Department of Accounting Published Work

How Closing a Tax Loophole Helps Resolve an Accounting Loophole

Authors: Zhan Furner, PhD, CPA and Denise Dickins, PhD, CPA, CIA

Publication: The CPA Journal

Link: https://www.cpajournal.com/2019/11/06/how-closing-a-tax-loophole-helps-resolve-an-accounting-loophole/

Abstract: The Tax Cuts and Jobs Act of 2017 (TCJA) was enacted on December 22, 2017. Among other things, the TCJA amended Internal Revenue Code (IRC) section 965 to impose a one-time transition tax on previously unrepatriated foreign earnings of 15.5% if held as cash and cash equivalents, and of 8% if held as illiquid assets. The purpose of this provision was to stimulate domestic economic investment and growth by encouraging multinational corporations (MNC) to repatriate some of the estimated $1 trillion in cash held offshore (Michael Smolyansky, Gustavo Suarez, and Alexandra Tabova, “U.S. Corporations’ Repatriation of Offshore Profits,” Fed Notes, Sept. 4, 2018, http://bit.ly/2kpzoN8). During the first half of 2018, MNCs repatriated cash of approximately $465 billion (Jeffry Bartash, “Repatriated Profits Total $465 Billion After Trump Tax Cuts—Leaving $2.5 Trillion Overseas,” MarketWatch, Sept. 19, 2018, https://on.mktw.net/2kljkvM). In comparison, the effect of the 2004 tax holiday on offshore assets was repatriation of approximately $312 billion of an estimated $750 billion. The TCJA also closed a tax loophole by switching from a worldwide tax system, under which foreign-source income was taxed only when repatriated, to a quasi-territorial tax system, under which foreign-source income is substantially exempt from U.S. taxation, except for the additional tax imposed on certain foreign earnings [known as the Global Intangible Low-Taxed Income (GILTI) provision]. This article demonstrates how, in doing so, the TCJA also helps close an accounting loophole used by some MNCs to overstate financial reporting earnings.

Keywords: taxes,law, tax loopholes,loopholes