The IRS recently published Notice 2018-67 (the, “Notice”) which provides guidance on the application of the new global intangible low-taxed income (“GILTI”) provisions to tax-exempt organizations. The Notice states that GILTI is generally excluded from gross income for purposes of calculating unrelated business income (“UBTI”) as well as excluding GILTI attributable to insurance income.
Enacted as part of the 2017 Tax Cuts and Jobs Act, the GILTI regime effectively establishes a new foreign minimum tax on certain U.S. shareholders of a controlled foreign corporation (CFC). Specifically, a 10 percent or greater U.S. shareholder of a CFC will generally be required to include in current U.S. income the amount of the CFC’s “tested income” that exceeds a 10 percent return on the CFC’s tangible assets. Certain domestic corporations are further allowed a 50 percent deduction (the section 250 deduction) on their GILTI income.
In the Notice, the IRS stated that it received comments about whether tax-exempt organizations must include GILTI in gross income when calculating UBTI. Specifically, taxpayers asked the IRS whether GILTI is treated the same as an inclusion of subpart F income for purposes of UBTI. In analyzing the issue, the IRS first noted the treatment of subpart F income, which is treated as a dividend for purposes of calculating UBTI, and as such is generally excluded from the calculation of UBTI. While GILTI is similar to subpart F income it is not actually subpart F income. However, the IRS noted that GILTI is generally treated in a manner similar to an inclusion of subpart F income for other purposes of the code – a point reinforced by the conference committee report accompanying the TCJA. As a result, the IRS takes the position in the Notice that an inclusion of GILTI should be treated in the same manner as an inclusion of subpart F income: as a dividend which is generally excluded from UBTI.
The Notice also touched upon the question of whether GILTI attributable to insurance income, that does not constitute subpart F income, is includable in gross income when calculating UBTI. In addressing the question, the IRS noted Congress did not change the law (which does not require the inclusion of such income in UBTI) when enacting GILTI, and has not otherwise specifically required the inclusion of insurance income in UBTI. Accordingly, the IRS will not treat GILTI attributable to insurance income as includable for calculating UBTI. However, the IRS indicated that this position could change in future regulations.
The Notice states that specified tax-exempt organizations may rely on the notice, but does not provide a reliance date with respect to the sections of the notice discussing the treatment of GILTI. While this Notice likely comes as welcome relief for many tax-exempt organizations battling with lingering uncertainty caused by the 2017 tax law changes, tax-exempts should continue to monitor the status of the positions set forth in this notice since we expect the IRS to issue further GILTI regulations in the near future.
For more information on other aspects of the Notice, see our prior alert: IRS issues guidance for determining UBTI for separate businesses.