Guidance on the GILTI Provision
Now that the Transition Tax is (almost) behind us, US Shareholders of foreign corporations (Controlled Foreign Corporations or CFCs) can turn their attention to the Global Intangible Low-Taxed Income (GILTI) provisions that supposedly continue the march to a territorial tax system in the US. The GILTI provisions were put into place to provide “guardrails” against US companies that have intangible assets in CFCs outside the US and are trying to escape US taxation under the new territorial system.
Guidance is Limited
The regulations address many issues about how to calculate the GILTI income, but do not address the foreign tax credit (FTC) issue nor the 50% deduction issues (which are under a different Code section). These latter two issues are important for corporate shareholders of CFCs.
The FTC issue is important to the distinction between the sourcing of the income between the new GILTI basket and the previous passive basket: how is this to be allocated when there may be multiple CFCs, not all of the income from a CFC is GILTI and there are loss CFCs that reduce the amount of GILTI income?
CFCs with GILTI income will have their aggregate income reduced by CFCs with losses. However, the 10% return on tangible assets (to arrive at the intangible return that GILTI is taxing) from loss CFCs cannot be used to offset the net income of the income/loss CFCs. This appears to be contrary to the aggregating calculation of GILTI that comes from the Senate explanation of the law, and is quoted in the proposed regulations:
“The Committee believes that calculating GILTI on an aggregate basis, instead of on a CFC-by-CFC basis, reflects the interconnected nature of a U.S. corporation's global operations and is a more accurate way of determining a U.S. corporation's global intangible income.”
The regulations have a number of requirements in calculating GILTI that essentially make a CFC calculate its income as it if were a US domestic corporation, with limitation on depreciation, possible nondeductible expenses such as T&E and penalties (that were not requirement in calculating E&P for CFCs in the past) and a limitation on the deduction of interest expense (30% of income) that was just introduced in the new tax act. This will require additional work and schedules to comply with the regulations.
New forms will be required in connection with the GILTI provisions. This includes a form to calculate the GILTI income (Form 8992-presently in draft format) and a Schedule I-1, that will be attached to the Form 5491 for each CFC reported on by the US Shareholder.
Individual US Shareholders
Individuals that own CFCs are not treated as kindly as are corporate shareholders. They are not allowed the 50% deduction of their GILTI income, and do not get a foreign tax credit for the taxes deemed paid by the CFC under Section 960. Because of this unfavorable treatment, the Section 962 election to tax GILTI (and other Subpart F income) at corporate rates will likely be the direction for many individuals. Although the individual cannot take the 50% deduction as a corporation can, he or she can claim an underlying credit for the taxes deemed paid by the CFC.
As expected, the regulations remind taxpayers that this issue needs to be addressed because it will impact their 2018 tax liability (and maybe even quarterly payment amounts). Preparing projections will avoid big surprises at tax preparation time.
This also highlights (again) the differences of foreign provisions on individual versus corporate taxpayers. There are several favorable provisions for corporations that are not available to individual shareholders of CFCs. Therefore, an individual’s objectives may be different or even the opposite from those of a corporate taxpayer. Ideas in the press or promoted by certain tax advisors that are mainly addressing corporate issues should be seriously questioned by an individual subject to GILTI.
Contact Moore Stephens Doeren Mayhew to help you wade through the complexities of this issue to arrive at the optional solution for your situation.
Grensy Quintero, CPA
Grensy Quintero, CPA has wide-ranging experience developing and implementing international tax planning initiatives for foreign corporations and high net worth clients. Grensy’s specialties include: FATCA and CRS Consulting & Reporting; US Tax Reform - International provisions (CFC and PFIC); International Tax Reporting; Expatriate Taxation; and, US Inbound & Outbound Consulting. Contact Grensy at firstname.lastname@example.org or +41 (0)43 433 10 40.