Treasury narrows reach of foreign income levy to fix 2017 law

The Treasury Department has narrowed the reach of a new tax aimed at technology and pharmaceutical companies with overseas income, wiping out an unintended consequence of President Donald Trump’s 2017 tax overhaul.

The tax law, aimed at discouraging companies from using intellectual property to shift profits out of the U.S., created the so-called GILTI levy, which stands for global intangible low-tax income. It required companies that paid foreign taxes at a rate below 13.125 percent to pay an additional 10.5 percent GILTI tax. But the hastily written law unintentionally hit some companies paying foreign taxes well above that 13.125 percent rate.

The Treasury Department issued new proposed regulations last Friday aimed at addressing that shortcoming. When computing the GILTI levy, companies can choose whether to exclude foreign income that was taxed at a rate greater than 18.9 percent.

Treasury Department building
The United States Treasury Department building in Washington, D.C.

Companies might want to exclude their high-tax income in order to maximize their deductions, according to H. David Rosenbloom, a tax lawyer at Caplin & Drysdale and a former Treasury official. The proposed rule says that once a company makes its final choice whether to exclude income from a foreign subsidiary, it’s stuck with its choice — and whatever the tax consequences may be -- for five years.

Before that so-called high tax kick-out exception, companies paying taxes above 20 percent in some Western European countries could have found themselves owing the tax and losing deductions.

“This is an important positive development in moving closer to the intent of Congress and in allowing manufacturers to support their workers, grow their businesses and contribute to the American economy,” said Chris Netram, the vice president of tax and domestic economic policy for the National Association of Manufacturers.

Still, multinational corporations aren’t out of the woods yet. Joan Arnold, a tax partner at Pepper Hamilton LLP, said that because the regulations were in proposed form, "clients cannot plan on it just yet."

Former tax-writers who worked on the 2017 law were not available for comment.

Trump’s law intended for GILTI to prevent large companies with valuable intellectual property from patents, licensing and royalties from shifting their profits out of the U.S. tax base to low-tax and no-tax countries. The law cut the corporate rate to 21 percent from 35 percent and generally taxes domestic profits only.

Previously, the U.S. taxed companies on their worldwide income but allowed them to defer paying taxes on foreign income that they left overseas. GILTI is applied to a company’s “excess” profits earned overseas through some of its foreign subsidiaries. Congress’s official scorekeeper, the Joint Committee on Taxation, estimates the tax will raise $112.4 billion over a decade.