Tax News & Views International Weekly: The Stewardship Situation

When Congress passed the One Big Beautiful Bill Act in July, they attempted to address one of the most persistent complaints from multinational corporations about the 2017 Tax Cuts and Jobs Act’s international tax regime. This was the seemingly unintentional quirk in the tax framework which caused the tax on global intangible low-taxed income to fall on income that was anything but low-taxed.

The new fix offers relief, but it also raises some new questions.

The issue was how the TCJA’s rules interacted with limitations on foreign tax credits. Those limitations—almost as old as the FTCs themselves, which were first enacted more than 100 years ago—are meant to prevent companies from claiming the credits on income that is actually domestic. It applies based on the ratio of a company’s domestic income and foreign income, with rules about how to apportion deductions for expenses like interest or research and development for the calculation.

When those expenses were allocated against foreign income determined to be GILTI, it could prevent U.S. companies from claiming FTCs that would otherwise apply. And even though the TCJA’s authors said that the purpose of the GILTI tax was to capture intangible income not adequately taxed by foreign countries, in this case the income could see effective taxation at rates much higher than the 10.5 percent set in the law.

While the U.S. Treasury Department offered some minimal relief on the issue, it could ultimately not resolve it completely. But the OBBBA mandated that interest and R&D would not be allocated against GILTI (now called Net CFC Tested Income or NCTI) for this purpose, and that instead only expenses “directly allocable” to the income would be included.

While that solved the immediate issue, it left many tax experts wondering what was meant by “directly allocable.” In particular, many practitioners have asked whether stewardship expenses—generally, expenses incurred to oversee a related corporation–would apply.

A recent letter to Treasury from the National Foreign Trade Council listing its regulatory requests asked for the department to clarify that stewardship should not be allocated to NCTI income, along with other types of costs such as those for “selling, general and administrative expenses.” It notes that transfer pricing rules have traditionally found that stewardship expenses are considered borne by the parent entity.

While maybe not as consequential as the interest and R&D issue, this could be a key determination for Treasury as it begins the tricky task of implementing the OBBBA’s new rules.

Recent Tax Pieces:

IRS Sets Grace Period for Remittance Transfer Providers – Jonathan Curry, Tax Notes ($):

UK Official ‘Optimistic’ on Side-by-Side Tax Agreement – Lauren Vella and Saim Saeed, Bloomberg Tax ($):

A Framework for Taxing AI –  Mindy Herzfeld, Tax Notes ($):

Manufacturers Seek Business-Friendly Guidance on GOP Tax Law – Chris Cioffi, Bloomberg Tax ($):

Are Companies’ Remote Workers Creating Permanent Establishments? – Christos Theophilou, STI Taxand, Bloomberg Tax:

Public Domain Superhero of the Week

Every week, a new character from the Golden Age of Comics, who’s fallen out of use.

This week’s entry: Iron Ace

Debut Year: 1942

Debut Publication: Air Fighter Comics #2

Origin Story: After getting shot down over France during World War II, British pilot Robert Britain, wearing centuries-old armor of a legendary warrior who fought for Charlemagne, fights back against German occupiers.

Superpowers: No superpowers, technically, but the ancient armor makes him near-impervious to bullets.

Eide Bailly's International Tax Team and our affiliates at HLB, The Global Advisory and Accounting Network, stand ready to assist with your worldwide tax needs.