Senator Sherrod Brown (D-Ohio) and Finance Committee Ranking Member Ron Wyden (D-Ore.) have introduced legislation that would undo the existing high-tax exception (HTE) for the Global Intangible Low-Taxed Income (GILTI) provision. This will result in double taxation on American businesses operating overseas and undermine the Tax Cuts and Jobs Act (TCJA).
This legislation, S. 3280, the “Blocking New Corporate Tax Giveaways Act,” should be rejected by the Senate.
GILTI was created to prevent taxpayers from eroding the U.S. tax base by assigning income to low tax jurisdictions. However, the provision was designed based on the pre-TCJA tax system which required companies to allocate a portion of domestic expenses to foreign income calculations. This resulted in a post-TCJA tax code where American businesses faced additional foreign tax liability because GILTI inadvertently taxed high-tax foreign income that was previously exempt from U.S. taxation.
To resolve this problem, Treasury proposed rules that allow businesses to elect a high-tax exclusion for a Controlled Foreign Corporation’s (CFC) income if this income is subject to foreign taxes above 90 percent of the corporate rate (18.9 percent based on the 21 percent corporate rate). This HTE ensures the integrity of the new, territorial tax system in a way that protects the U.S. tax base without subjecting taxpayers to double taxation or creating perverse incentives for businesses to restructure.
This legislation is particularly egregious because Congress clearly intended to exclude high tax foreign income from GILTI, as the conference report to accompany the TCJA clearly stated:
“The Committee believes that certain items of income earned by CFCs should be excluded from the GILTI, either because they should be exempt from U.S. tax – as they are generally not the type of income that is the source of base erosion concerns – or are already taxed currently by the United States. Items of income excluded from GILTI because they are exempt from U.S. tax under the bill include foreign oil and gas extraction income (which is generally immobile) and income subject to high levels of foreign tax.”
The existing high-tax exception should be preserved, not repealed as proposed by Senators Brown and Wyden. Repeal would increase taxes on businesses and undermine the integrity of the Tax Cuts and Jobs Act.