Not GILTI? Treasury Issues Final Regulations for Global Intangible Low-Tax Income High-Tax Exclusion

By Nick Zoyhofski, CPA on August, 10 2020
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Nick Zoyhofski, CPA

Senior Manager

GILTI article

Final Regulations under §951A (GILTI) and §954:

  • Allows taxpayers to exclude from gross tested income, gross income of a tested unit subject to foreign income tax at an effective rate that is greater than 90% of the maximum U.S. corporate tax rate or 18.9%, based on current tax rates. The effective tax rate is determined by dividing the amount of foreign income taxes paid of accrued attributable to the tested unit by the tentative net tested income.
  • States that in computing the effective tax rate of a tested unit, the tentative net tested income item is determined under U.S. federal income tax principles.
  • Provides three categories of tested units:
    • 1.) The controlled-foreign corporation (CFC) itself, if there are no other tested units
    • 2.) An interest in a pass-through entity or disregarded entity (DRE) held, directly or indirectly, by a CFC
    • 3.) A branch or a portion of a branch, the activities of which are carried on directly or indirectly by a CFC, provided that either the branch gives rise to a taxable presence in another country or the branch gives rise to a taxable presence under the owner’s law, however the local country tax law provides for an exclusion, exemption or some relief related to the branch’s income (i.e. the income from the Branch activities is taxed at a reduced/different rate than that of the rest of the CFC’s activities)
  • Provides for mandatory combining of tested units if the tested units are tax residents, or located in, the same foreign country.
  • Incorporates a consistency rule that provides that the election applies to all members of a CFC group (CFC group is generally defined under the same principles provide for affiliated groups in §1504(a) without regard to the exclusion of foreign corporations and substituting “50%” for “80%”). Meaning the election applies to all eligible tested units within the same group.
  • Provides taxpayers may elect the high tax exclusion on an annual basis.
  • Provides for specific rules on how disregarded payments between entities are to be treated for computation purposes.
  • While the regulations provide the high-tax exclusion applies to taxable years of foreign corporations beginning on or after July 23, 2020, and to taxable years of U.S. shareholders in which or with which such taxable years of foreign corporation’s end, taxpayers may choose to apply the exclusion in tax years beginning after December 31, 2017.
  • Taxpayers are eligible to make the high-tax election on an amended federal return so long as it is done within 24 months of the un-extended due date of the original return of the controlling shareholders returns. It is important to note that all shareholders of the CFC for the year in which the high-tax exception is being claimed must file amended returns within a six-month period.
  • As alluded to in the previous bullet point the regulations place additional notification requirements of controlling domestic shareholders to non-controlling shareholder regarding electing the exemption.

Stay Tuned for More GILTI Guidance

As with many tax discussions, the devil is in the details. Given the amount of guidance still to come from the IRS, we don’t even have all of those details yet. Be sure to subscribe to Freed Maxick’s blog for updates as new information becomes available.

Meanwhile, if the issues discussed in this article have you wondering if your business should re-evaluate its foreign reporting and/or operations, it’s never too early to start the discussion. Please contact the international tax team at Freed Maxick via our contact form, request a consultation, or call us at 716.847.2651 to discuss your situation.

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