GILTI regime guidance answers many questions.

AuthorMurillo, Jose
PositionGlobal intangible low taxed income

The Treasury Department and the IRS in September issued proposed regulations (1) under the new global intangible low-taxed income (GILTI) regime. The highly anticipated regulations package also proposes amendments and additions to the Subpart F income and consolidated return regulations.

The proposed regulations:

* Describe the manner of calculating the fundamental elements underlying the GILTI inclusion (e.g., "tested income" and "qualified business asset investment" (QBAI));

* Revise the definition of "pro rata share" for purposes of inclusions of both GILTI and Subpart F income;

* Set out anti-abuse rules in respect of certain basis step-up transactions for purposes of the GILTI regime;

* Adopt a hybrid aggregate/entity approach to U.S. partnerships and their partners for purposes of the GILTI regime; and

* Generally require a consolidated group to compute its GILTI inclusion as a group rather than member by member.

This article provides background information on the GILTI regime, including the relevant statutory provisions, and a detailed discussion of the proposed regulations. It also covers notable implications of the proposed regulations.

Background

The GILTI regime was enacted as part of the law commonly known as the Tax Cuts and Jobs Act (2) (TCJA), which added new Sees. 250 and 951A to the Internal Revenue Code and revised Sec. 960.

Sec. 951A requires a U.S. shareholder of any controlled foreign corporation (CFC) to include the U.S. shareholder's GILTI for each tax year--computed based on the CFC's attributes--currently in gross income. The GILTI inclusion is similar in certain respects to an inclusion of Subpart F income under Sec. 951.

Sec. 250 generally permits a corporate U.S. shareholder a deduction equal to 50% of its GILTI inclusion (resulting in an effective U.S. federal income tax rate of 10.5%). Sec. 960 treats a corporate U.S. shareholder as paying itself a portion of the non-U.S. income taxes paid by its CFCs--and therefore allows the U.S. shareholder to take those taxes as a credit against its GILTI tax liability under Sec. 901 (subject to certain other limitations).

The proposed regulations do not address Sees. 250 and 960; forthcoming regulations will do so. The proposed regulations also do not address many of the questions left open under the statute regarding the interplay between the GILTI rules and other Code sections, although some of these questions are raised in the preamble. Treasury notes that taxpayers have raised questions on the application of the dividends-received deduction under Sec. 245A, the anti-hybrid rules of Sec. 267A, and the interest limitation in Sec. 163(j) to the calculation of tested income and tested loss. Rather than resolve these questions in the proposed regulations, Treasury has noted that these items will be addressed in future guidance.

Treasury notes in the preamble that it anticipates issuing proposed regulations assigning the Sec. 78 gross-up attributable to the foreign taxes deemed paid to the GILTI foreign tax credit basket. However, Treasury does not indicate that future guidance will address other foreign tax credit--related issues. For example, the preamble does not indicate whether the lookthrough rule in Sec. 904(d) will apply to GILTI. Neither the preamble nor the proposed regulations address whether withholding taxes on GILTI previously taxed income (PTI) distributions will be included in the GILTI basket and subject to the 20% "haircut" in Sec. 960(d).The proposed regulations and preamble are also silent on the treatment of taxes that are "properly attributable" to tested income and are paid in a year other than the year in which the tested income is included in the U.S. shareholder's GILTI inclusion amount.

Comments submitted before issuance of the proposed regulations asked Treasury to adopt rules to allow for the carryover of a tested loss, similar to the existing rules for net operating loss carryovers that apply for determining the taxable income of a U.S. corporation. The proposed regulations, however, do not adopt such a rule to allow for the carryover of a tested loss.

Consistent with the definition of tested income under Sec. 951A(c)(2), the proposed regulations exclude from tested income any Subpart F income of a CFC that is excluded from foreign base company income or insurance income solely by reason of the high-tax exception. Accordingly, the proposed regulations do not exclude (or permit an exclusion) from tested income any non--Subpart F income that is subject to a high amount of tax.

Sec. 951A

As described in greater detail in the next section, the proposed regulations modify some of the provisions of Sec. 951A.

Under Sec. 951A and the proposed regulations, a U.S. shareholder's GILTI inclusion amount for a tax year equals the excess (if any) of the U.S. shareholder's "net CFC tested income" over its "net deemed tangible income return." Thus formulated, GILTI represents an amount deemed to be "excessive" as compared with a specified return.

A person is treated as a U.S. shareholder of a CFC only if that person owns (directly or indirectly) stock in the CFC on the last day in the tax year of the foreign corporation on which the foreign corporation is a CFC. A foreign corporation is treated as a CFC for any tax year if the foreign corporation was a CFC at any time during that tax year.

Net CFC tested income

A U.S. shareholder's net CFC tested income for a tax year equals the excess (if any) of: (1) the U.S. shareholder's aggregate pro rata share of the tested income of each of its CFCs for the tax year over (2) the U.S. shareholder's aggregate pro rata share of the tested loss of each of its CFCs for the tax year. (3) (For purposes of Sec. 951A, a U.S. shareholder's pro rata share of a relevant item of a CFC is determined under Sec. 951(a)(2) in the same manner as that section applies to Subpart F income, taken into account in the tax year of the U.S. shareholder (the "U.S. shareholder inclusion year" under the proposed regulations) within or with which the tax year of the CFC (the "CFC inclusion year" under the proposed regulations) ends.)

By definition, a CFC in a CFC inclusion year can have tested income or a tested loss, but not both. A CFC has tested income for a CFC inclusion year to the extent that: (1) the CFC's gross income for the tax year ("gross tested income" under the proposed regulations), excluding items of gross income in certain categories ("excluded gross income"), exceeds (2) the deductions (including taxes) properly allocable (under rules similar to those of Sec. 954(b)(5)) to the gross tested income ("allowable deductions" under the proposed regulations). (4) A CFC with tested income in a CFC inclusion year is a "tested income CFC" for that year under the proposed regulations. A CFC has a tested loss for a tax year to the extent that its allowable deductions exceed its gross tested income. (5) A CFC with a tested loss in a CFC inclusion year is a "tested loss CFC" for that year under the proposed regulations.

The categories of excluded gross income (ignored in calculating the tested income or loss of a CFC for a CFC inclusion year) are:

* U.S.-source items of income that are effectively connected with the CFC's conduct of a trade or business within the United States, provided that the rate of U.S. federal income tax to which the item is subject is not reduced by treaty;

* Gross income taken into account in determining the Subpart F income of the CFC;

* Gross income excluded from foreign base company income or insurance income (within the meaning of Sees. 954 and 953, respectively) under the so-called high-tax exception of Sec. 954(b)(4);

* Dividends received from related persons (within the meaning of Sec. 954(d)(3)); and

* "Foreign oil and gas extraction income" (within the meaning of Sec. 907(c)(1)). (6)

Sec. 951A also provides a coordination rule that is intended to deny a double benefit resulting from tested losses. Under that coordination rule, a tested loss CFC increases its earnings and profits (E&P) by the amount of its tested loss for purposes of applying the Subpart F current-year E&P limitation in Sec. 952(c)(1)(A) (the "tested loss add-back"). (7) There is no indication that tested loss must offset tested income to be subject to this rule.

Net deemed tangible income return

A U.S. shareholder's "net deemed tangible income return" for a U.S. shareholder inclusion year equals the excess of: (1) 10% of the U.S. shareholder's aggregate pro rata share of the QBAI of each of its CFCs (for the CFC's inclusion year ending with or within the U.S. shareholder inclusion year) over (2) the amount of interest expense of each of the U.S. shareholder's CFCs that constitutes an allowable deduction in the U.S. shareholder inclusion year, to the extent that the interest income attributable to the expense is not taken into account in determining the U.S. shareholder's net CFC tested income. (8) The proposed regulations generally refer to the amount in item (2) as "specified interest expense."

QBAI

A CFC's QBAI for a tax year means the average of its aggregate adjusted bases (for U.S. federal income tax purposes, as measured as of the close of each quarter of the tax year) in specified tangible property used by the CFC in a trade or business and for which a deduction is allowable under Sec. 167. (9) "Specified tangible property" generally means any tangible property used in the production of tested income. (10) Tangible property used by a CFC in the production of tested income and income that is not tested income is treated as specified tangible property in the same proportion as the tested income produced with respect to the property bears to the total gross income produced with respect to the property. The adjusted basis in any property is determined by using the alternative depreciation system (ADS) under Sec. 168(g) and by allocating the depreciation deduction ratably to each day during the...

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