Law360 Quotes Peter Barnes and David Rosenbloom: Foreign Credits At Risk in Senate Tax Bill, Analysts Say

A provision in the Senate’s version of the Tax Cuts and Jobs Act requiring U.S. multinationals to calculate their foreign tax credits on an annual basis means that companies could end up with unusable leftover credits and bookkeeping anomalies due to mismatches with other countries’ accounting rules, tax specialists say.

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For H. David Rosenbloom, a member at Caplin & Drysdale, Chtd., in addition to anomalies created by different governments’ accounting rules, the inability to carry over foreign tax credits “certainly cuts down on the ability to plan, and it cuts down on the ability to deliberately incur GILTI income.”

He noted that if a company carried over excess foreign tax credits, “the next year you would have an incentive to incur as much GILTI as you can. It seems to me if you have carryovers, you have an incentive to deliberately earn GILTI.”

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As for other possible motivations behind the shift to a one-year calculation, Peter A. Barnes, an Of Counsel at Caplin & Drysdale, Chtd., a senior fellow at Duke University School of Law and a former tax executive with General Electric Co., offered a few reasons.

He said it’s possible Congress will argue that the annual calculation prevents carrying forward taxes from a high-tax year to shelter low-taxed income in a subsequent year. In addition, he said, lawmakers "might argue simplicity" or that the calculation includes lots of foreign subsidiaries each year, so there is some natural pooling across subsidiaries.

“What is clear, however, is [that] the U.S. taxpayers will need to make accounting elections — where available — to try to match foreign taxable income to the amount that will be recognized under U.S. tax accounting principles for the same year,” Barnes said. “That may require deferring depreciation deductions, for instance, or taking other steps to try to synchronize the timing of foreign earned income. That is not simplification for tax professionals.”

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Excerpt taken from the article “Foreign Credits At Risk In Senate Tax Bill, Analysts Say” by Natalie Olivo for Law360.