United States

New offshore tax regulations would add complexity and record keeping

IRS issues complex regulations on taxation of offshore income

TAX ALERT  | 

The IRS has released Proposed Regulations (REG-104390-18) that provide guidance regarding the taxation of Global Intangible Low Taxed Income (GILTI). Under the Tax Cuts and Jobs Act, U.S. shareholders of certain foreign corporations must take into account and pay tax on their share of the corporation’s GILTI. According to a senior Treasury official, these Proposed Regulations – which focus mainly on computational issues – are the first of three installments of proposed regulations on GILTI, with guidance regarding foreign tax credits expected in approximately two months, and guidance regarding the new preferential tax rate for income derived by domestic corporations (section 250) expected later in the year.

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.

The Proposed Regulations are quite complex in some areas and impose new reporting requirements. At a high level, the Proposed Regulations:

  • Make clear that all GILTI calculations must generally made at the shareholder level and not at the CFC level. Thus, U.S. shareholders who are partners in a partnership that owns a CFC must take into account their pro rata share of the CFC’s income, deductions, etc., in calculating their total GILTI. Because the calculations depend on the use of shareholder specific information, the CFC or partnership will not likely be able to prepare GILTI calculations for U.S. shareholders, unlike the calculation for Subpart F income, which is an entity level calculation.
  • Provide new complex basis adjustment rules to prevent double counting of losses of one CFC that are used to offset income of another. The new rules require taxpayers to keep track of “net losses” of a CFC, meaning losses of a CFC used to offset income of other CFC reduced by income earned by the first CFC in subsequent years. Special rules are provided for consolidated groups.
  • Codify the rule in Notice 2010-41, which treats a U.S. partnership “blocker” as foreign in order to prevent taxpayers from improperly interposing a U.S. shareholder for U.S. tax purposes; this rule is proposed to be effective for taxable years of domestic partnerships ending on or after May 14, 2010.
  • Require U.S. taxpayers to complete and file a new Schedule I-1, Information for Global Intangible Low-Taxed Income, as well as new Form 8992 to report their GILTI.
  • Set forth a new anti-abuse rule designed to prevent manipulation of the amounts earnings of a CFC allocable to U.S. shareholder.

The Proposed Regulations are generally effective for taxable years of foreign corporations beginning after Dec. 31, 2017, and to taxable years of U.S. shareholders in which or with which such taxable years of foreign corporations end.

In addition to establishing an new minimum tax on certain U.S. shareholders of CFC, GILTI also introduced a new foreign tax credit (FTC) limitation basket, one specifically for GILTI inclusions. Notably absent from these Proposed Regulations, however, is guidance regarding this new FTC limitation basket – which has been of particular concern to many taxpayers.

The Proposed Regulations are very complex and would likely add significant burden to the annual compliance process, and even more regulations are forthcoming. Thus, taxpayers should carefully consider the impact of these regulations and discuss them with their advisors.

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