New Section 951A: GILTI Rules for Individual and Non-C...
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New Section 951A: GILTI Rules for Individual and Non-C Corporation CFC ShareholdersTreatment of CFC income, Reporting Requirements, Planning Techniques to Defer or Reduce GILTI Tax, and More
Today’s faculty features:
1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific
THURSDAY, JULY 12, 2018
Presenting a live 90-minute webinar with interactive Q&A
Cindy Grossman, Partner, Giordani Swanger Ripp and Jetel, Austin, Texas
Libin S. Zhang, Partner, Roberts & Holland, New York
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Strafford Webinar: New Section 951A: GILTI Rules for Individual and Non-C Corporation CFC Shareholders
Presented by Cindy L. Grossman for Strafford Publications
July 12, 2018
5L O O K I N G B E Y O N D O U R B O R D E R S
Deferred Deferred
Low-taxed High taxed
Assets/Income Assets/Income
Deferred Taxation – full U.S. rate
Subpart F
Assets/Income
Immediate U.S.
taxation—full U.S. rate
Controlled
Foreign
Corp
Controlled
Foreign
Corp
U.S.
Shareholder
Controlled
Foreign
Corp
Previous U.S. International Tax System (Pre-2018)
6L O O K I N G B E Y O N D O U R B O R D E R S
Deferred High-taxed
Assets/Income
Exempt 10% return on
tangible assets
Immediate U.S. tax on
excess returns
Subpart F Assets/Income Deferred
Low-taxed Assets/Income
Immediate U.S. taxation full U.S. rate
Controlled
Foreign
Corp
Controlled
Foreign
Corp
U.S.
Shareholder
Controlled
Foreign
Corp
Post-TCJA U.S. International Tax System (Post-2017)
New system (“GILTI”) combines
All deferred income and taxes
excess returns
7L O O K I N G B E Y O N D O U R B O R D E R S
Prior Treatment of CFC Income and Reporting Requirements
• Prior to enactment of 951A, most CFC planning involved avoidance of Subpart F income inclusion: earnings and profits of a CFC were permanently deferred until distributed, with the exception of Subpart F income and investment earnings from U.S. property
• Subpart F income includes:- Insurance Income – 953- Foreign Base Company Income - 954
◦ Foreign Personal Holding Company Income (exception for income from related parties)
◦ Foreign Base Company Sales Income (subject to exceptions)◦ Foreign Base Company Service Income from service performed by CFC outside of
CFC’s country of incorporation- Income from boycott operations; amounts relating to illegal kickbacks, bribes, etc. paid by
the CFC- Income derived in certain foreign countries disfavored by U.S.
• Income subject to accelerated tax under Subpart F or U.S. property investment rules was not taxed a second time upon distribution, and basis in CFC is increased
• U.S. Shareholders of CFCs filed Form 5471 (Information Return of U.S. Persons With Respect To Certain Foreign Corporations). Any U.S. Shareholder who owns stock in a CFC for an uninterrupted period of 30 days or more during any tax year of the CFC, and who owned that stock on the last day of the year, must file Form 5471 (these are called “Category 5 Filers).
8L O O K I N G B E Y O N D O U R B O R D E R S
Prior Treatment of CFC Income and Reporting Requirements
So, what changed?
• E&P of a CFC are still permanently deferred until distributed, but now GILTI is included as one of the exceptions to that rule, essentially obliterating the non-Subpart F planning that many CFCs engaged in
• Domestic C-corporations can receive a deduction equal to 50% of their GILTI and an 80% foreign tax credit
• Filing Requirements: TCJA repealed Section 958(b)(4), which excluded downward attribution of constructive ownership of non-U.S. corporation stock to U.S. shareholders. As a result, a U.S. partnership, corporation, trust, or estate will be deemed to own any stock in a non-U.S. corporation that is owned by a non-U.S. partner, shareholder, or beneficiary.
- IRS issued Notice 2018-13 stating that IRS intends to amend het instructions for Form 5471 to provide an exception from Category 5 filing for any U.S. person that is a U.S. Shareholder of a CFC as long as (i) no U.S. Shareholder owns stock directly in the CFC, and (ii) the non-U.S. corporation is a CFC solely because the U.S. person is considered to own the stock of the CFC owned by a non-U.S. person under the downward attribution rule in IRC 318(a)(3).
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10L O O K I N G B E Y O N D O U R B O R D E R S
Overview of Section 951A• Effective for tax years of controlled foreign corporations beginning after
December 31, 2017, each person who is a United States shareholder of any controlled foreign corporation for any taxable year of such United States shareholder shall include in gross income such shareholder's global intangible low-taxed income for such taxable year.
• Computation is done on a U.S. shareholder basis, not on CFC basis
- Caution urged when owning CFCs through separate U.S. shareholder chains under one U.S. parent
• Simply expressed, GILTI is calculated as follows:
- Net (after foreign tax) tested income – (QBAI*.1 – interest expense on QBAI)
• Section 951A is a Russian nesting doll of defined terms…
11L O O K I N G B E Y O N D O U R B O R D E R S
Overview of Section 951A• United States Shareholder: a United States person who owns (within the
meaning of section 958(a), or is considered as owning by applying the rules of ownership of section 958(b), 10 percent or more of the total combined voting power of all classes of stock entitled to vote of such foreign corporation, or 10 percent or more of the total value of shares of all classes of stock of such foreign corporation.
- United States Person: a citizen or resident of the U.S., a domestic partnership, a domestic corporation, any estate (other than certain foreign estates ), and trusts over which U.S. court exercises primary supervision and U.S. persons control substantial decisions of the trust
• Controlled Foreign Corporation: any foreign corporation if more than 50 percent of the total combined voting power of all classes of stock of such corporation entitled to vote, or the total value of the stock of such corporation, is owned (within the meaning of section 958(a), or is considered as owned by applying the rules of ownership of section 958(b), by United States Shareholders on any day during the taxable year of such foreign corporation
12L O O K I N G B E Y O N D O U R B O R D E R S
Overview of Section 951A
• Global Intangible Low Taxed Income: The term “global intangible low-taxed income” means, with respect to any United States shareholder for any taxable year of such United States shareholder, the excess (if any) of—
- such shareholder's net CFC tested income for such taxable year, over
- such shareholder's net deemed tangible income return for such taxable year.
13L O O K I N G B E Y O N D O U R B O R D E R S
Overview of Section 951A• Net CFC Tested Income: The term “net CFC tested income” means, with
respect to any United States shareholder for any taxable year of such United States shareholder, the excess (if any) of
- the aggregate of such shareholder's pro rata share of the tested income of each controlled foreign corporation with respect to which such shareholder is a United States shareholder for such taxable year of such United States shareholder (determined for each taxable year of such controlled foreign corporation which ends in or with such taxable year of such United States shareholder), over
- the aggregate of such shareholder's pro rata share of the tested loss of each controlled foreign corporation with respect to which such shareholder is a United States shareholder for such taxable year of such United States shareholder (determined for each taxable year of such controlled foreign corporation which ends in or with such taxable year of such United States shareholder).
14L O O K I N G B E Y O N D O U R B O R D E R S
Overview of Section 951A• Tested Income: the excess (if any) of the gross income of such corporation
determined without regard to—
- any item of income described in Section 952(b),
- any gross income taken into account in determining the subpart F income of such corporation,
- any gross income excluded from the foreign base company income (as defined in Section 954) and the insurance income (as defined in Section 953) of such corporation by reason of Section 954(b)(4),
- any dividend received from a related person (as defined in Section 954(d)(3)), and
- any foreign oil and gas extraction income of such corporation,
◦ over the deductions (including taxes) properly allocable to such gross income under rules similar to the rules of Section 954(b)(5) (or to which such deductions would be allocable if there were such gross income).
15L O O K I N G B E Y O N D O U R B O R D E R S
Overview of Section 951A• Tested Loss: The term “tested loss” means, with respect to any controlled
foreign corporation for any taxable year of such controlled foreign corporation, the excess (if any) of the deductions associated with Tested Income, over Tested Income.
• Coordination With Subpart F To Deny Double Benefit Of Losses: Section 952(c)(1)(A) shall be applied by increasing the earnings and profits of the controlled foreign corporation by the tested loss of such corporation.
• Shareholder-by-Shareholder planning, revisited: tested loss CFCs can cause issues
- Tested loss CFCs do not have any QBAI, so no deemed tangible income return to reduce GILTI
- Foreign taxes paid by tested loss CFC are not creditable
- Tested loss CFC can reduce foreign tax credits of other CFCs by offsetting that CFC’s tested income
16L O O K I N G B E Y O N D O U R B O R D E R S
Overview of Section 951A• Net Deemed Tangible Income Return: The term “net deemed tangible
income return” means, with respect to any United States shareholder for any taxable year, the excess of
- 10 percent of the aggregate of such shareholder's pro rata share of the qualified business asset investment of each controlled foreign corporation with respect to which such shareholder is a United States shareholder for such taxable year (determined for each taxable year of each such controlled foreign corporation which ends in or with such taxable year of such United States shareholder), over
- the amount of interest expense taken into account under subsection (c)(2)(A)(ii) in determining the shareholder's net CFC tested income for the taxable year to the extent the interest income attributable to such expense is not taken into account in determining such shareholder's net CFC tested income.
◦ In other words, this is interest expense paid by CFC to a CFC outside of US Shareholder’s ownership chain
17L O O K I N G B E Y O N D O U R B O R D E R S
Overview of Section 951A• Qualified Business Asset Investment: The term “qualified business asset
investment” means, with respect to any controlled foreign corporation for any taxable year, the average of such corporation's aggregate adjusted bases as of the close of each quarter of such taxable year in specified tangible property
- used in a trade or business of the corporation, and
- of a type with respect to which a deduction is allowable under Section 167
• Specified Tangible Property: the term “specified tangible property” means any tangible property used in the production of tested income; however:
- In the case of property used both in the production of tested income and income which is not tested income, such property shall be treated as specified tangible property in the same proportion that the gross tested income produced with respect to such property bears to the total gross income produced with respect to such property.
- Tested loss CFCs likely won’t have QBAI on which to calculate 10% return
18L O O K I N G B E Y O N D O U R B O R D E R S
Overview of Section 951A• More on QBAI:
- A CFC that holds an interest in a partnership will use its distributive share of the partnership’s aggregate adjusted basis in tangible property held by the partnership for purposes of calculating QBAI
19L O O K I N G B E Y O N D O U R B O R D E R S
Overview of Section 951A• Calculating GILTI:
GILTI: Net CFC Tested income - Net Deemed Tangible Income Return
CFC 1 CFC 2
Net CFC Tested Income: tested income - tested loss
Gross income $500,000 $250,000
Less: deductions allocable to gross income ($100,000) ($300,000)
$400,000 ($50,000)
US SH's pro rata share (ownership): 100% 100%
$400,000 ($50,000)
NTI: $350,000
Net Deemed Tangible Income Return: QBAI*.1
Qualified Business Asset Investment: specified tangible property $800,000 $300,000
Ownership percent 100% 100%
$800,000 $300,000
Applicable percent 10% 10%
$80,000 $30,000
Interest expense ($10,000) ($5,000)
$70,000 N/A
NDTIR: $70,000
GILTI: $280,000
20
C Corporation U.S.
shareholder
Individual U.S. shareholder Individual U.S. shareholder
with section 962(b) election
U.S. Federal Tax Rate 21% up to 37% 21%
Section 250 Deduction 50%
(37.5% after 2025)
None ¯\_(ツ)_/¯
Effective Income Tax Rate 10.5%
(13.125% after 2025)
up to 37% 10.5% or 21%
(13.125% or 21% after 2025)
Indirect FTC 80% allowed 0% allowed 80% allowed
Federal Tax Generally on
Distribution to Individual
23.8% 3.8%
(cf. Treas. Reg. 1.1411-10(g))
23.8% or 40.8%
Combined Federal
Tax Rate
31.8%
(33.8% after 2025)
40.8% 31.8% to 57%
22
Allowed for an individual United States shareholder since 1962
Election made on a year-by-year basis, for all CFCs
Three specified effects of the election:
◦ Federal corporate tax rate on subpart F income and GILTI
◦ Section 960 indirect FTC allowed, as if the subpart F income and GILTI were
received by a domestic corporation
◦ Some CFC distributions are taxable under section 962(d), rather than being tax-
free PTI distributions
23
Legislative history of Revenue Act of 1962:
◦ “The purpose of [section 962] is to avoid what might otherwise be a hardship in taxing a U.S.
individual at high tax brackets with respect to earnings in a foreign corporation which he does not
receive. This provision gives such individuals assurance that their burdens, with respect to these
undistributed foreign earnings, will be no heavier than they would have been had they invested in an
American corporation doing business abroad”
Smith v. Commissioner
◦ Whether section 962(d) taxable distribution is always qualified dividend
◦ Pending since 2015
◦ Can affect whether dividend is U.S. source or foreign source
24
Section 962(a)(1) provides that U.S. income tax on “amounts which are included in his gross income
under section 951(a)” and section 951A shall be “an amount equal to the tax which would be imposed
under section 11 if the amounts were received by a domestic corporation”
Treas. Reg. 1.962-1(b)(1)(i): taxable income subject to corporate tax is subpart F income plus section
78 gross-up, which “shall not be reduced by any deduction of the United States shareholder”
Notice 2018-26, 2018-16 IRB 480
◦ “Treasury Department and the IRS intend to modify §1.962-1(b)(1)(i) to provide that, in computing the
amount of tax due as a result of a section 962 election, the section 965(c) deduction may be taken into account.
Specifically, the regulations will provide that ‘taxable income’ as used in section 11 shall be reduced by the
section 965(c) deduction. These regulations will not apply to any other deductions, and therefore existing
§1.962-1(b)(1)(i) will continue to provide that ‘taxable income’ as used in section 11 shall not be reduced by
any other deductions.”
25
For a partnership that is a United States shareholder of a CFC, the partnership has
subpart F income and GILTI that is allocated to the individual partner.
If the individual is also a United States shareholder of the CFC, the individual can
make a section 962(b) election for the CFC.
But if the individual is not a United States shareholder of the CFC, the individual
cannot make a section 962(b) election that applies to the CFC. Notice 2018-26.
26
Net investment income includes interest, dividends, etc.
Net investment income does not include subpart F income.
◦ Section 1411 tax imposed instead on PTI distribution from the CFC.
Treasury Regulation 1.1411-10(g) election to impose section 1411 tax on the initial
subpart F income instead of the later PTI distribution.
◦ Irrevocable election, on a CFC-by-CFC basis, applies to all later years.
◦ Double tax interaction with section 962(b) election.
◦ Not currently applicable to GILTI.
27
Not affected by 20% indirect FTC reduction in section 960(d)
For U.S. tax purposes, the foreign withholding tax is imposed on either a tax-free
PTI distribution or a taxable dividend (for individual with section 962(b) election)
Categorization of the direct FTC as either passive, general, GILTI, or foreign branch
category
28
Base difference item (section 904(d)(2)(H)(i) and Treas. Reg. 1.904-6(a)(1)(iv))
◦ Before TCJA, base difference items are in the general category
◦ After TCJA, base difference items are in the new foreign branch category (typo?)
◦ CCA 200223022 (July 7, 2002), FSA 200210026 (March 8, 2002)
◦ FTC can offset U.S. tax on income in same category, with 1 year carryback and 10 year carryforward
Timing difference item (or otherwise relates back to the GILTI inclusion)
◦ GILTI category (recommendation of NYSBA Report No. 1394 on GILTI (May 4, 2018))
◦ No carryback or carryforward under section 904(c) – direct FTCs are useful only if the taxpayer
happens to have new GILTI in the PTI distribution year
◦ For subpart F income-related direct FTCs, section 960(c) increases the section 904 limitation in the
PTI distribution year to allow the direct FTCs as refundable credits. Not applicable to GILTI.
29
Contribute CFC stock to C corporation
Increase QBAI
Combine CFCs
Avoid CFC status and/or United States shareholder status
Convert GILTI to subpart F income
30
Contribute CFC stock to domestic C corporation
◦ New Section 250 deduction allows deduction of 50% of GILTI income of CFC
◦ This deduction will be reduced to 37.5% after December 31, 2025
Simplified example:
◦ CFC has $100,000 GILTI income, 0% foreign tax
◦ $100,000 is included in U.S. non-C corporation shareholder income under 951A, taxed at individual
rates under CFC regime, resulting in tax of $37,000 (assuming shareholder is in 37% bracket)
◦ If CFC is owned by U.S. C corporation, GILTI is included under 951A at corporate rates of 21%, but
50% is deducted. Total tax is $10,500 resulting in effective tax rate of 10.5% (before dividend to
shareholder). This achieves some deferral of tax, similar to goals under Subpart F regime with
respect to non-Subpart F income.
Foreign tax rate 0% 5% 10% 13.125% 20%
Residual U.S. tax rate 10.5% 6.5% 2.5% 0% 0%
Total Global tax burden 10.5% 11.5% 12.5% 13.125% 20%
31
◦ Section 338(g) election: Applicable upon acquisition of stock in CFC.
Section 338(g) election treats stock purchase as an asset purchase, resulting in
increased basis in assets of CFC. This increases the Net Deemed Tangible Income
Return, and reduces tested income due to depreciation/amortization of the CFC’s
assets at the higher beginning basis.
◦ Purchase property that has been previously leased by CFC
◦ Combine loss CFC that holds QBAI with a profitable CFC
Merger
Check the box if parent/subsidiary
32
CFC A paid $100 foreign income tax and has $1,000 tested income and section 78 gross-up,
CFC B has $400 tested loss
◦ Shareholder has net $600 of GILTI.
◦ Shareholder’s indirect FTC is first multiplied by 80%, to reduce $100 to $80
◦ Then multiplied by the section 960(d)(2) “inclusion percentage” which in this case is $600/$1,000
or 60%, to reduce $80 to $48.
◦ U.S. tax reduced from $126 to $78.
CFC AB paid $100 foreign income tax and has $600 tested income and section 78 gross-up
◦ Shareholder has $600 of GILTI.
◦ Shareholder’s indirect FTC is multiplied by 80%, to reduce $100 to $80.
◦ U.S. tax reduced from $126 to $46.
33
CFC is a foreign corporation owned more than 50% by vote or value by United
States shareholder(s)
United States shareholder is a U.S. person who owns 10% or more by vote or value
of a foreign corporation
◦ In 2017 and earlier, U.S. shareholder was 10% or more by vote only
Constructive ownership rules that use modified section 318(a) attribution, including
downward attribution
◦ Downward attribution previously not allowed, in 2016 and earlier, for attribution
from a non-U.S. person to a U.S. person
◦ Intended scope from legislative history, including The Colloquy
34
Section 957(c) U.S. person
exception for some residents of
Puerto Rico and other
possessions, with respect to
certain corporations organized
in Puerto Rico or the other
possessions
Ned
Jon
son
Sansa
daughter
Puerto Rico
corporation
50% 50%
35
foreign corporation
U.S. corporation A
40%
foreign parent
corporation
100%
60%
foreign corporation
U.S. corporation A
40%
60%U.S. corporation B
100%
foreign parent
corporation
36
foreign corporation
40%
60%
1%
U.S. person
foreign person
foreign corporation
40%60%
U.S. person
foreign person
U.S. partnership foreign partnership
1%
other partner
1%
U.S. corporation
100%
37
No section 250 deduction
High taxed exclusion, if foreign tax is >18.9%
◦ For taxpayers who cannot use indirect FTC, such as REITs and individuals who
cannot or do not make section 962(b) election
Indirect FTC allowed at 100% instead of 80%
Subpart F income and FTCs are passive category or general category, carried back
1 year and carried forward 10 years
Other situations where subpart F income can be preferable
38
Foreign personal holding company income
◦ Move employees of active rental business to separate regarded entity
Foreign base company sales income and services income
◦ Avoid same country exceptions
Section 953 insurance income
North Korea, Iran, Sudan, Syria, etc.
39