September 14, 2018

IRS Releases First Round of Proposed GILTI Regulations

Just after 4 p.m. on Thursday, September 13, 2018, the IRS released its second set of proposed international regulations under the Tax Cuts and Jobs Act of 2017 (TCJA). These proposed regulations provide the first piece of Treasury guidance under Code Section 951A (Global Intangible Low Taxed Income), which brings into effect the so-called "GILTI" regime. To put it simply, GILTI is a mechanism to tax U.S. shareholders of controlled foreign corporations (CFCs), on their share of CFC income over and above a 10 percent return on the tax basis of tangible depreciable assets (subject to certain exceptions).

Some key areas where guidance is provided in the proposed regulations include:

     

    The calculation of tested income and tested loss of a CFC:

    • The tested income and tested loss of a CFC are generally calculated by treating the CFC as a U.S. corporation;
    • In determining the tested income of a CFC, no deductions are allowed for net operating loss carryovers and capital loss carryovers;
    • The exception from tested income for "high-taxed income" only applies to gross income that would otherwise have been Subpart F income if the U.S. shareholder had not elected to exclude it under the high-tax exception;
    • Quarterly averaging rules for determining the tax basis in tangible assets;
    • The calculation of items necessary to determine the amount of interest expense that reduces net deemed tangible income return (based on QBAI).

    Other Items of Note:

    • The aggregation of the U.S. shareholder's pro rata share of GILTI to determine the actual GILTI inclusion amount;
    • The same translation rule that is used for Subpart F income is applied for translating a pro rata share of tested income, tested loss, tested interest expense, tested interest income and QBAI;
    • The treatment of domestic partnerships and their U.S. and foreign partners including a taxpayer-favorable rule for determining a partner's share of the "specified tangible property" of a partnership;
    • The treatment of the GILTI inclusion and subsequent adjustments to stock basis related to tested loss CFCs;
    • Determination of GILTI amounts for consolidated groups;
    • Treatment of GILTI is the same as Subpart F income for purposes of Section 1411 (3.8 percent tax on net investment income);
    • Anti-abuse rules for certain transactions that would otherwise result in a tax basis step-up to specified tangible property;
    • The proposed regulations (once issued in final or temporary form), would generally be effective for taxable years of foreign corporations beginning after December 31, 2017, and to taxable years of U.S. shareholders in which or with which such taxable years of foreign corporation's end. The comment period on the proposed regulations ends November 12, 2018.

    As helpful as this guidance may be for taxpayers, there are still numerous key issues that remain unaddressed (including whether certain provisions in the proposed regulations are inconsistent with the statute). The proposed regulations fail to discuss expense allocations for foreign tax credit purposes as they pertain to the GILTI regime, as well as the Code Section 250 (GILTI and FDII) deductions, amongst other issues that taxpayers are facing. The preamble to the proposed regulations does, however, mention that the Code Section 78 gross up which arises based on GILTI taxes deemed paid should be allocated to the GILTI basket which is good news to taxpayers.

    Stay tuned for insights and commentary on these regulations in the coming weeks and join us in anticipation as we await the next set of regulations.

    Related Issues:
    While the Tax Cuts and Jobs Act (TCJA) has been marketed as “reform,” it is better described as an expansion of Federal tax law, with many legacy rules remaining intact but now overlaid with additional requirements. One example of this is how companies are required to recognize foreign exchange (FX) gain or loss on distributions from foreign subsidiaries.
    On August 1, the IRS issued proposed regulations which interpret and apply the Sec. 965 transition tax. These regulations, by and large, affirm the interpretations of Sec. 965 from a trio of IRS Notices and a Revenue Procedure.
    As April 17 quickly approaches, the stakes are higher than ever as many companies face head-on the new transition tax on unrepatriated foreign earnings, or, as we have affectionately come to know it as, the toll charge.
    Kudos to the IRS and the SEC for giving us much needed guidance as we emerge from our holiday week. For many of us, the toll charge on deferred foreign income is now a first order of business.
    Authors

    David Fetner

    Associate
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