Tangible Intangibles in the United States’ Tax Cuts and Jobs Act : How Mixed Definitions of “Intangible” Lead to Mixed Results in the United States’ Efforts to Close Tax Loopholes, Move to a Territorial Tax System, and Reduce Base Erosion and Profit Shift

Abstract: The United States’ Tax Cuts and Jobs Act of 2017 (TCJA) changed a 30-year-old definition of the term “intangible property” and added assessment requirements for two different types of “intangible income”, both of which deviate from the newly changed general definition of “intangible” and most common understandings of the meaning of the word.  While it may appear unlikely that a change in meaning of a single word in a large tax code could have a drastic effect on international taxation, the differing definitions of “intangible” create far-reaching tangible consequences.   The TCJA affects the international taxation of US-based corporations for cross-border transactions, among many ways, by employing different definitions of the word “intangible” in three different provisions.  First, it modifies the general statutory definition of “intangible” to specifically include goodwill, workforce in place, and going-concern value will be examined.  Second, it uses an unusually broad definition of “intangible” in the new tax category of global intangible low-taxed income (GILTI); and third, the meaning of “intangible” as used in assessing so-called foreign-derived intangible income (FDII) essentially creates a broad export subsidy.  Each use of the term will also be assessed on how it ties into the TCJA’s intended purpose for the provision in which it appears.  Additionally, they will be assessed on how they compare with established international tax standards provided by the Organization for Economic Co-operation and Development (OECD) and its Base Erosion and Profit Shifting (BEPS) Plan.   By explicitly changing the definition of “intangible property”, it becomes apparent that the TCJA has increased the scope of potential tax liability for US corporations and has brought the US in line with the OECD’s use of the phrase as used in its model convention.   In examining how the GILTI tax is calculated, it will become evident that the tax can be applied to income that is not connected to intangibles despite the seemingly limited scope implied by its name.  Furthermore, a limitation on foreign tax credit means that GILTI might allow at least some continuation of the old worldwide tax system.  While potentially overly-burdensome, GILTI seems to be broadly in line with the BEPS goal towards reducing profit shifting.   As a result of how “intangible” is defined for purposes of determining FDII, two effects become apparent. First, for tax categorization, it encompasses income from both tangible and intangible assets.  Second, it permits deductions that can be construed as an export incentive.