Are You GILTI of Not Paying Enough Tax on Global Income?

Final Rules Released — Along with a Newly Proposed High-Tax Exception

The 2017 Tax Cuts and Jobs Act (TCJA) created a new framework for international taxes, including the concept of global intangible low-taxed income (GILTI), that affects U.S. taxpayers who own stock in foreign corporations, either directly or through domestic partnerships. The proposed regulations were issued in September 2018.

On June 14, 2019, the Treasury Department and the IRS published final regulations under Section 951A to address a variety of topics including GILTI, the treatment of domestic partnerships, foreign tax credits and specified tangible property. The final regulations, which incorporate a number of changes from the 2018 proposed rules, provide extra guidance on a range of issues related to Section 951A, which requires that U.S. shareholders of a Controlled Foreign Corporation (CFC) include their share of GILTI in taxable income.

The GILTI rules are intended to discourage ownership of intangible offshore property in a CFC by eliminating the deferred income benefit generated by the intangible property and by providing a minimum U.S. tax rate on that income. Although the final regulations generally follow the 2018 proposed rules, there are some key differences. Note, too, that the rules are retroactive to 2018, so some taxpayers may need to file amended returns.

These are some of the key changes in the final Section 951A regulations:

Domestic partnerships — In determining the level at which a GILTI inclusion is calculated, the final regulations adopt an aggregate approach to domestic partnerships. These partnerships are regarded as owning a proportionate amount of CFC stock. The aggregate treatment does not, however, apply in determining whether a U.S. person is a U.S. shareholder, whether a shareholder is a controlling domestic shareholder, or whether a foreign corporation is a CFC.

The effect of this rule is that a domestic partnership cannot have a GILTI inclusion amount (because it does not own stock of the foreign corporation under section 958[a]) and, therefore, the partners in the partnership will not have a distributive share of any GILTI inclusion. A partner that is a U.S. shareholder in a CFC picks up its share of tested items. Amending currently filed 2018 returns should be considered where the 951A inclusion was picked up in the partnership’s taxable income.

The Treasury and IRS also proposed regulations to expand the treatment of aggregation to Section 951 and its related provisions beyond Section 951A.

Pro rata share anti-abuse rule — The final regulations narrow the proposed pro rata share anti-abuse rule related to subpart F income, clarifying that the rule applies only to require “appropriate adjustments to the allocation of allocable E&P” in an income distribution to disregard the effect of a transaction or arrangement intended to avoid federal income tax. This adjustment must be applied to any outstanding share of stock as of the hypothetical distribution date but (with some exceptions) not to a transfer of CFC stock.

Double benefit in application of Section 951(a)(2)(B) — There were cases where some taxpayers were taking a position that a dividend received by a person other than the U.S. shareholder reduced both the shareholder’s pro rata share of subpart F income and tested income by the full amount of the dividend. Under the final regulations, a dividend received by a person other than the U.S. shareholder during a taxable year reduces the U.S. shareholder’s pro rata share of subpart F income and its pro rata share of tested income in the same proportion. This clarification was made to prevent an “inappropriate double benefit that is not contemplated” under the rules.

Pro rata share of qualified business asset investment (QBAI) — In the final regulations, for a tested income of less than 10% of QBAI, a shareholder’s pro rata share of QBAI is based on the pro rata share of the hypothetical tangible return. The final regulations also apply the excess QBAI rule to all investments, not just preferred stock.

Determination of disqualified basis — The proposed rules provided that “disqualified basis” may be reduced or eliminated through depreciation, amortization, sales or exchanges, section 362(e) limitations, and other methods. The final regulations, however, limit the rule’s application and reduce the disqualified basis to the extent that a deduction or loss attributable to the disqualified basis is taken into account in reducing gross income.

Temporarily ownership rule — Final regulations clarify that the temporary ownership rule applies “only if the holding of the property over the quarter close would, without regard to the temporary ownership rule, increase the DTIR of an applicable U.S. shareholder for its taxable year.” They also include a safe harbor for certain transfers between CFCs in order to exempt transfers for non-tax reasons.

Consolidated groups — The final regulations retain the proposed multi-step process and aggregation approach for determining the GILTI inclusion amount of a member of a consolidated group.

Foreign tax credits — The proposed revision to § 1.78–1 was adjusted in the final regulations to conform to TCJA and other statutory amendments, retaining the proposal to exclude Section 78 dividends from treatment as dividends under section 245A. The final regulations also clarify stock basis adjustment rules for a 10% owned corporation and include some changes to coordinate the effect of a section 965(n) election on section 172 with the computation of the foreign tax credit limitations under section 904.

New proposal: GILTI “high-taxed exclusion” — The proposed high-taxed exclusion is a key element of the GILTI regime. Under this election, a taxpayer may exclude certain CFC income items from gross tested income if the items are subject to a foreign effective income tax rate that exceeds 90% of the maximum Section 11 income tax rate of 21% (in effect, 18.9%). Note, however, that this provision is still a proposed rule, not yet final. The election, therefore remains unavailable for the 2018 year as well as any tax year that begins before the final regulations are published, which includes the 2019 calendar year.

What do these changes mean?

The final GILTI regulations maintain the structure and meaning of the proposed regulations, but with significant variations. Many taxpayers must now revisit and revise any completed GILTI calculations.

If you have questions about how these regulations may affect you, see our International Tax services page for more information or contact Weaver and we will carefully assess the impact of GILTI in your situation.

© 2019