Global Tax Agreements May Disqualify Some Seeking to Claim Tax Credits

As governments around the world work towards developing OECD Pillars One and Two into law, there are a number of wrinkles to iron out regarding lost credits and additional taxes for US multinational taxpayers. Among the changes introduced in Pillars One and Two is a change in when revenue is recognized.

Pillar Two introduces a global minimum tax rate, officially known as a Qualified Domestic Minimum Top-Up Tax (QDMTT), and notably is based upon book income data, rather than tax accounting data. For those who are unfamiliar, key differences exist in how revenue is recognized between book and tax accounting, and these timing differences may interfere with taxpayers looking to take advantage of the US Global Intangible Low-Taxed Income (GILTI) tax credit.

GILTI rules do not allow companies to carry foreign tax credits into different years, and as it currently stands, any credits that US companies may receive for paying their QMDTT would not offset GILTI tax liabilities should the IRS recognize the underlying income in a different year than the foreign jurisdiction’s book system. This could mean that in certain situations, taxpayers could face double taxation on their foreign earnings.

For example, if a controlled foreign corporation experiences a net loss in taxable income for a tax year but has a positive net book income. In this scenario, the taxpayer would be charged QDMTT and would not be deemed to qualify for a US tax credit, as there is no GILTI tax liability for the corporation that year.

We anticipate that there will be changes to the regulations governing foreign tax credits in the near future. For all updates regarding OECD guidelines, GILTI regulations, as well as any inquiries for our various international tax services, please do not hesitate to contact us.