GILTI rules address income subject to high foreign tax rate

To cater the provision of global intangible low-taxed income (GILTI), IRS issued an additional package Sec. 951A, which was added by the law known as the Tax Cuts and Jobs Act, P.L. 115-97. It requires 10% US shareholders of controlled foreign corporations (CFC) to include in their gross income as their share of the CFC’s GILTI for that tax year (the inclusion amount).

 The IRS issued final regulations on Sec. 951A in June 2019 (T.D. 9866). As per regulation, the provision applies to tax years of foreign corporations starting after Dec. 31, 2017, and to the U.S. shareholders’ tax years within which the foreign corporations’ tax year ends.

The amount to be added is intended to subject income earned by a CFC to U.S. tax on a current basis and is calculated using a formula. A 10% return is attributed to certain tangible assets (qualified business asset investment or QBAI), and each dollar over and above that certain income is effectively treated as intangible income. This inclusion amount is treated similarly to a Subpart F income inclusion, but it is determined in a fundamentally different manner.

T.D. 9902 finalizes the parts of proposed regulations (REG-101828-19) treating the income subjected to a high rate of foreign tax. However, it does not finalize the parts of those 2019 proposed regulations under Secs. 951, 956, 958, and 1502 related to the treatment of domestic partnerships. IRS and Treasury intends to settle those guidelines separately.

Along with the final regulations, the IRS issued new proposed rules (REG-127732-19) to address different aspects of GILTI while ensuring its goal in promulgating the GILTI high-tax exclusion are not undermined. These aspects comprise of GILTI high-tax exclusion and conforming them with the Subpart F high-tax exception. The proposed rules also provide for a single election under Sec. 954(b)(4) for purposes of both Subpart F income and tested income (the “high-tax exception”).

To facilitate the administration of certain rules, the proposed regulations also provides guidance under the information reporting provisions for foreign corporations. For the proposed rules, the IRS is asking for comments, suggestions and hearing requests to be received by Sept. 21, which is also the date the final regulations become effective.