by Julie Martin
International tax practitioners will need to quickly become familiar with an entirely new US international tax system and the acronyms that go with it — GILTI, FDII, BEAT — as Republican lawmakers on Friday reached agreement on final provisions for the US tax reform bill, the Tax Cuts and Jobs Act.
The bill now goes to the full House and Senate, where final passage is expected next week.
The reform would move the US to a territorial tax system, accomplished by a foreign dividends received deduction.
To transition to the new regime, the bill requires a deemed repatriation of existing earnings held offshore at 15.5% rate for cash and 8% rate for non-cash assets.
The repatriation rates in the final bill are higher than those proposed in the Senate and House bills. The provision is now expected to bring in $338.8 billion over 10 years, according to the Joint Committee on Taxation.
GILTI & FDII rules
The lawmakers adopted with modifications the Senate’s global intangible low-taxed income (GILTI) regime and the foreign-derived intangible income (FDII) rules.
The GILTI rules impose a minimum tax on a US multinational’s foreign earnings that exceed an amount equal to a standard rate of return on the foreign company’s assets.
GILTI tax is paid at the new US 21 percent corporate tax rate after applying a 50 percent deduction. Only 80 percent of foreign tax credits can offset the tax.
The GILTI rules kick in when the foreign tax rate on the excessive foreign earnings is below 13.125 percent. According to JCT estimates, $112.4 billion will be raised from this tax over a 10 year period.
The final bill also adopts FDII rules, which are similar to a patent box. These provisions grant a special reduced effective tax rate of 13.125 percent on income from US-held intangibles to the extent that the income is derived from exports of property and services. This incentive will cost the US $63.8 billion over ten years, the JCT said.
Lawmakers did not adopt a provision in the Senate bill that would have allowed for tax free repatriation of a controlled foreign corporation’s intangibles.
BEAT
The final agreement also includes a base erosion anti-abuse tax (BEAT), similar to the Senate version, and rejects the House’s bill’s controversial excise tax. The BEAT is an alternative minimum tax designed to curtail excessive earnings stripping through payments to foreign affiliates. It will raise $149.6 billion over 10 years, according to JCT estimates.
The BEAT, imposed on large groups (at least $500 million annual gross receipts), is equal to the amount that a company’s taxable income, computed without regard to base eroding payments to related corporations and taxed at a 10 percent rate, exceeds the company’s regular corporate tax liability minus certain tax credits.
Generally, base erosion payments are deductible cross-border payments to related parties, omitting payments subject to full 30 percent US withholding tax and cross-border purchases of inventory included in cost of goods sold. A change in the final bill adds related party reinsurance payments to the definition of base erosion payments.
The final BEAT provision also lowers the threshold that triggers the application of the tax. The Senate bill provided that the tax applied if four percent of a company’s total allowable deductions are associated with foreign activity; the final bill uses a two percent threshold for financial institutions and a three percent threshold for others.
The final BEAT also differs from the Senate version by allowing business tax credits, like the investment tax credit and production tax credit, to offset up to 80 percent of the BEAT tax.
Hybrids, interest deduction
The agreed text also adds the Senate bill’s rules restricting tax benefits for hybrid entities and transactions. The final version grants Treasury authority write rules addressing hybrid transactions involving entities and branches where the entity or branch does not meet the statutory definition of a hybrid.
The bill also eliminates a Senate proposal that would have restricted interest deductions to the extent that excess indebtedness of the US group exceeds total indebtedness of worldwide group.
Julie Martin
Julie Martin is the founder of MNE Tax. She edits the publication and regularly contributes articles on new developments in cross-border business taxation.
Julie has worked as a tax journalist and editor for more than 13 years. Prior to that, she worked as an in-house tax attorney in New York. She also holds an LLM in taxation from New York University School of Law.
Julie can be reached at [email protected].
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