A key component of the Tax Cuts and Jobs Act of 2017 (TCJA) was implementation of global intangible low-taxed income foreign tax credits (GILTI) for controlled foreign corporations. GILTI taxes U.S. shareholders on income earned through their controlled foreign corporations (CFC) even though their profits are not repatriated.
Affect of GILTI
According to the recently issued final GILTI regulations, partners are treated as they would be for any foreign partnership. Consequently, any partner who indirectly owns less than 10% of a CFC (by voting or value) will not have a GILTI inclusion. The final GILTI regulations are retroactive for any CFC tax year after December 31, 2017.
Application of the Regulations
This created a problem because treating income at the partnership level is inconsistent with the treatment of Subpart F Income, which traditionally has been determined at the partnership level. The Internal Revenue Service issued proposed regulations to resolve this. The proposed regulations extend the aggregate treatment of domestic partnerships to Subpart F and Section 956 inclusions — which is a fundamental change to the treatment of Subpart F income. These proposed regulations are effective for tax years beginning after December 31, 2017.
The proposed regulations also address the high-tax exclusion from GILTI by allowing CFCs to elect to exclude certain income that is subject to a foreign effective tax rate of at least 18.9% if that income is also excluded under Subpart F. CFCs that do not have Subpart F income still may be subject to GILTI. This exclusion will become effective once the proposed regulations are final and effective.
Opportunities and Challenges
These new rules pose potential opportunities and challenges for taxpayers:
- For purposes of these rules, partners who do not meet the 10% threshold are not considered a U.S. shareholder. These partners, however, still may be subject to the passive foreign investment company rules.
- If the high-tax exclusion is elected, it applies to all CFCs owned by the controlling U.S. shareholder group.
- Once the high-tax exclusion is elected, it applies to subsequent tax years unless it is revoked. If revoked, the election would not be available to that CFC for 60 months. Any subsequent elections cannot be revoked for 60 months.
- U.S. companies that have a high-taxed CFC and a low-taxed CFC may face unfavorable consequences if they elect the high-taxed exclusion.
- Coordinating the GILTI rules with the Subpart F rules may have tax consequences for CFCs with de minimis income as defined by Subpart F. Under the new regulations, Subpart F income is taxed solely under the Subpart F rules, whereas de minimis Subpart F incomes falls solely under the GILTI rules.