In Lieu of GILTI Excessive Unrepatriated Earnings

Abstract

Prior to the 2017 tax reform (TCJA), with a few exceptions, the United States only taxed the foreign income of its domestic corporations when profits were distributed to its U.S. shareholders as dividends. Through this policy, the United States supported its domestic corporations’ active overseas business operations by allowing equal economic competition with foreign entities without the additional burden of paying the U.S. income tax. However, corporations were able to use this ability to electively defer U.S. tax on foreign income as a tax planning technique, which, in part, contributed to the accumulation of large amounts of untaxed “offshore” earnings by U.S. multinational corporations. The U.S. Congress essentially terminated deferral and this tax planning technique when it enacted the current tax on global intangible low-taxed income (GILTI) as part of the TCJA. But GILTI is a formulaic calculation that taxes income regardless of the taxpayer’s intent, use of profits, or the income’s potential for aggressive tax planning. Although GILTI protects against the use of aggressive tax planning techniques, it compromises the tax policy goal of allowing U.S. corporations to compete in foreign jurisdictions unhindered by the U.S. income tax. In lieu of GILTI and the section 245A deduction, this Article proposes a new Subpart F inclusion for excessive unrepatriated earnings based on the concept of distributable net income. This proposal would be superior to the current GILTI regime because it would allow multinational corporations to use deferral for the beneficial goal of supporting foreign active business operations, but would prevent the use of deferral for tax planning purposes.