IRS Issues Final and Proposed Regulations on GILTI
The IRS and Treasury have released final and proposed regulations regarding the new global intangible low-taxed income (GILTI) regime. Both sets of regulations provide guidance on determining the amount of GILTI included in the gross income of certain U.S. shareholders of foreign corporations, as well as other rules more broadly applicable for purposes of subpart F income. The proposed regulations provide an elective high-tax income exclusion and adopt an expanded aggregate approach to partnerships with respect to Sec. 951, in addition to Sec. 951A. Concurrent with the release of final regulations, IRS also released temporary and proposed regulations on Sec. 245A, portions of which relate to GILTI.
Below are certain highlights of the GILTI final regulations:
- Elective High-Tax Income Exclusion (included in new proposed regulations)
- Aggregate Treatment of U.S. Partnerships for GILTI Purposes
- GILTI Accounting Methods
- Modified Anti-Abuse Guidance
Section 951A applies to tax years of foreign corporations beginning after December 31, 2017, and to tax years of U.S. shareholders in which, or with which, such foreign corporations’ tax years end. IRS and Treasury released proposed regulations under the new provision in 2018 (2018 Proposed Regulations).
- Aggregate Treatment of U.S. Partnerships for GILTI Purposes – The final regulations adopt an approach that treats a domestic partnership as an aggregate for purposes of determining the level at which a GILTI inclusion amount is calculated and taken into gross income. In general, for purposes of Sec. 951A, a domestic partnership is not treated as owning stock of a foreign corporation and rather, the partners of a domestic partnership are treated as owning proportionately the stock of CFCs owned by the partnership in the same manner as if the partnership were a foreign partnership under Sec. 958(a)(2). Because a domestic partnership is not treated as owning Sec. 958(a) stock for purposes of Sec. 951A, a domestic partnership does not have a GILTI inclusion amount and thus no partner of the partnership has a distributive share of a GILTI inclusion amount. This aggregate treatment is limited solely for purposes of Sec. 951A and any other provision that applies by reference to a Sec. 951A GILTI inclusion. A domestic partnership is still treated as an entity for purposes of determining whether the partnership is a controlling domestic shareholder and for the determination of U.S. shareholder and CFC status.
- GILTI Accounting Methods – The final regulations provide that determination of adjusted basis in property under Sec. 951A(d) is not a method of accounting. However, any changes made by a CFC to ADS from another depreciation method for purposes of calculating tested income will be treated as a change in method of accounting. Treasury and IRS expect that many CFCs that are not already using ADS for purposes of computing income and E&P will change their method of accounting for depreciation to comply. Most of such changes are already eligible for automatic consent under Rev. Proc. 2015-13; however, Treasury and IRS intend to publish another revenue procedure further expanding the availability of automatic consent for depreciation changes to take into account for Sec. 951A.
- Pro-Rata Share Anti-Abuse Rule – The final regulations narrow and clarify that the scope of the pro-rata share anti abuse rule applies only to require appropriate adjustments to the allocation of allocable E&P that would be distributed in a hypothetical distribution with respect to any share outstanding as of the hypothetical distribution date.
In addition to the above, the final regulations provide guidance on determining a U.S. shareholder’s pro-rata share of a controlled foreign corporation’s (CFC’s) subpart F income included in the shareholder’s gross income, and some reporting requirements regarding inclusions of subpart F income and GILTI. In addition, the final regulations address some of the foreign tax credit provisions applicable to persons that directly or indirectly own stock in foreign corporations.
The final regulations under Sec. 951A apply retroactively as of the applicability of Sec. 951A, i.e., to tax years of foreign corporations beginning after December 31, 2017, although other effective dates apply to other portions of the final regulations.
Proposed Regulations – High-Tax Exception
Concurrent with the final regulations, IRS and Treasury also released new proposed regulations on GILTI that included an elective high-tax income exclusion (high-tax exception) from gross tested income for any tentative gross tested income subject to foreign tax at an effective tax rate that is higher than 90% of the applicable highest U.S. tax rate imposed on a corporation or 18.9% (90% x 21%).
The election would exclude each tentative gross tested income item of a CFC that meets the effective rate test from gross tested income for the tax year, however it is important to note that the determination as to whether the tentative gross tested income qualifies for the high-tax exception is made at the qualified business unit (QBU) level.
The CFC must allocate foreign taxes paid or accrued to determine the effective rate that applies to the tentative gross tested income. Such taxes would be ineligible for the deemed paid foreign tax credit. A similar rule would apply to property used to produce any excluded income and that property would be excluded from determining QBAI.
The election is made by the CFC’s controlling domestic shareholders by attaching a statement to an amended or filed return for the inclusion year and the election is binding on all U.S. shareholders of the CFC. The election is effective until revoked by the controlling domestic shareholders of the CFC. Additional timing restrictions apply for revocations and subsequent elections after prior revocations; however, IRS may provide an exception if the CFC undergoes a change in control.
The high-tax exception is proposed to apply to tax years of foreign corporations beginning on or after the date of publication of the final regulations. As a result, the high-tax exception election would be available for calendar year foreign corporations and U.S. shareholders in 2020 at the earliest, if the final regulations are published prior to January 1, 2020.
Proposed Regulations – Expanded Aggregate Approach to Partnerships
In addition to the high-tax income exclusion, the proposed regulations also expand upon the aggregate treatment of domestic partnerships. While the final GILTI regulations addressed aggregate approach under Sec. 951A only, the new proposed regulations expand this treatment to Sec. 951, as well. For purposes of determining income inclusions under Secs. 951A and 951, a domestic partnership will be treated as an aggregate of its partners.
The proposed regulations are proposed to apply to taxable years of foreign corporations beginning on or after the date of publication of these rules as final regulation; however, domestic partnerships may rely on the proposed aggregate treatment rules with respect to taxable years beginning after December 31, 2017 provided that the proposed rules are consistently applied by certain related persons.
With the issuance of final regulations, taxpayers should revisit their prior GILTI calculations for both tax return and ASC 740 financial statement purposes to ensure the calculations adhere to the guidance outlined in the final regulations. For ASC 740 financial statement purposes, any adjustments that are required will need to be reflected in second quarter 2019 provision calculations for calendar year taxpayers as the final regulations are effective prior to June 30, 2019.
Although the high-tax income exclusion election is not currently effective for 2018 or 2019 calendar taxable years, taxpayers should analyze and model how this election may impact their operations on a go-forward basis and if any planning or restructuring that was being considered (such as planning into subpart F or checking/unchecking certain foreign entities) should be re-evaluated due to this new election.
Please reach out to your Andersen Tax advisor if you have questions on how the final and proposed regulations may specifically impact you or your business.