10.5% GILTI Tax Not Meet OECD Pilar Two Min. 15% Tax Rate Requirement

According to Law360, The U.S. measure for global intangible low-taxed income will likely remain out of sync with an international minimum tax agreement now that legislative windows have closed without key GILTI changes. 

Enacted under the 2017 Tax Cuts and Jobs Act, GILTI was meant to target income earned from intangible assets, such as patents or other intellectual property, held in jurisdictions with low tax rates. Foreign income that falls under the provision is immediately pulled into the U.S. for taxation and receives a deduction of 50%, 

Nearly 140 jurisdictions last October agreed in principle on Pillar Two, which would allow countries to apply top-up taxes to make up the difference if members of a corporate group land at effective tax rates below a 15% threshold.

By the time these 140 other countries signed on to the overhaul, the global regime differed from GILTI in two main ways: 

• Pillar Two involved a 15% minimum ETR, and 
• its top-up taxes operated on a country-by-country basis. 

GILTI, in contrast, still had its 10.5% rate and allowed for jurisdictional blending, which allows companies to use excess foreign tax credits from high-tax jurisdictions to cover the GILTI tax in other countries.

Congressional Democrats proposed changes to GILTI on these two key issues under the Build Back Better Act, which passed the House of Representatives in late 2021 but faced roadblocks in the Senate. Under the Inflation Reduction Act, GILTI remained unchanged.

The U.S. isn't the only country that has faced roadblocks with implementing Pillar Two, raising questions about the global outlook for the regime.

OECD officials have said Pillar Two is designed to work as long as there is a "critical mass" of large countries that adopt the rules. 

While it remains to be seen whether or when that critical mass may be reached, several jurisdictions including the U.K., Switzerland, Singapore and Canada, have announced plans to begin the implementation process.

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