Tax-Efficient Supply Chain in Shadow of Tax Reform: GILTI, FDII, and BEAT: they're not just acronyms - they require reassessing tax consequences of existing supply chain structures.

• Author: Spinowitz, Moshe
• Position: Global intangible low-taxed income, foreign derived intangible income, base erosion and antiabuse tax - Cover story

For the past quarter century the same legal framework and economic incentives have driven how multinational corporations structure their supply chains. Relatively high U.S. corporate rates incentivized companies to locate valuable assets and operations in lower-taxed jurisdictions; the United States' worldwide tax regime incentivized retaining and reinvesting those earnings outside the United States; and the anti-deferral regime of Subpart F of the Internal Revenue Code mandated compliance with its rules to avoid the generally adverse consequences of immediate, full U.S. taxation.

Then came December 22, 2017. Several core features of the tax reform legislation enacted that date (whose full name I have relegated to the endnotes) (1) should prompt multinational corporations to reevaluate their supply chain structures. First and foremost, the reduction in the U.S. corporate tax rate from 35 percent to 21 percent significantly shrinks the gap between the U.S. tax rate and foreign tax rates. When coupled with the foreign tax implications of the Organisation for Economic Co-operation and Development's BEPS project, that gap maybe be smaller yet.

Second, the replacement of the prior international taxation regime--in which foreign subsidiary income was generally not taxed in the United States until it was repatriated--with a new regime in which foreign subsidiary income is either taxed in the United States currently (albeit at potentially differential rates) or not at all alters the basic rules governing the taxation and repatriation of foreign earnings.

Finally--and derived from the prior point--the adoption of a bevy of new regimes (with their attendant acronyms) governing the taxation of cross-border activities--GILTI, FDII, and BEAT--requires a reassessment of the tax consequences of existing supply chain structures and their continuing tax and business efficiency under these new regimes. And with these rules already in effect, time is of the essence.

Below, I briefly summarize the key aspects of the new GILTI, FDII, and BEAT regimes. These summaries are by their nature general overviews and do not attempt to address every nuance or ambiguity of these new rules or their sometimes unexpected interactions. After those brief summaries, I discuss aspects of the landscape that have and have not changed, and the implications those changes might pose for multinational supply chain planning after tax reform.

Impact of Key International Aspects of Tax Reform on Supply Chain Planning

GILTI

Although some have described the new international tax system as a "territorial" system, that is at best a misnomer. The new regime is in fact one in which a far broader swath of foreign subsidiary income is subject to current U.S. taxation. And the main culprit is the new GILTI regime. (2) GILTI--or global intangible low-taxed income--is in some ways a new category of Subpart F income that subjects controlled foreign corporation (CFC) income in excess of a certain threshold (described below) to current taxation in the United States, at potentially reduced tax rates (only "potentially" because the deduction mechanism through which the reduced tax rate is achieved may not in fact yield a reduced rate of tax in all circumstances).

Broadly speaking, under the GILTI regime, a U.S. shareholder calculates its net CFC income (excluding for these purposes certain specified categories of income such as "regular" Subpart F income and netting for these purposes income and losses across CFCs) that is in excess of a 10 percent return on the CFC s basis in depreciable tangible property. (3) That "excess" net income is deemed to be intangible income that is included on a current basis in the taxable income of the CFCs U.S. shareholders. Corporate U.S. shareholders of the CFC are then entitled to claim a deduction (subject to certain limitations) equal to 50 percent (and falling to 37.5 percent after 2025) of the GILTI, yielding an effective tax rate of 10.5 percent (or 13.12 percent starting in 2026). (4) The U.S. shareholder may then claim a foreign tax credit in respect of 80 percent of the foreign taxes paid with respect to the GILTI. (5) In a simple scenario, foreign income that is taxed at a rate of 13.125 percent (16.4 percent starting in 2026) or greater would result in no U.S. residual tax, since 80...