On-Demand: GILTI “Must Knows” for Corporate Tax

With respect to the 2018 tax year, conclusions from it. After a busy couple of years where we had legislation, specifically on December 22nd, 2017, when the TCJA was enacted and we got our first glimpse of the GILTI regime. At that point, we were all too busy dealing with 965.

Some of us started modeling out the GILTI impact, on our businesses and our clients. One of the things that we first saw was, that we would have some difficulties. The deferral would end. We wanted additional information, because there were a lot of open questions.

Initially, most of the material that came out from treasury and the IRS, dealt with 965 related issues. Eventually, sometime in September on the 13th of last year, treasury and the IRS released the proposed GILTI regulations.

Mostly dealing with mechanics, but it helped us in our modeling of the GILTI liability on our clients. We had to rely... predominantly going into the tax season, on those proposed regulations.

Finally, in June of this year, on the 14th we received final regulations, GILTI regulations and some additional proposed regulations, dealing with the high tax exception. Given that... where we stood on that day, we had to go into the tax season.

After one year, dealing with the corporate tax filing deadline, and two years of the new tax law, we have some certain takeaways here and certain observations. What did we encounter, how did we deal with it?

One of the observations, or a couple of the observations that we have as takeaways there, were basically that certain clients are going to be or are in then at a low position. Therefore, GILTI is not a big consideration for them at the moment.

However, in certain instances, what did encounter was, where some clients had only modeled out and only started discussing with us, the impact of GILTI late into the game, closer to the extension deadline in October. Now, we were able to determine... or we determined, that there were potential other impacts.

For instance, we had one client model out the tax consequences, and determined that they would potentially have an $800,000 GILTI inclusion. However, they were comfortable, because they also had a $2.7 million FTC in the GILTI basket.

If you're looking at the rules early in 2019, you had a little bit of comfort at this. I would be able to offset my tax liability, with my foreign tax credits. When we modeled out and saw the impact of the inclusion, it basically wiped out the foreign tax credits. As a result, our client now had a GILTI liability of $800,000, no foreign tax credits takeaway, taken against that liability.

No foreign tax credits to carry forward, because they were wiped out because they were in the GILTI basket, and a high interest expense allocation. With that, we basically wanted to make sure that everyone... with a couple of months left in the tax year, in the calendar tax year.

People started thinking about, what could they do in order to deal with some of the issues, which may arise? One year into GILTI, we could say we're a little bit smarter. Now, we fully understand the legislation.

We have some proposed regulations, that probably will be pronounced at a later date. Which will help us, in order to do additional tax planning and move away just from mechanics.

One of the things that we wanted to deal with, is utilization of losses generated by foreign entities. That's low-hanging fruit. Low-hanging fruit, because here we go back to an old tax planning strategy, which hasn't gone away for the last 20 some years.

It's a check-the-box election. When looking at the check-the-box election, I would say first, you have to make sure that the legal entity or an entity, is eligible to make the election. It cannot be a per state corporation. Okay, and has to be some sort of limited liability company, in the local jurisdiction.

The benefit of this old strategy, is basically that, losses are generated by the foreign disregarded entity, and those losses are able to be utilized at the level of the parent company.

However, in order to do that, you need to also consider potential OFL and DCL issues. One of the things that's very beneficial here, is that you don't have any more GILTI. You don't have to worry about Subpart F anymore.

Now, all you have to do is worry about picking up the income, and potentially doing some additional FDI planning. In essence, this old strategy, old classic play, now allows for us to mitigate the tax complexity, and the filing requirements and focus fully on using the NOLs.

Until... and this is very key, until that entity becomes profitable. At which point, this strategy should be revisited, in order to determine whether let's say, some other tax planning opportunity is possible there. With that, we arrive at our first polling question.

Moderator: Polling Question.

Please remember that in order to receive your CPE Certificate, you must remain logged on for at 50 minutes, and respond to at least 3 polling questions.

We're just going to give you another 10 seconds to answer the question.                                      

Okay, I am now going to close the poll and share the results.

Chip Niculae:All right, so let's go back and see here. A, 15%, it's inapplicable, it's just a percentage. 21% is the corporate income tax rate in the US, not the answer. 13.125 is basically... it would be, here the ideal or the optimal foreign corporate income tax rate.

At which we would be able to take the foreign tax credit from GILTI and wipe out any resulting tax in the US, from a very highlight level perspective, which is also not the answer. The answer is 10.5. It's 10.5, because the way GILTI and section 250 deduction works.

Remember, you take the corporate income tax rate, it's 21% multiply it times 50%, and the answer is 10.5%. I will moving on now to Subpart F planning. It's interesting because prior to TCJ, most of our tax planning was in order to benefit from deferral.

Most of that tax planning, dealt with making sure that we take some sort of exception to Subpart F, which were different categories here. Make sure that we leave the income offshore, not having taxed US... to the US federal income tax.

However, now, fast forward a couple of years, we've found ourselves in a position where we're now trying to pick our poison, between Subpart F or GILTI. Additional modeling is really needed in order to determine, whether you have a good case, in order to plan in Subpart F.

However, preliminary planning that we've done here, with certain specific fact patterns, basically allowed us to determine that from a very high level perspective, there would be a benefit into planning Subpart F in certain circumstances.

Before doing that, it's important to really know what the GILTI benefits are and the downsides, and compare them to Subpart F. Model them out, and see how that impacts your business.

Looking first at GILTI, we could say right off the bat that the benefit of being in the GILTI regime, is that you benefit from 10% of the QBAI, with being able to bring that tax free in the US.

However, in certain instances where you are a service business offshore, in that case, you don't have many assets. It would be very difficult to benefit from this 10% of QBI. On the other hand, in most instances, you would be able to benefit from the 50% GUILTI deduction.

It's definitely important since, as you saw on the prior polling question, that allows you to have an effective tax rate of 10.5%. The downside... and it's so important here, of GILTI, is that it has broad application.

More importantly, you have to determine the impact of GILTI, or you have to look at the impact of GILTI on your foreign tax credits. GILTI foreign tax credits, or foreign tax rates and GILTI basket takes shape automatically by 20%.

In effect, what you're looking at is only being able to utilize 80% of your foreign tax credit, in the GILTI basket. Most importantly is, if you are unable to utilize your foreign tax credits, that are in the GUILTI basket as indicated in our conclusions following 2018 tax season.

You have a high interest expense allocation. In that instance, you are unable to carry forward the foreign tax credits, or even carry it back in certain instances. In effect, you completely lose them. As mentioned before, we had that instance where a client lost $2.7 billion worth of foreign tax credits.

It's important that you start revisiting your structure right now. You start revisiting you intercompany flows, and look at the transfer pricing policy that you have in place.

Determine whether engine company flows could be... and also the business operations, could be slightly amended or re-figured in order to utilize a different regime such as Subpart F.

You would have to look very closely, at your foreign personal holding company income such as rents, royalties, interest and dividends. Also, your foreign-based company sales income, and your foreign-based company services, income. All key items and clauses, or Subpart F.

Now, moving on to Subpar F. First and foremost the important thing is, you look at the pros. You preserve 100% of the foreign tax credits. It is important to you to preserve the foreign tax credits. Subpart F might be one of the issues you might have to look at. FTCs are carried forward 10 years, and back in certain instances for a limited year. The Subpart F income inclusion, is limited to earnings and profits.

It has a very limited scope in the sense that, there is a lot of exceptions that you need to now make sure that you don't plan into. Therefore, exclude your income from Subpart F.

Very important here, is that you model out the different options and calculate the tax benefits. See, which is more beneficial, GILTI or Subpart F? For that purposes, we've also put a little example on the right hand side.

If you notice in the prior slide, we had a flat structure. The US company held the Irish CFC 1 and CFC 2 in that case. Basically it turns that Irish entity in a Foreign Disregarded Entity. Now, that Foreign Disregarded Company... its management service income, flows directly to Cyprus.

This is Cyprus, you being the newly formed holding company, holding the CFC. Becuase of this classic play, all of a sudden now we have created Subpart F income, and therefore gone around GILTI.

Strictly because, as you're aware in the GILTI regulations and the GILTI rules, Subpart F is an excludable income item from GILTI. Important to know though, that there are certain concerns.

Both Subpart F and GILTI have an interest expense allocation. It's important because the higher the interest expense allocation, the lower your foreign tax credit utilization will be.

With respect to GILTI, there's a potential here that if you are in a GILTI position, and you have high interest expense allocation, you will lose or not be able to utilize 100 or 80% of your foreign tax credits. Subpart F also has the same concern.

However, an interest expense allocation that does not allow you to utilize your foreign tax credits fully, basically permits you now or forces you actually, to carry forward your foreign tax credits to a later year.

Giving you a little additional time, in order to deal with your interest expense allocation, and fully utilize the foreign tax credits at a later date. In order to deal with some of these 861 interest expense allocation issues, you might want to revisit your intercompany debt structure.

Potentially your borrowing from third parties. In certain cases, when it comes to your intercompany structure, intercompany loans, you may want to restructure the way your intercompany loans flow.

In this instance, additional planning may be needed in order to push down some of that debt, into the foreign operations, which are specifically more profitable.

Another opportunity which should be also considered is, potentially also doing foreign tax planning, in order to drive down the effective tax rate in that jurisdiction. Therefore, not creating foreign tax credits, that will need to be utilized for US tax purposes.

Here is an interesting one, Bringing Back the Intellectual Property to US. For years, once again, prior to TCJA, we were busy planning and basically carving out the rest of the world's rights to intellectual property, and transferring them offshore, migrating them offshore.

Now, with some new issues like FDII in place, and other tax planning concerns that we have such as GILTI in the foreign jurisdictions, intellectual property repatriation has become a reality.

In many instances, what we would have is that, we would have to plan into FDII. If your intercompany flows are stretched properly, in the sense that you're able now to take advantage.

With respect to license and income, product sale or services income, ultimately winding up or being utilized by third parties in foreign jurisdictions. You could not benefit from a 37.5 deduction in the US. That in effect, allows you to have an effective tax rate of 13.125.

That deduction is very important to know. It's reduced after December 31st, 2025 to 21.875. As a result now, one of the things that... this strategy allows you to take away to subpart F, and the GILTI out of foreign jurisdiction.

It's important to know, that you also need to also focus on the local tax considerations. You have to have the right pattern, in order to implement the strategy. The one fact that's very important here, is that the local jurisdiction must be in an NOL position.

The reason for it, when transferring in many instances, intellectual property out of each jurisdiction such as Ireland, you potentially have an exit tax on the capital gain that, that intellectual property will generate.

Losses available there, could offset that exit tax. Which should be a consideration in your tax planning. Now, onto our last tax planning opportunity, which right now isn't something that we could say is into fruition, planning into the high tax exception.

The reason for that as your many of you are aware, is that the high tax exemption is still part of the proposed regulations. The proposed regulations really specified, that the rule is only to be utilized once the regulations become final.

It's from the date the regulations have been adopted into final form. In that instance now, we could do some planning, and determine when that regulation becomes actually beneficial to us.

In fact, what we're looking at... and I would strongly suggest is, unless there's something that comes in the next couple months from treasury and the IRS, it is likely that the benefit from this rule will only come to fruition in 2020.

With that being said, I'd like to go and move on to this little example that we have here. First, I'd like to point everyone on the right hand side on top. Where we have US source sales of $170, and the interest expense of $70. Bringing our profits there to $100.

I'd like to point out that the US Parent, as you see CFCs, CFC 1 and CFC 2. CFC 1 is in a low tax jurisdiction, that taxes only at 10%. CFC 2, is in a high tax jurisdiction, which basically has a corporate income tax rate of 35%.

Right off the bat, I would say given your knowledge of the high tax exemption that you've encountered in the past, with respect to Subpart F.

I can now take the 90% rule, apply it against the 21% corporate income tax in the US and come to an 18.9% tax. In effect now, 18.9 is really your benchmark. If corporate income taxes in the foreign jurisdiction, are below that benchmark of 18.9%, you will not be able to benefit from the high tax exemption.

Let's go through an example on the left hand side there. On the left hand side, we have one column with the high tax exception.

We have a high tax and a GILTI inclusion of $100 from CFC 1. We use a 250 deduction, which basically reduces that by 50%. Now, we're at a 50% GILTI inclusion. We add a taxable income to $50, plus the $100 from the right side of the US income. You get to 150.

Take the 150 now, and multiply times the 21% to get $32. In effect now, our tax in the US $32, on both the US source income and also the GILTI inclusion. Remember, we do have a 10% tax on the CFC. We have $100 of profits, that are subject to tax or taxable income.

In this instance, you have a 10% corporate income tax and CFC one's jurisdiction. Remember this though, because this income is in the GILTI basket, now the foreign tax has to get reduced by 20%. In effect now, we only have a foreign tax credit of $8.

Going through the calculation here, we have to do the interest expense allocation, with respect to $70. What happens is, once we carve out the different baskets here, because we have the 250 deduction and also the GILTI category, we come out with an interest expense allocation of $10.

Fast forward that down to the 904 limitation. Once you go into the calculation, and see what you could basically take as a foreign tax credit, you will determine that you can only utilize $8, out of the $8. Which is not a bad fact here, ideally in this example.

We could fully utilize the foreign tax credit. You subtract $8 out of 32, and comes to $24 US tax rate after utilizing different tax credits. I'd like to pause there for a second. The next example where no high tax exceptions is able to be utilized, will bring a different result.

Strictly... and I'll point this out before we start, because as you will determine that, once we do the interest expense allocation or the GILTI basket, we can only use $16 out of $36 that are foreign tax credits. Very important to point that out.

Now, I'm going into the second example where, as it is right now in the current tax system, before the high tax exemption becomes permanent, we have income from both foreign jurisdictions at $200. We also have... now, remember that section 250 deduction, which reduces our GILTI income down to $10.

We add that against the US income, which is another $100, we go into 200. Multiply that times 21%, we're at $42. The foreign tax credits, as mentioned there, is now... remember we have $35 and $10, from both CFC 1 and CFC 2 in taxes that we pay locally.

Multiply that times 80%, and you get $36 that you can take as a foreign tax credit, before the interest expense allocation. Run your interest expense allocation. Now, all of a sudden, you have to go determine what the limitation is, 904 limitation.

As mentioned before, with respect to the GILTI basket, after we run the limitation, it's determined that only $16 may be utilized against the credible foreign taxes. Subtracting now the 16 from this $42, basically allows or exposes us to a foreign US tax of $26.

You see now the difference between the two. In the first one, where there is a benefit to the high tax exception, because the tax rate is $2 lower because we're able to utilize the exception.

Whereas on the other side, not only do we not benefit and have a higher tax rate, would we also lose $20 in foreign tax credits. As mentioned under FTCs in the GILTI basket, it's not getting carried forward. Now, the benefits quickly. Income is exempt.

High tax income is exempt from the CFC tested income of GILTI. It's no longer reliable on FTCs. For people or companies that are on NOL position in the US, and would lose those foreign tax credits, now... actually for those companies in the US that are on NOL position and could not benefit from the GILTI FTCs.

Some 80% of them, now they could just use this high tax exception and not use up the NOLs. NOLs remain in the tax. The cost of expense allocation against GILTI, is being basically decreased. Remember, you have an expense allocation. You're at 21% in the US.

Then an interest expense allocation against foreign sourced income, that could potentially be up. Let's say in this instance, Japan at 33%. There is a bit of a mismatch.

The cost of it is, you will have an inability to cross credit taxes from low tax jurisdictions, or income from low-tax jurisdiction, GILTI income against high-taxed GILTI income. If you could use Subpart F income in this instance as a planning tool, you could potentially benefit from it.

However, the cost also includes, you don't benefit from the QABI when you're in the high-tax exemption. You rely predominantly on 245A, being the participation exception regime.

As mentioned before, this is not a tax planning opportunity at the moment. Strictly because at the moment this regime is not finalized. With that, we turn to our polling questions here.

Moderator: Polling Question.

Please remember that in order to receive your CPE Certificate, you must remain logged on for at least 50 minutes, and respond at least 3 out of the 4 polling questions.

All right, we're going to give you another 10 seconds.

All right, I am now going to close the poll and share the results.

Chip Niculae:All right, so the majority seems to be correct. 38% of you have elected option D, and this is... it's 21.875%. That is correct. 50% is at 250 deduction, incorrect. B, 37.5 is the deduction prior to 2025. Zero means you're not getting an FDII.

With that, I now well, would like to turn it over to my colleague, Anthony DiGiacinto, Tax Director in our Corporate Tax Group. Today, he will be speaking about the effects of the tax reform on financial statements.

Anthony DiGiacinto: Hi everybody. This is Anthony DiGiacinto. As Chip mentioned, I'm the Director in a Corporate Tax Group here at EisnerAmper. I'm going to talk about the financial reporting issues, and the tax provision issues associated with GILTI.

I'm also going to briefly mention FDII, which Chip mentioned also. Some of the provision issues that presents. First though, we have our third polling question of the day.

Moderator: Polling Question.

Anthony DiGiacinto: Okay, since you can only have one answer here. Assume that the foreign tax credit, is not going to offset the tax that's caused by GILTI. Otherwise, I guess there could be two correct answers here. Keep that in mind.

Moderator:We're just going to give you a few more seconds to respond.

Just to make sure we get everyone in, we'll give you another 10 seconds.

All right, I am not going to close the poll and share the results.

Anthony DiGiacinto:Okay, all right. Most people got the question right. The question is meant to show that GILTI is not your friend. It's never going to have a decrease in the effective tax rate. It could have no impact if your 250 deduction, and your foreign tax credits offset the impact of the income pickup.

Generally, GILTI can only increase your tax rate. Okay, yeah. Before we get into discussing the provision issues, let's talk a little bit about SAB 118. This was... the FCC provided an extension to publicly-traded companies, to finalize the accounting with the impact of the new law.

This extension period has expired. If a company would like to change its accounting method GILTI... as we'll discuss, they will have to go through the change in accounting method protocol at this point.

Okay, so first, let's get FDII out of the way. FDII can only be a deduction, so it's relatively simple. It's treated like a special deduction, just like the section 199 deduction was accounted for.

The section 199 is now repealed. It was the deduction you got for exploring a property, manufacturing here in the US. Don't confuse it with 199A, which is a totally separate provision under the law. 199 is gone. FDII is like the good twin of GILTI.

It can only provide a tax benefit to C corporations, and only the C corporations. All right, this deduction doesn't apply to any types of entities, nor to individuals. Generally, a corporation which exports goods or services, can take advantage of this deduction.

As Chip mentioned, the deduction is equal to 37% of the company's foreign-derived intangible income. After 2025, it goes down to about 22%. The amount of this deduction, is treated as a favorable permanent difference.

Now of course, we have to consider the state impact of this deduction also. Some states follow the federal treatment, and some states don't. Just be aware, when you're doing tax provisions, you have to consider the state impact of all these new rules also.

Okay, now on to GILTI. GILTI is a little bit more complex. GILTI income is similar to Subpart F income. We're picking up the current foreign earnings, and including it in our US taxable income.

The issue with GILTI is, whether to record the deferred taxes relating to the basis differential, between the book carrying value of the assets and liabilities of the company, of the foreign company and the GILTI basis, right?

These differences will reverse as GILTI income, or deductions in future periods. The FASB has left it up to the company, to make this policy election. As we discussed, SAB 118 period has expired. At this point, every company has may had a policy election, whether they know it or not.

Companies that have decided to use this accounting policy, should have disclosed this in their financial statements. If you've recorded deferred taxes based on the GILTI regime, there should be a disclosure in there, explaining exactly what the company did.

If the election was not made, then GILTI income is treated as a period item. Just like the FDI deduction, will have a direct impact on the company's effective tax rate.

Measuring the impact of GILTI on deferreds, introduces challenges that would not be present if it was just treated as period item. I'm not going into too much detail about these issues.

Since most companies have decided to account for the income as a period item, and not to record deferred taxes for the GILTI income. A company should only record GILTI deferred taxes, if it expects to have GILTI inclusions in the future.

If the net deemed intangible return, is expected to exceed the CFCs net tested income, or if the CFCs are expected to consistently produce losses, then no deferred should be recorded. All right, the rate to value deferreds, is also a tricky issue.

Since the GILTI income takes a 50% haircut, we are already at a 10 and a half percent effective tax rate. Companies would also. Have to factor in the impact of the anticipated foreign tax credits. Also, a residual outside basis difference may exist.

This may create an additional deferred tax liability that would need to be considered. As you could see, creating a... or calculating the deferred balances for a GILTI type of timing differences, is a challenging issue. I think that's why most companies shied away from it.

GILTI can also have an impact on the need for evaluation allowance. All right, so if future expected GILTI income can be used as a source of income, it needs to be considered when evaluating the need for a valuation allowance.

When a company is a loss position, and there is no section 250 deduction... I'm sorry. When a company is in a loss position, there is no section 250 deduction. The gross amount of GILTI income will start to chip away, at the NOL carried forward.

A company can use two approaches to determine the realizability, of deferred tax assets. The first approach is a with and without method. A company compares what expects its cash taxes to be, with the NOL carry forward, and what cash taxes would be without the NOL carried forward.

The company would include in both calculations, the estimated effects of the section 250 deduction, the 50% deduction and the foreign tax credits associated with its forecasted GILTI.

A company would measure the benefits, from its deferred tax asset associated with the NOL carry forward, by taking the difference between these two calculations, and recording a valuation allowance on the remainder of the DTA.

If you would pay no tax with the NOL, right, that makes sense? You would pay no tax without the NOL, because of the section 250 deduction and the foreign tax credit. Then the NOL provides no incremental benefit, and a full valuation allowance would be recorded.

To me, this method is problematic, since there are so many other factors to consider in a valuation allowance analysis. Okay, the other method which we can use is the tax ordering approach, which is mainly what we have used for our clients.

This approach ignores the fact that the future section 250 deduction, any FTCs will not be utilized because of the NOLs. A valuation allowance is recorded, if future taxable income inclusive of the GILTI, does not support the utilization of the existing DTAs.

I think that, that method makes more sense. You're going to have GILTI pickup in future years. It's going to reduce your NOLs, and to the extent that you could prove that, it would foster not having a valuation allowance.

GILTI also, has to be considered for interim period tax provision calculations also. Since GILTI will create a permanent income pickup, it will affect the estimated effective tax rate, that companies use to calculate their quarterly tax provisions.

When estimating the effect on the current tax provisions, the company must consider the full impact of the GILTI calculation, including the return on tangible business property, the section 250 deduction, foreign tax credits and any valuation allowance implications.

This provision has made it a little bit more difficult, to estimate the effective tax rate for companies that have to report on a quarterly basis. Okay, also, just like FDII, GILTI has an impact on a state tax calculations also.

I'm not going to go into those nuances since Gary will be speaking about those, but just keep those in mind as you're doing your tax provision, that obviously you need to consider each state and its separate rules.

I'm sure you'll gain some knowledge based upon what Gary is about to talk about. With that, I'm turning it over to Gary.

Gary Bingel:Great. Thanks Anthony. Appreciate that. Hi everybody. My name is Gary Bingel. I head up the firm state and local tax group. I'm going to be talking about some of the state tax ramifications, of some of these international provisions.

It's been a busy couple of years to say the least, in state and local tax between the... looking at some of the tax reform provisions, and how they apply to the states. Then we had the Wayfair decision. It's been been a lot going on.

First, just a quick overview. For those of us in the state tax area, just kind of backing up and taking a high-level view, as to what some of these things GILTI is deemed to be gross income reported as a dividend. That's on your 1120 line 4. FDII is in your line one.

FDII is just a new deduction as we talked about. It's not any new sort of income. GILTI is a newer sort of income. That's important when you're looking at things like, some states don't have a rolling conformity to the internal revenue code, and they have a fixed conformity.

We'll see that with California, and that's why it's important to just have a good general overview. Generally, the issues we're going to look at the state level, are how much of these items are included? How much of FDII and GILTI do you include in your apportionable tax space?

How much is subject to tax, and how are they treated for apportionment purposes? Those are the two kind of big overriding issues, from a state tax standpoint. If applicable, the allowable GILTI and FDII deductions... yes, are shown on line 29. They're deemed to be special deductions.

The reason that's important, is because obviously a lot of states have different starting points. A lot of states, even if they are tied to the internal revenue code, some start with line 28, some start with line 30.

That's why we need to know exactly where these items fall out, as is often the case with state taxes. We need to really nail down the federal treatment, before we can address the state treatment, just because of the way they're laid out.

For state tax purposes, these deductions are below the line being 28, deductions are reflected on line 2. They're really made up of 3 separate section 250 deductions. One is the FDII deduction, which is for 37.5% currently, that's changing in the future as a Chip noted.

Then we've got the GILTI deductions, the 50% GILTI deduction overall, then the 50% gross up deduction. The state treatment, as we go through, we're going to hit on some of the major states here, and some of the ones we've been looking at for our clients. Just to hit some of the highlights.

All the above states... so we know, here include the GILTI and FDII gross income. This assumes for California, that we're using the Federal Reconciliation Method, for calculating your California net income. California has a couple of different ways of doing it.

The easiest way is what most folks do, is they tie it to the federal. Then you have the add-backs, and the adjustments to really get to the IRC for California purposes, which we'll talk about in a minute. The amount of GILTI and FDII that's deductible, varies due to the various IRC conformity items.

Again, FDII always has been an income that's nothing new. It's just a deduction that's new. Virtually, all States allow or exclude deduction, for the section 78 gross-up, regardless whether it's GILTI or not. Either it's some sort of dividends received deduction, or some other modification.

The exception we're going to talk about is Massachusetts, which only allows 95% deduction for the section 78 gross-up. The following slides, like I said, we're going to go through some of these states in a little more detail.

Like with everything, just kind of a little bit of background. Again, states are always changing these items. We do have clients that every quarter call us up, and have us update some of their provisions, or review their provisions and their calculations and such, just to see if anything changed.

I know the states themselves just like taxpayers, are grappling with a treatment of these. The states themselves are grappling with some of this treatment, and have changed several times based on input from accounting firms, and industry and such.

 New Jersey, we'll talk about them a little bit. They had some changes as well. They released one set of guidance over the summer. Then they just changed it again, and released the revised guidance last week, on Halloween actually.

I don't know if they're trying to scare everybody or what, by releasing the new guide, but it actually was a little bit better than the other guide. Again, you always have to constantly look at these, and make sure they're updated when you're doing your calculations.

It'll probably be a few more quarters at least, before all of this is settled down a bit. Even then there'll probably be some litigation. Jumping into California here. California starts with line 28. We're going to talk about this for each state, set before the IRC 250 deductions.

One thing to remember, California is one of those states that conforms to the internal revenue code, but they do it as of a static date, and a specific date in time. It's not a rolling conformity.

They are tied to the internal revenue code as of 1/1/2015, which is obviously prior to the Tax Cuts and Jobs Act. What does that mean? We include the gross GILTI and the section 78 gross-up... or I'm sorry. The gross GILTI and section 78 gross-up are excluded.

The way you exclude it, again, you're starting with your current line 28, is basically... that's a California modification. You back those out for the GILTI, and the gross-up and such. The FDII, because that's always been in there, and that was included. That's nothing new.

That remains in the California taxable income, since it's always been a component of your line 1 sales. California does not allow any sort of deduction for FDII. California, because it's excluded from your tax base, you should also exclude it from your apportionment factor.

That's something to just... again, a general concept is that, to the extent items of income are included in your tax base, they should be included in your apportionment. To the extent they're excluded from your income base, they should be excluded from your apportionment factor, just to match that up.

That's just a... kind of basic tenant here. Generally, FDII has always been in your line one. That will always be included in your denominator, of your sales factor.

We go on to Florida. Florida starts with line 30, so again, that's after those special deductions on line 29. That's after the IRC 250 deductions, for FDII and GILTI and such. They allow a subtraction modification, for the net GILTI that's included in your state taxable income.

Essentially, they're going to tax zero of your GILTI. Starting with line 30, which already has part of the deduction, and they're giving you the rest of the deduction.

As I just mentioned, since all of the GILTI is essentially deductible or is not included your tax base, you do not include it in your Florida Sales Factor. Again, just matching there. Somewhat straight forward for that.

For Illinois, we start with line 30. Again, just like Florida that was after your IRC 250 deductions. Then they allow a dividend received deduction, for the net GILTI that's included on your... again, just like Florida, on your state taxable income. Again, you're not including any in there.

For taxable years beginning after 2018, they do require an add-back for the federal FDII deduction. They're not going to give you that FDII deduction. Since 100% of your GILTI is deductible, that should not be included in your Illinois Sales Factor.

Since all of your FDII is going to be added back, or the deduction is going to be added back, it's all going to be included. Again, that would all be included in your sales factor. Yeah, just kind of laying it out there, that this is going to be pretty similar for a lot of the states.

We want to make sure... like we say there, to the extent states are giving you a deduction for some of that GILTI and FDII, you can obviously only deduct it to the extent it's been included, in your tax base already. We're going to talk at the end about double deductions, but just keep that in mind.

Make sure you're not the ducting more than what's in your tax base, so Indiana. Indiana, again, is a line 30 state. After the 250 deductions, then they require then an add-back for both of the IRC 250 GILTI deductions. They then allow a DRD for the GILTI.

Assuming you meet the 80%, 100% deduction, if you have 80% or more ownership. They also allow deduction for the section 78 gross-up, irrespective of ownership. They make you add it back. We see that sometimes with state taxes.

I think sometimes they want to track the information, and then I think sometimes it's just a matter of the way the form works, and they don't want to redo their whole form. Sometimes they'll make you add something back, and then take the full deduction.

Again, you're essentially adding back the GILTI, then taking it all, deduct it. Since it's all deducted, you don't include it in the sales factor. FDII, again, you're allowed to use it in a sales factor. For a lot of these states, there isn't a lot of guidance.

We see here, Indiana allows the federal FDII deduction. A lot of states don't have a lot of guidance, as to whether to include that net amount, or the gross amount of FDII. Some of the guidance set out, that is out. Will say, "Well, you just include the net amount, because that's what's in the tax base."

I think very often since the full amount's included in your line 1 receipts, you end up at least having a position to include the gross amount. To the extent there isn't any guidance, I would certainly... if it's a big number, possibly include that amount just to get some apportionment solution there.

Moving on to Massachusetts. Massachusetts starts with line 28, so before the IRC deductions. Then they allow a 95% DRD for your gross GILTI, including the section 78 gross-up. The GILTI deductions are subject... if see for a lot of these states.

These states... they're really treating it purely as a dividend. Some states come in and say, "Well, we don't really think it's a dividend." For those states that are treating it as a dividend, giving you a good DRD, obviously you need to meet those ownership or voting requirements, et cetera.

Just like you would for any DRD. Massachusetts does not allow any FDII to be deducted. Again, since they're starting in line 28, that's before the federal deductions here, including 100% of your FDII. Here you would obviously include all of it, in your Massachusetts' receipts factor.

Massachusetts come out and said, "Well, GILTI, we're not treating it as revenue for sales factors." You're going to exclude all the GILTI, despite the fact that you have 5% in your tax base. Maine, four Maine purposes, Maine starts with line 30, after the deductions.

They require an addition modification for the federal GILTI deductions, and then allow states subtraction. Again, what we see is essentially, the net results of the Maine allows you to deduct everything. They make you add some back, and then you take the full deduction, like we talked about a minute ago.

No Maine modifications for FDII. Since it starts with line 30, you get the same deduction for Maine for FDII, as you do for federal purposes. This is one of those states. There is a filing position to include the net GILTI, at least in the Maine Sales Factor denominator.

New York City, New York State, moving on to the ones who are probably a lot more relevant, to some of the folks. They're one of the states... again, it illustrates that we have to constantly update these, because states are changing their positions from year to year, sometimes quarter to quarter.

For New York State, New York City generally start with line 28. Before any of the federal deductions. 2018, New York State and New York City, only allowed the GILTI portion of the 250 deduction.

It's taken some modification on your return. They do not allow any deduction for FDII, against the sort of the line 28. 2019 and going forward, New York State does allow a 95% deduction for GILTI, and they essentially treat it as exempt CFC income.

Now, New York does have some of these expense modification rules and expense tracing. Where they say, "Well, to the extent you're taking that deduction, you have to reduce it by any interest expense, that's attributable to that income."

If you're taking an interest expense, and you've got some portion of these deductions for GILTI, you may need to reduce that GILTI by the amount of interest deduction, to basically this allowed an interest deduction. Or they do over 40% safe harbor.

They still don't allow a deduction for FDII, so that didn't change. New York City treats the same, for '18 and '19 and adopted the state change. As far as the sales factor goes for 2018, you include the net GILTI in the denominator. Then in 2019, you include just the 5%.

Again, matching that up. New York City for all the years, include the GILTI in the denominator. New Jersey, this was the state again, that... they came out with some new guidance just last week.

They start with line 28, before the deductions. They give you a subtraction modification for any of the 250 deductions, that you actually took for federal tax purposes. Or you didn't get the same deduction for state, as you did for federal. The net amount is included in the sales factor.

If you have that section 78 gross-up from the GILTI, you should be able to subtract the remaining 50%, as a New Jersey subtraction. Although they don't really address it in the new guidance.

 All of that... some of you may have heard, their prior guidance said that you were going to remove the GILTI, put it on the separate schedule. It had this kind of funky apportionment, where you looked at New Jersey gross domestic product, over all the state's domestic product where you were filing returns.

You had a special apportionment for that. They got so much... they thought they were being kind of generous for that, and they got so much pushback from the industry, and from accounting firms and such. That's why they released this new guidance.

They just got rid of all that, and said, "Okay, now the GILTI... you just forget about all that... You're just going to apportion it, like you do all your other income just in your base. Or just apportion it, you don't have to do any new separate schedules."

Generally, they also came out and said, "One thing we haven't addressed generally for all these, to the extent it's FDII and GILTI, including the denominator. Is the question as to whether you should include in your enumerator."

Generally, I don't think that you should be including any new enumerator. New Jersey has come out and said that, they don't really think anything is going to be included in your enumerator for apportionment purposes.

They did hedge a little bit and said, "Other than some theoretical scenarios, we don't see you having to include any new enumerator. They really just put that in, because they knew they couldn't address every situation out there.

They wanted to have some leeway, in case something came up in the future. Pennsylvania.

Moderator: Polling Question. 

Gary Bingel: I tried to make this a little bit of a throwaway for everybody, since I know it's been a lot of information thrown out in this webinar. Anybody who knows state local laws, there are very few universal provisions out there. Expect 100% to get this right.

Moderator: Again, I just wanted to... you want to make sure that you answered, three out of the four polling questions. If you haven't answered three already, please do it now.

Moderator: Okay, I'm going to close the poll and share the results.

Gary Bingel:13%, you're killing me. At least we got the 87. Like I said, every state kind of treats them a little bit differently. Some... just looking at Massachusetts, you get a 95%, versus some states get 100%, et cetera.

Some have some provisions, as far as how much you're including in the denominators and things. Generally, answer with everything in state and local taxes, it depends, including for here. The correct answer there is false.

Looking at Pennsylvania just real quick, so I know we're coming up to the end here. PA starts with line 28, before the deductions for federal purposes. They treat the gross GILTI as a dividend, subject to the DRD. You have to meet the various ownership requirements there.

They did say... and this was for all dividends, since they treat it as a dividend. Dividends are excluded from the Pennsylvania Receipts Factor. That's going to hold true for this as well. PA does not allow the federal FDII deduction.

Then Philadelphia. Just like we talked about New York City, you have to look at some of your larger localities, if you are paying tax there. For Philadelphia, their business income and receipts tax. They start with method two, which is line 28.

Most people start with method two, they tie it to the federal just before the deductions. Then they also treat GILTI as a dividend. You have to look the DRD requirements, and they also exclude it from the receipts factor, just because it qualifies for the DRD.

The last little item, I just wanted to say, be careful about the double deductions. There is some software or some of the forms, that may seem like you're getting 100% deduction or 150% deduction, because you might be starting with a line 30 amount.

Which already has some of the federal deductions built in, and just the way some of the forms flown and such. It may appear that on first, or you have $100 of income included, and we're deducting 150. That's just not going to fly anywhere.

Just be careful, that some softwares that are doing that. You can obviously only deduct or get a deduction, for what you've included in, not more than that. That's it for the state piece. I'll turn it over to Chip to wrap it up.

Chip Niculae:Thank you Gary. As final takeaways from this whole session, I would like to say that from an international tax perspective, beware of the 861 interest expense allocation. Beware of having any remaining foreign tax credits in your GILTI FTC basket, because they will get wiped out.

Be weary also, of paying too high of a tax in the local jurisdiction, which may not be utilized as a foreign tax rate. Make sure you go revisit your foreign operations. Determine whether they are projecting losses or income, and revisit your tax planning.

Be aware of any potential complexities that you may encounter on your forms 54-71s 1118s, 80-58s, 89-92 and 89-93. Remember, there is only two months left. It's important you try to maximize your FDII, and minimize the impact of GILTI.

Once again, I would like to thank everyone for attending the webcast, and my two esteemed colleagues, Gary and Anthony for joining me on the panel. As a recap, today we covered GILTI from an international tax, tax accounting and sale perspective.

Focused on the following tax planning opportunities, checking the box to preserve NOLs, planning into Subpar F, dealing with interest expense allocation, repatriating intellectual property, especially when losses are available to offset the local gain.

Hoping that the high tax exemption becomes a permanent law. I look forward to seeing everyone on our next international tax webinar.

^{Transcribed by Rev.com}