Much-anticipated proposed regulations provide guidance for determining the amount of global intangible low-taxed income (GILTI) that a U.S. shareholder of a controlled foreign corporation must include in gross income.
Under the GILTI tax, a CFC’s intangible income is subject to U.S. tax on a current basis, much like subpart F income. However, to limit harm to the competitive position of U.S. corporations, the income is taxed at a reduced rate by way of a deduction.
The CFC determines its intangible income under a formula that assigns a 10% return to tangible assets (qualified business asset investment, or QBAI). Each additional dollar above that return is treated as intangible income.
Calculating the GILTI Inclusion
Although the GILTI inclusion is treated similarly to a subpart F inclusion for some purposes, taxpayers determine it in a very different manner.
The GILTI inclusion amount begins with the calculation of certain items of the CFC, including:
- tested income,
- tested loss,
- net deemed tangible income return, and
- specified interest expense.
The U.S. shareholder determines its share of these CFC-level items, and takes these amounts into account in determining the GILTI inclusion. Then the shareholder computes a single GILTI inclusion amount by reference to all of its CFCs.
What Do the Proposed Regulations Cover?
The proposed regulations show how to determine the GILTI inclusion, and also define relevant terms. Additionally, the proposed regulations provide rules to:
- determine the items determined at the CFC level-tested income;
- calculate the U.S. shareholder’s pro rata share of CFC-level items; and
- aggregate the U.S. shareholder’s pro rata share amounts to determine the shareholder’s GILTI inclusion amount.
The regulations also apply Subpart F rules for some purposes, including:
- determining a U.S. shareholder’s pro rata share of certain items of the CFC;
- determining gross income and allowable deductions;
- translating foreign currency into U.S. dollars; and
- allocating and apportioning allowable deductions to tested income.
However, other subpart F rules are inappropriate because subpart F income is determined solely at the CFC level. For example, the proposed regulations provide detail on how a U.S. shareholder determines its specific interest expense based on the interest expense and interest income of each CFC owned by the shareholder.
In addition to definitions and computation rules, the regulations include anti-abuse provisions. The IRS will disregard certain transactions that reduce a U.S. shareholder’s GILTI inclusion amount, for example, by increasing a CFC’s QBAI or decreasing a CFC’s tested income. The regulations also prevent certain transfers of property that would reduce GILTI.
Consolidated Groups and Domestic Partners and Partnerships
The proposed regulations generally calculate GILTI on a consolidated group basis. Similarly, U.S. shareholders of a domestic partnership CFC compute GILTI at the partnership level.
In addition, reporting requirements require a U.S. shareholder to file a new Schedule I-1, Information for Global Intangible Low-Taxed Income, associated with Form 5471, Information of U.S. Persons With Respect to Certain Foreign Corporations.
U.S. shareholders must also file new Form 8992, U.S. Shareholder Calculation of Global Intangible Low-Taxed Income (GILTI). This form provides the information that a U.S. shareholder is using with respect to each of its CFCs to determine the GILTI inclusion amount.
Finally, a U.S. shareholder partnership’s Schedule K-1 must include information to determine a partner’s distributive share of the partnership’s GILTI inclusion amount, or a U.S. shareholder partner’s own GILTI inclusion amount.
What the Proposed Regulations Do Not Cover
The proposed regulations do not cover the GILTI foreign tax credit provisions or rules related to the GILTI deduction. These rules will be in separate proposed regulations.