Shifting Income, Assets Help Stem Tide of Rising Global Tax Rates

Effective tax rates for global intangible low-taxed income and foreign-derived intangible income are set to increase after 2025. Concerns about these increases, as well as the potential for tax hikes in the US generally, have prompted corporate taxpayers to see if they can benefit from today’s lower tax rates or if there are ways to mitigate the cost of higher prospective taxes.

Although planning with respect to these issues must be tailored to meet the taxpayer’s specific tax profile and align with business objectives, there are some planning themes for US multinational groups to consider.

One common theme is to consider accelerate income. Specifically, a corporate taxpayer might recognize income that would otherwise be recognized in a later tax year, when higher tax rates are expected, into an earlier year when tax rates are lower.

Income acceleration transactions typically create offsetting tax attributes, such as depreciable or amortizable tax basis or deferred deductible expenses. These attributes can be recovered in later higher tax rate years, increasing the value of such attributes and resulting in a favorable tax rate arbitrage.

In our experience, income acceleration transactions take various forms. First, taxpayers that earn income under multi-year contracts from services or royalties, for example, can negotiate for payments relating to future years to be “prepaid” in the current year.

Due to US tax accounting rules, the payee-taxpayer generally can expect to recognize the prepaid amounts as income in the year of payment. The payor-taxpayer generally can expect to recognize deductions on a deferred basis, such as over the period that “economic performance” occurs, under the all-events test.

In principle, a prepayment can occur between unrelated or certain related parties. In the case of the latter, parties must determine prepaid amounts using arm’s-length terms, including appropriate discount rates and interest rates, and they must be supported by sound business objectives.

A variation on this theme includes taxable business restructurings or asset sales. A taxpayer that, for business reasons, intends to restructure appreciated assets within the corporate group (or sell such assets to a third party in the near term) could consider accelerating the sale or restructuring into the current, lower tax rate year.

If the transaction occurs within the corporate group, the taxpayer also should benefit by creating a basis that can be recovered in higher tax rate years. This transaction type can be powerful when a group seeks to realign its non-US intellectual property due to changes in the group’s business profile.

For example, a corporate taxpayer might transfer built-in gain property, plant, and equipment or intangible assets (such as a patent or copyright) in a taxable transaction, and lease or license these assets back. The transferor would pay tax now at current (lower) rates but be entitled to rental or royalty expense deductions for use of such assets at the increased tax rate.

Corporate taxpayers also may find it beneficial to defer deductions to later tax years when the benefit of those deductions can be realized at a higher effective tax rate. For example, they may consider deferring accruals for pensions or delaying a bonus or vacation pay until later in the succeeding tax year, requiring them to take the deduction in the subsequent year.

Alternatively, taxpayers may consider the application of provisions such as those in Sections 263(a) and 263A of the Internal Revenue Code. These provisions allow or require taxpayers to capitalize expenses that otherwise would be expensed as accrued and incurred, creating higher current-year income in exchange for future deductions.

Many of these transactions or positions can be applied in both domestic and international contexts. Corporate groups might consider the possibility of implementing acceleration transactions between controlled foreign corporations or between a US corporation and a controlled foreign corporation.

Corporate taxpayers will need to evaluate the non-US tax consequences of these transactions, as acceleration transactions can have meaningful withholding tax, stamp duty, value-added tax, transfer pricing, and non-US timing rules implications. Taxpayers also may want to consider transactions that don’t give rise to current tax consequences in a foreign country, notwithstanding these being taxable in the US.

A prepaid royalty is an example of such a transaction. Foreign tax law rules might follow International Financial Reporting Standards or statutory accounting treatment in assessing the appropriate timing of income recognition of a prepaid royalty. In some jurisdictions, this would treat the prepaid royalty as deferred income and not subject that income to tax abroad, while the US treatment of the prepaid royalty might be to recognize the income in the year of payment.

Acceleration transactions can yield tax benefits even without tax rate increases—particularly if the taxpayer has other tax attributes, such as excess foreign tax credits that fall into the global intangible low-taxed income bucket. A taxpayer with expiring net operating losses may benefit from creating enough income to absorb those losses.

Taxpayers should model the tax and financial accounting implications of income acceleration, or deduction deferral or capitalization transactions—especially when the transaction would require the taxpayer to pay cash tax. (This is the case because the income isn’t offset by losses or other attributes.) Taxpayers also must assess time value of money costs relative to the benefit of recognizing income at a lower tax rate or recognizing deductions at a higher effective tax rate.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Kevin Glenn is partner at DLA Piper with 35 years of experience advising multinationals in cross-border tax matters.

Lindsey Jordan is of counsel at DLA Piper, focused on international tax practice.

Nathaniel Bird, an associate at DLA Piper, contributed to this article.

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