Firm Seeks Retroactive Application of GILTI High-Tax Exclusion

August 6, 2019

CC:PA:LPD:PR (REG-101828-19)
Courier's Desk
Internal Revenue Service
1111 Constitution Avenue, NW
Washington, DC 20024

Re:Comments on Proposed Regulations Regarding the GILTI High Tax Exclusion (REG-101828-19)

Dear Sir or Madam:

On behalf of Freeport McMoRan Inc. (“FCX”), Miller & Chevalier respectfully submits this letter in response to the Notice of Proposed Rulemaking under sections 958 and 951A,¹ published in the Federal Register on June 21, 2019 (the “Proposed Regulations”).² FCX is a leading international mining company with headquarters in Phoenix, Arizona. FCX operates a portfolio of mining assets that includes the Grasberg minerals district in Indonesia, one of the world's largest copper and gold deposits, and significant mining operations in the Americas, including the Morenci mineral district in the United States and the Cerro Verde operation in Peru.

The Proposed Regulations provide for an elective high tax exclusion from the “global intangible low-taxed income” or “GILTI” regime because the Treasury Department (“Treasury”) and Internal Revenue Service (“IRS”) determined, consistent with Congressional intent, that GILTI should not include certain high-taxed income. As the preamble to the Proposed Regulations observes, the legislative history of the GILTI statute evidences an intent to exclude high-taxed income from GILTI because such income does not raise concerns about erosion of the U.S. tax base.³ We commend Treasury and IRS for providing for this GILTI high tax exclusion (as defined below) in the Proposed Regulations, and we respectfully request that final regulations provide that taxpayers may elect to apply the GILTI high tax exclusion retroactively to tax years beginning after December 31, 2017.

Section 951A requires a United States shareholder (“U.S. Shareholder”) of a controlled foreign corporation (“CFC”) to include its GILTI in income. In determining its GILTI, a U.S. Shareholder must first determine the “tested income” of its CFCs. For any CFC, tested income means the excess (if any) of gross income over properly allocable deductions.⁴ Tested income does not include certain types of income, including gross income taken into account in determining subpart F income, gross income excluded from foreign base company income (“FBCI”) or insurance income by reason of the subpart F high tax exclusion of section 954(b)(4), and foreign oil and gas extraction income.⁵

The statutory interaction between the GILTI rules and the subpart F high tax exclusion that the GILTI rules reference is unclear. The Proposed Regulations resolve this ambiguity by providing for an election pursuant to which tested income may be excluded from GILTI if it is subject to high levels of foreign tax (the “GILTI high tax exclusion”). In contrast, final regulations published on June 21, 2019 interpret the reference to the subpart F high tax exclusion in section 951A to be limited to items of income that are excluded from FBCI or insurance income “solely” by reason of an election made under the subpart F high-tax exclusion of section 954(b)(4).⁶ The Proposed Regulations would permit taxpayers to elect to apply the GILTI high tax exclusion to high-taxed income regardless of whether that income would otherwise be FBCI or insurance income. High-taxed income is defined for this purpose as gross income subject to foreign income tax at an effective rate that is greater than 90 percent of the U.S. corporate income tax rate, i.e., 18.9 percent based on the current rate of 21 percent.⁷

We applaud the GILTI high tax exclusion in the Proposed Regulations because it is consistent with the purpose of section 951A and sound tax policy. As noted in the preamble to the Proposed Regulations, the legislative history of section 951A evidences an intent to exclude from GILTI items of income that are “generally not the source of base erosion concerns,” such as “foreign oil and gas extraction income (which is generally immobile) and income subject to high levels of foreign tax.”⁸ Income from foreign mining operations is not a source of base erosion concerns because it is subject to high levels of foreign tax in local jurisdictions and it is immobile, in the same way as foreign oil and gas extraction income. The use of the term “low-taxed income” throughout section 951A provides further support for this proposition. In addition, the GILTI high tax exclusion reflects sound tax policy because it allows a U.S. Shareholder “to ensure that its high-taxed non-subpart F income is eligible for the same treatment as its high-taxed FBCI and insurance income.”⁹ In this way, the Proposed Regulations recognize that active business income earned by CFCs should not be treated less favorably than passive or mobile income that would otherwise be FBCI or insurance income. The GILTI high tax exclusion eliminates any need for taxpayers that benefit from it to engage in unnecessary restructurings intended “to convert gross tested income into FBCI for the sole purpose” of qualifying for the GILTI high-tax exclusion.¹⁰ Finally, the GILTI high tax exclusion provides relief for taxpayers that would otherwise be subject to U.S. residual tax on high-taxed GILTI, for example due to domestic losses.

The Proposed Regulations state that the GILTI high-tax exclusion is available for taxable years beginning after the Proposed Regulations are finalized.¹¹ We understand that Treasury and IRS are considering alternatives to the manner and terms of the election to apply the GILTI high-tax exclusion¹² and that, pending such consideration, Treasury and IRS may have been reluctant to permit taxpayers to rely on the proposed exclusion on a retroactive basis. Final regulations presumably will include a final GILTI high-tax exclusion that reflects further consideration through the notice and comment process. We request that in those final regulations, Treasury and IRS make the GILTI high-tax exclusion available with respect to the first taxable year of a foreign corporation beginning after December 31, 2017 and to taxable years of U.S. Shareholders in which or with which such taxable years of foreign corporations end. Allowing taxpayers to make the election to apply the GILTI high-tax exclusion retroactively, on an amended return, would better effectuate the purpose of the GILTI high-tax exclusion and would avoid inappropriate and disparate results that could otherwise ensue if the election were only available in future years. If the election is not made available retroactively, the result will be that high-taxed active business income earned by CFCs in 2018 and 2019 will be subject to less favorable treatment than high-taxed FBCI and insurance income in tax years 2018 and 2019. This disparity is precisely what Treasury and IRS were seeking to avoid by expanding the GILTI high tax exclusion in the Proposed Regulations. Given that Treasury and IRS have determined that the GILTI high tax exclusion in the Proposed Regulations best effectuates the purpose and policies of the GILTI regime, the election should likewise be made available in the first taxable year in which GILTI is applicable.

For the reasons discussed above, we request that final regulations provide that taxpayers may elect to apply this GILTI high tax exclusion retroactively to tax years beginning after December 31, 2017. Treasury and IRS have ample authority to permit taxpayers to make the election to apply the GILTI high tax exclusion retroactively. In particular, section 7805(b)(7) provides that Treasury and IRS may provide for any taxpayer to elect to apply any regulation retroactively. Further, since the GILTI high tax exclusion is elective, taxpayers who do not wish to make the election will not be disadvantaged by retroactivity.

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We appreciate your consideration of our request and would be happy to answer any questions that you may have.

Respectfully submitted,

Layla J. Asali
Miller & Chevalier
Washington, D.C.