gilti calculations for individual cfc shareholders: section 951a...
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GILTI Calculations for Individual CFC Shareholders:
Section 951A Tax on Foreign Intangible Income
THURSDAY, FEBRUARY 13, 2020, 1:00-2:50 pm Eastern
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February 13, 2020
GILTI Calculations for Individual CFC Shareholders: Section 951A Tax on Foreign Intangible Income
Sean Dokko, J.D., LL.M., Managing Director,
National Tax Office - International Tax Services
BDO USA
Libin Zhang, Partner
Fried Frank Harris Shriver & Jacobson
Notice
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New York | Washington, DC | London | Frankfurt
GILTI Calculations for Individual CFC Shareholders: Section 951A Tax on Foreign Intangible Income
Libin Zhang
Fried, Frank, Harris, Shriver & Jacobson LLP
New York NY
February 13, 2020
U.S. International Taxation Overview
◼ U.S. shareholders of controlled foreign corporations’ foreign income:
* Undistributed 1987-2017 income was mostly deemed repatriated and taxed in 2017-2018 under section 965.
Subpart F
income
Undistributed Other
Income (e.g., active
business income)
Distributed Other Income
Before 2018 Generally
taxable
Not taxable* Taxable as dividend
2018 and later Generally
taxable
Part taxable to the extent
of GILTI
Part not taxable
Part taxable to the extent of GILTI
Part taxable as dividend
Part not taxable if distributed to
certain domestic C corporations
(245A dividends-received
deduction)
6
Global Intangible Low-Taxed Income (GILTI)
◼ Not necessarily global, intangible, or low-taxed
◼ For a controlled foreign corporation (CFC), generally all income is GILTI except:
▪ Income effectively connected with a U.S. trade or business and subject to U.S.
income tax (e.g., not exempt under a tax treaty),
▪ Subpart F income,
▪ Subpart F income under high tax exception (>18.9% foreign tax),
▪ Dividends from certain related corporations,
▪ Foreign oil and gas extraction income,
▪ Net deemed tangible income return equal to 10% of adjusted basis of its GILTI-
producing depreciable assets (qualified business asset investment, or “QBAI”),
owned by a CFC with positive GILTI income
7
GILTI Taxation
◼ Ordinary income for a “United States shareholder”
▪ U.S. person, including resident aliens
▪ Owns 10% or more of CFC by vote or value
▪ Constructive ownership rules apply
◼ 50% section 250 deduction for domestic C corporation or for
individual who makes section 962(b) election
▪ 37.5% in 2026 and later
◼ 80% indirect foreign tax credits (FTCs) allowed for domestic C
corporation or for individual with section 962(b) election
▪ 100% section 78 gross-up
◼ No carryback or carryforward of GILTI-category FTCs8
GILTI: Corporation vs. Individual
C Corporation U.S.
shareholder
Individual U.S. shareholder Individual U.S.
shareholder
with section 962(b)
election
U.S. Federal Tax Rate 21% up to 37% 21%
Section 250 Deduction 50%
(37.5% after 2025)
None 50%
(37.5% after 2025)
Effective Income Tax
Rate
10.5%
(13.125% after 2025)
up to 37% 10.5%
(13.125% after 2025)
Indirect FTC 80% allowed 0% allowed 80% allowed
Federal Tax Generally on
Distribution to Individual
23.8% 3.8%
(cf. Treas. Reg. 1.1411-10(g))
23.8% or 40.8%
Total Tax Rates 31.8%
(33.8% after 2025)
40.8% 32.2% to 47.4%
(34.3% to 49.1% after 2025)
9
Section 250 Deduction
◼ Statute allows 50% section 250 deduction for domestic C corporations
◼ March 2019 proposed regulations: individual or trust taxpayer who
makes the section 962(b) election is allowed the section 250
deduction for GILTI inclusions (and section 78 gross-up treated as
a taxable dividend)
◼ Deduction allowed for 3.8% section 1411 Medicare tax? Compare
with section 965(c) deduction for deemed repatriation income (no).
10
Indirect Foreign Tax Credit (FTC)
◼ 80% indirect FTC allowed for domestic C corporation or individual with
section 962(b) election
▪ 100% section 78 gross-up treated as a taxable dividend
◼ Either GILTI category FTC or (rarely) passive category FTC
▪ FTC regulations – section 78 gross-up is in same category
◼ No carryback or carryforward of GILTI category FTC
11
Direct FTC
◼ Not affected by 20% indirect FTC reduction in section 960(d)
▪ But see JCT Blue Book (technical correction may be
necessary to reduce GILTI-related direct FTC by 20% too)
◼ For individual without section 962(b) election, foreign withholding tax
is imposed on a tax-free PTI distribution
◼ For individual with section 962(b) election, foreign withholding tax is
imposed on either a tax-free PTI distribution or a taxable dividend
◼ Categorization of the direct FTC as either passive, general, GILTI, or
foreign branch category
12
Direct FTC from PTI Distribution
2019 final regulations:
▪ PTI distribution is a timing difference that relates back to the initial
GILTI inclusion, instead of being a base difference
▪ Either GILTI category FTC or (rarely) passive category FTC
▪ No carryback or carryforward of GILTI category FTC
▪ But section 960(c) increases the section 904 limitation in the PTI
distribution year, to allow the direct FTCs as refundable credits in
the later year. Applies to both subpart F income and GILTI.
13
Example
◼ Individual owns 100% of CFC with $180 of GILTI inclusions and $20 of foreign
taxes, makes section 962(b) election
◼ Individual has $200 gross income (including $20 section 78 gross-up) and
$100 taxable income after 50% section 250 deduction
◼ $100 taxable income results in $21 tentative tax at corporate rate
◼ $21 tax reduced by $18 (80%) FTC to $3 net tax liability
▪ Income and FTC both in GILTI category
◼ Individual has $3 of previously taxed income (PTI) in CFC
◼ CFC distributes $10 to individual the next year, subject to $2 (20%)
foreign withholding tax ($0.60 FTC attributable to GILTI-related PTI)
14
Direct FTC from Taxable Distribution
◼ Same FTC category as the taxable distribution (dividend income)
◼ Look-through rules in section 904(d)(3):
▪ Passive category to the extent that CFC’s earnings are passive
▪ General category to the extent that CFC’s earnings are general
▪ Special rules for CFC’s high-taxed income
15
Ways to Mitigate GILTI
◼ Avoid CFC status and/or United States shareholder status
◼ Contribute CFC stock to C corporation
◼ Increase QBAI
◼ Combine CFCs
◼ Convert GILTI to subpart F income
◼ Pay interest, rent, or royalties to shareholder
16
Avoid CFC Status or U.S. Shareholder Status
◼ CFC is a foreign corporation owned more than 50% by vote or value by
United States shareholder(s)
◼ United States shareholder is a U.S. person who owns 10% or more by
vote or value of a foreign corporation
◼ Constructive ownership rules that use modified section 318(a)
attribution, including downward attribution
▪ Downward attribution previously not allowed, in 2016 and earlier, for
attribution from a foreign person to a U.S. person
▪ Smaller intended scope according to legislative history
▪ Downward attribution limited by new regulations in other contexts,
but not for CFC or U.S. shareholder status 17
Puerto Rico
◼ Section 957(c): U.S.
person exception for some
residents of Puerto Rico
and other possessions,
with respect to certain
corporations organized in
Puerto Rico or the other
possessions
18
Ned
Jon
son
Sansa
daughter
Puerto Rico
corporation
50% 50%
Downward Attribution
19
foreign corporation
U.S. corporation A
40%
foreign parent corporation
100%
60%
foreign corporation
U.S. corporation A
40%
60%U.S. corporation B
100%
foreign parent corporation
Downward Attribution II
21
foreign corporation
40%
60%
1%
U.S. person
foreign person
foreign corporation
40%60%
U.S. person
foreign person
1%
other partner
1%
U.S. corporation
100%
U.S.
partnership
foreign
partnership
Downward Attribution – Other CFC Consequences
◼ Lack of portfolio interest exemption for interest paid to a related foreign
corporation that is a CFC
◼ Form 5471 filings (limited exceptions in Notice 2018-13)
◼ Form 1099 reporting (turned off by Oct. 2019 proposed regulations)
◼ Rev. Proc. 2019-40 safe harbor for duty to inquire CFC status of certain
foreign corporations
▪ The foreign corporation would only be a CFC due to foreign-to-US
downward attribution
▪ No actual knowledge, statements, or reliable public information that the
foreign corporation is a CFC
▪ Asked the foreign entity whether it is a CFC and whether it owns (directly or
indirectly) any domestic subsidiaries or foreign corporate subsidiaries 22
Partner in Partnership
◼ Prior rules: for a partnership that is a United States shareholder of a
CFC, the partnership has subpart F income and GILTI that is allocated
to the individual partner.
◼ June 2019 final GILTI regulations and proposed subpart F
regulations – only partners who are United States shareholders of
the partnership’s CFC have GILTI and subpart F income, for 2018
and later.
23
Foreign partnerships
◼ A fund can use a foreign partnership
to own CFC stock, instead of U.S.
partnership
◼ Helps avoid CFC status
◼ June 2019 regulations --
partnership type does not affect
United States shareholder status
starting in 2018 and later
◼ Collateral tax consequences: U.S.
dividend withholding, PFIC rules,
section 1248 gain, etc.
foreign corporation
100%
U.S. citizen A U.S. citizen B
8%16%
NRA
76%
partnership
24
Contribute CFC stock to C corporation
◼ Less practical if the CFC stock is owned at lower tiers.
◼ Less relevant now that 50% section 250 deduction is allowed for an individual
who makes the section 962(b) election.
◼ Possible benefits under U.S. income tax treaties for corporate shareholders.
▪ Treaty benefits may apply to S corporations though
◼ Sometimes state and local income tax benefits.
◼ Disadvantages:
▪ Gain from future sale of CFC stock is subject to U.S. corporate-level tax.
▪ Possible adverse foreign tax consequences.
▪ Difficult to unwind. See Eagles, Hotel California (1977).
25
Increase QBAI
▪ Purchase property that has been previously leased by CFC
▪ Combine loss CFC that holds QBAI with a profitable CFC
▪ Merger
▪ Uncheck-the-box if parent/subsidiary
▪ Section 338(g) election: Applicable upon acquisition of stock in CFC.
▪ Section 338(g) election treats stock purchase as an asset
purchase, resulting in increased basis in assets of CFC.
▪ Increases the Net Deemed Tangible Income Return, and reduces
tested income due to depreciation/amortization of the CFC’s
assets at the higher beginning basis.
26
Combine Income and Loss in One CFC
◼ CFC A paid $100 foreign tax and has $1,000 tested income (with section 78 gross-up)
◼ CFC B has $400 tested loss
▪ Shareholder has net $600 of GILTI.
▪ Shareholder’s indirect FTC is first multiplied by 80%, to reduce $100 to $80
▪ Then multiplied by the section 960(d)(2) “inclusion percentage” which in this case is
$600/$1,000 or 60%, to reduce $80 to $48.
▪ U.S. tax reduced from $126 to $78.
◼ CFC AB paid $100 foreign tax and has $600 tested income (with section 78 gross-up)
▪ Shareholder has $600 of GILTI.
▪ Shareholder’s indirect FTC is multiplied by 80%, to reduce $100 to $80.
▪ U.S. tax reduced from $126 to $46.
27
Subpart F Income
◼ High tax exclusion for subpart F income, if foreign tax is >18.9%
▪ The excluded subpart F income is not GILTI
▪ Better for taxpayers who cannot use indirect FTC, such as REITs
and individuals who do not make section 962(b) election
▪ Favorable expense apportionment and allocation
▪ June 2019 proposed regulations – exclusion for high taxed GILTI
income too
▪ More complex and less elective compared to subpart F rule
▪ Only for taxable years beginning on or after finalized regulations
▪ Law360, High-Tax Exception to TCJA Rule Catching Political
Heat (Jan. 27, 2020). 28
Subpart F Income (cont’d)
◼ No section 250 deduction
▪ 50% GILTI section 250 deduction not useful in some situations, e.g.,
a U.S. shareholder with net operating losses
◼ Subpart F indirect FTC (if allowed) is allowed at 100% instead of 80%
◼ Subpart F FTCs are passive category or general category
▪ can be carried back 1 year and carried forward 10 years
▪ compare to no carryback or carryforward for GILTI category FTCs
◼ Other benefits for subpart F income in many cases
▪ See generally Libin Zhang, To the Frying Pan: New Virtues of
Subpart F Income over GILTI, 160 Tax Notes 73 (July 2, 2018).
29
How I Learned to Stop Worrying and Love Subpart F Income
◼ Foreign personal holding company income
▪ Earn more passive income
▪ Move employees of rental business to separate regarded entity
▪ Check-the-box election before sale of subsidiary entity
◼ Foreign base company sales income and services income
▪ Sell property or provide services through related intermediate
entities organized in low tax countries
▪ Avoid same country exceptions
▪ Use contract manufacturers (see Rev. Rul. 97-48)
◼ Start a business in North Korea, Iran, Sudan, Syria, etc.
30
CFC Pays Interest, Rents, Royalties to Shareholder
◼ Potentially better FTC treatment
▪ Especially for CFCs subject to high foreign withholding taxes
▪ Interest, rents, and royalties are general or passive FTC category,
even if deducted by the CFC against GILTI-related income
▪ General or passive FTC can be carried back 1 year and carried
forward 10 years (compared to no carryback and no carryforward for
GILTI category FTCs)
◼ No section 250 deduction
31
32
GILTI Calculations for Individual CFC
Shareholders: Section 951A Tax on Foreign
Intangible Income
Sean Dokko
BDO USA, LLP
212-885-7269
33
Calculating GILTI
34
Tested Income and Tested Loss
Tested income and tested loss generally determined under the rules of §1.952-2 for
determining Subpart F income
Essentially treats the foreign corporation as a domestic corporation taxable under
Section 11 and by applying the principles of Section 61 and the regulations thereunder
• Subject to special rules in §1.952-2(c)
• Only items of deduction that would be allowable in determining the taxable income
of a domestic corporation may be taken into account for purposes of determining a
CFC’s tested income or tested loss
• If an item of a CFC would be disallowed as a deduction in determining the CFC’s
taxable income if the CFC were a domestic corporation, the item cannot be taken
into account for purposes of determining the tested income or tested loss of the CFC
even if the item reduces the CFC’s earnings and profits
35
Section 952(c) Coordination Rule
Section 952(c)(1)(A) provides a current E&P limitation for Subpart F income
• Subject to recapture provisions in Section 952(c)(2)
Reg. §1.951A-2(c)(4)(iii)(A) provides a coordination rule with the Section 952(c) current
E&P limitation
Reg. §1.951A-2(c)(4)(iii)(B) provides a coordination rule with the recapture provisions in
Section 952(c)(2)
36
Section 952(c) Coordination Rule
Year 1
USP has $0 Subpart F income because of the Section
952(c)(1)(A) current E&P limitation
Reg. §1.951A-2(c)(4)(iii)(A) provides that $100 excluded
from Subpart F income because of current E&P limitation
is excluded from gross tested income
Year 2
USP recaptures $100 as Subpart F income under Section
952(c)(2) and §1.952-1(f)(2)
Reg. §1.951A-2(c)(4)(iii)(B) provides that the $100
recaptured Subpart F income is not excluded from gross
tested income
See Reg. §1.951A-2(c)(4)(iv)(A), Example 1
USP
CFC
Year 1:
• $100 SubF
• ($100) general category loss
in oil and gas extraction
• $0 current E&P
Year 2:
• $0 SubF
• $100 general category income
• $100 current E&P
37
Other Coordination Rules
Section 954(b)(3)(A) provides a de minimis rule for Subpart F income
• Sum of FBCI and gross insurance income for the taxable year is less than the lesser of
(i) 5% of gross income or (ii) $1 million
Section 954(b)(3)(B) provides a full inclusion rule for Subpart F income
• Sum of FBCI and gross insurance income exceeds 70% of gross income
For purposes of the Subpart F exclusion to tested income, gross income taken into
account in determining Subpart F income does not include any item of gross income
excluded from FBCI or insurance income under the de minimis rule, but generally does
include any item of gross income included in FBCI or insurance income under the full
inclusion rule
See also, §1.951A-2(c)(4)(iii)(C) for coordination with full inclusion rule and high tax
exception
38
Midyear Sale of CFC Stock
Sale of a CFC stock from a 958(a) U.S.
shareholder to a Non-U.S. shareholder; CFC
ceases to be a CFC
Reg. §1.951A-1(d) provides rules for
determining pro rata share
Subject to certain modifications, for tested
income generally apply the rules of Section
951(a)(2) and §1.951-1(b) and (e) in the same
manner as those provisions apply to Subpart F
income
USP generally includes pro rata share of tested
income into GILTI calculation
• Based on ratio of days foreign corporation
was a CFC during the taxable year over
days in the entire taxable year
USP
CFC
F1
FC
Sale
39
Midyear Sale of CFC Stock
Sale of a CFC stock from a 958(a) U.S.
shareholder to a Non-U.S. shareholder; CFC
remains a CFC
Repeal of Section 958(b)(4) permits
downward attribution from a foreign person
to a U.S. person in certain situations for
purposes of determining U.S.
shareholder/CFC status
Section 958(a) U.S. shareholders on the last
day of the foreign corporation’s tax year in
which it is a CFC have Subpart F/GILTI
inclusions
Solely constructive Section 958(b) U.S.
shareholders do not have Subpart F/GILTI
inclusions
See Temp. Reg. §1.245A-5T(e) for limitations
on USP claiming a 245A DRD on its 1248
dividend, if any
USP
CFC
F1
CFC
Sale
USS
40
QBAI
QBAI = average of the aggregate of its adjusted bases, determined as of the close of
each quarter of the taxable year, in specified tangible property used in its trade or
business and of a type with respect to which a deduction is generally allowable under
Section 167
• Very generally, specified tangible property is tangible property used in the
production of tested income
• Special rules for dual-use property. See Reg. §1.951A-3(d)
• Adjusted bases generally determined by using ADS under Section 168(g)
o Election to not determine basis under ADS under certain limited circumstances.
See Reg. §1.951A-3(e)(3)(ii)
• Special rules for short taxable years. See Reg. §1.951A-3(f)
• Rules regarding partnership QBAI. See Reg. §1.951A-3(g)
• Anti-abuse rules that disregard basis. See Reg. §1.951A-3(h)
• Reg. §1.951A-3(b) confirms that a tested loss CFC has no QBAI
Using ADS for purposes of determining QBAI is not a method change (though a change to
ADS for purposes of computing tested income/loss is a method change)
41
Net Deemed Tangible Income Return
NDTIR = 10% of QBAI – specified interest expense
Specified interest expense is the excess (if any) of -
• The aggregate of the shareholder’s pro rata share of the tested interest expense of
each CFC for a CFC inclusion year that ends with or within the U.S. shareholder
inclusion year, over
• The aggregate of the shareholder’s pro rata share of the tested interest income of
each CFC for a CFC inclusion year that ends with or within the U.S. shareholder
inclusion year
Tested interest expense is reduced by qualified interest expense and tested loss QBAI
amount
• Designed to prevent net interest expense incurred in an active financial or insurance
business with third parties from lowering NDTIR
42
Tested Interest Expense and Tested Interest Income
Facts
CFC1 and CFC2 are tested income CFCs
CFC1 and CFC don’t hold qualified assets and
do not own stock of another CFC
Analysis
CFC1 has $100 of tested interest expense and
no tested interest income
CFC2 has $100 of tested interest expense and
$100 of tested interest income
USP’s specified interest expense is $100 (=
$200 - $100)
See Reg. 1.951A-4(c)(1), example 1
USP
CFC2CFC1
$100 interest
expense
Unrelated
Bank
$100 interest
expense
44
Section 962
45
Section 962: Overview
Section 962(a) - Under regulations prescribed by the Secretary, in the case of a U.S.
shareholder who is an individual and who elects to have the provisions of this section
apply for the taxable year—
• the tax imposed under this chapter on amounts which are included in his gross
income under Section 951(a) shall (in lieu of the tax determined under Sections 1 and
55) be an amount equal to the tax which would be imposed under Section 11 if such
amounts were received by a domestic corporation, and
• for purposes of applying the provisions of Section 960 (relating to foreign tax credit)
such amounts shall be treated as if they were received by a domestic corporation
46
Section 962: General Rules
Reg. §1.962-2(c)(1) – Except as provided in Reg. §1.962-2(c)(2) and Reg. §1.962-4, an
election under this section by a U.S. shareholder for a taxable year shall be applicable to
all controlled foreign corporations with respect to which such shareholder includes any
amount in gross income for his taxable year under Section 951(a) and shall be binding for
the taxable year for which such election is made
Reg. §1.962-2(a) - The election under Section 962 may be made only by an individual
(including a trust or estate) who is a U.S. shareholder (including an individual who is a
U.S. shareholder because, by reason of Section 958(b), he is considered to own stock of a
foreign corporation owned (within the meaning of Section 958(a)) by a domestic pass-
through entity (as defined in Reg. §1.965-1(f)(19)))
47
Section 962: Distributions of PTEP
Section 962(d) - The earnings and profits of a foreign corporation attributable to
amounts which were included in the gross income of a U.S. shareholder under Section
951(a) and with respect to which an election under Section 962 applied shall, when such
earnings and profits are distributed, notwithstanding the provisions of Section 959(a)(1),
be included in gross income to the extent that such earnings and profits so distributed
exceed the amount of tax paid under this chapter on the amounts to which such election
applied
How should distributions of PTEP taxable under Section 962(d) be taxed?
• See Smith v. Comm’r, 151 T.C. No. 5 (2018)
PTEP ordering rules (which PTEP comes out first?)
• Reg. §1.962-3
• Notice 2019-01
48
Basis Adjustments
Section 961(a) - In the case of a U.S. shareholder who has made an election under
Section 962 for the taxable year, the increase in basis provided by this subsection shall
not exceed an amount equal to the amount of tax paid under this chapter with respect
to the amounts required to be included in his gross income under section 951(a)
Section 961(b) - In the case of a U.S. shareholder who has made an election under
Section 962 for any prior taxable year, the reduction in basis provided by this paragraph
shall not exceed an amount equal to the amount received which is excluded from gross
income under Section 959(a) after the application of Section 962(d)
49
Section 962: Issues for Consideration
CFC local country income tax rate(s)
Future plans for distributions
• Qualified foreign corporation/QDI vs. ordinary income
• Local country withholding taxes
o Section 960(c) with no Section 962 Election
Plans for sale or other dispositions
• Basis increase
• Interplay with Section 1248(d)(1)
o See Regs. §§ 1.1248-2(e)(3)(iii) and 1.1248-3(e)(2)(i)
Interplay with AMT
• See FSA 200247033 and FSA 200247034
Section 962 election on an amended return?
50
Section 962: Tax Return Filings
From the Instructions to Form 1040, Line 12a
Tax due to making a section 962 election (the election made by a domestic shareholder of a
controlled foreign corporation to be taxed at corporate rates). See section 962 for details.
Check box 3 and enter the amount and “962” in the space next to that box. Attach a
statement showing how you figured the tax.
Recommended filings to attach with Form 1040
• Form 8992, U.S. Shareholder Calculation of Global Intangible Low-Taxed Income
(GILTI)
• Form 8993, Section 250 Deduction for Foreign-Derived Intangible Income (FDII) and
Global Intangible Low-Taxed Income (GILTI)
• Statement detailed in Reg. §1.962-2(b)
• Whitepaper showing calculation of Section 78 gross up and Section 960(d) foreign tax
credits
• Whitepaper showing calculation of U.S. tax due
51
Section 962: SALT Implications
What about State and Local Tax? For example:
• Policy Bulletin IT 2018-01 Exclusion for Dividends from Sources Outside the United
States, Ga. Dept. of Rev., updated 08/13/2019
o Georgia does not recognize the IRC § 962 individual taxpayer election to pay tax
on the income as if the income is received by a C Corp. Georgia uses federal
adjusted gross income as the starting point for calculating state taxable income
but how tax is paid is provided under a separate Georgia law section, and there is
no comparable provision in Georgia law similar to IRC § 962 that provides for a
different tax computation.
• State of Michigan Department of Treasury Notice: Income Tax Guidance for
Corporations, Individuals, Trusts and Estates on Global Intangible Low-Taxed Income
(GILTI)
o If an individual, trust, or estate elects federally to be taxed on GILTI as a
domestic corporation under IRC 962(a)(1), the taxpayer will recognize GILTI
adjusted for IRC 78 gross-up and IRC 250 deduction in AGI in that year as deemed
income.
• Other approach?
52
GILTI High Tax Exclusion
53
Final GILTI High Tax Exclusion
The GILTI final regs retain the GILTI High Tax Exclusion (tied to Section 954(b)(4)) from
the prior GILTI proposed regs (the Final GILTI High Tax Exclusion)
The Final GILTI High Tax Exclusion applies only to items of gross income that are
excluded from FBCI or insurance income solely by reason of an election under Section
954(b)(4) and Reg. §1.954-1(d)(5). See Reg. §1.951A-2(c)(1)(iii)
− This exclusion does not apply to any item of gross income excluded from FBCI or
insurance income by reason of an exception other than Section 954(b)(4), regardless
of the effective rate of foreign tax to which such item is subject
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GILTI Proposed Regulations
The new GILTI proposed regs provide that an election (the Proposed GILTI High Tax
Exclusion) may be made for a CFC to exclude from gross tested income, gross income
subject to foreign income tax at an effective rate that is greater than 90 percent of the
rate that would apply if the income were subject to the maximum rate of tax specified
in Section 11 (= 18.9% based on the current rate of 21%). See Prop. Reg. §1.951A-
2(c)(6)(i)
The election is made by the CFC’s controlling domestic shareholders with respect to the
CFC for a CFC inclusion year by attaching a statement to an amended or filed return in
accordance with forms, instructions, or administrative pronouncements. See Prop. Reg.
§1.951A-2(c)(6)(v)(A)
If an election is made with respect to a CFC, the election applies to exclude from gross
tested income all the CFC’s items of income for the taxable year that meet the effective
rate test in Prop. Reg. §1.951A-2(c)(6)(iii) and is binding on all the U.S. shareholders of
the CFC. See Prop. Reg. §1.951A-2(c)(6)(v)(B)
− Special rules with regards to revoking the election. See Prop. Reg. §1.951A-
2(c)(6)(v)(D)
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GILTI Proposed Regulations
The election to apply the Proposed GILTI High Tax Exclusion with respect to any high-
taxed income allows taxpayers to eliminate the need to use foreign tax credits to reduce
GILTI tax liability on such income by removing such income from gross tested income
However, taxpayers choosing the election will not be able to use the foreign tax credits
associated with that income against other Section 951A category income, and they will
not be able to use the tangible assets owned by high tax QBUs in their QBAI computation
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GILTI Proposed Regulations
In general, the relevant items of income for purposes of the Proposed GILTI High Tax
Exclusion are all items of gross tested income attributable to a qualified business unit
(QBU as defined in Section 989(a) and the regulations thereunder). See Prop. Reg.
§1.951A-2(c)(6)(ii)(A)(1)
− Gross income is attributable to a QBU if the gross income is properly reflected on the
books and records of the QBU. Such gross income must be determined under Federal
income tax principles, except that the principles of Reg. §1.904-4(f)(2)(vi) (without
regard to the exclusion described in Reg. §1.904-4(f)(2)(vi)(C)(1)) apply to adjust
gross income of a QBU to reflect disregarded payments. See Prop. Reg. §1.951A-
2(c)(6)(ii)(A)(2)
The GILTI proposed regs provide that for purposes of both the exception under Section
954(b)(4) and the Proposed GILTI High Tax Exclusion, the effective rate of foreign tax
imposed on an item of income is determined solely at the CFC level by allocating and
apportioning the foreign income taxes paid or accrued by the CFC in the current year to
the CFC’s gross income in that year based on the rules described in the regulations under
Section 960 for determining foreign income taxes “properly attributable” to income
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GILTI Proposed Regulations - Applicability
The Proposed GILTI High Tax Exclusion is proposed to apply to taxable years of foreign
corporations beginning on or after the date that final regulations are published in the
Federal Register, and to taxable years of U.S. shareholders in which or with which such
taxable years of foreign corporations end
Until the Proposed GILTI High Tax Exclusion regulations are effective, a taxpayer may
not exclude any item of income from gross tested income under Section
951A(c)(2)(A)(i)(III) unless the income would be foreign base company income (FBCI) or
insurance income but for the application of Section 954(b)(4) and Reg. §1.954-1(d)
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Disclaimer
This document is current as of January 30, 2020. This document is not written
tax advice directed at the particular facts and circumstances of any person. This
document is for general information purposes only, and should not be used as a
substitute for consultation with professional advisors. If you are interested in the
subject of this document we encourage you to contact an independent tax advisor
to discuss the potential application to your particular situation.