Company Seeks Change in GILTI High-Tax Exclusion Effective Date

July 3, 2019

Internal Revenue Service
CC:PA:LPD:PR (Reg — 101828-19)
Room 5203
Post Office Box 7604
Ben Franklin Station
Washington, D.C. 20044

RE: Proposed Regulation 1.951A-2(c)(6) Election for application of high tax exception of Section 954(b)(4)

Dear Sir or Madam:

In the above referenced proposed regulations, you have provided for an election that would exclude income subject to foreign taxes in excess of 90% of the U.S. federal tax rate from the Global Intangible Low-taxed Income rules of Section 951A. As you note, this exclusion is in accordance with the legislative history for Section 951A. We are in agreement with the proposed regulation 1.951A-2(c)(6); however, we are concerned that by proposing an effective date for the regulation that is for years beginning after the date the final regulation is published in the federal register (Regs Section 1.951A-7(b)), you are subjecting U.S. corporations to a tax on income that you have agreed was not in accordance with the legislative intent. We respectfully request that the effective date for this regulation be changed to be the first date that a corporation is subject to Section 951A.

As noted in the preamble to the proposed regulations, “[t]he legislative history evidences an intent to exclude high-taxed income from gross tested income.” The following is a quote from the Senate Explanation at 371:

“The Committee believes that certain items of income earned by CFCs should be excluded from the GILTI, either because they should be exempt from U.S. tax — as they are generally not the type of income that is the source of base erosion concerns — or are already taxed currently by the United States. Items of income, excluded from GILTI because they are exempt from U.S. tax under the bill include foreign oil and gas extraction income (which is generally immobile) and income subject to high levels of foreign tax.” [emphasis added]

We note that the other regulations under Section 951A are effective for years beginning after December 31, 2017 (Regs Section 1.951A-7(a)). If you are in agreement that it was not the intent of Congress to subject income that has already been subject to a high rate of foreign income tax to be included in taxable income under Section 951A, it does not make sense to delay the effective date of a regulation that is in accordance with that intent for two years after the date that Section 951A is applicable.

IPG Corporation manufactures and sells laser equipment around the world. In virtually every country in which we do business the statutory and effective tax rates are 20% and above. The Company pays significant taxes in the U.S. and a substantial part of the Company's foreign income is earned in Germany (tax rate 31%) and China (tax rate 25%); the Company's overall effective tax rate was 24% in 2018 and in the first quarter of 2019. However, as a result of the continued application of the regulations under Section 861 which require the allocation of U.S. deductions to the income taxed under Section 951A, the ability to offset the U.S. tax on GILTI by the foreign tax credit is reduced. The effect is that the Company pays additional U.S. tax on income that has already been taxed at a higher rate in a foreign country. We do not believe that it is in accordance with legislative intent to have income that has been subjected to foreign tax rates in excess of the U.S. federal rate to then be subject to additional tax in the U.S. under the provisions of a code section that is designed to assess a U.S. tax on “low-taxed” income.

The proposed regulation 1.951A-2(c)(6) is designed to fix this problem but in order to be fully effective, it should be available in years beginning after December 31, 2017. Based on the above reasoning, we recommend that in the final regulations, Regs Section 1.951A-7(b) is deleted so that the effective date for Regs Section 1.951A-2(c)(6) is governed by Regs Section 1.951 A-7(a) which means that a Company could make the election in the first year that it is subject to the Global Intangible Low-taxed Income rules under Section 951A.

Please feel free to contact me with any questions at tmammen@ipgphotonics.com or at 508-373-1124.

Sincerely Yours,

Timothy P.V. Mammen
Chief Financial Officer and
Senior Vice President
IPG Photonics Corporation
Marlborough, MA