Much-anticipated proposed regulations provide guidance for U.S. shareholders determining the amount of global intangible low-taxed income (GILTI) to include in gross income. The Tax Cuts and Jobs Act ( P.L. 115-97) enacted Code Sec. 951A, a new current year inclusion that requires U.S. shareholders of controlled foreign corporations (CFCs) to include in gross income the shareholder’s GILTI for the tax year. The proposed rules are proposed to 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.
The tax on GILTI subjects intangible income earned by a CFC to U.S. tax on a current basis, similar to the treatment of a CFC’s subpart F income. The income is taxed at a reduced rate, by way of a deduction, in order not to harm the competitive position of U.S. corporations.
Intangible income is determined according to a formulaic approach that assigns a 10-percent return to tangible assets (qualified business asset investment (QBAI)) and each dollar above the return is treated as intangible income.
Determining the GILTI Inclusion
The GILTI inclusion is treated similarly to a subpart F inclusion for some purposes, but it is determined in a very different manner.
The GILTI inclusion amount begins with the calculation of certain items of the CFC, including tested income, tested loss, QBAI, net deemed tangible income return, and specified interest expense.
The U.S. shareholder determines its share of the CFC-level items. The amounts are taken into account by the shareholder in determining the GILTI included in the shareholder’s gross income. The shareholder will then compute a single GILTI inclusion amount by reference to all of its CFCs.
Proposed Regulation Coverage
The proposed regulations provide general rules to determine the GILTI inclusion and associated definitions. The proposed regulations also provide rules for:
- determining the items determined at the CFC level-tested income, tested loss, QBAI, net deemed tangible income return, and interest expense deduction;
- determining the U.S. shareholder’s pro rata share of CFC-level items; and
- describing the aggregation of the U.S. shareholder’s pro rata share amounts to determine the shareholder’s GILTI inclusion amount.
Subpart F rules apply for some purposes, including:
- determining a U.S. shareholder’s pro rata share of certain items of the CFC;
- determining gross income and allowable deductions;\
- translating foreign currency into U.S. dollars; and
- allocating and apportioning allowable deductions to tested income.
Other subpart F rules are inappropriate because subpart F income is determined solely at the CFC level. For example, the proposed regulations provide detail on how a U.S. shareholder determines its specific interest expense based on the interest expense and interest income of each CFC owned by the shareholder.
Anti-abuse provisions are included in addition to the computational and definitional guidance. Certain transactions that reduce a U.S. shareholder’s GILTI inclusion amount, for example, by increasing a CFC’s QBAI or decreasing a CFC’s tested income will be disregarded. This includes rules to prevent taxpayers from making certain transfers of property that would reduce GILTI.
Consolidated Groups; Domestic Partners and Partnerships
New rules cover the computation of GILTI for members of consolidated groups and for domestic partnerships and their partners. The proposed regulations provide that GILTI is generally calculated on a consolidated group basis. U.S. shareholders of one or more partnership CFCs will compute GILTI at the partnership level.
Under new reporting requirements, a U.S. shareholder must file a new Schedule I-1, Information for Global Intangible Low-Taxed Income, associated with Form 5471, Information of U.S. Persons With Respect to Certain Foreign Corporations.
U.S. shareholders must also file new Form 8992, U.S. Shareholder Calculation of Global Intangible Low-Taxed Income (GILTI). The form is used to provide the information that a U.S. shareholder is using with respect to each of its CFCs to determine the U.S. shareholder’s GILTI inclusion amount for the tax year.
A U.S. shareholder partnership must include on its Schedule K-1, associated with Form 1065, U.S. Return of Partnership, information to determine a partner’s distributive share of the partnership’s GILTI inclusion amount, or a U.S. shareholder partner’s own GILTI inclusion amount.
The proposed regulations do not cover the GILTI foreign tax credit provisions or rules related to the GILTI deduction. These rules will be provided in separate proposed regulations.
Written or electronic comments and requests for a public hearing must be received by 60 days after publication of the document in the Federal Register. ADDRESSES: Send submissions to: Internal Revenue Service, CC:PA:LPD:PR (REG-104390-18), Room 5203, Post Office Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand-delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (indicate REG-104390-18), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, N.W., Washington, DC 20224, or sent electronically, via the Federal eRulemaking Portal at www.regulations.gov.