Does the Global Intangible Low-Taxed Income (GILTI) Provision Work?
The Tax Cuts and Jobs Act (TCJA), passed in December of 2017, was aimed at encouraging multinationals to repatriate profits and dissuade them from moving profits offshore (or even moving intangibles back to the US). There were provisions in the TCJA to penalize those with offshore intangibles who did not bring them back. The penalty is taxing the income from those intangibles currently rather than allowing them to be earned offshore under the new territoriality system that would have exempted the dividends when repatriated.
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Thus, the GILTI provision that taxes that income currently, but at a 10.5% rate for five years (which is higher than the 0% rate in the past, but lower than the 21% rate if taxed as US income). This is also lower than the old 35% rate before the TCJA. However, it may make shifting (if still possible) or keeping intangibles offshore more beneficial, at least for the next five years.
Law of Unintended Consequences
The GILTI provision (new Sec. 951A) may be a perfect example of this “law” and demonstrate how complex the US tax system really is, even after reform. John Locke is normally credited with this saying and it has come to be used as an adage or idiomatic warning that an intervention in a complex system tends to create unanticipated and often undesirable outcomes.
Akin to Murphy’s law, it is commonly used as a wry or humorous warning against the hubristic belief that humans can fully control the world around them.
Before the TCJA, companies that offloaded profits linked to sales, research or production were taxed at a 35% rate when the profits were brought to the United States. The TCJA moved the country to a “territorial” system, which was meant to reduce or eliminate the incentive for companies to invert to avoid U.S. taxes on foreign income.
Corporate Tax Rate Now 21%
Under a territorial tax system, U.S. multinational corporations no longer face an additional domestic tax on their foreign profits when those profits are repatriated to the United States. This system should make companies with foreign profits indifferent to the location of their headquarters. However, AbbVie Inc. is one corporation that is taking advantage of the new system.
According to reports, Richard Gonzalez, the CEO, told investors earlier this year that, because of the change to a territorial system (where only profits reported by domestic subsidiaries face U.S. tax), the biopharmaceutical company expects its tax rate to fall from around 22% in recent years to 9% for 2018.
The company has historically reported its income in lower tax jurisdictions, which is possible in part because AbbVie holds most of the patents for its top-selling drug, Humira®, in Bermuda—a country with a zero-tax rate on corporate profits.
Despite recording over half its $28.2 billion in 2017 sales in the U.S. and basing most of its research facilities there, its annual reports show that the suburban Chicago company has never reported a profit in its home country.
In 2017, AbbVie reported foreign earnings before income tax of $10.4 billion on international revenue of only $9.97 billion. Yet, between 2013 and 2016, AbbVie had to pay around $1 billion a year of taxes in the United States, when it repatriated profits from its foreign subsidiaries to help cover expenses from its U.S. operations.
In the future, under the TCJA, it won’t have to pay such taxes. The authors of the law have said their bill would discourage the shifting of profits earned in the United States. However, the main anti–tax avoidance measures in the law still allow companies to benefit strongly from profit shifting by using patents.
Are “Guardrails” Preventing Avoidance?
It should be noted that the AbbVie situation is where the intangibles profits have already been moved offshore under the old rules. New rules and focus by the IRS on the movement of intangibles offshore make this more difficult for many companies. It appears the main consequence of this GILTI provision is that it does not act as an incentive to bring intangible profits back to the US. This is what the Foreign Derived Intangible Income (FDII) provision was meant to do. But this mainly helps US companies that generate intangible profits from sales outside the US. Companies like AddVie sell much of their products to US customers.
What to Do?
Whether a large multinational or a smaller operation with international operations or sales, you should determine where your intangible and tangible assets are located (or could be located) and then decide how the new law impacts your US tax liability. Only then can you decide whether it is worth moving assets around (and if it is practical or possible). The new law tries to provide incentives for intangibles used in the US and disincentives for those used offshore. Actually, it is also a matter of determining where your tangible (depreciable) assets are located, and then how much intangible assets are used in generating your profits.
Once you have done this analysis, you can then decide what action might be appropriate for your company. This includes considering where you are in the possible development of intangibles, whether you have a long-term perspective in any changes (do not expect quick results) and what the impact of changes in the new tax law might have on any action you take presently.
Moore Stephens Doeren Mayhew can help you in this analysis and act as a sounding board, using our knowledge of the complex international tax provisions that have been enacted as part of the TCJA. Contact us for assistance.
James J. Miesowicz, CPA
Jim Miesowicz has significant experience in helping foreign-owned U.S. entities with a variety of inbound international issues and working with foreign nationals. He offers assistance with structuring international business operations and investments. Jim provides guidance with international inbound and outbound transactions, as well as assisting U.S. companies with establishing operations outside the U.S. Contact Jim at email@example.com or 248.244.3115.