The IRS proposed new rules under the global intangible low-taxed income (GILTI) provision (Sec. 951A) added by P.L. 115-97, the law known as the Tax Cuts and Jobs Act (REG-104390-18). Sec. 951A requires U.S. shareholders of controlled foreign corporations (CFCs) to include in their gross income their GILTI income for that tax year (the inclusion amount). The new provision applies to tax years of foreign corporations beginning after Dec. 31, 2017, and to the U.S. shareholders’ tax years within which the foreign corporations’ tax years end.
This inclusion amount is intended to subject intangible income earned by a CFC to U.S. tax on a current basis and is determined using a formula. A 10% return is attributed to certain tangible assets called specified tangible property (qualified business asset investment, or QBAI), and each dollar of certain income above that is treated as intangible income. The IRS explains that the inclusion amount is treated similarly to a Subpart F income inclusion, but it is determined in a fundamentally different manner, aggregating the inclusion amounts for all CFCs the U.S. shareholder owns.
To determine its GILTI inclusion amount, the U.S. shareholder first calculates certain items of each CFC the shareholder owns, such as tested income, tested loss, or QBAI. A U.S. shareholder then determines its pro rata share of each of these CFC-level items similar to a shareholder’s pro rata share of Subpart F income. However, unlike Subpart F, the U.S. shareholder’s pro rata shares of these items are not amounts included in gross income, but rather are amounts taken into account by the shareholder in determining the GILTI included in the shareholder’s gross income, meaning it is calculated on an aggregate basis.
The U.S. shareholder aggregates (and then nets or multiplies) its pro rata share of each of these items into a single shareholder-level amount — for example, aggregate tested income reduced by aggregate tested loss becomes net CFC tested income, and aggregate QBAI multiplied by 10% becomes deemed tangible income return. A shareholder’s GILTI inclusion amount for a tax year is then calculated by subtracting one aggregate shareholder-level amount from another — the shareholder’s net deemed tangible income return (net DTIR) is the excess of deemed tangible income return over certain interest expense, and, finally, its GILTI inclusion amount is the excess of its net CFC tested income over its net DTIR.
Under Sec. 951A, the regulations address the applicable general rules and definitions, the calculation of tested income and loss, the rules regarding QBAI and specified tangible property, what is included in specified interest expense, the treatment of domestic partnerships and their partners, and the treatment of the GILTI inclusion amount and adjustments to earnings and profits and basis.
Under Sec. 951, the proposed regulations amend Regs. Sec. 1.951-1(e) to address certain avoidance structures the IRS has become aware of, which implicate Sec. 951A as well as Sec. 951. The proposed regulations also modify Regs. Sec. 1.951-1(e) in specific ways to take into account Sec. 951A. The proposed regulations also update Regs. Sec. 1.951-1 consistent with the modification in the TCJA of the definition of a U.S. shareholder in Sec. 951(a) and modify the reporting requirements in Regs. Sec. 1.6038-2(a) and 1.6038-5 to reflect the elimination by the TCJA of the 30-day CFC status requirement in Sec. 951(a)(1).
The IRS is requesting comments on the proposed regulations 60 days after the date they are published in the Federal Register. In addition, the proposed regulations are effective the date they are published in the Federal Register.
— Sally P. Schreiber, J.D., (Sally.Schreiber@aicpa-cima.com) is a Tax Adviser senior editor.