As taxpayers near the end of income tax provision and tax return extension calculations, they may be thinking they have reached the end of the learning curve in terms of the impact of the Tax Cuts and Jobs Act (TCJA). While tax departments were busy developing new data sets and finding tools to assist with the calculations, the Internal Revenue Service (IRS) was releasing new draft and revised forms. Taxpayers will be required to familiarize themselves with these forms to report the TCJA effects in the coming months.

To aid alleviating this ever-expanding burden, A&M Tax has delved into the forms identifying key changes and discovering some notable surprises along the way. This article focuses on the new forms to report Global Intangible Low Taxed Income (GILTI), the Section 250 Deduction for GILTI and Foreign Derived Intangible Income (FDII), the Base Erosion and Anti-Abuse Tax (BEAT) and the transition tax under IRC section 965 (aka “the toll-charge”). A&M’s insights on changes to Form 5471 (Information Reporting for Controlled Foreign Corporations (CFCs)) and Form 1118 – (Foreign Tax Credit – Corporations) will be published in the coming weeks.

Taxpayers will attach all forms discussed below, if applicable, to their income tax returns and file by the due date for that return (including any extensions), meaning taxpayers may be getting close to turning their focus away from the calculations to reporting the results of all the hard work they have done thus far.

New Forms

Form 8992 - U.S. Shareholder Calculation of GILTI

As a refresher, GILTI is a U.S. Shareholder-level tax on the earnings of non-U.S. subsidiaries. U.S. Shareholders report this inclusion on Form 8992 using inputs from the Form 5471 Schedule I-1s for each CFC it owns. The U.S. Shareholder reflects these inputs within Schedule A of Form 8992 to show tested income or loss, qualified business asset investment (QBAI), and specified interest expense by CFC. The U.S. Shareholder then reports the aggregate of its pro rata share of each of these inputs on the face of the form. Specifically, the required reporting is as follows:

• Part I – Net CFC Tested Income – Report the aggregate of net tested income and net tested loss from each CFC shown in Schedule A.
• Part II – Calculation of GILTI – Using inputs from Part I as well as the aggregate QBAI and specified interest expense amounts, show the GILTI inclusion which the U.S. Shareholder filing this form ultimately includes within its taxable income.

One requirement which may come as a surprise is that a corporation must pick up its pro rata share of these inputs for all CFCs, even those for which the corporation itself does not file a Form 5471 Schedule I-1.[1] As such, we recommend any multinational organization perform a full review of its ownership structures as of December 31, 2018 (or relevant fiscal year end) along with a corresponding completeness check of each U.S. Shareholder’s Form 8992 before filing.

Both U.S. individuals and corporations file Form 8992 to report GILTI inclusions. However, the 50 percent deduction (under Section 250) to offset any inclusion is only available to U.S. corporations and is reportable on Form 8993.[2]

Form 8993, Section 250 Deduction for Foreign Derived Intangible Income (FDII) and Global Intangible Low-Taxed Income (GILTI)

U.S. corporations use Form 8993 to report 1) FDII and 2) any limitation on the deductions available on both FDII and GILTI.

1. FDII
Parts I-III of Form 8993 largely focus on which portion of a U.S. corporation’s export income may qualify for FDII benefits. The details are as follows:

• Part I – Determining Deduction Eligible Income (DEI) – Show the gross income, exclusions from gross income (such as Subpart F, GILTI, CFC dividends and foreign branch income) and allocable deductions to arrive at DEI.
• Part II – Determining Deemed Intangible Income (DII) – Report the U.S. corporation’s QBAI (or, stated differently, the quarterly average of its tax basis in fixed assets).
• Part III – Determining Foreign Derived Ratio – Of the DEI, identify which income the U.S. corporation derives from its foreign activities (e.g. sales or services) versus its U.S. activities.

2. Possible Limitation on Available Deduction

Generally, a U.S. corporate taxpayer may claim up to a 50 percent deduction on GILTI and up to a 37.5 percent deduction on FDII. However, a U.S. corporation’s available deduction may be lower than these specified percentages if it has a taxable loss, but for GILTI and FDII, or if the taxpayer is using Net Operating Losses (NOLs) carryforwards. Part IV of the form illustrates the mechanics of this limitation.

Note that beyond what is reported on Form 8993, the taxpayer must maintain sufficient records to support the qualifying income streams. As such, we suggest taxpayers allow themselves substantial time to confirm compliance with the foreign use documentation standards as outlined within the proposed section 250 regulations before preparing Form 8993.

Form 8991 – Tax on Base Erosion Payments of Taxpayers with Substantial Gross Receipts

As background, the BEAT serves as a new minimum tax which affects many large U.S. multinationals who make deductible payments to foreign affiliates (e.g., interest, royalties etc.). U.S. corporations report the computation of their BEAT liability using Form 8991. Form 8991 is laid out as follows:

• Part I – Applicable Taxpayer - Generally, U.S. corporations subject to BEAT are those that meet the following two thresholds 1) have a prior three-year average of $500 million or greater gross receipts and 2) make deductible payments to foreign affiliates exceeding three percent of all total deductions. A U.S. corporation reflects this determination here.
• Part II – Modified Taxable Income – Identify any deductible payments to foreign affiliates which meet the criteria as “base erosion payments” and show the addback of these payments to taxable income. Taxpayers report the supporting base erosion payment calculation details within Schedule A to this form. For example, within Schedule A, a taxpayer identifies certain excepted payments such as those which are subject to withholding tax or qualify for the Services Cost Method.
• Part III – Regular Tax Liability Adjustment for Purposes of Computing BEAT – Report the taxpayer’s regular tax liability (factoring in any available deductions including the Section 250 deduction and NOLs). Furthermore, taxpayers must report all tax credits for the tax year (i.e. foreign tax credits, R&D credits etc.), only some of which are allowable against BEAT (i.e. Section 38 credits), as specified within Schedule B of Form 8991.
• Part IV – Computation of BEAT – Using the inputs above, this section shows whether the taxpayer is subject to its regular tax liability for the taxable year, or rather must pay the BEAT tax liability.

Note that any U.S. C-corporation (other than a regulated investment company or a real estate investment trust) that has gross receipts of at least $500 million in one or more of the three preceding tax years ending with the preceding tax year must file Form 8991.[3] Somewhat unexpectedly, this means that certain taxpayers for whom BEAT is not applicable may still need to file Form 8991.

For example, if a taxpayer’s gross receipts for the preceding three years are Year 1: $400 million, Year 2: $400 million, and Year 3: $500 million, the taxpayer’s gross receipts would be below the average of $500 million for the preceding three years and, therefore, be below the applicability threshold for BEAT. However, based on the form’s filing requirements, this hypothetical taxpayer still must complete Form 8991.

Form 965 – Inclusion of Deferred Foreign Income Upon Transition to Participation Exemption System

Generally, U.S. Shareholders of calendar year foreign corporations were subject to a one-time inclusion of the accumulated earnings and profits of such foreign corporations in its 2017 tax year. U.S. Shareholders of certain fiscal year foreign corporations may have this inclusion in the 2018 tax year. Both categories of U.S. Shareholders report these inclusions using Form 965. The form designates requirements and applicable rates based on the relevant inclusion years. Reporting on the form is as follows:

• Part I – Section 965(a) Inclusion – Show the aggregate of inclusions required for 2018 and 2017 tax years, reflecting supporting details using Form 965 Schedule A. Specifically, within Schedule A, for each foreign corporation owned the U.S. shareholder reports the accumulated earnings or deficit translated at the applicable spot rate, as well as its ownership of that foreign corporation as of relevant measurement dates.
• Part II – Section 965(c) Deduction – Toll-charge inclusions are subject to preferable tax rates through means of a rate equivalent deduction. The deduction ranges based on two factors 1) the amount of liquid assets (e.g. cash, short term receivables) on the foreign corporation’s balance sheet (as reported in greater detail on Schedule D) and 2) the taxable year of inclusion. The form specifies the mechanics and applicable deduction percentages by year of inclusion in this section.
• Part III – Elections – The taxpayer designates any elections it has made with respect to its toll charge liability such as to pay over eight-year installments or defer payment through an S-corporation.

It is important to note that even if U.S. Shareholders do not owe toll charge tax due to owning foreign corporations with accumulated E&P deficits, they still must file Form 965 to report this accumulated deficit position.[4]

Alvarez & Marsal Taxand Says:

The new IRS forms add another layer of complexity to already difficult international tax computations as a result of TCJA. After determining which forms apply, we recommend taxpayers start early in tackling this next compliance obstacle and utilize automated tools which can help process the large sets of data this reporting requires. Reach out to us with any questions that arise as you begin checking these tasks from your 2018 compliance to do list.