Proposed Regulations Released on Global Intangible Low-Taxed Income (GILTI)

| 9/20/2018
On Sept. 13, the U.S. Department of the Treasury and the IRS issued proposed regulations for global intangible low-taxed income (GILTI) under IRC Section 951A. The purpose of GILTI is to tax U.S. shareholders of controlled foreign corporations (CFCs) on their shares of a CFC’s intangible income if that income was subject to a low local tax rate. Intangible income generally is defined as CFC income to the extent it exceeds a 10 percent return on the tangible depreciable assets of the CFC. Unfortunately, the proposed regulations fall short of addressing most of the major questions looming over the new provision, particularly foreign tax credit guidance.

Following are the main components of the proposed regulations and what they might mean for taxpayers:

Proposed regulation 1.951A-1: General provisions (and definitions)
  • Qualified business asset investment (QBAI) does not include assets of a net loss CFC.
Proposed regulation 1.951A-2: Tested income and tested loss
  • The tested income or tested loss of a CFC is determined by treating the CFC as a domestic corporation, including permanent disallowances that reduce earnings and profits, such as fines or penalties.
  • Proposed regulations clarify that the exclusion of gross income from income qualifying for the Subpart F high-taxed exception applies to income that is excluded from foreign base company income and insurance income solely because of an election made to exclude the income under the high-tax exception. Income that otherwise would be foreign personal company holding income but for the active financing exception would not be excluded from tested income for GILTI purposes even if it also qualifies for the high-tax exception.
Proposed regulation 1.951A-3: QBAI
  • A CFC’s QBAI is the average of the CFC’s aggregate adjusted bases as of the close of each quarter.
  • Regardless of the date of the acquisition of the CFC, the adjusted basis in its tangible property should be determined under the alternative depreciation system (ADS).
  • The QBAI of a CFC with a short taxable year will be reduced to an amount that, if annualized, would equal the QBAI for a 12-month taxable year.
  • A step-up in the basis in tangible property as a result of a transfer among related CFCs during the period immediately prior to the transferor CFC’s first GILTI year will be disallowed for the purposes of calculating the transferee CFC’s QBAI.
Proposed regulation 1.951A-4: Tested interest expense and tested interest income
  • A U.S. shareholder’s specified interest expense is the excess of its aggregate pro rata share of the tested interest expense over its aggregate pro rata share of the tested interest income. Specified interest reduces the 10 percent return on QBAI and, consequently, increases GILTI. 
Proposed regulation 1.951A-5: Domestic partnerships and their partners
  • If a partner independently qualifies as a U.S. shareholder in a CFC and also indirectly owns an interest in that CFC by virtue of the partner’s ownership of a domestic partnership that also qualifies as a U.S. shareholder of the CFC, the partner will be treated as owning a proportionate amount of the domestic partnership’s interest in the CFC as if the domestic partnership was a foreign partnership.
Proposed regulation 1.951A-6: Treatment of GILTI inclusion amount and adjustments to earnings and adjustments to earnings and profits and basis related to tested loss CFCs
  • GILTI inclusion amounts will be treated in the same manner as Subpart F income for purposes of applying Section 1411, the net investment income tax.
  • The basis in tested loss CFCs, which has used tested loss amounts to offset tested income, will be decreased immediately before a disposition.
  • A consolidated group is treated as an aggregate of aggregates. For example, the components of a consolidated group member’s GILTI is calculated on the basis of the aggregate of its proportionate share of the components for each CFC in which it has an interest, and the consolidated group in turn computes its GILTI based on the aggregate components of each of the members of the group.
  • Filing requirements are provided for new Form 8992, “U.S. Shareholder Calculation of Global Intangible Low-Taxed Income.”
Proposed regulation 1.951A-7: Applicability dates
  • Section 951A and the associated regulations apply to taxable years of foreign corporations beginning after Dec. 31, 2017, and to taxable years of U.S. shareholders in which or with which such taxable years of foreign corporations end.

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