Following on from our recent news alert on IRC Section 174, the new capitalization and amortization requirements may be more costly for U.S. multinationals than anticipated, potentially leading taxpayers to pay U.S. tax on phantom foreign earnings.
IRC Section 951A requires a U.S. shareholder of any controlled foreign corporation (CFC) to include in gross income the shareholder’s global intangible low-taxed income (GILTI) for each taxable year. GILTI is based on the net CFC tested income over the shareholder’s net deemed tangible income return. To make this calculation, the regulations require a U.S. taxpayer to account for the income and expenses of the CFC under U.S. tax principles. The new capitalization and amortization of R&D expenditures could increase the CFC net tested income, while having no impact on the deemed foreign tax credits available to offset the GILTI inclusion. This increase in tested income, with no other changes, may create a GILTI tax liability for the U.S. taxpayer if the taxpayer does not have enough deemed paid credits. The increase in tested income may also impact a taxpayer’s ability to make a high-tax election for a given year.
Section 174 amortization is not all bad news for U.S. multinationals. For U.S. corporations that derive income from serving foreign markets, the five- or 15-year capitalization requirements will increase taxable income and reduce the current year expenses allocated and apportioned to income qualifying as foreign derived intangible income (FDII). This enhancement to the deduction provides a meaningful benefit, offsetting some of the punitive impact on GILTI.
Multinationals should immediately evaluate the impact of the Section 174 capitalization requirements on their international tax provision to minimize any last-minute surprises. With taxable income being the starting point for FDII, the Base Erosion and Anti-Abuse Tax (BEAT), and the foreign tax credit limitation, it is critical to understand the impact of these new provisions.
Ryan’s income tax professionals can assist in reviewing the impact of the new rules on your federal, state, and international taxes. Contact one of the experts listed below today.
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