Treasury and the IRS have released proposed regulations under Section 951A (the Proposed Regulations), relating to a US shareholder’s ‘global intangible low-taxed income’ (GILTI). That provision requires a US shareholder to pay a minimum aggregate US and foreign tax on its share of the earnings of its controlled foreign corporation (CFC). The Proposed Regulations, released September 13, are the first administrative guidance under the new GILTI regime that was enacted by the 2017 tax reform legislation (the Act).
The Proposed Regulations provide needed guidance related to the mechanics of determining a US shareholder’s GILTI inclusion, including for CFCs held through partnerships. Rules for determining GILTI inclusion on a consolidated basis also are provided.
A new rule is included for adjusting the basis of the CFC stock based on the tested losses generated by the CFC. Taxpayers need to be prepared to track GILTI attributes in CFC stock, adding complexity to complying with an already complex new GILTI regime. The Proposed Regulations also add anti-abuse rules related to determining pro rata share as well as for determining the tested income or loss and qualified business asset investment (QBAI) of a CFC.
The Proposed Regulations do not include rules relating to foreign tax credits (FTCs), the Section 250 deduction, or the interaction of a GILTI inclusion with Sections 163(j), 245A, and 267A. The preamble notes that these issues will be addressed in future guidance and will include rules for assigning the Section 78 gross-up attributable to Section 960(d) deemed paid foreign taxes to the Section 904(d)(1)(A) separate category.
The Proposed Regulations largely follow the statutory definitions provided in Section 951A, while providing additional guidance directed to assist taxpayers in calculating their GILTI inclusion. At the same time, these Proposed Regulations include new provisions that taxpayers should carefully review.
Taxpayers will need to maintain a cumulative record of the tested income and loss of each CFC as well as determine historical basis for assets held by its CFCs. Taxpayers should review the Proposed Regulations and recalibrate their calculations and models accordingly.
Taxpayers should also review and assess the impact of the specific proposals in the Proposed Regulations on their business and industry, and consider commenting on the proposals, or on other issues arising under the Proposed Regulations that Treasury and the IRS should address.
Partner, Washington National Tax Services ITS Leader, PwC US