Companies await foreign tax guidance
U.S. companies anxiously awaiting guidance on how hard they will 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 157 pages of regulations on Thursday that provide some details on which assets are subject to the tax on 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 [Federal Trade Commission] 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 that are essentially left in limbo.”
The rules provide a starting point for companies to calculate what they owe. Without the additional information, however, they still won’t be able to reach a level of comfort to complete tax returns and file documents with the Securities and Exchange Commission, Silverman said.
The foreign levy effectively sets a 10.5 percent rate to apply to a company’s “excess” profits earned overseas through some of its foreign subsidiaries.
The tax on global intangible low-tax income 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.
Corporations don’t want to underestimate their foreign liability because they could be hit with a penalty if they pay too little in their quarterly tax installments to the IRS. Treasury officials said during a call with reporters Thursday that the additional guidance will come in about 60 days.
The Republican tax overhaul slashed the corporate rate to 21 percent from 35 percent, shifting the U.S. to a system of taxing its companies on their domestic profits only. Those changes required guardrails — such as the tax on global intangible low-tax income — 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 — underscores the complexity of the tax law’s international provisions.
Tax advisers have been modeling the effects of the new law for their multinational clients. Because many of the new provisions are interconnected, however — and because implementation may be governed by old tax regulations still on the books — they are able only 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 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.
Still, Thursday’s regulations signal that some good news may lie 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 tax bill, said Mitch Thompson, a tax partner at Squire Patton Boggs.
“It’s taxpayer friendly,” Thompson said.
Bank lobbyists have urged Treasury to come up with a fix that would lessen the pain from the foreign levy, saying an adjustment is needed to make the tax consistent with the intent of Republican lawmakers who wrote the legislation.
Even after the foreign tax credit question is answered, companies will still be trying to figure out how they fare under the new international tax rules.