On September 13, 2018, Treasury and the IRS released proposed regulations under section 951A. The proposed regulations provide some important guidance with regard to various mechanical and computational aspects of the Global Intangible Low-Taxed Income (“GILTI”) regime, as well as rules on reporting requirements. The proposed regulations also include revisions to Treas. Reg. § 1.951-1 to address certain “avoidance structures” under the pro rata share rules, to coordinate certain aspects of the subpart F and GILTI regimes, and also to reflect statutory changes to the definition of US shareholder and the elimination of the so-called 30-day requirement. The proposed regulations do not contain any rules on the foreign tax credit (including rules on expense allocation to the section 904(d)(1)(A) GILTI basket) as it relates to GILTI. The preamble states that such rules will be included in separate notices of proposed rulemaking. The preamble does provide that “it is anticipated” that the section 78 gross-up related to the section 951A inclusion will be assigned to the GILTI basket.
The proposed regulations provide detailed rules on many of the computational aspects of the GILTI regime including:
- the calculation of tested income and tested loss;
- the calculation of the amount of qualified business asset investment (or “QBAI”);
- rules on tested interest expense and tested interest income;
- the effect of the GILTI inclusion amount on earnings and profits and the basis in the stock of the relevant foreign corporations;
- basis adjustments as a result of using a tested loss; and
- rules for determining the GILTI inclusion amount for domestic partnerships and their partners.
The proposed regulations include anti-abuse rules to disregard basis in certain circumstances if the basis either (i) could affect the amount of QBAI or (ii) would result in a deduction or loss (e.g., amortization deductions with respect to intangibles) that, absent the application of the anti-abuse rule, would be allocated and apportioned to gross tested income of the CFC.
Citing to section 7805(b)(2), the preamble states that the proposed regulations under section 951A and 1502 will apply to taxable years of foreign corporations beginning after December 31, 2017, and to taxable years of US shareholders in which the taxable years of such foreign corporations end. The proposed regulations under Treas. Reg. § 1.951-1 addressing the pro rata share rules will apply to taxable years of US shareholders ending on or after the date the proposed regulations are filed with the Federal Register.
For a more detailed discussion of these proposed regulations, please see the Baker McKenzie Client Alert, “Treasury and IRS Release Proposed GILTI Guidance,” distributed on October 3, 2018 and also available under Insights at www.bakermckenzie.com. Among other observations, the Client Alert noted that the validity of the anti-abuse rule in the proposed regulations that targets basis step-up transactions with respect to intangibles that occur between January 1, 2018 and the date on which the acquiring CFC becomes subject to GILTI is highly questionable. We expect taxpayers will challenge this rule on validity grounds. Please refer to the client alert for additional observations with respect to other aspects of the proposed regulations. Any written or electronic comments on the proposed regulations and requests for a public hearing must be received by Treasury within 45 days of publication of the proposed regulations in the Federal Register (which occurred on October 10, 2018).