New GILTI High-Tax Exclusion Provides Past, Present and Future Benefits
In general, US shareholders that own 10 percent or more of a controlled foreign corporation (“CFC”) must increase their US income each year for any CFC earnings that are captured by the Subpart F and GILTI rules. Since the enactment of the Tax Cuts and Jobs Act (“TCJA”) in 2017, these two rules have forced US CFC owners to pick up most of their CFC earnings in US income each year and sharply increased double-taxation for individuals and passthrough owners who are unable to credit foreign taxes paid by their CFCs on their US return.
Recently released IRS regulations provide significant relief and allow taxpayers with high-taxed GILTI income to realize past, present and future benefits.
- The Past Benefit: By filing an amended return, taxpayers can obtain a refund for any US tax paid on high-taxed GILTI income included in their 2018 or 2019 returns. In addition, applying the high-tax election to past years may increase the amount of NOLs that can be carried back under the CARES Act by reducing taxable income in 2018 and 2019 and increasing the potential refunds in the higher-taxed pre-TCJA years.
- The Present Benefit: Starting with their 2020 tax year, taxpayers can elect to exclude high-taxed GILTI income from their US return each year.
- The Future Benefit: Noncorporate taxpayers can continue to defer foreign earnings until such time as they decide to repatriate these earnings to the US. US corporate taxpayers that qualify for the Section 245A participation exemption can avoid any US tax on their foreign earnings.
GILTI High Tax Exception – Key Elements
- In order to qualify for the new opportunity, taxpayers need to show that their GILTI income is “high-taxed” –because the exception is calculated based on 90 percent of the US corporate rate, any foreign tax rate of 18.9 percent or more is considered high-taxed.
- Unlike the 2019 Proposed Regulations, which allowed the high-tax election to be made on a CFC by CFC basis, an election to take the GILTI High-Tax Exception under the Final Regulations applies to all of a US taxpayer’s CFCs and applies at the “tested unit” level.
- The election is made on an annual basis by a CFC’s controlling domestic shareholder, and notice must be provided to minority CFC owners.
- Once made, the election is irrevocable.
One note of caution: while the benefits of making the election in the right circumstances are substantial, calculating the impact of the election can become quite complex. Determining the effective foreign tax rate has several steps, and the calculations related to CFC-owned branches and passthrough entities are among the more challenging rules to apply in the Code. To avoid unintended consequences that may arise from the election, we recommend you consult your tax advisor and carefully model and confirm the benefit before making the irrevocable election.
If you have questions about GILTI rules, contact Patrick McGuire, Tax Principal, at email@example.com or 314.687.2389.