GILTI High Tax Kick-Out Election — Kicked Out by Dems!

On February 12, Senate Finance Committee Ranking Member Ron Wyden, D-Ore., and Senator Sherrod Brown, D-Ohio, introduced legislation to prevent the Treasury Department from carving out an exception (commonly called the GILTI High Tax Kick-Out) for multinational companies to escape the so-called GILTI provisions of the Tax Cuts and Jobs Act (TCJA). The title of the proposal is the “Blocking New Corporate Tax Giveaways Act’’; a title giving you a feel for what’s to come.

Here’s the scoop —

GILTI – Background & Development of Treasury Regulations

The Global Intangible Low-Taxed Income or so-called “GILTI” provisions enacted by TCJA turned the world of international taxation on its head for “controlled foreign corporations” (CFC). GILTI income, a brand new category of income for shareholders of a CFC to contend with, is income that is deemed repatriated in the year it is earned. In other words, the tax law “pretends” that the GILTI income is paid out to the CFC’s US shareholder, even though no actual distribution has been made.  Of course, the result is US taxation on this “pretend” income distribution.

Tax rules prescribe how the GILTI income is to be calculated; notably, even if a CFC has no Subpart F income the US shareholder can still be taxed currently under GILTI. The relevant Internal Revenue Code section (IRC Section 951A) excludes certain types of gross income from the “tested” income of a CFC used to compute GILTI income. One of these exclusions is for income that the US shareholder of the CFC already recognizes as Subpart F income and gross income excluded from Subpart F due to the so-called high-tax exception election of IRC Section 954(b)(4).

The Internal Revenue Service (IRS) had issued  proposed regulations under GILTI in October 2018. These regulations provided that the Section 951A exclusion of high-tax exception election income only applies to income that would otherwise be foreign base company income or foreign insurance income under the Subpart F provisions. Therefore, any high-taxed income that would not otherwise be Subpart F income if it was not for the high-tax kick-out election, could not be excluded from the “tested” income of the CFC.  I agree with this limitation solely based on my reading of the statutory language in IRC Section 954(b)(4).

The IRS then issued final regulations on June 14, 2019.  These final regulations adopted the October 2018 proposed regulation high-tax exclusion rules without any modification. Simultaneously, however, IRS issued a new set of proposed GILTI regulations that would provide for a more expansive high-tax exclusion. The proposed regulations provide an election may be made to exclude from CFC “tested” income, gross income that is subject to a foreign country’s  income tax at an effective rate that is greater than 90 percent of the maximum US corporate tax rate (in other words the proposed regulations dropped the qualifying limitation that the income must first be foreign base company income or foreign insurance income in order to qualify). This equates to an 18.9 percent foreign country tax rate based on the current US corporate rate of 21 percent.  It is this more expansive exclusion that is on the proverbial chopping block via the “Blocking New Corporate Tax Giveaways Act’’.

The expanded high-tax kick-out of the proposed regulations marked a major shift in simplifying application of the GILTI rules and if adopted would provide substantial tax relief to many corporations. Essentially, it could exempt from GILTI much of the active income of foreign corporations earned in developed countries having a tax regime! The high-tax kick-out was slated to become effective only after the publication of final regulations, but the proposed legislation by Senators Wyden and Brown, if enacted,  would pre-empt this move and the proposed regulations may never see the light of day.

No GILTI Tax Break Say Dems

The Senate Finance Committee news release accused the Treasury of caving in to the demands of multinational corporations and going beyond its legal authority to create an impermissible GILTI tax cut.  It stated:  “Multinational corporations, unhappy with the combination of limits on foreign tax credits and the new GILTI regime, aggressively lobbied Treasury for a way out of paying what they owe… The Treasury Department [went] well beyond its legal authority to create the multinationals’ desired tax break. The regulations propose an elective exemption from paying any GILTI taxes on certain income, if companies pay at least an 18.9 percent effective tax rate on that income.”

The “Blocking New Corporate Tax Giveaways Act’’ proposed by the Democrat Senators would curtail the breadth of this high tax kick-out election. The Act would limit the high tax exclusion election strictly to income that would otherwise be foreign base company income or foreign insurance income under the Subpart F rules.  This is bad news for all CFC’s – not every CFC is a big multinational corporation! For a well reasoned discussion of why Treasury proposed the expanded high-tax kick out, see John Richardson’s post that references the submission made by the law firm Arnold Porter to the Treasury in November 2018.  Essentially, Treasury interpreted Section 951A in the overall context of the Subpart F rules to mean that high taxed income should (subject to election by the taxpayer) be excluded from the definition of GILTI income.

Let’s see what happens. Watch this space!

Posted March 12, 2020

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