U.S. companies anxiously awaiting guidance on how hard they’ll be hit by a new foreign levy in the tax overhaul will have to stay tuned for at least another two months.
The Internal Revenue Service proposed regulations on Sept. 13 spanning 157 pages that provide some details on which assets are subject to the tax on Gilti, or global intangible low-tax income, and how to calculate it. But one of the most pressing questions -- to what extent multinational companies can use foreign tax credits and business expenses to offset the levy -- remained unanswered.
“It’s a very big deal that the FTC and expense allocation issues have been left out,” said Andrew Silverman, a Bloomberg Intelligence analyst who focuses on tax policy. The regulations are “not a great answer for companies who are essentially left in limbo.”
The rules provide a starting point for how to calculate what they owe, but without the additional information companies still won’t be able to get to a level of comfort to complete tax returns and file documents with the Securities and Exchange Commission, Silverman said.
Corporations don’t want to underestimate their Gilti liability because they could be hit with a penalty if they pay too little in their quarterly tax installments to the IRS. The deadline for two portions has already passed and the next payment is due Sept. 15. Treasury officials said during a call with reporters Thursday that the additional guidance will be coming in about 60 days.
The Republican tax overhaul slashed the corporate rate to 21% from 35%, 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.
The piecemeal guidance process, and the lack of understanding about the ultimate amount of tax that will be paid until all the parts are finalized, underscore the complexity of the tax law’s international provisions.
Tax advisers have been modeling the effects of the new law for their multinational clients, but because many of the new 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.
That’s been a frustration for many publicly traded companies and their investors, who are anxious to understand how the new tax law affects them.
Companies are hesitant to record a tax hit for Gilti that they don’t think they should pay, so they’re waiting for the clarification in the regulations, said Brent Felten, managing director of international tax at accounting firm Crowe.
While the proposed regulations include “some important operational ground rules,” they “do nothing to restrict the application of Gilti to the appropriate target,” Felten said.
Still, regulations on Sept. 13 signal some good news could be ahead for multinationals. The rules indicate that companies can “gross up” their foreign income by the amount of foreign tax paid, a move that would result in a lower Gilti bill, said Mitch Thompson, a tax partner at Squire Patton Boggs.
“It’s taxpayer friendly,” Thompson said.
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.
Gilti was intended to prod American technology and pharmaceutical companies into holding their valuable intellectual properties in the U.S. Currently, many hold their patents in subsidiaries in Ireland or other low-tax countries. The tax is 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.
However, tax lawyers and accountants say quirks in the way the tax is calculated mean it will likely hit other companies, such as big banks with offshore operations, even when they already pay effective foreign tax rates above the threshold.
Bank lobbyists have urged Treasury to come up with a fix that would lessen the pain from Gilti, saying an adjustment is needed to make the tax consistent with the intent of Republican lawmakers who wrote the legislation.
Pass-through entities such as partnerships and limited liability companies could fare even worse than corporations under the Gilti tax, but they won’t want to restructure their business without knowing how the foreign tax credit guidance will work, said David Shapiro, a partner at the law firm Saul Ewing Arnstein & Lehr.
That could create a rush of companies looking to reform as corporations after the regulations come out and before the end of 2018, Shapiro said.
Even after all of the Gilti questions are 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 later this year 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 base-erosion and anti-abuse tax on payments corporations make to foreign subsidiaries.
The need to pay estimated taxes before receiving guidance has already caused headaches for some corporations that overpaid their repatriation taxes on profits accrued offshore since 1986. Some companies had overpaid to avoid penalties and were hoping for a refund. Instead, the IRS said in August it wouldn’t send the excess funds back and would apply them to a future installment of the repatriation tax bill.
“The more guidance you get from IRS and Treasury, the better, and the sooner you get it the better,” said Joe Calianno, a tax partner and international technical tax practice leader in BDO’s Washington office.
By Laura Davison, Lynnley Browning and Allyson Versprille