said in an interview with Bloomberg Television Wednesday, referring to how Gilti taxes companies at 10.5 percent — half of the 21 percent U.S. corporate rate — if they move to a country with no taxes. Still, relocating to a zero-tax haven can be difficult for companies to justify following new U.S. and EU regulations.

Quarterly Estimates

For most U.S.-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 installments 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 specializing in international tax at consulting firm Alvarez & Marsal.

Even with many 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 U.S.-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.

–With assistance from Lynnley Browning.To contact the reporter on this story: Laura Davison in Washington at ldavison4@bloomberg.net To contact the editors responsible for this story: Alexis Leondis at aleondis@bloomberg.net John Harney
COPYRIGHT
© 2018 Bloomberg L.P