Just when you thought it was safe to put the Ibuprofen back in the medicine cabinet, the IRS has issued proposed GILTI (Global Intangible Low-Taxed Income) regulations in addition to the long anticipated final ones. (For an explanation of what was supposed to be going on, see Tax Break February 10, 2019).

Back in my day, the examinations for admission to the Institute of Chartered Accountants in England and Wales were multi-stage. The last stage was supposedly the toughest (and I do not use that word lightly). I was, therefore, very surprised (and suspicious) when I turned over the ‘Financial Accounting’ paper to discover a 25 mark question that could be answered by a page of T accounts. T accounts are the graphic form of double-entry bookkeeping, providing a framework for ‘debits by the window, credits by the door’. If that still doesn’t resonate with you, it is like being presented with a first grade Arithmetic problem in twelfth grade Maths (Google translate: Math). When the official answers were published some weeks later, there was a comment by the examiner to the effect that many students had achieved very high marks by answering the question in the wrong way. That alone made me wonder whether I really wanted to join this elite group. Monty Python may have declared that ‘It’s accountancy that makes the world go round’, but from where I was looking, it was more likely to make the world go pear-shaped.

That is what I feel about the proposed US regulations – despite being neither a US taxpayer, nor US tax advisor. I shall explain.

By the time the 2018 US tax reform package in general, and Global Intangible Low-Taxed Income in particular, had been suitably chewed over, it was apparent that US corporations were unlikely to be accidentally hit with GILTI tax. (As long as their subsidiaries were paying at least 13.125% corporate tax in their country of residence, they were fairly safe, at least in the short-term). Individuals weren’t so lucky and – in order to avoid horrifically skewed tax bills – they would need to use the obscure section 962 of the tax code, electing to be treated as corporations for this income. It was a case of scratching their left ear with their right hand. And that was how it was expected to remain.

So, despite having no faith in the IRS making anything simple, I was simply gobsmacked when I saw the shock announcement last week that there are proposed regulations that will effectively exclude the reporting of GILTI income where corporate tax is paid in the foreign country at a rate of at least 90% of the US federal rate (18.9%), similar to existing – and well-oiled – passive income rules. Apart from the not-insignficant saving of paperwork for US corporate shareholders, there shouldn’t be a tax difference – GILTI tax only kicking in below 13.125% abroad. It is a sea-change, on the other hand, for individuals with companies in ‘high-tax’ countries such as Israel where they will not need to go through the fantastical rigmarole of corporate-imagined taxation. (In Israel, there will still be an issue with companies with special low tax rates).

What is amazing is that there is no mention in the proposed regulations of the genuine grievance of individuals that these proposed regulations will evidently redress. There were other reasons given.  In other words, it looks like something sensible and good happened (or, at least, might happen) while nobody was paying attention. Not a million miles from the examiner’s comment in that faraway accounting exam.

And, Monty Python or not, the United States economy really does make the world go round. Scary.