U.S. Companies Get Tax Reprieve in IRS Foreign-Income Rules

Tuesday, July 21, 2020

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(Wall Street Journal)

The Treasury Department relaxed some tax rules on U.S.-based multinational corporations, issuing final regulations that give relief to companies operating in high-tax foreign countries.

The final rules gave companies some but not all of what they wanted and will reduce the U.S. tax burden on companies operating in places such as Germany and Japan. The change may encourage them to invest more in such high-tax places, according to an analysis by the Treasury Department and Internal Revenue Service.

Companies can now seek retroactive benefits, going back to periods before the proposed regulations came out in June 2019. And they also have somewhat looser rules about how their foreign subsidiaries are defined.

The rules implement the Global Intangible Low-Taxed Income (GILTI) system that Congress created in the 2017 tax law. That requires U.S. companies to pay additional U.S. taxes if their foreign rates are below certain thresholds. It was designed to prevent companies from concentrating profits in low-tax jurisdictions.

Lawmakers and companies say they thought the GILTI tax wouldn’t apply if companies paid rates above 13.125%. But there were technicalities in how the new U.S. system interacted with longstanding U.S. tax rules, which meant that many companies with relatively high foreign tax rates were subject to GILTI—including Kansas City Southern and Procter & Gamble Co.

The Treasury rules finalized on July 20 largely mean that companies with tax rates above 18.9% shouldn’t owe GILTI. That higher rate mirrors the rule that applies when U.S. companies earn investment income abroad.

Companies such as Freeport McMoRan Inc., Corning Inc., and Hanesbrands Inc. had filed public comments seeking changes to the proposed rules.

The rules give companies some choice in how the system applies to them each year, and they will invariably pick the way that lets them pay lower taxes, said Sen. Ron Wyden of Oregon, the top Democrat on the Finance Committee.

“This is yet another case where the Trump administration makes the rules more favorable toward megacorporations as the regulatory process moves forward,” he said in a statement.

Category: Economic News