In an extended game of unintended consequences, some U.S. corporations are facing uncertainty that may result in moving R&D operations outside the U.S. The 2017 tax law changes didn’t account for existing rules that require certain U.S. business expenses to be attributed to foreign taxable income. The new overseas-profit tax means a higher foreign tax liability as foreign tax credits become limited by pre-2017 tax law expense allocation requirements. The net effect means companies could pay more U.S. tax on foreign income when they increase domestic R&D spending.
As outlined in a recent article on Bloomberg Tax, the new tax on Global Intangible Low-Taxed Income (GILTI) aims to ensure companies pay U.S. tax on income from foreign countries where the company has a tax rate lower than 13.125%. Due to the way foreign tax credit usage is limited based on the type of expenses that go into taxable GILTI income, companies with high tax bills outside the U.S. can’t claim similar foreign tax credits.
Current proposed regulations attempt to fix the problem, however the proposed regulations(REG-104259-18)do not address allocation of R&D expenses. There are several proposed fixes on the table, most of which will likely result in new Treasury guidance and/or regulations. One way or another the problem will get “fixed”, and probably create other unintended consequences.