AuthorRosenberg, Rebecca
PositionTax Cuts and Jobs Act of 2017, global intangible low-taxed income

Table of Contents I. Introduction: Changes to the Foreign Tax Credit System, 341 and Interaction with the Changes Made to Other International Tax Rules II. New Foreign Tax Credit Rules for GILTI Inclusions 345 A. Overview 345 B. Computing Deemed Paid Foreign Taxes Related to 352 GILTI 1. Overview of the Calculation. Including the 352 Inclusion Percentage 2. Eighty Percent Limit in GILTI Foreign Tax Credit 363 Calculation: Partial Coordination of the Foreign Tax Credit with Reduced U.S. Effective Rate on GILTI 3. Properly Attributable Foreign Taxes 368 4. Aggregation of CFCs into One GILTI Foreign Tax 372 Credit Computation a. In General 372 b. Proposed Rule Regarding High-Taxed Income: 376 Allowing Choices that Enhance Cross-Crediting 5. Lack of Carryover for GILTI-Related Credits 381 6. Section 78 Gross-Up: 100 Percent, Rather than 80 386 Percent C. Separate Basket for GILTI 391 1. In General 391 2. Relevance of the GILTI Basket for Individuals 394 3. What's Left in the General Basket, after the GILTI 396 Basket Takes Effect? 4. Possible Placement of GILTI and Its Taxes in 399 Other Baskets D. Big Picture Summary on GILTI Credit 401 III. Coordination of the Existing Foreign Tax Credit Rules with 404 Other New International Tax Provisions Added by the TCJA A. Overview: General Trend of Reducing Potential 404 Foreign Tax Credits to Reflect Lower U.S. Tax Burden B. Coordination with One-time Deemed Repatriation 405 C. Coordination with 100 Percent DRD for Certain 422 Foreign Dividends D. Coordination with Hybrid Dividend Rules 128 E. Coordination with BEAT 429 F. Coordination with FDII 431 G. Coordination with Section 199A Deduction for 434 Qualified Business Income of Non-Corporate Taxpayers IV. Conclusion 437 I. INTRODUCTION: CHANGES TO THE FOREIGN TAX CREDIT SYSTEM, AND INTERACTION WITH THE CHANGES MADE TO OTHER INTERNATIONAL TAX RULES

The Tax Cuts and Jobs Act (TCJA) (1) enacted massive changes to the U.S. tax system's international tax rules, (2) including changes to the U.S. foreign tax credit. (3) The new U.S. international tax system looks like Swiss cheese, compared to the old set of rules. Many of the changes relate to the manner, extent, and timing of U.S. tax imposed on U.S. shareholders (4) regarding the income of their foreign subsidiaries. (5) Among other things, the TCJA required that certain earnings and profits of certain foreign subsidiaries of U.S. shareholders must be included in such shareholders' income (for U.S. tax purposes) as of the end of 2017, essentially to the extent that such earnings and profits had not previously been subject to U.S. tax (in the foreign subsidiaries' or the U.S. shareholders' hands). (6) Such income inclusions are subject to U.S. tax at the relatively low effective tax rates of 8 percent and 15.5 percent, and such U.S. tax is payable over eight years. (7) The TCJA also imposed the GILTI (global intangible low-taxed income) rules, (8) which tax U.S. shareholders currently on certain types of their foreign subsidiaries' income, but grant a 50 percent deduction for such inclusions (9) and allow a potential foreign tax credit for foreign taxes imposed on the foreign subsidiaries' income. (10) There is also a new 100 percent deduction for dividends received by a U.S. shareholder from certain foreign subsidiaries, (11) and there are multiple other new international tax rules with colorful acronyms like FDII (foreign-derived intangible income) (12) and BEAT (the base erosion and anti-abuse tax). (13)

The foreign tax credit is a credit against--a dollar-for-dollar reduction of--a taxpayer's U.S. federal income tax for the amount of foreign taxes paid or accrued, subject to many, many rules. (14) For example, assume that a U.S. taxpayer owes $100,000 of U.S. federal income tax before any foreign tax credit, and also pays or accrues $20,000 of income tax to Belgium. Assuming that all requirements are met--for example, the Belgian tax qualifies as a creditable income tax (15) and the foreign tax credit limitation fraction is satisfied (16)--the U.S. taxpayer's final U.S. income tax is $80,000 ($100,000 pre-credit U.S. tax minus a $20,000 foreign tax credit for the Belgian tax). Thus, the foreign tax credit can be very valuable, because it can represent a sizable reduction in U.S. tax liability. (17) The credit therefore has the potential to significantly alter taxpayers' behavior.

Among other changes to the international tax rules, the TCJA added a new type of foreign tax credit: a credit for U.S. shareholders for a portion of the foreign taxes paid or accrued by certain foreign subsidiaries, when such shareholders have GILTI inclusions (18) with respect to such foreign subsidiaries' income. (19) The new law also added two new "baskets" for performing the foreign tax credit limitation calculation: one for GILTI inclusions, and one for foreign branch income. (20) In addition, the TCJA repealed section 902 (which treated U.S. shareholders as having paid some of certain foreign subsidiaries' foreign taxes, when such subsidiaries paid dividends), (21) and changed the mechanics of subpart-F-related (22) deemed paid credits. (23) Further, the Tax Cuts and Jobs Act reduced the foreign tax credit in specific circumstances, to reflect the impact of other new provisions enacted by the TCJA, including the one-time deemed repatriation of certain earnings of foreign corporations and the 100 percent deduction for dividends from certain foreign corporations. (24)

The new Code rules that relate to foreign tax credits tend to be more generous than a purely accurate amelioration of double taxation, although they often require some reduction of the foreign tax credit to reflect--although only partially--that full U.S. tax is not imposed on the relevant item of income. (25) Thus, the new TCJA-enacted international tax rules often strike the balance more (although not entirely) in favor of competitiveness of U.S. multinationals over precise reduction of double taxation (i.e., taxation by the United States and a foreign country of the same income). (26) The IRS and Treasury have sometimes pushed the balance more towards accuracy where regulatory authority has allowed them to do so--but they are constrained by generous Code rules.

This Article discusses the operation and impact of the GILTI-related foreign tax credit rules and the coordination of other new international provisions with the existing foreign tax credit system. The Article argues that the GILTI-related foreign tax credit is more generous than purely accurate reduction of double taxation would demand, and that the TCJA's coordination of other new rules with the foreign tax credit system also tends to be more taxpayer favorable than mere fairness would require (with some exceptions). The post-TCJA foreign tax credit rules correct somewhat for the lack of full U.S. tax on some foreign source amounts, but still are often more taxpayer favorable than mere reduction of double taxation.


    1. Overview

      The Tax Cuts and Jobs Act created both a new GILTI inclusion (27) for U.S. shareholders of controlled foreign corporations (CFCs) and a new foreign tax credit associated with such inclusions. (28) Overall, the new GILTI-related foreign tax credit (discussed below) is more generous than mere precise reduction of double taxation of GILTI amounts would require, and allows for massive amounts of cross-crediting, although it does place some limitations on the use of such foreign tax credits.

      Under the new rules, a U.S. shareholder of a CFC must include in income, each year, the GILTI that is computed by taking into account items of all of such shareholder's CFCs in one computation. (29) In general. GILTI equals the excess of net tested income from all of such CFCs ("net CFC tested income") over ten percent of the bases of tangible, depreciable assets used in the production of tested income. (30) Net CFC tested income equals the excess of the aggregate tested income from all of such shareholder's CFCs over the aggregate tested losses from all of such shareholder's CFCs. (31) Tested income, in turn, consists of all of a CFC's net income other than subpart F income, certain oil- and gas-related income, and certain other exclusions. (32) Net tested loss is similarly computed by considering all of a CFC's income and deduction items other than subpart F items, certain oil- and gas-related amounts, and certain other exceptions. (33) GILTI is calculated each year, using the tested income, tested loss, and asset bases for that year from each of the U.S. shareholder's CFCs (except that assets of tested loss CFCs are not taken into account). (34) Only the U.S. shareholder's pro rata shares of each CFC's tested income, tested loss, and asset bases are taken into account in these computations. (35) Each U.S. shareholder's pro rata share is determined under subpart F principles. (36) Generally, for example, a U.S. shareholder who owned 15 percent of CFC 1 and 25 percent of CFC 2 would take into account 15 percent of CFC 1's tested income and relevant asset bases, and 25 percent of CFC 2's tested income and relevant asset bases, in such U.S. shareholder's GILTI computation.

      GILTI of a U.S. shareholder is included in such U.S. shareholder's taxable income each year, for U.S. tax purposes--regardless of whether or not any CFC actually distributes tested income to such shareholder. (37) But GILTI is also subject to a 50 percent deduction for corporate U.S. shareholders, resulting in a maximum U.S. effective rate of 10.5 percent (half of the U.S. corporate tax rate of 21 percent) for such shareholders. (38)

      The Tax Cuts and Jobs Act also enacted a new foreign tax credit associated with GILTI: U.S. corporations who are required to include GILTI in their income (from one or more CFCs in which they are U.S. shareholders) are deemed to pay some of the foreign taxes of such CFCs, and then can potentially...

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