The Tax Times: Final Regs Provide That GILTI High-Tax Exception Is Retroactive

Tuesday, July 21, 2020

Final Regs Provide That GILTI High-Tax Exception Is Retroactive

According to Law360, The U.S. Treasury Department finalized Monday a partial tax exemption for companies that have already paid high foreign taxes on global income, and will allow businesses to apply the exemption retroactively to the end of 2017.

The U.S. Treasury Department finalized rules Monday that will allow companies to choose to apply the global intangible low-taxed income high-tax exclusion to taxable years back to Dec. 31, 2017.

Under the exemption, the 10.5% tax on global intangible low-taxed income, part of the 2017 Tax Cuts and Jobs Act , won't apply to foreign income that has already been taxed by other jurisdictions at rates of 18.9% or more.

Treasury proposed the expanded exclusion in June 2019. The final rules let companies choose to apply the GILTI high-tax exclusion to the taxable years of foreign affiliates that begin after Dec. 31, 2017, and before July 23, 2020, when the regulations will be published in the Federal Register.

Lawmakers initially said GILTI would act as a corporate minimum tax, ensuring that companies do not pay excessively low taxes on income from intangible assets, such as intellectual property. The conference report that both chambers of Congress passed alongside the TCJA said that the GILTI tax wouldn't apply on income already taxed at 13.125% or higher, as businesses can use foreign tax credits to cover 80% of the foreign tax imposed.

Despite those nonbinding statements, Treasury ultimately found that foreign tax credit limitations can apply, creating much higher GILTI payments for some companies.

While the department declined to give businesses full relief from the foreign tax credit limits, it did offer an exemption for companies that have paid foreign taxes at rates higher than 18.9%, which is 90% of the full U.S. 21% corporate tax rate.

The decision proved controversial with critics who claim it goes beyond the language of the statute.

By applying the exception retroactively, the rule may help companies dealing with the economic fallout of the novel coronavirus pandemic. The GILTI system does not allow companies to carry losses forward, which practitioners say can be unduly harsh for unprofitable companies. If they can use the exception, companies can remove subsidiaries from GILTI calculations entirely, potentially allowing for more flexibility in managing economic losses.

Aside from the final rule on the high-tax exclusion, issued under Internal Revenue Code Section 951A , Treasury on Monday also issued guidance under IRC Section 954 . The measure is part of Subpart F, the longstanding regime that immediately taxes the global passive income of controlled foreign corporations, or CFCs. In order to use the GILTI high-tax exception, a company must elect to use both Section 951A and Section 954.

The proposed regulations apply based on a company's effective foreign tax rate for the aggregate of CFC income attributable to a single qualified business unit, or QBU. For the final rules, Treasury rejected comments requesting the rate apply on a CFC-by-CFC basis, noting that doing so "would inappropriately allow the blending of high-taxed and low-taxed income."

Such blending "is inconsistent with the purpose of Section 951A, which is to limit potential base erosion incentives created by a participation exemption regime," Treasury said.

The regime, under the TCJA's IRC Section 245A , generally allows companies to bring home foreign-sourced income by claiming a 100% dividends-received deduction, provided the earnings don't fall under Subpart F or GILTI.

While the final rules don't apply on a CFC-by-CFC basis, they replace the QBU-by-QBU approach with "a more targeted" way for identifying relevant foreign earnings, according to Treasury.

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