Gilti Formulas And Election To Individual Taxpayers For Gilti Relief

The Treasury Department and the IRS request comments on these proposed rules. Internal Revenue Code Section 962 provides an election for individual U.S. shareholders so that their Subpart F income including GILTI is subject to federal income tax at the corporate tax rate of 21% rather than individual tax rate of up to 37%. This election is also available to an individual U.S. shareholder of a passthrough entity.

The final rules also adopt, with some modification, the part of the proposed FTC regulations (Prop. Reg. § 1.965-7) addressing the interaction between the section 965 election and the section 904 limitation. Under section 965, a taxpayer may elect to exclude the amount of section 965 inclusions (reduced by section 965 deductions) and associated section 78 dividends in determining the amount of the net operating loss carryover or carryback that is deductible in the tax year of the inclusions. Under the finalized rule, taxpayers making a section 965 election are prevented from "walling off" the net section 965 inclusion from the allocation and apportionment of expenses for section 904 limitation purposes.

Careful consideration should be given to the negative US tax treatment of any future dividends paid by his Canadian corporation under this election. The resulting 18.9% rate is below the corporate tax rate in many countries, including the UK, Australia, anddozens of others.

Therefore, because few states exclude Subpart F income for personal income tax purposes, it is important for such individuals to determine whether states in which they will be fbar filing date personal income tax returns are "rolling" IRC conformity states or "fixed-date" IRC conformity states. More forgiving rules apply in the case of a USS that is a domestic corporation. C corporations are eligible for a special 50 percent deduction (37.5 percent starting in 2026) against the GILTI inclusion amount as well as a deemed paid foreign tax credit. Thus, the effective tax rate on a C corporation’s GILTI inclusion is 10.5 percent and is further reduced by available foreign tax credits.

As a result, any electing taxpayer with expenses allocated or apportioned to foreign source income would have to treat those expenses as partially absorbed against the net section 965 inclusion for FTC limitation purposes. The 2018 proposed regulations would have disregarded any transaction with a principal purpose of avoiding federal income tax for purposes of determining a U.S. Shareholder’s pro rata share of a CFC’s subpart F income and tested items for GILTI purposes. Several comments asserted that this anti-abuse rule was overbroad, noting that it potentially could cause a U.S. Shareholder that disposed of its interest in a CFC to indefinitely include its pro rata share of tested items with respect to the CFC.

In response, Treasury modified the rule to require adjustments only to the allocation of allocable earnings and profits that would be distributed with respect to outstanding shares on the hypothetical distribution date. Thus, under the final rule, adjustments will only be made to shareholders that actually own stock on the hypothetical distribution date. The GILTI calculation itself can certainly be complex especially where multiple CFCs are involved.

The 50 percent deduction is taken directly from the amount of GILTI included on the parent corporations US tax return as a result of IRC §951A. More specifically, a US business must include GILTI in its gross income annually. GILTI is calculated as the total active income earned by a US firm’s foreign affiliates that exceeds 10 percent of the firm’s depreciable tangible property. A corporation can generally deduct 50 percent of the GILTI and claim a foreign tax credit for 80 percent of foreign taxes paid or accrued on GILTI.

Quite basically, GILTI is the excess of a US shareholder’s pro-rata share of a CFC’s income reduced by an allowable return equal to 10% of the CFC’s adjusted tax basis in certain depreciable tangible property or Qualified Business Asset Investment ("QBAI"). US corporate CFC shareholders are given a 50% deduction via IRC §250 against any GILTI inclusion and can, subject to certain limits, credit IRC §902 taxes paid by the CFC to offset the US tax resulting from the GILTI inclusion.

Specifically, the final regulations provide that for purposes of the GILTI statute and regulations, a domestic partnership does not have a GILTI inclusion amount, and thus no partner of the partnership will have a distributive share of GILTI inclusion reported to them by the partnership. Instead, the partnership will report necessary information to its partners, and they themselves must determine if they are a U.S. shareholder and therefore subject to reporting the GILTI inclusion under the final regulations.

Thus, if the foreign tax rate is zero, the effective US tax rate on GILTI will be 10.5 percent . If the foreign tax rate is 13.125 percent or higher, there will be no US tax after the 80 percent credit for foreign taxes. The new law includes the U.S. federal tax on global intangible low-taxed income referred to as GILTI. The GILTI rule applies to U.S. shareholders of controlled foreign corporations .

Effective on January 1, 2018, a U.S. shareholder of a CFC is required to report and pay U.S. federal tax on their share of a CFC’s non-previously taxed and undistributed earnings on an annual basis. The GILTI reporting requirement applies if the U.S. shareholder owns at least 10% of the CFC’s vote or value while taking into account direct, indirect, and constructive ownership.

Under this election, individual U.S. shareholders can claim FTCs under the GILTI rules, which would not otherwise be available to them. This could significantly reduce or even eliminate the individual U.S. shareholder’s GILTI tax liability.

However, the U.S. shareholder reports GILTI only to the extent of their direct and indirect ownership percentage of the CFC through other foreign entities even if less than 10%. While a number, but certainly not all, of states will wholly or partially exclude federal Subpart F income from a C corporation’s state taxable income, these exclusions or deductions often do not apply to individuals for personal income tax purposes. As a result, individuals in that capacity or that are shareholders in S corporations or partners/members of a PTE that are U.S. shareholders with respect to a DFIC that has a 2017 IRC § 965 DRTT "inclusion amount" could also realize a significant state personal income tax impact from the DRTT.

This outcome provides considerable relief from GILTI liability for those partners of a domestic partnership having small minority interests that might have otherwise been allocated partnership level GILTI under the proposed regulations. For example, a partnership that is a 100 percent owner of a foreign corporation would have calculated and allocated a GILTI inclusion amount under the proposed regulations and it is likely that partners owning less than 10% of the CFC would have been subject to tax on that amount. Under the final regulations, only partners who have a 10% interest in the foreign corporation have income inclusions. There are three different types of US shareholders of controlled foreign corporations, Corporations, pass-through entities, and individuals. Under IRC §250 only Corporations are eligible for the 50 percent GILTI deduction and indirect foreign tax credits associated with GILTI.