On June 14, 2019, the U.S. Treasury and the IRS released proposed regulations related to global intangible low-taxed income (GILTI), one of the key international provisions provided in the Tax Cuts and Jobs Act (TCJA) of 2017.
The proposed regulations provide a GILTI high-tax exception similar to the subpart F exception, which allows taxpayers to elect to exclude high-taxed income from the taxpayer’s GILTI calculations. This election to exclude high-taxed income of a controlled foreign corporation (CFC) can apply if income was subject to an effective tax rate in the relevant foreign country greater than 90% of the 21% U.S. corporate rate (i.e. 18.9%).
>> Read “3 GILTI Planning Options Non-C Corporations Should Consider Before Year-End”
How to Make the High-Tax Election
If the regulations become final, the controlling domestic shareholder of the CFC will be able to make the election at any time. But it is an “all-or-nothing” election, meaning, if made, it must be made for all CFCs more than 50% owned by the same domestic shareholders. The election remains effective for all subsequent years unless the controlling domestic shareholder revokes it. Once revoked, the election cannot be made again for 60 months. Taxpayers may apply this expansion of the high-taxed exclusion beginning in years after the proposed regulations are finalized.
Who Will Benefit from Making the High-Tax Election?
Specifically, the election can benefit U.S. C Corporations that cannot fully use indirect foreign tax credits.
Under the GILTI rules, corporate shareholders are eligible for both a 50% GILTI deduction and an 80% foreign tax credit. These provisions work in conjunction, such that C Corporations with GILTI taxed at a rate of 13.125% or more in the foreign jurisdiction generally will not incur incremental U.S. tax. However, foreign tax credit limitations could result in additional U.S. tax.
U.S. non-corporate shareholders are not eligible for either the 50% deduction or the indirect foreign tax credits, putting them at an inherent disadvantage. These taxpayers can now take advantage of this high-tax exception to mitigate the U.S. tax on GILTI inclusions. Taxpayers should carefully consider whether this election will benefit them.
Please contact a member of your service team, or contact Ray Polantz at firstname.lastname@example.org for further discussion.
Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.