IRS Issues Proposed Regulations On Global Intangible Low-Taxed Income For U.S. Shareholders
US Expats with non US corporations, hold your hats…..The TCJA of 2017 imposed not only a one time “deemed repatriation tax” or ‘transition tax’ of 15.5% on untaxed foreign earnings or business profits accumulated overseas from 1986- 12/31/17 held in cash or cash-equivalents and 8% for profits held in non-cash form, but also starting for the 2018 income tax year an annual GILTI (Global Intangible Low Tax Income) inclusion and the IRS only released those GILTI tax ‘proposed’ regulations on September 123, 2018! The GILTI would be taxed at ordinary US income tax rates.
As in the case of the one-time ‘Repatriation” IRC Sec 965 tax, this would apply whether or not the funds had been repatriated by deeming these earnings to be repatriated, for any US persons owning more than 10% of a controlled foreign corporation (CFC), where a CFC is a foreign corporation in which US persons control more than 50%.
Again this would apply whether or not the funds had been repatriated by deeming these earnings to be repatriated.
The Internal Revenue Service issued proposed regulations today concerning global intangible low-taxed income under section 951A and related sections of the Internal Revenue Code.
The Tax Cuts and Jobs Act (TCJA), passed in December 2017, made major changes to the tax law, including adding new rules requiring the inclusion of global intangible low-taxed income generated by controlled foreign corporations (CFCs).
Under the TCJA, a U.S. person that owns at least 10 percent of the value or voting rights in one or more CFCs will be required to include its global intangible low-taxed income as currently taxable income, regardless of whether any amount is distributed to the shareholder. A U.S. person includes U.S. individuals, domestic corporations, partnerships, trusts and estates.
New reporting rules requiring the filing of Form 8992, U.S. Shareholder Calculation of Global Intangible Low-Taxed Income, are also described in the proposed regulations.
To determine its GILTI inclusion amount, the U.S. shareholder first calculates certain items of each CFC the shareholder owns, such as tested income, tested loss, or QBAI. A U.S. shareholder then determines its pro rata share of each of these CFC-level items similar to a shareholder’s pro rata share of Subpart F income. However, unlike Subpart F, the U.S. shareholder’s pro rata shares of these items are not amounts included in gross income, but rather are amounts taken into account by the shareholder in determining the GILTI included in the shareholder’s gross income, meaning it is calculated on an aggregate basis.
The U.S. shareholder aggregates (and then nets or multiplies) its pro rata share of each of these items into a single shareholder-level amount — for example, aggregate tested income reduced by aggregate tested loss becomes net CFC tested income, and aggregate QBAI multiplied by 10% becomes deemed tangible income return. A shareholder’s GILTI inclusion amount for a tax year is then calculated by subtracting one aggregate shareholder-level amount from another — the shareholder’s net deemed tangible income return (net DTIR) is the excess of deemed tangible income return over certain interest expense, and, finally, its GILTI inclusion amount is the excess of its net CFC tested income over its net DTIR.
Under Sec. 951A, the regulations address the applicable general rules and definitions, the calculation of tested income and loss, the rules regarding QBAI and specified tangible property, what is included in specified interest expense, the treatment of domestic partnerships and their partners, and the treatment of the GILTI inclusion amount and adjustments to earnings and profits and basis.
Under Sec. 951, the proposed regulations amend Regs. Sec. 1.951-1(e) to address certain avoidance structures the IRS has become aware of, which implicate Sec. 951A as well as Sec. 951. The proposed regulations also modify Regs. Sec. 1.951-1(e) in specific ways to take into account Sec. 951A. The proposed regulations also update Regs. Sec. 1.951-1 consistent with the modification in the TCJA of the definition of a U.S. shareholder in Sec. 951(a) and modify the reporting requirements in Regs. Sec. 1.6038-2(a) and 1.6038-5 to reflect the elimination by the TCJA of the 30-day CFC status requirement in Sec. 951(a)(1).
The new law applies to the first tax year of a CFC beginning after Dec. 31, 2017, and the U.S. shareholder’s year with or within which that year ends, and all subsequent tax years.
These proposed regulations do not include foreign tax credit computational rules relating to global intangible low-taxed income, which will be addressed separately in the future.
Treasury and IRS welcome public comments on these proposed regulations. For details on submitting comments, see the proposed regulations.
Updates on the implementation of the TCJA can be found on the Tax Reform page of IRS.gov.