Additional regulations for Global Intangible Low-Taxed Income (“GILTI”) were released on June 14, 2019. Taxpayers were relieved to find two favorable adjustments:
- Proposed GILTI high-tax exclusion
- Final guidance on how to calculate GILTI for partnerships
GILTI was put into place to tax the intangible earnings of companies and discourage shifting of profits to low-tax jurisdictions. Unfortunately, as taxpayers were modeling out the GILTI calculations, many found themselves subject to GILTI. The manual GILTI calculation showed that the Controlled Foreign Corporation (CFC) income did not need to be intangible or low-taxed to become subject to GILTI. Taxpayers have been calling for relief from the burdensome calculations.
The high-tax exclusion was proposed in June 2019, which is similar to Subpart F high-tax exclusion. If passed, taxpayers will avoid having GITLI income on a CFC, if the taxpayer establishes that the income of the CFC is subject to an effective rate of income tax greater than 90% of the maximum corporate tax rate in the foreign country. This would mean an effective rate of at least 18.9% at a CFC level would exempt a taxpayer from the cumbersome GILTI calculation.
If passed, the high-tax exclusion would be an election made by the taxpayer. If a taxpayer makes the election, the election is for all CFCs in a commonly controlled group, and once made it cannot be changed unless the election is revoked. The high-tax exclusion cannot be utilized until final regulations are passed.
GILTI for Partnerships
The final regulations took a favorable approach for the calculation of GILTI for partnerships, but the late passing of the regulations may cause some taxpayers grief.
Previous guidance indicated that the U.S. tax consequences for minority partners invested in a partnership that owned a CFC depended on whether the partnership was formed under domestic or foreign law. Domestic law stated that you looked to see if GILTI applied on an entity basis, and foreign law stated that you looked to see if GILTI applied on an aggregate basis.
If the diagram to the right was a domestic partnership, A, B, and C would be required to include their allocated share of GILTI income in their taxable income under prior regulations.
If the diagram was a foreign partnership, A and B would be required to include their allocated share of GILTI income in their taxable income, but C would not be a U.S. Shareholder and would have no GILTI income in their taxable income under prior regulations.
Final guidance states the partnership should apply GILTI based on aggregate approach like the foreign partnership in the example above. The final guidance also confirmed that S Corporations would be treated the same way as a partnership, and it also confirmed that this approach should apply for tax years beginning after December 31, 2017. This would mean any partnership or S Corporation with minority shareholders that have already filed their 2018 tax return may need to amend to incorporate this change.
Continual guidance is being issued to help implement international tax reform. Please reach out to Barnes Dennig to assist with questions you have regarding your specific tax situation. Contact us here, or call 513-241-8313 to learn more.