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Guidance for GILTI High-Tax Exception
On June 14, 2019, the U.S. Department of the Treasury and the IRS released final global intangible low-taxed income (GILTI) regulations under Internal Revenue Code Section 951A and related foreign tax credit regulations. Treasury and the IRS also released a new set of proposed GILTI and Subpart F regulations and temporary regulations under the new §245A participation exemption.
Newly issued proposed regulations include a new GILTI high-tax exception election that would apply to any high-taxed controlled foreign corporation (CFC) income that would otherwise be tested income. This new exclusion is broader than the current high-tax exclusion, which only applies to CFC income that would otherwise be Subpart F income.
The new GILTI high-tax exception is not available until the newly issued proposed regulations are finalized and effective. As currently drafted, the exception would not be effective retroactive to 2018 tax years that begin before the regulations are finalized.
GILTI High-Tax Exception Election
Enacted in the Tax Cuts and Jobs Act (TCJA), §951A excludes certain types of gross income from the tested income of a CFC that a U.S. shareholder uses to compute GILTI income. Such exclusions include—but are not limited to—income the U.S. shareholder already recognizes as Subpart F income and gross income excluded from Subpart F due to the high-tax exception election of §954(b)(4). The prior GILTI proposed regulations released in October 2018 provide that the §951A exclusion of high-tax exception election income only applies to income that would otherwise be foreign base company income or foreign insurance income under the Subpart F rules. Therefore, any high-taxed income that would not otherwise be Subpart F income if not for the high-tax exception election cannot be excluded from CFC tested income under the §951A high-tax exclusion.
The final regulations issued on June 14, 2019, adopt the October 2018 proposed regulation high-tax exclusion rules without modification. However, Treasury and the IRS issued a new set of proposed GILTI regulations that would provide for a broader high-tax exclusion. Below is a synopsis of the new proposed GILTI high-tax exclusion:
- The proposed regulations provide that an election may be made for a CFC to exclude under §954(b)(4)—and thus exclude from gross CFC tested income—gross income subject to foreign income tax at an effective rate that is greater than 90 percent of the maximum U.S. corporate tax rate (18.9 percent based on the current rate of 21 percent).
- The election can be made or revoked at any time by the CFC’s controlling domestic shareholders for any CFC inclusion year. However, if a U.S. shareholder revokes an election for a CFC, the U.S. shareholder cannot make the election again within five years after the revocation, and then if an election is subsequently made, it cannot be revoked again within five years of the subsequent election.
- A GILTI high-tax exception election applies to each item of income for each CFC in a group of commonly controlled CFCs that meets the effective rate test.
- The effective rate test is applied separately to each qualified business unit of a CFC.
- The preamble to the final GILTI regulations clarifies that until the proposed regulations containing the new GILTI high-tax exception are finalized and effective, taxpayers may not exclude any item of income from CFC tested income under a high-tax exception election unless the income would otherwise be foreign base company income or foreign insurance income under the Subpart F rules.
- The proposed GILTI regulations provide that the new GILTI high-tax exception will be effective for taxable years beginning on or after the date that final regulations are published.
While the proposed GILTI high-tax exclusion is welcome news, deciding whether to make the election—once it is available—may not be simple. Numerous factors would need to be considered on a case-by-case basis to determine whether the GILTI high-tax exception election would be beneficial.
For more information on the regulations, including changes affecting partnerships and S corporations, check out the full BKD Thoughtware® article on the topic. Reach out to your BKD trusted advisor or use the Contact Us form below for help applying these rules to your specific situation.