8 Areas You Should Review Under GILTI’s High-Tax Exception

July 28, 2020

By Chip Niculae, Gerry O'Beirne and Charles Brezak

The final regulations addressing the new GILTI high-tax exception were issued on July 20, 2020, and are effective as of September 21, 2020. These final regulations allow taxpayers to apply the GILTI high-tax exclusion to taxable years of foreign corporations beginning on or after July 23, 2020, and to tax years of U.S. shareholders in which or with which the above-mentioned taxable years of a foreign corporation ends. Under the new regulations, the taxpayer has the option of retroactively applying the GILTI high-tax exclusion to the taxable years beginning after December 31, 2017, and before July 23, 2020. An annual election is required to utilize the exception. The regulations adopt a “consistency” rule that limits the opportunity to pick and choose certain entities for the election. A related development to these final regulations are proposed regulations to conform the Subpart F high-tax election so that a single election would be made for both GILTI and Subpart F.

The election allows U.S. shareholders to avoid the GILTI rules. However, there are also disadvantages in certain situations, and a review is necessary to determine if the election would be beneficial. Such a review should consider the following:

  1. Do you have controlled foreign corporations with operations in countries that are high taxed and low taxed? The benchmark rate is currently 18.90%, but the effective rate calculation is not that simple. Moreover, the analysis utilizes a targeted approach based on the “tested unit” standard, rather than on the basis of CFCs. For example, a tested unit may be a permanent establishment of a CFC.
  2. Have you modeled out the effect of the new high-tax exception for GILTI? The modelling needs to take into account such factors as U.S. net operating losses, foreign tax credits, and expense allocation against foreign source income for the foreign tax credit limitation.  
  3. Have you considered how the high-tax exception election might affect your foreign tax credit position? For example, there is cross-crediting for GILTI if you also have high taxed and low taxed GILTI income, but cross-crediting is limited where the election is made.
  4. Have you considered how the high-tax exception election might affect the amount of QBAI you can use to reduce your GILTI inclusions? GILTI inclusions are generally computed as the amount of tested income in excess of 10% of your QBAI aggregated from all CFCs. The high-tax exception election will prevent you from using the QBAI that generates the excepted income.
  5. Have you considered a CFC grouping election under the interest deduction limitations of Section 163(j)? Such grouping election can be beneficial in avoiding the 30% limitation of Section 163(j) on intercompany debt. 
  6. Do you have projections of CFC income for the next three to five years? One of the dynamics is the effect on current and future net operating loss utilization where there is the opportunity to make the election and avoid reporting GILTI income. Such a consideration is especially relevant due to the financial circumstances arising from COVID-19 and the CARES Act.
  7. The factors and considerations involving retailers and manufacturers versus technology companies may be different. For example, the former may have substantial QBAI overseas and supply chain issues, whereas the latter may be highly impacted by allocation of research and development expenses.
  8.      Have you considered the impact of the election on the future repatriation of foreign earnings? With proper planning, the related income may be repatriated without U.S. tax under the new rules of Section 245A.

Due to the complexity surrounding this issues, consultation with your international tax expert is recommended.

About Chip Niculae

Chip Niculae is a Tax Director in the International Services Group with experience in international tax structuring, cross border transactions, tax structuring, mergers and acquisitions, entity formation, global restructurings and liquidations.

About Gerard O'Beirne

Gerard O’Beirne is a Tax Partner and leader of the firm’s International Tax Group, with more than 25 years of experience. Gerry has extensive experience with both inbound and outbound structuring, including mergers and acquisitions.

About Charles Brezak

Charles Brezak is an International Tax Services Group Director with over 30 years experience advising clients on cross-border tax planning.

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