New U.S. Base Erosion Rules Target Multinationals with Income in Low Tax Jurisdictions

2018 Whole Ball Of Tax

Wolters Kluwer Examines Newly Enacted Measures

(NEW YORK, NY, January 2018) — The Organization for Economic Cooperation and Development (OECD)’s base erosion and profit shifting (BEPS) project, which began in 2013, has been said to represent the most significant development in international tax in the last 30 years.

“The United States, unlike other G20 and OECD member states, has generally held back from taking BEPS-related action until now,” said Joy Hail, International Tax Analyst for Wolters Kluwer Tax & Accounting. “The 2017 U.S. tax reform legislation included a number of base erosion provisions that are in line with measures across the globe that have been enacted to address BEPS.”

One of these new measures introduces a Base Erosion and Anti-Abuse Tax (BEAT). This new tax targets companies that have lower tax liability in the United States because they have money offshore. For 2018, the base erosion minimum tax amount is generally calculated by comparing 10 percent (five percent for tax years beginning in calendar year 2018) of the taxpayer’s modified taxable income to the taxpayer’s regular tax liability. In 2025, this rate increases to 12.5 percent and the taxpayer’s regular tax liability is reduced by the aggregate amount of allowable credits (this includes credits such as the investment tax credit and production tax credit, so investors that take advantage of these credits may change the way that they invest in the future, which could have a negative impact on certain industries).

Additional base erosion measures were also part of the 2017 tax reform legislation that target intangible property (such as patents). These include a provision that changes the definition of intangibles to attempt to limit income shifting (from a high tax jurisdiction to a low tax jurisdiction) through transfers of intangible property. Also included are provisions that require U.S. shareholders of controlled foreign corporations to include global intangible income (that is considered low tax income) in their income.

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