The Tax Cuts and Jobs Act enacted section 951A implementing the Global Intangible Low-Taxed Income (GILTI) regime. On June 21, 2019, proposed regulations were published regarding the GILTI high-tax exception (HTE) and were largely adopted in the final regulations, absent a few changes.
What is GILTI?
GILTI requires U.S. shareholders of controlled foreign corporations (CFC) to include in their gross income a GILTI amount as of January 1, 2018.
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What is Included in the Finalized GILTI Regulations?
Under the finalized GILTI regulations released this month, the threshold rate of tax to qualify to elect to use the HTE is 90% of the highest corporate tax rate (21%); thus, if a CFC’s effective tax rate is at least 18.9% they would meet the threshold to exclude GILTI.
The original proposed regulations looked to each qualified business unit (QBU) to determine whether income was eligible for the GILTI HTE. The final regulations provide that the GILTI HTE will be determined at the tested business unit (TBU) level. A TBU aims at determining all the items of income which would possibly be subject to tax in a foreign jurisdiction by way of either being a tax resident or having created a permanent establishment.
A TBU is made up of three categories: a CFC, an interest in a passthrough entity held by the CFC, and a branch that either gives rise to a taxable presence in the country where it is located or a taxable presence under the owner’s tax law where the owner’s tax law provides an exclusion for the branch’s income.
The final regulations require that if an election (or revocation) is made, the election (or revocation) applies to all of the taxpayer’s commonly controlled CFCs so long as they meet the effective tax rate threshold.
How Long is the GILTI Election in Effect?
Comments were submitted pertaining to the proposed regulations on how long an election of the GILTI HTE would be in effect. The final regulations provided that the GILTI HTE is made on a year-by-year basis. Additionally, the final regulations removed the 60-month waiting period following a tax year in which an election was revoked. This removal of the waiting period allows an election to be made in one year, then revoked in the following year, and then elected for the subsequent year.
The applicable date of the final GILTI HTE regulations under section 951A apply to tax years of foreign corporations which begin on or after July 23, 2020. Additionally, the final regulations provide a retroactive applicability option for tax years of a foreign corporation that began after December 31, 2017, and before July 23, 2020, so long as the taxpayer consistently applies the final regulations to each year in which they have elected to apply the GILTI HTE. There are specific guidance/timelines in the final regulations that taxpayers should follow if they so choose to apply the final regulations retroactively in amending tax returns.
Taxpayers should consider whether amended returns are warranted to obtain a federal or state tax refund on GILTI inclusions in years beginning after December 31, 2017. Also, estimated tax payments may need to be adjusted to consider the GILTI HTE exclusion from income.
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GILTI came in with tax reform. But now that final regulations are in, we can see the impact GILTI may have on your international business ventures. Understanding this program and its consequences for your business will help you make a knowledgeable decision about its impact to your foreign subsidiary.
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