Proposed Regulations Issued Under IRC Section 951A: GILTI

On September 13th, the IRS issued proposed regulations under Section 951A. The Section 951A Global Low TaxedIntangible Income (GILTI) regime was added to the Internal Revenue Code 2017 by P.L. 115-97 (Tax Cuts and Jobs Act) andis effective for tax years beginning after December 31, 2017.

Under the GILTI regime, U.S. shareholders of a controlled foreign corporation (CFC) may have to include “intangible” income earned by the CFC in excess of a deemed return on depreciable assets in their U.S. taxable income.

The GILTI inclusion amount is calculated as the excess of “Net CFC Tested Income” over a 10 percent return on the depreciable assets used in generating tested income. The inclusion amount is calculated based on an aggregate of the shareholders pro rata share of tested income and tested loss from each CFC owned.

Corporate shareholders, and individuals electing to be treated as corporations for purposes of Subpart F income, are eligible to claim a foreign tax credit for up to 80 percent of foreign taxes paid on tested income, and corporate shareholders can claim a deduction for 50 percent of the GILTI inclusion amount under Section 250.

Under the proposed regulations, the following rules apply to the calculation of the GILTI inclusion:

  • A U.S. shareholder of a CFC is defined as a U.S. person who owns stock (directly or indirectly) in the CFC on the last day of the tax year. If a foreign corporation was treated as a CFC at any point during the year, it is treated as a CFC for the entire year.
  • Tested income is defined as the excess, if any, of gross income of the CFC over deductions (including taxes) allocable to such gross income. Gross income for purposes of determining the GILTI inclusion excludes:
    • Income effectively connected with a U.S. trade or business
    • Subpart F income
    • Income excluded from Subpart F income because it is subject to an effective foreign tax income tax rate greater than 90 percent of the maximum U.S. corporate income tax rate
    • Dividends received from related persons
    • Certain foreign oil and gas income
  • Net Deemed Tangible Income Return is 10 percent of the shareholder’s pro rata share of the qualified business asset investment (QBAI) used in the production of tested income of each CFC, minus the interest expense deducted in computing tested income.

The proposed regulations will require U.S. shareholders to compute the CFC’s taxable income under U.S. tax rules. For example, depreciation must be computed under the ADS rules of Section 168(g). This will result in a significant increase in the compliance and reporting burden for many taxpayers.

For purposes of calculating the GILTI inclusion, domestic partnerships are treated with a hybrid aggregate/entity approach. Under the hybrid approach, U.S. shareholder partnerships determine the GILTI inclusion under general rules, but only to calculate the distributive share of the GILTI amount of any partner not considered a U.S. shareholder partner with respect to a CFC. U.S. shareholder partners use the aggregate method.

The proposed regulations do not address Section 250 (permitting a shareholder a deduction equal to 50 percent of its GILTI inclusion), the calculation of a separate foreign tax credit limitation on GILTI income under Section 960, or the gross up for deemed paid taxes under Section 78; however, the IRS has indicated that additional regulations addressing these items will be forthcoming.

Section 951A and the proposed regulations are likely to increase the complexity of compliance obligations for all U.S. shareholders of a CFC. In particular, U.S. individuals who own CFC shares directly or through a flow-through entity can be subject to significant additional tax as a result of the GILTI regime. Careful analysis and planning should be undertaken before year end to estimate the potential impacts of GILTI and identify opportunities to minimize the additional tax.

Please contact your tax advisor with any questions regarding Section 951A and the proposed regulations.

Charles Edge
Partner, DHG Tax