GILTI rules address income subject to high foreign tax rate

The IRS issued an additional regulation package on the global intangible low-taxed income (GILTI) provision, Sec. 951A, which was added by the law known as the Tax Cuts and Jobs Act, P.L. 115-97, and 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. The IRS issued final regulations on Sec. 951A in June 2019 (T.D. 9866).

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.

T.D. 9902 finalizes the portions of proposed regulations (REG-101828-19) on the treatment of income subject to a high rate of foreign tax. However, it does not finalize the portions of those 2019 proposed regulations under Secs. 951, 956, 958, and 1502 regarding the treatment of domestic partnerships. Treasury and the IRS plan to finalize those regulations separately.

Along with the final regulations, in response to comments, the IRS issued new proposed rules (REG-127732-19) addressing various aspects of the GILTI high-tax exclusion and conforming them with the Subpart F high-tax exception so that the IRS’s goals in promulgating the GILTI high-tax exclusion are not undermined. They 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”).

In addition, the proposed regulations also provide guidance under the information reporting provisions for foreign corporations to facilitate the administration of certain rules in the proposed regulations.

For the proposed rules, the IRS is asking for comments and hearing requests to be received by Sept. 21, which is also the date the final regulations are effective.

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