The Impact of U.S. GILTI and FDII Regimes on Taxation of Intangible Income, Cross-Border Tax Planning, and International Taxation

Abstract

This study examines the GILTI and FDII regimes, which were enacted as part of the comprehensive U.S. tax reform called the Tax Cuts and Jobs Act (TCJA) in late 2017. The study focuses on how the income generated from intangibles is taxed under these regimes and how the regimes affect U.S. MNEs and their cross-border tax planning. In addition, the regimes are analyzed from European point of view and in light of international tax and trade policies. Finally, attention is paid to how the regimes could influence the development of international taxation.

Under the FDII provision, foreign income derived from intangibles is effectively taxed at the rate of 13.125% instead of the statutory corporate tax rate of 21%. On the other hand, pursuant to the GILTI provision, income of CFCs exceeding the deemed annual 10% routine return on tangible assets is effectively taxed at the rate of 10.5% at the level of the U.S. shareholder unless the same income has already been effectively taxed at a sufficient rate in foreign jurisdiction.

Hence, the regimes aim to incentivize the holding of intangibles in the U.S. and encourage U.S. MNEs to export intangible-related goods and services. On the other hand, the regimes aim to discourage the offshoring of intangibles. It is however discovered in the study that, because the FDII and GILTI are calculated based on assumptions, the regimes also affect decisions on the location of tangible assets. In addition, the impact of the regimes on cross-border tax planning depends on several other features such as uncertainties relating to the permanence of the regimes and tax incentives provided by other countries.

There have been doubts whether the FDII regime violates international commitments and constitutes a harmful tax regime or a prohibited export subsidy. For now, the FDII regime has not been challenged in the WTO but it is under peer review in the OECD Forum on Harmful Tax Practices. Due to its innovative approach, the FDII regime significantly deviates from other equivalent measures. Thus, it is impossible to say with certainty whether the regime ultimately constitutes a breach of international commitments.

Ultimately, the GILTI provision is examined with regard to the development of international taxation. First, it has been considered that the GILTI regime has already partly resolved challenges relating to taxation of digital economy. Second, the GILTI provision has served as inspiration for the income inclusion rule, a kind of minimum global tax, which was recently proposed by the OECD.

The GILTI and FDII regimes have given rise to much discussion around the development of international taxation and tax competition, and it is certain that the discussion will continue in the future. It remains to be seen how the GILTI and FDII regimes will ultimately affect the outcome of these discussions.