September 13, 2018 / 8:35 PM / 5 days ago

U.S. Treasury proposes GILTI rules minus foreign tax credit guidance

WASHINGTON (Reuters) - The U.S. Treasury and Internal Revenue Service on Thursday proposed new regulations on the treatment of global intangible low-taxed income, or GILTI, a provision of President Donald Trump’s tax overhaul that has stirred concern among U.S. corporations.

But the 157-page document does not address one of the provision’s most contentious topics, the calculation of foreign tax credits that can determine whether companies see higher or lower tax bills from a law meant to bring permanent relief to corporate America. The government said the foreign tax credit issue will be addressed later.

The GILTI provision, meant to discourage multinational corporations from avoiding U.S. taxes by holding intangible assets such as software patents abroad in low-tax countries, imposes an effective 10.5 percent tax rate on income from tax havens.

“We are providing clarity to taxpayers and closing loopholes that previously allowed for inappropriate international tax planning and shifting profits overseas,” Treasury Secretary Steven Mnuchin said in a statement.

Trump’s tax overhaul slashed the domestic U.S. corporate tax rate to 21 percent from 35 percent and moved the federal tax code toward a so-called territorial system by eliminating taxes on most corporate income earned abroad. Foreign U.S. corporate income was previously taxed at the domestic rate.

GILTI and other international provisions were included to protect the U.S. tax base by penalizing companies for moving assets and the profits they generate overseas to take advantage of the new low-tax global system.

The Treasury and IRS guidance provide general rules to help identify foreign assets and investments, and calculate GILTI-related income or losses.

But GILTI has proved controversial on at least two fronts.

Some corporations have found that GILTI can result in tax rates of 15 percent or more, due to the provision language that appears to restrict the availability of credits for taxes paid to foreign companies.

Experts warn that the provision could backfire. Because the effective GILTI tax rate is half of the new law’s 21 percent domestic corporate income tax, companies could sharply reduce their U.S. tax bills by reporting losses in the United States and accepting the 10.5 percent GILTI rate on overseas income.

Thursday’s proposed GILTI regulations apply to companies, individuals, partnerships, trusts and estates that own at least 10 percent of a foreign-controlled corporation.

Reporting by David Morgan; editing by Alistair Bell and Leslie Adler

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