The tax law includes several new international tax provisions that may affect companies that do business globally. This includes sections on global intangible low-taxed income (GILTI), base erosion and antiabuse tax (BEAT), and foreign-derived intangible income (FDII). The aim of these rules is to curb the erosion of the US tax base by equalizing the US tax burden on exported goods band services and controlled foreign corporation earnings, and by reducing the benefits of related-party deductible payments.
These provisions are proving to be complex, often ambiguous, and interrelated, and they also involve foreign tax credit provisions. If one of the goals of tax reform was simplification, then the new tax law may have missed the mark, particularly with respect to the international provisions. What’s more, some CTOs are concerned that the cost of the international tax provisions may unintentionally offset the savings corporations could receive from the tax rate cut.
The uncertainty over how to implement these provisions has placed tax functions under tremendous pressure. They’re being asked to deliver detailed insights about how the tax law affects current business conditions, as well as its mid- and longer-term implications so companies can plan for the future. At the same time, they’re responsible for calculating tax obligations for quarterly filings.
CTOs are also struggling to determine their company’s effective tax rate (ETR) when making earnings calls, writing up press releases, or meeting with audit committees. Assembling projection models has proven to be extremely difficult, and changing even one assumption can totally alter calculations\ given the interrelation of all the provisions. To give themselves some leeway, many CTOs are presenting their company’s ETR as a range spanning several percentage points, typically from the mid-to-upper twenties. CTOs have found that senior management and boards generally are not satisfied with ETRs presented as a range — they want certainty. So CTOs are trying to come up with creative ways to explain the issue, for example, relying on illustrations.
A good deal of uncertainty exists about what position organizations should be taking with respect to the international tax provisions. It has also become clear that BEAT is impacting far more global businesses than previously expected. Until technical corrections or formal guidance is issued, the consensus seems to be that if the provision seems “broken but clear,” CTOs should follow the law as stated. However, where the law is ambiguous or unclear and in the absence of guidance, CTOs should do their best to determine the statute’s meaning, take a reasonable position, use best estimates, and be consistent.
— How are you gathering the data needed to compute foreign taxes and credits (e.g. D&A tools, ERP systems)?
— If intellectual property (IP) is held offshore, does it make sense to move it back to the United States?