New GILTI High Tax-Exclusion Final Regulations: Tested Units, Controlled CFC Groups, and Retroactive Application

Description

Simply put, the final GILTI High-Foreign-Tax Exclusion Regulations under IRC Section 951A permit a U.S. taxpayer to elect to exclude from its inclusion of GILTI items of income subject to a high effective rate of foreign tax. Under the final regulations, income is viewed as subject to a high rate of foreign tax if the effective foreign rate exceeds 90 percent of the highest U.S. corporate income tax rate then in effect during the relevant year (i.e., greater than 18.9 percent, assuming the highest relevant U.S. corporate income tax rate then in effect is 21 percent). Once the exclusion election is made, it applies to all “related” CFCs under a consistency requirement.

Most aspects of the final regulations follow the original 2019 proposals. There are, however, striking differences. For example, the final regulations dispose of the “qualified business unit” (QBU) as a metric, and instead apply the exclusion on the basis of newly defined "tested units" of a foreign corporation. This standard is intended to more accurately match foreign taxes to items of income, and to minimize the inappropriate blending of income items subject to different rates of foreign tax.

With the July 2020 final regulations, proposed regulations were released under IRC Section 954(b)(4) (REG-127732-19) that would conform the Subpart F Income "High-Tax Exception" to the finalized GILTI High-Tax Exclusion. Applying that exception on a tested-unit basis would similarly minimize blending of items of income subject to different rates of foreign tax and more generally result in greater Subpart F Income inclusions. If and when finalized, a unitary election would apply for purposes of both the GILTI High-Tax Exclusion and the Subpart F Income High-Tax Exception.

On the upside, the final regulations allow an annual election rather than the five-year binding election, which was originally proposed in 2019. On the downside, the election is an all or none election for certain commonly controlled CFCs.

One thing is certain: businesses and their advisers now need to undertake massive calculations, and carefully analyze their existing tax postures and effective foreign tax rates, in order to take full advantage of the tax saving opportunities presented by these final GILTI High-Tax Exclusion Regulations

The benefits of foreign tax credits, the combining of CFCs, weighing Subpart F vs. GILTI taxation, understanding tested units, and deciding whether to apply the final regulations retroactively are just a few of many challenges to consider when implementing these rules. The final regulations have important implications for the Subpart F Income High-Tax Exception under Section 954(b)(4), upon which the GILTI High-Tax Exclusion rules were founded.

Listen as our panel of international taxation experts guides you through the major considerations of the GILTI High-Tax Exclusion Regulations, including hands-on examples calculating and applying the GILTI HTE rules, when and how to retroactively apply the final regulations, and when forgoing this election may minimize overall tax liability.