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State tax considerations of the GILTI high-tax exclusion election

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December 2020

Overview

Final Treasury regulations published July 23 provide guidance related to taxpayers’ ability to exclude gross income from tested income of CFCs by reason of the high-tax election (HTE) under Section 951A. 

Income exempt from GILTI due to the HTE would not constitute previously taxed income (PTEP) federally and would be subject to tax if distributed were it not for the Section 245A exemption. State tax complications arise due to the different ways states conform to the Internal Revenue Code. Taxpayers may be surprised to be subject to state tax on income that is exempt for federal income tax purposes.

The takeaway

The federal HTE provides taxpayers with significant opportunities to reduce their taxable GILTI. Although the election may be favorable for federal tax purposes, taxpayers should not assume that state tax treatment will mirror federal. Taxpayers should review state IRC conformity, particularly around Section 245A, to determine whether income excluded from tax under the HTE could be subject to state income tax.

Taxpayers should also be aware of the final regulations’ interpretation around the HTE’s scope and how state conformity impacts the extent to which such federal regulations are followed.

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Peter Michalowski

Partner, State and Local Tax Consulting Leader, PwC US

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