ABA Tax Section Looks to Refine GILTI Regs

ABA Tax Section Looks to Refine GILTI Regs

American Bar Association Section of Taxation

The American Bar Association Section of Taxation has submitted a report on proposed regulations (<a href="/lr/resolve//28f7p">REG-104390-18</a>) on global intangible low-taxed income, recommending that portions of the regs be reconsidered and suggesting clarification of other provisions. Among the topics of concern are the pro rata share rules, the general rules for determining GILTI, the interaction of the GILTI rules with section 952, the qualified business asset investment (QBAI) calculations, and the consolidated return rules. Members suggest that the pro rata share rules be clarified to identify specifically which provisions of the proposed regs represent the “time value of money principles” referenced in proposed reg. section 1.951-1(e)(4)(iii) and how those principles are to be applied. Members also recommend clarification of the antiabuse rule in proposed reg. section 1.951A-1(e)(6). They suggest that this pro rata share antiabuse rule be limited to the allocation of subpart F income and GILTI among a controlled foreign corporation’s classes of stock regarding those shareholders that actually own, directly or indirectly, shares in the CFC on the last day of the tax year on which such entity is a CFC. Members also address the general rules for determining GILTI. To conform the proposed regs to the statutory language in section 951A(e)(1), they suggest that the term “CFC inclusion date” as currently defined in proposed reg. section 1.951A-1(e)(1) not be defined by reference to the status of the relevant foreign corporation as a CFC but only by reference to the last day of the CFC’s tax year. Turning to the issue of how the GILTI rules interact with section 952, members examine the definition of “gross income taken into account in determining the subpart F income.” They recommend that the term be defined as any category of subpart F income (as determined under section 954(a) or 953, as the case may be), which is determined without regard to the application of section 952(c)(1) but with regard to the application of sections 952(c)(2) and 954(b)(3) in order to avoid potential double taxation. Members further recommend that the final regs should deny a U.S. shareholder the ability to (1) offset tested income with tested loss within the meaning of section 951A(c)(2)(B) and (2) also allow that U.S. shareholder to create or increase a qualified deficit as defined under section 952(c)(2) with the same economic loss. Section members suggest alternatives to some of their recommendations if the final regs adopt different approaches. Regarding QBAI calculations, members recommend that the final regs modify the definition of “qualified business asset investment” to include specified tangible property held by a “tested loss CFC” within the meaning of proposed regs. section 1.951A-2(b)(2). Further, section members recommend that the final regs eliminate the so-called tested loss CFC QBAI exclusion and that the regs provide additional examples for computing QBAI for dual use property in some situations. Members address the use of the alternative depreciation system within the meaning of section 168(g), recommending that taxpayers be permitted to elect to compute tested income or tested loss using the adjusted basis of their specified tangible property determined under the depreciation method used by the CFC. Among the section members’ recommendations for the consolidated return rules is the adoption of a hybrid approach under which: (1) both the GILTI inclusion amount and the section 960(d) foreign tax credit are determined under an aggregate approach to preserve neutrality, and (2) the GILTI inclusion amount and the net basis increase resulting from the section 960(d) foreign tax credit are allocated based on a netting approach. Members also recommend that the final regs provide that the section 245A dividends received deduction be available to a CFC in calculating its subpart F income.

The American Bar Association Section of Taxation has submitted a report on proposed regulations (REG-104390-18) on global intangible low-taxed income, recommending that portions of the regs be reconsidered and suggesting clarification of other provisions.

The American Bar Association Section of Taxation has submitted a report on proposed regulations (REG-104390-18) on global intangible low-taxed income, recommending that portions of the regs be reconsidered and suggesting clarification of other provisions. Among the topics of concern are the pro rata share rules, the general rules for determining GILTI, the interaction of the GILTI rules with section 952, the qualified business asset investment (QBAI) calculations, and the consolidated return rules. Members suggest that the pro rata share rules be clarified to identify specifically which provisions of the proposed regs represent the “time value of money principles” referenced in proposed reg. section 1.951-1(e)(4)(iii) and how those principles are to be applied. Members also recommend clarification of the antiabuse rule in proposed reg. section 1.951A-1(e)(6). They suggest that this pro rata share antiabuse rule be limited to the allocation of subpart F income and GILTI among a controlled foreign corporation’s classes of stock regarding those shareholders that actually own, directly or indirectly, shares in the CFC on the last day of the tax year on which such entity is a CFC. Members also address the general rules for determining GILTI. To conform the proposed regs to the statutory language in section 951A(e)(1), they suggest that the term “CFC inclusion date” as currently defined in proposed reg. section 1.951A-1(e)(1) not be defined by reference to the status of the relevant foreign corporation as a CFC but only by reference to the last day of the CFC’s tax year. Turning to the issue of how the GILTI rules interact with section 952, members examine the definition of “gross income taken into account in determining the subpart F income.” They recommend that the term be defined as any category of subpart F income (as determined under section 954(a) or 953, as the case may be), which is determined without regard to the application of section 952(c)(1) but with regard to the application of sections 952(c)(2) and 954(b)(3) in order to avoid potential double taxation. Members further recommend that the final regs should deny a U.S. shareholder the ability to (1) offset tested income with tested loss within the meaning of section 951A(c)(2)(B) and (2) also allow that U.S. shareholder to create or increase a qualified deficit as defined under section 952(c)(2) with the same economic loss. Section members suggest alternatives to some of their recommendations if the final regs adopt different approaches. Regarding QBAI calculations, members recommend that the final regs modify the definition of “qualified business asset investment” to include specified tangible property held by a “tested loss CFC” within the meaning of proposed regs. section 1.951A-2(b)(2). Further, section members recommend that the final regs eliminate the so-called tested loss CFC QBAI exclusion and that the regs provide additional examples for computing QBAI for dual use property in some situations. Members address the use of the alternative depreciation system within the meaning of section 168(g), recommending that taxpayers be permitted to elect to compute tested income or tested loss using the adjusted basis of their specified tangible property determined under the depreciation method used by the CFC. Among the section members’ recommendations for the consolidated return rules is the adoption of a hybrid approach under which: (1) both the GILTI inclusion amount and the section 960(d) foreign tax credit are determined under an aggregate approach to preserve neutrality, and (2) the GILTI inclusion amount and the net basis increase resulting from the section 960(d) foreign tax credit are allocated based on a netting approach. Members also recommend that the final regs provide that the section 245A dividends received deduction be available to a CFC in calculating its subpart F income.

Sec. 951A Global intangible low-taxed income included in gross income of United States shareholders

Sec. 951 Amounts included in gross income of United States shareholders

Sec. 1502 Regulations

Sec. 6038 Information reporting with respect to certain foreign corporations and partnerships

United States

Consolidated returns

Controlled foreign corporations (CFCs)

Global intangible low-taxed income (GILTI)

Information reporting

Intangible assets

International taxation

Partnerships

Tax Cuts and Jobs Act

Eric Solomon

DOC 2018-46448

2018 WTD 229-21

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Eric Solomon is a partner in the tax practice at Steptoe &amp; Johnson LLP.
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ABA Tax Section Looks to Refine GILTI Regs