Treasury and the IRS on June 14 released 318-page final regulations (the Final Regulations) and 74-page proposed regulations (the Proposed Regulations) under Section 951A as enacted by the 2017 tax reform act (the Act).
The Final Regulations incorporate with modifications the rules described in the prior proposed regulations (the 2018 Proposed Regulations) under Section 951A and set forth additional guidance on a range of issues relating to the implementation of that provision. Among the changes, the Final Regulations clarify the interaction of subpart F and GILTI for purposes of determining ‘tested income,’ modify anti-abuse rules for certain property transactions taking place prior to the effective date of Section 951A, and modify the treatment of domestic partnerships for purposes of determining a domestic partner’s GILTI inclusion.
The Proposed Regulations provide an exception from GILTI gross tested income for certain income subject to ‘high tax’ in a foreign jurisdiction, as well as amend the treatment of domestic partnerships for purposes of determining a foreign corporation’s status as a CFC and computing a US shareholder’s subpart F and GILTI inclusions.
In general, US shareholders of insurance CFCs that have benefited from an exemption from subpart F income pre-reform have become subject to GILTI, with no meaningful reduction afforded by the deemed tangible income return, as typically insurance CFCs do not have material investments in tangible assets. Given the various attributes tied to GILTI, companies have been considering potential approaches to mitigating GILTI, in certain cases by surrendering their subpart F exemption. The newly proposed high-tax exception is an important step in that direction.
Taxpayers subject to these rules should review the Final Regulations and Proposed Regulations to determine the impact, if any, on their GILTI tax liability.
A more detailed discussion of the Final and Proposed Regulations can be found here. This Tax Insight highlights certain aspects of the Final and Proposed Regulations that have specific implications for insurance companies
Although the Final Regulations generally follow the structure and approach set forth in the 2018 Proposed Regulations, there are significant modifications that are likely to impact a taxpayer’s GILTI calculation. Taxpayers should review the Final Regulations and Proposed Regulations to determine whether their GILTI tax liability with respect to insurance CFCs may be affected. Taxpayers also should consider the modifications outlined in the Proposed Regulations, as they could have a significant impact in the future.
Insurance Tax Leader, PwC US