More Anti-SimplificatIon: How PTI and GILTI Override the Section 245A Exemption and the U.S. Territorial Tax System

Abstract

Prior to the 2017 tax reform (TCJA), previously taxed income (PTI) was a necessary part of Subpart F, and ensured that U.S. shareholders, who paid tax currently on their controlled foreign corporation’s (CFC’s) Subpart F income, were not taxed again on the same earnings when distributed as dividends. Section 959 served this function by excluding distributions of PTI from the U.S. shareholder’s gross income. PTI implemented the policy goals of preventing double taxation of the same earnings and ensuring that credit for PTI occurred at the earliest time possible. When the TCJA enacted a territorial tax exemption system utilizing the section 245A deduction, the actual distribution of earnings from a CFC to its corporate U.S. shareholder was no longer a taxable event. It seemed that PTI would no longer be necessary. Yet PTI in conjunction with the global intangible low-taxed income (GILTI) are a powerful combination, which now dominate the United States international tax system. The PTI ordering rules have the effect of allowing the section 245A deduction only after all previously taxed earnings have been allocated. For multinational corporations with significant amounts of GILTI and other PTI, this effect potentially eliminates the availability of the section 245A deduction and, therefore, the exemption system established by the TCJA. This paper demonstrates how the post-TCJA laws may function to override the U.S. exemption tax system. Thus, instead of a move toward a territorial tax system, the TCJA may be characterized as a move toward a pure residence-based, worldwide tax system without deferral.