July 2020 / United States

July 23 2020

United States Provides New Guidance on Excluding High-Taxed Foreign Income from GILTI and Subpart F Income

The US Treasury Department and Internal Revenue Service (IRS) have issued final regulations (TD 9902) and proposed regulations (REG-127732-19) that provide guidance on the exclusion of certain income that is subject to a high rate of foreign tax ("high-taxed income") from the income of a controlled foreign corporation (CFC) for purposes of computing the global intangible low-taxed income (GILTI) and subpart F income of the US shareholders. The regulations were announced by the IRS in News Release IR 2020-165 dated 20 July 2020. Both the final and proposed regulations are scheduled to be published in the Federal Register on 23 July 2020.

The final regulations

The final regulations were issued pursuant to section 951A of the Internal Revenue Code (IRC), which was enacted as part of the US international tax reform implemented by Tax Cuts and Jobs Act (TCJA) on 22 December 2017. In general terms, the GILTI rules of section 951A require a US shareholder of a CFC to include in gross income each year the excess of such US shareholder's pro rata share of the net tested income of the CFC over such US shareholder's pro rata share of a deemed 10% return on the CFC's qualified business asset investment (QBAI). GILTI must be included by the US shareholders in addition to the regular subpart F income of the CFC.

The final regulations retain the basic approach and structure of proposed regulations that were issued on this topic in 2019, with certain revisions. The preamble to the final regulations addresses the public comments that were received by the Treasury and IRS in response to the 2019 proposed regulations.

The GILTI rules permit US shareholders to exclude income that is subject to a high rate of foreign tax from the tax base used to compute GILTI.

The definition of "high-taxed" under the final regulations continues to be based on a comparison of the effective foreign tax rate with 90 percent of the maximum US corporate tax rate (currently 21%) i.e. 18.9%. If the effective foreign tax rate on the income exceeds the 90% measure, an election may be made to exclude such income from GILTI.

The final regulations also address the computation of the effective foreign tax rate. The final regulations rejected public comments that the computation should be made using a CFC-by-CFC approach, rather than a "qualified business unit" (QBU) approach, i.e. QBU-by-QBU, as in the originally proposed 2019 regulations, but adopt a more targeted approach to the foreign income that is taken as the basis for the computation, specifically using a "tested unit" approach rather than a QBU approach.

In response to a number of public comments, the final regulations provide that the GILTI high tax exclusion can be elected annually, subject to the consistency requirement ("all-in or all out") set out in the regulations, and eliminated the 60-month re-election restriction that applied under the proposed regulations if the election was revoked.

The final regulations will be effective from 21 September 2020, and the GILTI high-tax exclusion applies to taxable years of foreign corporations beginning on or after 23 July 2020, and to taxable years of US shareholders in which or with which the taxable years of such foreign corporations end. Subject to certain conditions, taxpayers may also choose to apply the exclusion to taxable years of foreign corporations that begin after 31 December 2017, and before 23 July 2020, and to taxable years of US shareholders in which or with which the taxable years of such foreign corporations end.

The final regulations do not finalize the portions of the 2019 proposed regulations under IRC sections 951, 956, 958, and 1502 regarding the treatment of domestic partnerships. The Treasury Department and the IRS plan to finalize those regulations separately.

The proposed regulations

The proposed regulations were issued at the same time as the final regulations and are intended to conform a similar exclusion of high-taxed income that applies to subpart F income under IRC section 954(b) to the rules applicable to GILTI in the final regulations. This is intended to prevent inappropriate tax planning and reduce complexity.

The proposed regulations provide for a single high-tax election for purposes of both GILTI and subpart F income. In addition, to facilitate administration of the rules regarding these elections, the proposed regulations include a contemporaneous documentation requirement that requires US shareholders to maintain specific contemporaneous documentation that substantiates their high-tax exception computations. The proposed regulations also include an anti-abuse rule to address actions undertaken with a significant purpose of avoiding the purposes of the subpart F and GILTI provisions.

The IRS has requested comments on the new proposed regulations. Comments should be received by 21 September 2020.

July 21 2020

IRS Issues Practice Unit on Computing Foreign Tax Credits for Individuals

The US Internal Revenue Service (IRS) has released guidance on how to calculate the amount of allowable foreign tax credits (FTCs) for individuals. The guidance, in the form of a Practice Unit, sets out the steps to compute FTCs as well as the calculation of the foreign tax credit limitation. Related legislative and administrative resources are also listed. The Practice Unit also notes a number of considerations that may be relevant for auditing purposes. Practice Units are issued by the Large Business and International (LB&I) division of the IRS for the purpose of internal staff training. The document states that it is not an official pronouncement of law, and cannot be used, cited or relied upon as such. The Practice Unit bears a Document Control Number of INT-P-218 and indicates a date of last update of 2 July 2020. Note: US citizens and resident aliens are subject to tax on worldwide taxable income, which includes both US source taxable income and foreign source taxable income (FSTI). When a foreign jurisdiction also taxes FSTI, the United States provides an FTC to relieve this double taxation. The FTC is limited, however, to the amount of US income tax imposed on FSTI. This is called the FTC limitation. In practice, this generally prevents the FTC from being claimed for foreign taxes that exceed the US tax on the same income.
July 10 2020

COVID-19 Pandemic: Regulations Issued on Net Operating Losses of Consolidated Corporate Groups

The US Treasury Department and Internal Revenue Service (IRS) have issued proposed and temporary regulations that affect corporations filing consolidated returns. The two sets of regulations respond in particular to changes made under the Tax Cuts and Jobs Act (TCJA) and the CARES Act regarding the carry forward and carry back of net operating losses (NOLs). The IRS announced the issuance of the proposed and temporary regulations in News Release IR-2020-138. The regulations were issued under section 1502 of the Internal Revenue Code and address certain aspects of those NOL rules that are relevant to consolidated groups, in particular groups that include certain types of insurance companies. The TCJA revised the NOL rules to eliminate the carryback of NOLs and limit the use of NOL carryforwards so that such NOLs may offset only 80% of taxable income in a carry-forward year. The TCJA applies special rules to non-life insurance companies and farming losses. The CARES Act delayed the effective date of the TCJA provisions until 1 January 2021 and permits a five-year carryback for NOLs, including NOLs of non-life insurance companies and farming losses, and also allows an option to waive NOL carrybacks. The proposed regulations include guidance for consolidated corporate groups on the application of the 80% limitation. The temporary regulations include an allowance for certain acquiring consolidated groups to make an election to waive all or a portion of the pre-acquisition portion of the extended carryback period for certain losses attributable to certain new members acquired by consolidated groups.
July 3 2020

COVID-19 Pandemic: New Guidance on Procedure for Claiming Net Operating Loss Carry-Backs

The Internal Revenue Service (IRS) has provided guidance regarding the deadlines for submitting claims for the carry-back of a net operating loss. The guidance clarifies how the 6-month extension for submitting such claims under Notice 2020-26 interacts with the extension to 15 July 2020 for taxpayers to perform specified time-sensitive actions granted under Notice 2020-23. The guidance, in the form of frequently asked questions (FAQs), explains when a taxpayer may apply the 15 July 2020 deadline. The guidance supplements previous FAQs regarding temporary procedures for claiming quick refunds of the prior year minimum tax credit and net operating loss deductions.

July 1 2020

COVID-19 Pandemic: No Further Deferral of Federal Tax Filing and Payment Deadline

There will be no further deferral of the deadline for filing and payment of 2019 federal taxes, the US Treasury Department and the US Internal Revenue Service (IRS) have announced. The deadline had previously been postponed from 15 April to 15 July in response to the COVID-19 crisis. The news release, dated 29 June 2020, also notes that individual taxpayers unable to meet the 15 July deadline can request an automatic extension of time to file until 15 October. It also lists various payment options to avoid interest and penalties. The IRS also reminds taxpayers that state filing and payment deadlines may differ.