 Hello and welcome to this session. This is Professor Farhad in this session. We're going to be looking at the US tax reform of 2017. Specifically, we're going to be looking at the global, intangible, low tax income, or also known as Guilty. This topic is covered in international accounting or international taxation, also covered on the CPA and ACCA exam. As always, I would like to remind you to connect with me on LinkedIn if you haven't done so. YouTube is what I house, my 1,500 plus accounting, audit, tax, and finance. Please like my lectures, share them, put them in the playlist, subscribe. I cover all these courses. So any accounting courses you can think of, I do have it covered, please check out my YouTube. On my website, I do have additional resources in addition to the lectures. I have notes, PowerPoint slides, multiple choice through false. And if you're studying for your CPA, 2,000 plus CPA questions, please check out my website. Studypal.co is an artificial intelligence, driven study body platform that matches you with a CPA or a CFA candidate. They are located in 85 countries in 2,500 cities. An important prerequisite for this session is understanding the concept of controlled foreign corporation subpart F income. Because believe it or not, CFC and Guilty, they're in a sense very similar in concept, as you will see. So first, I'm gonna go over the controlled foreign corporation concept. Then I will explain Guilty because it will make much easier putting Guilty into a historical perspective. And the link for this is in the description. I put the link for the whole playlist. So just make sure if you don't understand how CFC work or subchapter F, make sure you view the lecture before you keep on going with Guilty. Just gonna make your life much easier. So Guilty is basically a confusing topic. So I'm gonna try to simplify this as much as possible. But let's look at the overall picture. This is a review from the prior session just to make sure we understand where we stand. So in 2017, the Tax, Cats and Jobs Act made the most extensive changes to international tax provisions in the US since 1986. The objective was to reduce, to make the US corporate more competitive internationally and basically to reduce their income tax rate from 35 to 21, and prevent the erosion of US tax base. Simply put, they don't want you to move overseas. They want to be able to tax you in Guilty. It's gonna try to work on this, prevent the erosion of US tax base. So the most significant change of the new law was the participation exemption or partial territory system in which foreign subsidiaries is exempt from US taxation. And we already discussed this in details in prior chapter. Other major international tax provision were the deemed repatriation of accumulated foreign earnings, which you already covered in the prior chapter. In this session, we will look at the taxation of global intangible low tax income guilty. So in this session, we'd look at Guilty and we still have to deal with the imposition of base erosion anti-tax, which is called beat. We'll talk about this in the next session. So what is this Guilty is all about? This taxation of global intangible low tax income. Well, we have to look at it from a historical perspective. So we'll be able to understand where it's coming from, where it's originating. But the purpose of it is simply is to prevent the erosion of US tax base. And what is that? What is the erosion of US tax base? Well, US multinational corporation, multinational and wealthy individuals, they can shift their profit to low or no income tax location when there's a little or no economic activity. So basically this sounds like controlled foreign corporation sub part F income. When we talked about this, we said the US corporation, the multinational and the wealthy individuals, they were shifting their assets, shifting their assets to different places like became an island in the Bahamas where there is little or no economic activity but tax havens. Well, it is still true. It is still true in a sense. That's what it's trying to, trying to combat shifting assets somewhere else and shifting income, but we live in a different time. So in 1962, when the controlled foreign corporation and sub chapter F income came into place, came into place, the portable assets were simply put money. So you were able to move your money somewhere else, move your portfolio somewhere else. So it was easy. So this is what I was trying to combat. Okay? You could not move your manufacturing facilities to the Bahamas. You can, but it's not as easy than transferring your portfolio of stocks and bonds and investments or register there and operate from that country. So the government responds to the shift in your assets and your money to low tax or tax haven countries was the controlled foreign corporation, sub chapter F income where they combat passive income which is the stocks, bonds, sales income where you just locate there to create sales in other countries and the service income. So the reason I went over this controlled foreign corporation to tell you the government already combating this type of income. So if you shift your passive income overseas, they can get you because it's included under assuming you're a controlled foreign corporation and it's a passive income. It's under sub chapter part F income. Now what's happening in today's world, the economy is much, much different. Now what's happening, technology is portable. Okay? What does that mean? That means a company like Apple and Big Tech in general, I'm not talking about Apple specifically you have Google, you have Microsoft, they can transfer their patent to somewhere else. For example, Apple transferred their patent to Ireland's not one patent, a lot of their patent. Now then the foreign subsidiaries pay royalties to Apple Ireland for international sales. Therefore, Apple is located in Ireland, tax haven country and all the international sales goes to Apple. So the government said, well, guess what? That doesn't sounds right because we're not being able to tax you. So somehow the government response was, let's create this creative idea of called global intangible low tax income. So there are several assumptions being made here. Let's look at some of the assumption. So here we go. So the assumption is any income not supported by fixed asset must be generated from some type of an intangible, an idea. And the reason why the intangible asset is important because in today's economy, all big tech companies, all their most important assets are the patents. So what they're saying is if your income is not supported clearly by fixed asset, it must be coming from intangible asset, which makes sense, in a sense it makes sense that if it's not the fixed assets that generating your income, it must be your intangible asset because you do need to use assets to generate income. So the other assumptions that they make here is the patent, your patent was created in the US. Well, we can talk about this a little bit further in a moment, but that's the other assumption. So the first assumption is your income must be coming from intangible asset. The second assumption is the income is created, the patent itself was created in the US. Well, guess what? Then the income from that patent should be taxed in the US. So based on these assumptions, which is a very creative idea to tax companies, okay? In a sense, it's a preemptive tax. It's like, hold on a second, we're gonna assume it's a patent, we're gonna assume it was created in the US, therefore we're gonna extend our hands and tax you. So notice the controlled foreign corporation, they only had to worry in the past about sub-chapter F income. Now that's no longer the case. They have to worry about older income, okay? But the question is are old patents created in the US? And that's questionable because companies, US companies, they have offices, research facilities all over the world in Europe and India and Australia. So that's not really true. But the point is the US government want to extend their hand to basically prevent the erosion of the tax base. They want you to pay taxes although your international company, as long as your US company, although you're operating internationally, they want to have access. They want you to pay the taxes now. They don't want you to defer anything. That's the whole idea behind this global intangible low tax income, which is a genius idea. If you think about it, whoever came up with it, it's like really, that's pretty creative on extending your hand to even active income overseas to tax it now in the US. So beginning in 2018, US corporation now they must include this guilty, this guilty. Now, how do we compute this guilty? This is important, the amount. Well, the amount to be included is based upon two concepts. So they're gonna look at two things. They're gonna look at your tested income and a specified return. And this specified return is specified by who? By Uncle Sam. So they're gonna tell you what's the specified return is. So the tested income, what's tested income is the aggregate amount of foreign subsidiary income across countries less certain deduction. So simply put, all of your income, all of your income. And here we're not talking about income that's subpart F income because that's tax separately. So all your other income, simply put all your other active income, okay? So guilty can exist whether the corporation derives income from intangible asset or not. So they don't care whether you have intangible asset or not. Sometime you don't, the intangible asset are not listed on the balance sheet but you are still subject to guilty, whether you are, your income is derived from intangible asset or not. Now that's the tested income. Think of tested income, any income that's not taxed because you are a controlled foreign corporation operating overseas, okay? Now the specified return, it's specified by Uncle Sam is 10%. It's an arbitrarily made US government of your qualified business asset investment, QBIA, which is generally equal to your book value of the tangible depreciable asset. Simply put, your specified return is take your book value of your fixed asset, fixed tangible asset multiplied by 10%, okay? Now, if one, if the tested income is greater than the specified return, then you have guilty. So if your tested income is greater than your 10% of your fixed asset, which is your book value of tangible asset. Now what's wrong with the book value computation? Well, guess what? Different companies will have different book values because depending on when did they bought the asset? How are they depreciating the asset? So it's very, there's a lot of questions mark about how to, not how to compute the validity of the book value. Also there's a question mark about the 10%. So what they're saying is your book, your assets, you simply put your fixed asset are generating 10% of your income. That's what they're saying. That's your return. Is, you know, some companies, the return on fixed asset is more, some companies, the return on fixed asset is less. Also your book value is dependent upon how, when did you bought those assets? Okay, but let's take a look. Let's go a little bit further. So what happened is after you take the different, if one is greater than two, if your tested income is greater than 10%. So if you simply put, if you're making income, that's more than 10% of your fixed income, then what we assume is that must be coming from intangible asset. Then the government would say, okay, you can deduct up to 50% of the amount of guilty included in taxable income. So we're gonna give you a deduction of 50%, which basically then your effective tax rate on that income is 10.5. So your effective rate is 10.5, okay. Then the tax, the tax on that guilty can be further reduced by 80% of the foreign tax credit. So if you pay taxes overseas, we're gonna give you 80% on that foreign tax credit to reduce your taxes. Therefore the US corporation whose controlled foreign income earned in the jurisdiction with low average foreign income tax rate will be most affected because they have no tax credit to offset it with. So they're looking for companies where they have, the assumption is they're using intangible asset and they are located in low tax jurisdiction. So this way they have no tax credit to use. Now also the guilty tax credit has its own foreign tax credit basket. So it's not, it's separate than the other three foreign tax, foreign tax credit baskets that we talked about in the prior chapter. If you're not sure what these are, look in the prior session. So if your foreign tax credit allowed exceed, exceed the amount owed on guilty, you have an excess foreign tax credit. Unfortunately, there's nothing you can do with this excess foreign tax credit that's specific to guilty. Simply put, you cannot go backward one year, you cannot carry it forward 10 years like for the other foreign tax credit, excess foreign tax credit. So once if you don't use it, you lose it. But the good thing about this, once your income has been included in the US through guilty, that's it. Now you can bring the money back, tax free, you don't have to worry about anything. So simply put, the overall idea, the US government want to tax you now on all your income, it doesn't matter whether it's sub part F income or active income. If they tax you now, they're gonna tax you at 10.5. So they're gonna give you a break. Now, is this a good thing for the corporation? Bad things, that's, it's, it just started. So this is starting in 2008. So we're gonna find out later if the US government is better off. And I'm sure the US government is better off because they can tax the money now. The money is worth, the money worth now more than if you receive it down the road. So the government, the government wants their money now. That's simply put, but they're giving you a break, okay? So the best way to illustrate this is to actually work an example. So in 2018, this corporation, B corporation, foreign subsidiaries had an aggregate property, plant and equipment, which is the tangible property, plant and equipment of 20 million. So if we take 20 million, multiply 20 million by 10%, it means you have $2 million. So what they're saying is this, what they're saying is this, your fixed asset of 20 million should be generating on average to you as a US corporation 10%. We're okay with that. They're saying we're okay with that. We can accept that. Therefore this 2 million is coming from tangible asset. But let's take a look at this. You generated aggregate before tax income of 5 million. Well, you generated a 5 million worth of income. We think 2 million should be coming from your fixed asset. Well, guess what? The access is 3 million. This access 3 million must be coming from your intangible asset. And this is where guilty comes into place. They say, okay. So the access is the gross amount of guilty. Now this is not the net amount. They're gonna give you a break on that. But the point is, if you have 20 million of assets, you should have 10% return as fair, as fair. And we accept that. We're not gonna tax you on that. But anything in access, it must be coming from intangible asset, which is a very, very questionable assumption but we have to live with this because that's the law. Then what they do after you compute the 3 million, so 5 million minus 2 million, you get to the 3 million, you can deduct half of that. So immediately they would say, okay, we're gonna give you another break. So it's okay, not the 3 million, maybe half of it is intangible asset. Okay, therefore we're gonna give you a break. You can subtract half of it. Now this is the guilty included in the US parent taxable income. Now this money is taxable, 1.5 million. So 1.5 million, if we take 1.5 million based on the US tax rate is 21%. Your US tax liability is 3.15. Now here's what's gonna happen. This is your US tax liability. Let's assume that this company paid on average 16% overseas under taxes. What does that mean? If they paid 16%, 1.5 million, if they paid 16% on that, it means they paid $240,000 in foreign taxes. Guess what? The US government, it's gonna give you 80% credit, which is 80% times 240, that's 192. Therefore we're gonna reduce your taxes by an additional 192,000. Therefore your net tax liability is 123,000. 123,000. So this is basically how we computed guilty. So they gave you a few breaks, few breaks. Again, the government is eager to get their money now. That's the whole point. The government is eager to get their money now. Therefore they're gonna make this assumption that your access income, again, if you understand it, it's really important that you understand what you're doing. What they're saying is this 3 million, 3 million, the access amount is coming from intangible asset. Then we're gonna tax you on that. We're gonna give you a break. We're gonna give you a 50% deduction. We're gonna assume that 50% of it is not. Then we're gonna give you tax credit for all the tax credit that you paid overseas. Now if you're in a tax haven country, you will not have the 16% or this 60% will be less than the US government share will be higher. So that's the whole thing. I hope this session explained the concept of guilty. In the next session we'd look at the beat, base erosion, anti-abuse tax, which is beat. Now I'm gonna also invite you once again to visit my website if you'd like to see additional lectures, I do have lectures on many topics. I strongly suggest you subscribe. It's an investment in your career. Good luck, study hard.