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Expense Apportionment to GILTI

Following tax reform, domestic corporate taxpayers are required to include in gross income the amount of a CFC’s income in excess of its Subpart F income and 10 percent of depreciable tangible property (referred to as GILTI). The corporate taxpayer generally can deduct 50 percent of the amount of GILTI (10.5 percent US tax rate), and claim a foreign tax credit for 80 percent of foreign taxes paid or accrued on the GILTI (subject to limitation).

The Conference Report states: “At foreign tax rates greater than or equal to 13.125 percent, there is no residual US tax owed on GILTI, so that the combined foreign and US tax rate on GILTI equals the foreign tax rate.”

Many taxpayers are finding—to their surprise—that, if pre-tax reform expense allocation and apportionment principles apply, the foreign tax credit limitation can result in a significantly higher overall tax rate than 13.125 percent. For example, assume a domestic corporation has $10 million of GILTI that was subject to a 25 percent foreign income tax rate. Further assume that, under existing expense allocation and apportionment rules, $3 million of expenses (e.g., interest) would be apportioned to the income. Under these facts, $630,000 of US tax would be paid on the GILTI because of the foreign tax credit limitation, resulting in an overall effective tax rate of 31.3 percent.

The US Department of Treasury has been open to discussions with taxpayers to explore potential approaches to expense allocation and apportionment that would address the adverse impact of the pre-tax reform rules. Taxpayers should consider taking the opportunity to discuss their concerns and issues with Treasury through in-person meetings, comment letters or by endorsing comment letters that support your position. Treasury and the IRS are currently working on proposed regulations on GILTI and are targeting issuance of such guidance in late summer of 2018. Thus, the window to provide comments on this guidance is soon closing.

© 2019 McDermott Will & Emery


About this Author

Caroline H. Ngo, Tax Attorney, McDermott Law Firm

Caroline H. Ngo is a partner who practices corporate and international tax law, focusing on structuring for tax-free and taxable acquisitions, dispositions, restructurings, and liquidations, in particular, reorganizations and spin-offs.  She regularly represents clients before the Internal Revenue Service in obtaining private letter rulings.  Caroline also regularly advises clients on international tax matters, such as cross-border mergers and acquisitions, supply chain planning and application of bilateral income tax treaties.  Caroline works predominantly and...

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K. Christy Vouri-Misso, tax lawyer, Mcdermott Will & Emery

K. Christy Vouri-Misso focuses her practice on all stages of complex federal tax controversies including Internal Revenue Service (IRS) examinations, administrative appeals, voluntary disclosures, and litigation. She has settled multiple tax disputes with IRS legal counsel avoiding costly litigation in court.

Christy also focuses on international disputes and agreements, including transfer pricing audits, litigation, Advance Pricing Agreements, and the Mutual Agreement Program. She has significant experience advising clients on strategic and procedural considerations in US Tax Court and other federal courts.

Christy is an adjunct professor of Tax Practice and Procedure, Litigation, at the Georgetown University Law Center.

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