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New Regulations on GILTI Related Matters

Final and Proposed Regulations on Global Intangible Low-Taxed Income (GILTI) Related Matters

Final regulations address the GILTI provisions of Internal Revenue Code (IRC) Section 951A. The final regulations retain the basic approach and structure of the proposed regulations published in October 2018. The final regulations address open questions and comments received on the proposed regulations.

Final regulations on the foreign tax credit also adopt proposed regulations published in December 2018. These rules were issued to ensure that the applicability dates coincide with the applicable dates of the Code sections to which they relate. The final foreign tax credit regulations retain the basic structure and approach of the proposed regulations.

Also, a number of provisions were substantially revised.

Domestic Partnerships

The final regulations treat a domestic partnership as an entity for purposes of determining whether a U.S. person is a U.S. shareholder and whether a foreign corporation is a controlled foreign corporation (CFC). However, the final rules treat a domestic partnership as an aggregate for purposes of determining whether and to what extent a partner of a domestic partnership has a GILTI inclusion.

Transfers During Qualified Period

The final regulations allow taxpayers to make an election that eliminates disqualified basis in property, by reducing a commensurate amount of adjusted basis in the property for all purposes of the Code.

Specified Tangible Property

A CFC may elect to use the non-alternative depreciation system (ADS) depreciation method for property acquired before enactment of the GILTI rules. A special rule requires depreciation of the salvage value, which is the portion of the basis in the property that would not be fully depreciated under the non-ADS depreciation method.

Anti-Abuse Rule

Under a “per se” rule in the proposed regulations, property was deemed to be held for the principal purpose of reducing a GILTI inclusion if held by the CFC for less than a 12-month period. The final regulations convert the per se rule to a rebuttable presumption. Under a second presumption, property held for more than 36 months is not subject to the rule. A safe harbor applies for certain transfers.

Foreign Tax Credit

The foreign tax credit proposed regulations contained a rule for determining the adjusted basis of the stock of the foreign corporation for purposes of allocating expenses to stock of certain foreign corporations. The final regulations state that a taxpayer should not have an adjusted basis below zero in stock of a foreign corporation. A taxpayer’s adjusted basis may be reduced below zero as a result of an adjustment for earning and profit deficits, as long as the adjustment for earnings and profits increased the adjusted basis of the foreign corporation above zero.

Applicability of Final Regulations

The final GILTI regulations generally apply to tax years of foreign corporations beginning after December 31, 2017, and to tax years of U.S. shareholders in which or with which such tax years of foreign corporations end.

Proposed Regulations

The Treasury Department and the IRS also issued proposed regulations on the treatment of domestic partnerships for determining amounts included in their partners’ gross incomes under IRC Section 951 with respect to CFCs owned by the partnership, and the GILTI treatment of gross income that is subject to a high rate of foreign tax under IRC Section 951A.

The proposed regulations would affect U.S. persons that own stock of foreign corporations through domestic partnerships and U.S. shareholders of foreign corporations.

Aggregate Treatment Adopted

To be consistent with the treatment of domestic partnerships under IRC Section 951A, the Treasury and the IRS determined that a domestic partnership should also generally be treated as an aggregate of its partners in determining stock owned under IRC Section 958(a) for IRC Section 951 purposes.

Expansion to Exclude Other High-Taxed Income

The Treasury and the IRS also determined that the GILTI high-tax exclusion should be expanded (on an elective basis) to include certain high-taxed income even if that income would not otherwise be foreign base company income (FBCI) or insurance income. Further, taxpayers should be allowed to elect to apply the IRC Section 954(b)(4) exception (the “GILTI high tax exclusion”) for certain classes of income that are subject to high foreign taxes.

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