Retroactive and Future High-Tax Exceptions Available

New regulations released by the Treasury Department on July 21, 2020 have confirmed inclusion of a high-tax exception to avoid global intangible low-taxed income (GILTI). Released under IRC Section 951A and the temporary regulations under section 954, these regulations have been anxiously awaited since temporary regulations were released last year that contained a high-tax exception to avoid GILTI.

In 2017, the Tax Cuts and Jobs Act (TCJA) introduced GILTI as a new class of income that must be included in the gross income of a U.S. Shareholder of a controlled foreign corporation (“CFC”), and which further diminished the ability to defer the U.S. taxation of foreign-sourced business income.

How GILTI Exclusions Work

The regulations released this year have confirmed this high-tax exception will apply to GILTI.  The exclusion will be an annual election made by the taxpayer and will apply to all related CFCs. High-taxed is confirmed to be income taxed at an effective rate of at least 18.9%, which is 90% of the current corporate income tax rate of 21%.  The proposed regulations provide for a single high-tax exception election to apply to both subpart F Income and GILTI income.

The GILTI high-tax exclusion applies to taxable years of foreign corporations beginning on or after July 23, 2020, and to taxable years of U.S. shareholders in which or with which such taxable years of foreign corporations end.  The final regulations also allow taxpayers to retroactively apply the GILTI high-tax exclusion to taxable years of foreign corporations that begin after December 31, 2017, and before July 23, 2020, and to taxable years of U.S. shareholders in which or with which such taxable years of the foreign corporations end.

Tax Modeling Matters – We Can Help

With the ability to make a retroactive or future high-tax exception election, tax modeling is more important than ever. Connect with a Barnes Dennig tax expert for answers to questions you have regarding your specific tax situation. We’re here to help.