Elizabeth Stevens Comments on GILTI and Virus Losses in Law360
The international provisions in the 2017 tax overhaul limit how much companies can shift in losses to offset taxes in profitable years, potentially hindering their ability to rebound from the COVID-19 downturn — but a proposed exemption could provide relief.
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Losses can also affect how the system measures intangible income. The application of GILTI is based on how much depreciable tangible property a taxpayer holds offshore, measured globally. But foreign subsidiaries that do not have profit at all aren't considered as part of the calculation. Their losses do not offset income in other subsidiaries, and the assets they may hold don't add to the equation that would have reduced the amount of GILTI.
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"Requiring companies to use NOL carrybacks against de facto exempt income dramatically undercuts the purpose of the CARES Act provision," Caplin's Stevens said. "Making the high-tax exception fully retroactive would further that legislative purpose."
Even if Treasury does apply the retroactive relief, it will not completely alleviate the GILTI restrictions. Companies will need to carefully plan and manage their losses, including how those losses are distributed among subsidiaries.
"Ideally you'd have enough income in enough places that you could move it to the right places and make the best use of your losses," Stevens said. "But in this particular year, there will be losses everywhere, so that will make it more challenging."
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