The Treasury recently issued final regulations under IRC Sections 951A and 954, implementing an annual election to exclude Global Intangible Low-Taxed Income (GILTI) subject to a high rate of tax in foreign jurisdictions. The GILTI regime was introduced as part of the Tax Cuts and Jobs Act (TCJA) as an effort to disincentivise U.S. taxpayers from shifting income out of the U.S. and into foreign low tax jurisdictions. The provision brings into income certain earnings of foreign corporations owned by U.S taxpayers. For more information on the computation and who’s subject to the provisions you can refer to our previous blog, International Tax Update: What is the GILTI Provision?

GILTI High-Tax Exclusion

Background

Last year, the Treasury published proposed regulations that would provide for an election to be available to certain shareholders of controlled foreign corporations (CFC). The election would allow for the exclusion of gross tested income that is subjected to an effective foreign income tax rate greater than 90% of the U.S corporate tax rate. Below are some of the key details of the proposed provisions.

• The election would be available to CFCs’ controlling domestic shareholders. Once made, the election would be binding to all U.S. shareholders.
• The election could be revoked, but once revoked, could not be made for another 60 months.
• The election would be applied by assessing the effective tax rate of each qualified business unit (QBU) of a CFC as defined under IRC Section 989(a).
• With the election, the tested income would be excluded for each QBU where the effective foreign tax rate exceeds 18.9% (90% of the U.S. corporate income tax rate of 21%)
• The election was intended to be effective prospectively, for CFC tax years beginning on or after the rules were adopted as final regulations.

Final Regulations

The final regulations largely signed the proposed regulations into law. However, it’s important to note a few significant changes between the proposed regulations and final regulations. Some of the most significant changes are summarized below.

• The election is now made on an annual basis, removing the 60 month restriction.
• The final regulations retain the consistency approach of the proposed regulations. In that, the election applies to ALL CFCs owned by the same domestic controlling U.S. shareholders (CFC group) AND to all of a CFC’s U.S. shareholders.
• The QBU approach has been replaced with a “tested unit” approach. The final regulations outline three types of tested units: (1) the CFC itself, (2) an interest in a pass-through entity held by a CFC, and (3) certain foreign branches of a CFC.
• The regulations retained the definition of high-tax as an effective rate greater than 18.9% as opposed to the effective GILTI rate of 13.125%.

Effective Date

The final regulations apply to tax years of foreign corporations beginning on or after July 23, 2020. Taxpayers also have the option to apply the final regulations retroactively for tax years beginning after December 31, 2017, and before July 23, 2020, provided certain consistency requirements are satisfied.

Along with the final regulations for the GILTI high-tax exclusion, the Treasury also issued proposed regulations relating to the existing high-tax exception for Subpart F income under IRC Section 954(b)(4). The proposed regulations would work to conform the existing Subpart F high-tax exception to the newly enacted GILTI exclusion. The proposed regulations would also provide for a single election under IRC Section 954(b)(4) for purposes of both Subpart F income and GILTI.

Navigating these rules can be complicated. We’re here to help. Contact us.