GILTI Final and Proposed Regulations

On Friday, June 14, 2019, the Internal Revenue Service issued final regulations, as well as new proposed regulations, for the new anti-deferral regime known as Global Intangible Low Taxed Income (GILTI). The final regulations adopt most of the proposed regulations previously issued in September 2018. Below are highlights, along with a brief overview.

Background

GILTI applies to U.S. taxpayers who own a 10% or greater interest in a foreign corporation that is ultimately controlled by U.S. taxpayers, who each also own at least 10% in the foreign corporation. Under the rules’ complex calculations, all, or a portion of the earnings of the foreign corporation may not be deferred from current tax in the U.S. by the U.S. owners of the foreign corporations.

Highlights of New Final and Proposed GILTI Regulations

The final regulations clarify the anti-abuse rule related to picking up a taxpayer’s pro rata share of a foreign corporation’s income. In short, the anti-abuse rule ignores any transaction for which the principle purpose is to avoid federal income tax regarding Subpart F or GILTI, by reducing a U.S. taxpayer’s pro rata share of the foreign corporation.

The final regulations modify the rule that can apply when 10% of a controlled foreign corporation’s tangible, depreciable assets exceed its tested income under the complex GILTI calculations.

In the case of foreign corporate stock owned through U.S. partnerships, the originally proposed GILTI regulations required that less-than-10% owners of the foreign corporation (through the U.S. partnership) were still required to pick up a portion of GILTI income. The final regulations provide relief for such partners, making clear that only partners who own at least 10% directly or indirectly (though a partnership) are subject to the GILTI rules. Note that if a contrary position was taken in the past on a tax return (i.e., for taxpayers who have already filed their 2018 tax returns), this should be reviewed further with your tax advisor, and an amended tax return may be in order.

The subpart F income exclusion from the new GILTI regime was further clarified. In short, the clarifications aim to include in GILTI items of income that were not treated as subpart F income due to certain exceptions, and vice versa (e.g., the full inclusion rule and de minimus exceptions) applicable under that regime. For purposes of completeness, the high-taxed exception continues to remove income from both the Subpart F and GILTI regimes.

The final regulations modify the definition of “specified interest expense,” a key term in the GILTI calculation, as it applies to controlled foreign corporations that have losses. The result of this modification is to remove a perceived double benefit in the original calculations.

The proposed regulations add a new election to reduce or eliminate GILTI income to a U.S. taxpayer if the income of the controlled foreign corporation is subject to local tax at a rate of at least 18.9%.

Marcum’s international tax advisors will keep you posted on these regulations and additional interpretations of the new regulations.