Should Companies Plan Into Subpart F Following the TCJA?

• Author: Silbering-Meyer, Jessica
• Position: Tax Cuts and Jobs Act of 2017

Following the enactment of the U.S. Tax Cuts and Jobs Act (TCJA), U.S. multinational companies (MNCs) now face a new anti-deferral provision in the form of global intangible low-taxed income (GILTI). GILTI is an additional category of income, which is taxed on a current basis to U.S. shareholders of controlled foreign corporations (CFCs), even though the income is not distributed.

Depending on the facts, it may be advantageous for a corporate U.S. shareholder to have Subpart F income instead of GILTI. This is especially true for banking and other financial companies, which have a higher interest expense than other industries, leading to a higher GILTI inclusion. The allocation of expenses under Section 861 can reduce the taxpayers foreign tax credit (FTC) limitation, leading to a higher U.S. residual tax. Finally, excess credits associated with GILTI cannot be carried forward or back.

Subpart F

In general, U.S. shareholders of CFCs must include in gross income their pro rata share of the CFCs Subpart F income for the taxable year. (1) U.S. shareholders are U.S. persons that own (or are considered to own under attribution rules) at least ten percent of the total combined voting power or at least ten percent of the total value of shares in the CFC. (2) Following the enactment of the TCJA, a corporate U.S. shareholder's Subpart F income is subject to current tax at twenty-one percent minus applicable FTCs. (3)

Subpart F income includes a CFCs foreign base company income (FBCI), (4) which is the sum of its foreign personal holding company income, (5) foreign base company sales income, and foreign base company services income. A U.S. shareholder's Subpart F FTCs are generally placed into either the general limitation basket or the passive limitation basket. (6) In general, passive income includes dividends, interest, and royalties. Foreign taxes paid or accrued that exceed the FTC limitation (7) are carried back to the first preceding taxable year and forward to the first ten succeeding taxable years. (8)

An exception to FBCI arises when a CFC's income was subject to an effective rate of income tax imposed by a foreign country that is greater than ninety percent of the U.S. corporate tax rate (i.e., the high-tax exception). (9) Therefore, with a U.S. corporate tax rate of twenty-one percent, a CFC's income that is subject to a foreign effective income tax rate greater than 18.9 percent is not subject to the Subpart F rules.

GILTI

On October 10...