Stephen E. Shay (Boston Faculty; Google Scholar), Addressing an Opaque Foreign Income Subsidy With Expense Disallowance, 172 Tax Notes Fed. 699 (Aug. 2, 2021):
Permitting U.S. shareholder deductions for bills allocable to exempt international dividends and the portion of GILTI exempted by deduction is an opaque subsidy for international funding. This text’s evaluation concludes that gross earnings offset by deductions whose object is to exempt international earnings from U.S. tax (exemptive deductions) is a category of earnings wholly exempt from taxes for functions of making use of the deduction disallowance rule of Part 265(a)(1) to such deductions. The quantities doubtlessly topic to disallowance are substantial. This evaluation raises questions for taxpayers who’ve taken deductions for these bills and haven’t established a monetary assertion reserve or reported the place.
Primarily based on the evaluation on this article, a discover and remark regulation confirming the applying of Part 265 to earnings offset by an exemptive deduction would fairly interpret the statute.
The Treasury Division’s Fiscal Yr 2022 Income Proposals would amend Part 265 to disallow deductions allocable to a category of international gross earnings that’s exempt from tax or taxed at a preferential charge by a deduction. The proposal states that no inference needs to be drawn relating to present legislation. Underneath the evaluation on this article, the Treasury has authority to undertake a regulation regardless of whether or not the legislative proposal is adopted.
The contributions of this text are to establish exemptive deductions as an expense disallowance concern, to light up its impact as a subsidy and its income significance, and to point out how totally different authorized avenues, together with statutory interpretation, regulation, laws and their combos, can be found to the federal government to deal with the problem.