Maintaining GILTI’s High-Tax Exemption

Since the adoption of the Tax Cuts and Jobs Act, corporations have tried to make sense of the law’s complicated new international provisions. An alphabet-soup of acronyms—BEAT, GILTI, and FDII—represent Congress’s desire to move the United States from a worldwide system of taxation to a quasi-territorial one. But in the process of poring over legislative text and regulations, companies quickly realized that one provision, in particular, wasn’t going to work quite the way policy makers intended. 

GILTI, short for Global Intangible Low-Taxed Income, provides a backstop to the new territorial system by creating a functional minimum tax, ensuring that mobile intellectual property doesn’t escape taxation. According to the law, GILTI ensures companies pay an effective rate of at least 13.125 percent on foreign income. But due to an interaction with existing statutes, companies are still facing effective rates as high as 30 percent. 

Thankfully, the Treasury Department released guidance to companies to prevent the unintended outcome, providing for a “high-tax exemption” to GILTI. I described the guidance previously as such: 

In their recent proposed regulations, the Treasury Department helped fix part of this problem. They created a high-tax exemption (HTE): in essence, if a company’s foreign income was taxed at a rate higher than 18.9 percent, the income is exempt from taxation under GILTI. This is a worthwhile change. Subjecting high-taxed income to another layer of taxation in GILTI was clearly not the intent of Congress when it adopted the tax reform law. The TCJA’s conference report plainly states, “the minimum foreign tax rate, with respect to GILTI, at which no U.S. residual tax is owed by a domestic corporation is 13.125 percent.” 

Ever since then, many have argued that Treasury has exceeded its authority, creating an exemption out of thin air, even though the conference report is clear on Congress’s intent in adopting GILTI. 

Now, Senators Wyden (D-OR) and Brown (D-OH) have released legislation to overturn Treasury’s guidance. Entitled the “Blocking New Corporate Tax Giveways Act,” the bill would gut the high-tax exemption, raising effective tax rates on many U.S. multinational corporations. 

Ironically, the bill also discredits previous Democratic arguments against GILTI. As noted by George Callas, former Republican chief tax counsel and advisor to former Speaker Paul Ryan, Wyden and Brown called the bill a “clarification,” suggesting that Treasury actually did have sufficient authority to create a high-tax exemption. 

The bill is unlikely to move in the current Republican-controlled Senate, but could be a real threat in 2021. Many Democratic presidential candidates have targeted GILTI, calling it an “unfair incentive.” Eliminating the high-tax exemption would raise costs for businesses, putting pressure on American jobs and workers.