The GILTI Tax* is one of two major new and highly complex international tax regimes created under the Tax Cuts & Jobs Act that became law in December 2017. GILTI aimed to prevent multinational companies such as Microsoft, Google and Apple from shifting post-2017 profits to their foreign subsidiaries located in low-tax countries. Not only did the GILTI tax not create a carve out for small businesses, but in fact it taxed these small businesses at tax rates higher than those paid by the multinational giants. As a result, these 200,000 businesses found themselves facing exorbitant compliance costs and double taxation on the income, both which threatened their existence.
e-advocacy involving community building, educating the Treasury & IRS of the problem, and fighting to obtain permanent regulatory relief.
Days after our launching a global grassroots email campaign in March 2018, senior Treasury & IRS officials in charge of international taxation received hundreds of emails from business owners advising them of the tremendous burden that GILTI imposed on them. In addition, foreign governments closely aligned with the U.S. were mobilized and took formal and informal measures to address the problem. The above activity, in addition to face to face meetings, directly lead to the incorporation of the following permanent relief in the relevant Treasury regulations:
- Allow small businesses making the IRC 962 election to benefit from the 50% GILTI deductions. (Prior to the fix, Google and Apple automatically received this benefit. Insanely enough, small businesses do not.)
- Allowing taxpayers making the IRC 962 election to benefit from foreign tax credits. (Prior to the fix, Google and Apple automatically received this benefit. Insanely enough, small businesses do not.)
Two different final regulations, published in 2020, expanded on the relief granted in the proposed relief and provided the vast majority of small businesses with permanent relief from both paying any GILTI tax as well as having to comply with GILTI. Both of the final regulations were issued very shortly after we filed out GILTI lawsuit.
- Final regulation 1: IRC 962 and IRC 250 (50% GILTI deduction and foreign tax credits)
- Final regulation 2: High tax exemption from GILTI
- Retroactivity of the relief to 2018, when GILTI commenced
- Ability to amend prior returns to allow retroactive IRC 962 elections.
Despite the fact that Treasury provided businesses with a permanent solution to their GILTI problem, it was less than what we sought. Our goal is a complete exemption from GILTI for ALL small/medium businesses in ALL circumstances, not only in terms of tax liability, but in terms of annual compliance. To achieve these goals, we filed a GILTI lawsuit (identify to the previously filed “Transition Tax” lawsuit) against Treasury for issuing the GILTI tax regulations in violation of the Regulatory Flexibility Act and Paperwork Reduction Act. These laws mandate that the federal agency issuing the regulation propose ways to exempt smaller businesses from the underlying law and regulation, and if they refuse to do so, they provide a reasoned basis for their refusal.
Bottom line (and we are always bottom line), through effective and innovative use of (i) e-advocacy and (ii) virtually never-before used federal statutes, we created an effective and feasible way that allows smaller businesses to secure concrete and permanent regulatory relief from the GILTI law and regulations. And to obtain 100% of our goals, we filed suit using innovative and proven legal theories that we developed.
* GILTI stands for Global intangible low-taxed income