On September 13, 2018, the IRS issued long-awaited proposed regulations providing guidance for the inclusion of Global Intangible Low-Taxed Income ("GILTI") by U.S. shareholders enacted under section 951A as part of the Tax Cuts and Jobs Act, which was signed into law on December 22, 2017.
The proposed regulations address several topics, including:
- Guidance on the determination of pro-rata shares applicable to tested income or loss and to qualified business asset investment ("QBAI") for purposes of determining GILTI;
- Guidance on the calculation of tested income and loss;
- Rules regarding QBAI and specified tangible property (e.g., clarification that tested loss CFCs do not have specified tangible property);
- Guidance on tested interest expense and tested interest income;
- Guidance on the treatment of domestic partnerships and their partners; and
- Guidance on the treatment of the GILTI inclusion amount and adjustments to earnings and profits and basis.
The IRS explains that GILTI inclusion is treated similarly to a Subpart F income inclusion, but it is determined in a fundamentally different manner, aggregating the inclusion amounts for all holdings in CFCs the U.S. shareholder owns. The background discussion preceding the proposed regulations note that without this clarification, many taxpayers would be compelled to reorganize their ownership structures to obtain the full aggregation of CFC attributes for the GILTI calculations.
The proposed regulations include anti-abuse rules related to tangible assets and their use in a reduction to the GILTI inclusion.1 The proposed regulations discourage planning relying on reducing GILTI through asset basis step ups realized through reorganizations and temporary changes in asset ownership if those changes are determined to have been undertaken strictly for purposes of reducing tax under the GILTI rules.
Clarification on two key and interrelated taxpayer issues regarding GILTI were notably absent from the proposed regulations. These two issues are the foreign tax credit calculations and the related expense allocation which could limit allowable foreign tax credits. These issues are expected to be addressed in future guidance.
The proposed GILTI regulations can be found here.
The comment period on the proposed regulations ends November 12, 2018.
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