USA: New high-tax exception rules encourage taxpayers to go spelunking through CFC's books
Yesterday, the Treasury and the IRS released final high-tax exception GILTI regulations and proposed high-tax exception Subpart F income regulations.
Yesterday, the Treasury and the IRS released final high-tax exception GILTI regulations and proposed high-tax exception Subpart F income regulations. While the regulations are favorable in that they allow taxpayers to apply the high-tax GILTI regulations retroactively to taxable years of foreign corporations beginning after December 31, 2017, and are a little more favorable than the proposed high-tax exception GILTI regulations (the 2019 proposed regulations), the regulations will change the tax community’s view of the high-tax exception.
For purposes of computing a controlled foreign corporation’s (CFC’s) foreign base company income and insurance income (components of Subpart F income), a U.S. shareholder can currently elect to exclude any item of income that was subject to an effective rate of foreign tax equal to at least 90 percent of the U.S. corporate tax rate. With the reduction of the corporate tax rate as part of TCJA, the potential for income to be eligible for the high-tax exception dramatically increased.
The 2019 proposed regulations proposed to allow a similar election to exclude certain income items from the calculation of GILTI. However, the proposed methodology for GILTI purposes varied from the well-established methodology that applied to the Subpart F income high-tax exception. Yesterday’s release attempts to harmonise the operation of the two exceptions, largely by proposing amendments to the Subpart F regulations to adopt the concepts of the GILTI regulations. However, it is important to note that the proposed Subpart F regulations are not effective yet, and yesterday’s guidance does not permit taxpayers to rely upon them. Therefore, taxpayers will continue to apply two different rules at least until the Subpart F rules are finalised.
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