U.S. companies won some concessions from the Internal RevenueService (IRS) following proposed regulations that would soften theblow of a new foreign tax—but the rules didn't go as far as thebusiness community had hoped.

The agency issued guidance Wednesday that would in some waysallow businesses to minimize the hit when calculating how much theyowe for the new levy on their GILTI, or global intangible low-taxincome. Companies have to allocate only half—instead of all—ofcertain domestic expenses to foreign subsidiaries, whicheffectively lowers their GILTI liabilities, according to theregulations.

The IRS also gave companies some leeway to take advantage oftheir unused foreign tax credits after they voiced concerns thatthe law wouldn't do enough to account for the taxes paid to foreigngovernments.

Still, business groups, including the U.S. Chamber of Commerce,had argued that companies shouldn't have to allocate any expensesto reduce their tax bills.

“The IRS met the taxpayer halfway,” says Libin Zhang, a partnerat law firm Roberts & Holland.

See also:

• Offshore Tax Will Hit Some Firms Harder ThanOthers
• Multinationals Still Lack GILTI Guidance
• Tax Law Fails to Kill off Corporate America'sPrized Dodge

Corporate America had been anxiously awaiting guidance on howhard it would be hit by the GILTI tax. The IRS issued more than 150pages of regulations in September about which assets are subject to the tax and somedetails on how to calculate it, but the most critical aspect—towhat extent multinational companies can use foreign tax credits andexpenses to offset the levy—remained unanswered.

The GILTI levy effectively sets a 10.5 percent rate to apply toa company's “excess” profits earned overseas through some of itsforeign subsidiaries. It's intended to apply only in cases where acompany's cumulative overseas tax bill is below 13.125 percent, or16.4 percent after 2025.

Companies were confused by the tax in part because of new limitsestablished for foreign tax credits that they had used to reducetheir U.S. taxes. But at the same time, the old conventions of howcompanies were directed to divvy up their expenses between domesticcompanies and foreign subsidiaries were still in place.

Prior to the IRS's rules on Wednesday, a company would have hadto allocate all of its domestic expenses for administration,research, and interest payments to the foreign corporations throughwhich it did business. Those expenses would have shrunk the foreignincome pile on which the company owed U.S. tax, in turn diminishingthe value of credits for foreign taxes they had already paid onthose units.

'Undue Tax Burden'

Even with the 50 percent rule, there will still be “some unduetax burden in place for companies with relatively high foreigneffective tax rates,” says David Noren, a partner at law firmMcDermott Will & Emery.

Lobbyists had urged the Treasury Department to not require anyexpense allocation, saying the adjustment was needed to make thetax consistent with the intent of Republican lawmakers who wrotethe legislation.

“We are disappointed these rules do not provide sufficientrelief from the GILTI double taxation issue,” says Caroline Harris,chief tax policy counsel for the U.S. Chamber of Commerce.

The reporting burden—what companies will pay accountants andlawyers to comply with the proposed rules—is estimated to total $52billion, according to the agency.

Technology firms and banks are most most concerned about thetreatment of foreign tax credits, since they tend to have offshoreoperations but don't have factories, machinery, or equipment abroadthat can reduce their GILTI tax bills, says Stow Lovejoy, counselat law firm Kostelanetz & Fink.

President Donald Trump's tax overhaul last year slashed thecorporate rate, from 35 percent to 21 percent, and shifted the U.S.to a system of taxing its companies on their domestic profits only.Those changes required guardrails—like the tax on GILTI—to ensuremultinationals pay at least something on their future overseasprofits.

Critics of the GILTI levy say it increases the incentives forcompanies to shift production offshore since assets like equipmentcan offset some of the income they earn from intellectual property,and ultimately lower their GILTI liabilities.

Senator Sherrod Brown, an Ohio Democrat, says the GILTI taxprodded General Motors Co. to move operations abroad. The automakerannounced this week it would cease production at five facilities,including one in his state.

Companies get a “50 percent off coupon” on taxes if they moveout of the U.S., Brown said in an interview with BloombergTelevision Wednesday, referring to how GILTI taxes companies at10.5 percent—half of the 21 percent U.S. corporate rate—if theymove to a country with no taxes.

For most U.S.-based multinational companies, this release of theGILTI regulations was crucial, as they could be hit with a penaltyif they pay too little in their quarterly tax installments to theIRS. Corporations have already made three of four estimatedpayments this year. The next portion is due Dec. 15.

“Companies are going to scramble to learn this and then go backto look at their quarterly estimates to see how far off they were,”says Nicolaus McBee, a senior director specializing ininternational tax at consulting firm Alvarez & Marsal.

Even with many of the GILTI questions answered, companies willstill be trying to figure out how they fare under the newinternational tax regime.

Treasury officials have said they plan to issue proposedregulations by year's end on the other two major internationalprovisions in the tax overhaul—a tax break encouraging companies toexport U.S.-made goods, known as the foreign derived intangibleincome deduction, and the BEAT, or base-erosion and anti-abuse tax,on payments corporations make to foreign subsidiaries.

From: Bloomberg

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