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U.S. Bill Introduced to Limit GILTI High-Tax Exclusion

The U.S. Senate Committee on Finance has issued a release on the introduction of a draft bill by Senator Ron Wyden (D-OR) and Senator Sherrod Brown (D-OH) to limit the GILTI high-tax exclusion. As provided in the bill, it would amend the Internal Revenue Code of 1986 to clarify that high-taxed amounts are excluded from tested income for purposes of determining global intangible low-taxed income (GILTI) only if such amounts would be foreign base company income or insurance income.

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Background:

The 2017 Republican tax law created a new tax regime for multinational corporations – "Global Intangible Low-Taxed Income," or "GILTI." GILTI provides a special low tax rate for U.S. multinationals, allowing them to pay a 10.5 percent tax on their foreign earnings, half the 21 percent corporate rate.

Multinationals can further lower this reduced tax rate by claiming credits for taxes paid to foreign countries, though long-standing rules limit the amount of these "foreign tax credits" a company may take.

Multinational corporations, unhappy with the combination of limits on foreign tax credits and the new GILTI regime, aggressively lobbied Treasury for a way out of paying what they owe.

The Treasury Department then went well beyond its legal authority to create the multinationals' desired tax break. The regulations propose an elective exemption from paying any GILTI taxes on certain income, if companies pay at least an 18.9 percent effective tax rate on that income.

This GILTI High-Tax Exclusion allows companies to choose how they want to be taxed under the GILTI regime. Corporations naturally will only use the exception when it cuts taxes on their offshore income.

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