Mastercard Requests Guidance on Gross-Up for GILTI Purposes

July 26, 2018

The Honorable Steven Mnuchin
Secretary of the Treasury
Department of the Treasury
1500 Pennsylvania Avenue N.W.
Washington, DC 20220

The Honorable David J. Kautter
Assistant Secretary (Tax Policy) and Acting Commissioner (Internal Revenue Service)
Department of the Treasury
1500 Pennsylvania Avenue N.W.
Washington, DC 20220

Re: Recommendations Relating to the Global Intangible Low-Taxed Income ("GILTI") Regime

Dear Sirs:

Mastercard Incorporated Is a U.S. headquartered company. Through our global payments processing network, we facilitate the switching (authorization, clearing and settlement) of payment transactions and deliver related products and services, connecting consumers, financial institutions, merchants, governments and businesses in more than 210 countries and territories. We have significant global operations and we believe that the Impact of the 2017 tax reform legislation ("the Act") will contribute to our continued success.

Section 951A created GILTI, a new category of income which requires immediate inclusion of certain amounts earned by controlled foreign corporations ("CFCs") In the U.S. shareholder's taxable income.¹ Generally, GILTI is the aggregate income of a U.S. shareholder's CFCs, reduced for certain adjustments such as U.S. Effectively Connected Income ("ECI"), subpart F Income, and 10% of the CFCs' qualified business asset investment ("QBAI"), among others.

Under Sections 250(a)(1)(B) and 960(d), U.S. shareholders receive a 50% deduction on their gross GILTI inclusion and are permitted to claim foreign tax credits to reduce any residual U.S. tax on GILTI. However, under Section 960(d)(1), only 80% of the otherwise allowable deemed paid foreign tax credit can be claimed, while the Section 78 gross-up required to be included in gross Income is not subject to the 20% haircut. In addition, Section 904(d)(1)(A) requires GILTI to be treated as a separate basket for foreign tax credit purposes. Under Section 904(c) as amended by the Act, excess foreign tax credits in the GILTI basket cannot be carried back or carried forward. Consequently, credits that the taxpayer cannot utilize in the year of a GILTI inclusion are lost, which may often result in double tax on the income.

The recommendations that follow address two issues relating to the GILTI regime. First, we make certain recommendations with respect to expense allocations to the GILTI basket. Second, we recommend clarity with regard to the proper basket within which the Section 78 gross-up related to the GILTI inclusion should fall.

Expense allocations result in residual U.S. tax where the non-U.S. effective tax rate on GILTI inclusions is higher than 13.125%

In the absence of expense allocations, gross GILTI income as reduced by the 50% deduction provided for under Section 250(a)(1)(B) results in an effective U.S. tax rate of 10.5%. In accordance with legislative intent (further discussed below), there should be no residual U.S. federal income tax on a GILTI inclusion to the extent the underlying income was taxed, on an aggregate basis, at a rate of at least 13.125%. However, the allocation of expenses to the Section 904(d)(1)(A) GILTI separate limitation basket produces a foreign tax credit limitation which, under the Act, results in residual U.S. tax due to the creation of excess foreign tax credits which taxpayers are not permitted to either carry forward or backwards due to the amendment of Section 904(c) by the Act. This result is inconsistent with Congressional intent, as expressed in the conference report accompanying H.R. 1 (the "Conference Report").

The Conference Report states the following:

The Conference Report also states in footnote 1526:

Therefore, It seems clear that Congress did not intend for there to be any residual U.S. federal income tax on an inclusion of GILTI as long as the foreign effective tax rate on such Income was at least 13.125%.

The following example illustrates how expense allocations would lead to residual U.S. tax on GILTI, despite having a high foreign tax rate (this example assumes no QBAI, subpart F income or ECI):

Two Scenarios Depicting Potential Residual U.S. Tax on GILTI Inclusion

	GILTI Without Expense Allocation	GILTI With Expense Allocation
Income from CFCs	1,000	1,000
Foreign tax rate	25%	25%
Related foreign taxes	250	250
After tax income	750	750
USCo GILTI	750	750
Section 78 Gross-up	250	250
Grossed up GILTI	1,000	1,000
50% deduction	500	500
Taxable Income	500	500
Interest Allocated	—	100
Foreign Source Income	500	400
US Tax @ 21%	105	105
Creditable Foreign Taxes (80% limitation)	200	200
Foreign Tax Credit Limit	105	84
Foreign Tax Credit	105	84
U.S. Tax on GILTI	—	21

In Scenario I above, a taxpayer has $750 of a GILTI inclusion and $250 of related foreign taxes due to a 25% foreign tax rate. The subsequent gross-up under Section 78 is $250, resulting in a grossed up GILTI inclusion of $1,000. After applying the 50% deduction permitted under Section 250(a)(1)(B) to the grossed up GILTI inclusion, the residual U.S. tax before the application of foreign tax credits at the 21% U.S. rate is $105. After applying the Section 960(d)(1) 80% limitation to the $250 of foreign taxes, the U.S. taxpayer is left with a $200 deemed paid foreign tax credit. The $500 of foreign source income in the GILTI basket results in a foreign tax credit limitation of $105, thus eliminating any residual U.S. tax on the GILTI inclusion. This scenario reflects the intent of congress under the Act — that there would be no residual U.S. tax on earnings taxed at a rate equal to or greater than 13.125% outside the U.S.

Scenario II illustrates a common result of the GILTI provisions in the absence of guidance on allocation of expenses. In this Scenario, the taxpayer allocates $100 of interest expense to the GILTI basket, thereby reducing the GILTI basket income from $500 to $400. The foreign tax credit limitation is reduced to $84. As a result of expense allocations the foreign tax credit limitation is reduced and the taxpayer will Incur residual U.S. tax on the GILTI inclusion of $21. Scenario II is not an anomaly. In cases where the foreign tax rate equals or exceeds 13.125%, If there are any expenses allocated to the taxpayer's foreign source income, the taxpayer will incur residual U.S. federal income tax, despite the fact that Congress did not wish taxpayers to suffer double income tax in this situation.

As mentioned above, the legislative intent is clear that no residual tax should apply if the taxpayer's foreign tax rate is equal to or greater than 13.125%. Yet, as the above scenarios demonstrate, even where a taxpayer has an effective tax rate outside the U.S. of 25%, the taxpayer incurs residual U.S. tax liability under the GILTI provisions that foreign tax credits do not offset as a result of expense allocations. Therefore, Mastercard respectfully requests the Department of Treasury and the IRS to use their authority to issue guidance which would alleviate the unintended consequences that result from allocating expenses to the GILTI basket.

The Section 78 gross-up amount should be part of the "GILTI basket”

The Department of Treasury and IRS should clarify that the Section 78 gross-up attributable to taxes deemed paid with respect to GILTI inclusions under Section 951A belongs in the same GILTI basket under Section 904(d)(1)(A) as the relevant income and taxes associated with the GILTI inclusion. Reaching any other conclusion would be illogical and inconsistent with the intent of the Section 78 gross-up rules and the Act.

Section 78 treats the gross-up amount as a dividend for all purposes of the code except for Sections 245 and 245A. The Act did not, however, amend Section 904(d)(3)(G). Section 904(d)(3)(G) specifies that any amount included in gross income under Section 78 to the extent attributable to gross income under Section 951(a)(1)(A) shall not be treated as a dividend, but instead as gross income under Section 951(a)(1)(A). The absence of any reference to GILTI in Section 904(d)(3)(G) appears to treat amounts included in income under Section 78 that are associated with taxes paid on GILTI inclusions differently from the income inclusion under Section 951A for purposes of determining the GILTI basket under Section 904(d)(1)(A). Thus, the Section 78 gross-up associated with taxes paid on GILTI inclusions appears to not be included as gross income in the GILTI basket.

Treas. Reg. Sec. 1.904-6(b)(3) treats the Section 78 gross-up as income in the separate category to which the deemed paid taxes were allocable under Section 960(a). Section 960(a) refers to items of income included under Section 951(a), while Section 960(d) is the provision that discusses the deemed paid credit resulting from GILTI inclusions under Section 951A. It would not be logical for the Section 78 gross-up resulting from GILTI inclusions to be anywhere other than in the GILTI basket, when the Section 78 gross-up resulting from subpart F income is included in the same basket as the underlying Subpart F income.

Treasury and the IRS have the authority to propose regulations that specifically provide for the Section 78 gross-up associated with GILTI inclusions to be considered "GILTI basket" income.⁴ Such regulations could essentially mirror the language of Section 904(d)(3)(G), but apply to inclusions under Section 951A. Mastercard respectfully requests the Department of Treasury and the IRS to confirm as soon as practicable the treatment of the Section 78 gross-up with regard to the GILTI inclusion.

Thank you in advance for your consideration of our comments and recommendations. If it would be helpful, we would be pleased to discuss these matters with you further in person or by phone.

Sincerely,

Timothy G. Berger
Executive Vice President, Global Tax
Mastercard
Purchase, NY

cc
The Honorable William M. Paul
Acting Chief Counsel and Deputy Chief Counsel (Technical)
Internal Revenue Service
1111 Constitution Avenue N.W.
Washington, DC 20224

Lafayette G. "Chip" Harter III
Deputy Assistant Secretary (International Tax Affairs)
Department of the Treasury
1500 Pennsylvania Avenue N.W.
Washington, DC 20220

Douglas Poms
International Tax Council
Department of the Treasury
1500 Pennsylvania Avenue N.W.
Washington, DC 20220

Marjorie Rollinson
Associate Chief Counsel (International)
Internal Revenue Service
1111 Constitution Avenue N.W.
Washington, DC 20224

Douglas Bell
Deputy Assistant Secretary
Department of the Treasury
1500 Pennsylvania Avenue N.W.
Washington, DC 20220