UK R&D: Companies Have Reason to Revisit Credit Claim Opportunities
It’s still advantageous for UK subsidiaries of US companies to make UK research and development (R&D) credit claims. Following the 2017 tax reform in the US, a 2016 change in the UK R&D Expenditure Credit (RDEC), and especially after the recent RDEC rate increase to 13 percent, it may now be even more beneficial for some companies to revisit and claim those credits.
Furthermore, companies may still come out ahead of the game if the Democrats’ proposed tax reform agenda alters the GILTI regime or raises corporate rates.
What’s Changed and What about GILTI?
UK R&D benefits are now delivered ‘above-the-line’, i.e., from an accounting perspective akin to a grant, effectively providing additional revenue for the company that directly improves EBIT.
The US Tax Cut and Jobs Act of 2017 (TCJA) lowered the maximum corporate tax rate and added minimum tax safety nets on foreign income to prevent tax base erosion. US legislators, seeking to discourage multinationals from artificially shifting profits abroad and ensuring a minimum amount of tax was collected on foreign income, added new taxes in the TCJA, most notably the tax on Global Intangible Low Taxed Income (GILTI).
In addition,US legislators, seeking to discourage multinationals from artificially shifting profits abroad and ensuring a minimum amount of tax was collected on foreign income, added new taxes in the TCJA, most notably the tax on Global Intangible Low Tax Income (GILTI).
Many corporations are discovering that even with GILTI factored into R&D credit claim calculations, they can realize a substantial benefit to the top line.
For all these reasons, multinationals should run calculation models to see the impact of claiming eligible projects in the UK under RDEC.
Scenarios Under Current Law and the US Administration’s Plan
Consider first the impact of RDEC on GILTI: the RDEC benefit a UK company receives gives rise to a GILTI inclusion for the US parent of the UK company. However, because the RDEC benefit is independent of the UK company’s tax liability, it does not reduce the foreign income tax. Rather, the IRS, in examining similar regimes, has taken the position that such a credit is a not necessarily refund of foreign income tax simply because it can use reductions in corporate tax liabilities as a means of paying the credit. Because the credit is payable in cash even if the foreign taxpayer had no local tax liability the cash refundable foreign research credits may not be viewed as a reduction to a corporation’s foreign income taxes[1]. Therefore, the US company may be entitled to a foreign tax credit of the UK tax liability, even if some or all of that tax is refunded by reason of the RDEC. As a result, the benefit of a decreased UK tax is not necessarily washed out by a decrease in the available foreign tax credit against US tax. This allows for a greater US foreign tax credit than had been available before RDEC became an above-the-line benefit.
A&M ran a series of simulations to see what impact GILTI would have on a hypothetical multinational corporation. First, we compared any benefit before RDEC was introduced and afterwards, in two calculations: under current law and the Democrats’ proposals. Under current law, the theoretical corporation realized a significant benefit. And even under contemplated changes to the GILTI regime and a potential corporate rate increase under the Democrats’ latest proposed tax plan, the net benefit was only slightly smaller.
In the simplest terms, the benefit manifests because (1) the GILTI tax on the RDEC to the US parent company is outweighed by the UK benefit, and (2) the RDEC does not reduce the amount of foreign taxes that may be creditable against GILTI tax. Put differently, any RDEC will bear a maximum GILTI cost of 21 percent US income tax on the quantum of the benefit. Because the RDEC does not decrease creditable UK taxes for US purposes, the RDEC benefit will therefore significantly outweigh the GILTI cost.
Whilst there may be ample opportunities for companies who have not already pursued R&D claims to realize benefits, they should run their own models, which may be affected by their broader GILTI profile. But for many companies who haven’t explored the benefits of RDEC claims, revisiting the credit may open up new opportunities or change the way they conduct R&D in the future. For example, as the UK scheme conveys benefits through additional taxed income, it won’t be affected by a global minimum tax proposal. Furthermore, as the Organisation for Economic Co-operation and Development’s transfer pricing changes begin to impact, organizations will likely be reviewing intercompany arrangements, and coupling this with the R&D modelling may be more effective.
Contact A&M for a demonstration on how your company might benefit from an R&D tax calculation.
