Final rules govern GILTI, Subpart F income, and foreign tax credits

By Sally P. Schreiber, J.D.

The IRS on Friday issued guidance on Sec. 951, Subpart F income; Sec. 951A, global intangible low-taxed income (GILTI) inclusion; Sec. 1502, consolidated return rules; and Sec. 6038, certain reporting requirements (T.D. 9866). The IRS also finalized foreign tax credit rules issue in December (REG-105600-18) and issued new proposed regulations.

Sec. 951A, which was added by P.L. 115-97, the law known as the Tax Cuts and Jobs Act, requires 10% U.S. shareholders of controlled foreign corporations (CFCs) to include in their gross income their share of the CFC’s GILTI for that tax year (the inclusion amount). The provision applies to tax years of foreign corporations beginning after Dec. 31, 2017, and to the U.S. shareholders’ tax years within which the foreign corporations’ tax years end.

This inclusion amount is intended to subject income earned by a CFC to U.S. tax on a current basis and is determined using a formula. A 10% return is attributed to certain tangible assets (qualified business asset investment, or QBAI), and each dollar of certain income above that 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.

The final regulations contain, with certain modifications based on comments received, anti-abuse provisions that were included in the proposed regulations (REG-104390-18) and revise the proposed regulations’ domestic partnership provisions to adopt an aggregate approach for purposes of determining the amount of GILTI included in the gross income of a partnership’s partners under Sec. 951A with respect to CFCs owned by the partnership.

The final regulations also provide guidance relating to the determination of a U.S. shareholder’s pro rata share of a CFC’s Subpart F income and GILTI included in the U.S. shareholder’s gross income, as well as certain reporting requirements relating to inclusions of Subpart F income and GILTI.

The final regulations also contain rules under Secs. 78 (gross-up for deemed paid foreign tax credit), 861 (income from sources within the United States), and 965 (treatment of deferred foreign income upon transition to the new participation exemption system) relating to certain foreign tax credit aspects of the transition to an exemption system for income earned through foreign corporations.

At the same time, the IRS issued proposed regulations (REG-101828-19) on how a domestic partnership determines amounts included in the gross income of its partners under Sec. 951, Subpart F income, with respect to CFCs the partnership owns and the treatment of income of a CFC that is subject to a high rate of foreign tax under the GILTI rules. The IRS requested comments on these proposals by Sept. 19, 2019.

Sally P. Schreiber, J.D., (Sally.Schreiber@aicpa-cima.com) is a Tax Adviser senior editor.

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