Treasury Department Issues Guidelines to Clarify Requirements

Do you need an international tax consultant? If you’re a multinational company with foreign earnings, you just may. The Tax Cuts and Jobs Act of 2017 (TCJA) included several international tax provisions, including a tax on a new category of global intangible low-taxed income, also known as GILTI. GILTI income applies to “U.S. Shareholders” of controlled foreign corporations (CFC).

Background

Before GILTI was included in the tax reform package, U.S. shareholders didn’t have to recognize income earned by a foreign corporation until the time that that income was distributed to them as a dividend or if the income was Subpart F income. Now, certain U.S. taxpayers are required to pay tax on a percentage of deferred foreign earnings.

The TCJA enacted IRC Section 951A which, starting in 2018,  requires a U.S. shareholder (10%) owner of a CFC to include its pro rata share of GILTI in its gross income for the year. In general, GILTI is income of the CFC that exceeds 10% of a CFC’s adjusted tax basis of its tangible depreciable fixed assets that are used in its trade or business. The GILTI provision has a further reach than one would expect. Not only does it impact foreign intangible corporations but it also has a major effect on CFCs in the service industry or CFCs that have a low level of tangible depreciable assets.

New Treasury Guidelines

The new GILTI rules did not go far enough in specifying how to assess the tax owed. For example, how are public companies affected? How are foreign tax credits treated? On June 14, 2019, Treasury issued final regulations and proposed regulations to help affected taxpayers determine the amount of GILTI included in income. In addition to providing rules for how foreign tax credits should be treated for individuals who directly or indirectly own stock in foreign corporations, the final regulations included rules for U.S. individuals who own stock through domestic partnerships.

Final regulations highlights include:

  • Foreign tax credit provisions for individuals who directly or indirectly own stock in foreign corporations
  • Determination of a U.S. shareholder’s pro rata share of a controlled foreign corporation’s Subpart F income included in the shareholder’s gross income
  • Foreign tax credit provisions for individuals who directly or indirectly own stock in foreign corporations
  • Clarifications of the pro rata share anti-abuse rule

Proposed regulations include:

  • GILTI high-tax exclusion regarding a CFC’s gross income subject to foreign income tax at an effective rate that is greater than 90%
  • Treatment of income of CFCs that is subject to a high rate of foreign tax under section 951A

Further guidance on GILTI rules is expected before the end of 2019.

When You Need International Tax Expertise

The GILTI calculation is complicated. While the GILTI tax provision may have put an end to the U.S. tax deferral of foreign income, the good news is that we can help you restructure your operations to mitigate the tax. If these provisions affect you, or you have other international tax questions, the International Tax Team at Daszkal Bolton can help. With more than 25 years of domestic and international tax experience, International Tax Practice Director Christopher Galuppo and his team can advise you on a wide range of international tax matters. Contact Chris at 561-886.5296 or email Chris.