Tax reform has been a boon for our economy and for manufacturers in the U.S. but ensuring that the Tax Cuts and Jobs Act (TCJA) is implemented in line with congressional intent is a key priority for manufacturers. On February 5, the National Association of Manufacturers (NAM) submitted comments in response to the Department of Treasury’s proposed regulations implementing the tax reform law’s changes to our international tax system. Of particular concern to manufacturers is Treasury’s implementation of the Global Intangible Low-Taxed Income provision.
Tax reform moved the U.S. from an outdated and uncompetitive “worldwide” system of taxation (where foreign earnings are taxed at the U.S. corporate tax rate when repatriated, encouraging companies to keep profits overseas) toward a territorial system, which allows businesses to repatriate foreign earnings without an additional layer of U.S. tax. To prevent companies from eroding the U.S. tax base through profit shifting into low-taxed foreign jurisdictions, however, the law also created, in essence, a global minimum tax in the form of an anti-base erosion provision called Global Intangible Low-Taxed Income, imposing a minimum 13.125 percent tax on foreign earnings.
The problem facing manufacturers operating globally is that given the provision’s interaction with current international tax rules, some manufacturers can be subject to U.S. tax on foreign earnings that are already taxed above 13.125 percent. In other words, while the provision is aimed at low-taxed foreign income, the reality is that it can hit high-taxed foreign earnings. This was clearly not Congress’ intent as reflected in the tax reform conference committee report, which states that “the minimum foreign tax rate, with respect to [Global Intangible Low Tax Income], at which no U.S. residual tax is owed by a domestic corporation is 13.125 percent.”
In the comment letter, the NAM calls on Treasury to implement the provision in a manner consistent with congressional intent. If Treasury fails to do so, the letter proposes that it at least provide manufacturers with the option of a high-tax exception for foreign earnings to ensure manufacturers do not face additional U.S. tax if they pay a foreign tax greater than 18.9 percent. The proposed high-tax exception mirrors one that already exists in the tax code for subpart F income and the letter points out that Treasury has the authority to provide for such an exception.
As Treasury continues to implement tax reform, the NAM will continue working to ensure that it is implemented in the right way so that manufacturers can continue achieving their promise of creating more jobs, increasing wages and boosting investment as a result of pro-growth tax reform.
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