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Bill Would Exclude US Territories, Possessions From GILTI Regime

Friday, May 15, 2020

On May 4, 2020, a bill was introduced in the United States House of Representatives to limit the impact of the Global Intangible Low Tax Income (GILTI) regime on businesses based in US territories and possessions.

According to Stacey E. Plaskett, who represents the US Virgin Islands in the House, US tax laws have traditionally treated investments in US territories and possessions more favorably than in other foreign jurisdictions. However, under the GILTI tax, introduced by the 2017 Tax Cuts and Jobs Act, territories and possessions are treated the same as foreign countries, negatively impacting investment in these places.

"To remedy this unintended result, I have introduced H.R. 6648, the Territorial Economic Recovery Act, to treat qualified investment in US territories as domestic – rather foreign – for purposes of the GILTI tax regime. In other words this bill will place the Territories on par with other states here in America. This legislation is not intended to favor the issue of status in any of the US territories," Plaskett explained.

The GILTI rules are intended to discourage US corporations from shifting high-yielding intangible assets such as intellectual property rights to low-tax jurisdictions. GILTI is defined as the portion of the income of a controlled foreign corporation (CFC) owned by US shareholders that exceeds a notional 10 percent return – a rate that is intended to reflect the normal rate of return on tangible assets. After a 50 percent deduction, GILTI is subject to an effective corporate tax rate of 10.5 percent.

Plaskett said that H.R. 6648 would implement a limitation on the GILTI tax for businesses operating in US territories. To qualify, companies would have to ensure that they have an active trade or business in a territory or possession of the United States, and that income from the business would be limited to possession-sourced income.

More specifically, a "qualified possession company" would be a CFC which in the preceding three-year period derived at least 80 percent of its gross income from sources within a possession of the US. Additionally, at least 75 percent of the gross income of such corporation would need to be effectively connected with the active conduct of a trade or business within a possession of the US.

Under the bill, a possession means Puerto Rico, the US Virgin Islands, and any specified possession described in section 931(c) of the Internal Revenue Code.