Corning Seeks Changes to GILTI High-Tax Exclusion Regs

August 1, 2019

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

The Honorable Charles Retting
Commissioner
Internal Revenue Service
1111 Constitution Avenue, NW
Washington, DC 20224

Dear Messrs. Mnuchin and Retting:

Corning Incorporated (“Corning”) is pleased to submit comments with respect to REG-101828-19, proposed regulations (“Proposed Regulations”) related to the proposed elective high tax exclusion for the Section 951A Global Intangible Low-Taxed Income (“GILTI”) provisions under Section 954(b)(4).¹

Corning is one of the world's leading innovators in material science with over 165-year history of developing life-changing innovations, such as optical fiber, precision glass for advanced displays, wireless technologies, and clean-air technology for automobiles and trucks. Corning is headquartered in the United States and employs approximately 50,000 employees world-wide.

Corning respectfully makes the following comments regarding the Proposed Regulations:

• Application of the high tax exclusion on a Qualified Business Unit (“QBU”) by QBU basis

• Election should be available annually

• Treatment of expenses associated with high taxed excluded GILTI income

• Effective date

1. Application of the Exclusion on a QBU by QBU basis

Issue and recommendation

The Proposed Regulations provide that the proposed high tax exclusion election would apply on a QBU by QBU basis.

Corning respectfully requests that the Treasury Department and the IRS reduce complexity under the QBU by QBU approach by providing an election under which all of a CFC's QBUs located within a single foreign country or possession that are taxed at the same tax rate and have the same functional currency may be combined for purposes of performing the effective rate test in proposed §1.951A-2(c)(6)(iii).

Analysis

Corning appreciates Treasury and IRS providing an elective GILTI high tax exclusion.

The proposed regulations apply the GILTI high tax exclusion on a QBU by QBU rather than a CFC by CFC basis explaining that, while the QBU by QBU approach “may be more complex and administratively burdensome in certain circumstances, it more accurately pinpoints income subject to a high rate of foreign tax and therefore continues to subject to tax the low-taxed base erosion-type income that the legislative history describes section 951A as intending to tax.”

Corning agrees that the QBU by QBU approach provides more accurate testing of income statutorily subject to the GILTI provisions. Corning also agrees that the QBU by QBU approach potentially adds substantial complexity and administrative burden for both taxpayers (in regard to compliance) and the IRS (upon audit) when compared to a CFC by CFC approach.

Corning requests that, to reduce some of the complexity and administrative burden, the QBU by QBU approach be simplified by allowing taxpayers to elect, for purposes of the GILTI high tax exclusion, to combine “qualifying QBUs” within the same CFC. The term “qualifying QBUs” would mean QBUs that (i) are located within the same CFC, (ii) are located within the same country, (iii) are taxed at the same local tax rate, and (iv) have the same functional currency. Such combination of qualifying QBUs would be a “combined QBU group.”

The following are two examples:

Thus, the high-tax and low-tax earnings could be separated to ensure that low-taxed earnings are subject to tax under Section 951A, while simplifying the complexity and administrative burdens for taxpayers and the IRS by combining similar qualifying QBUs.

Corning respectfully requests that the Treasury Department and the IRS provide taxpayers an election to combine qualifying QBUs into combined QBU groups, as such approach could reduce complexity and administrative burden for both taxpayers and the IRS while still meeting the objective outlined in the proposed regulation to separate high-taxed income from low-taxed income when performing the effective rate test in proposed §1.951A-2(c)(6)(iii).

2. Election should be available annually

Issue and Recommendation

The GILTI high tax exclusion provides an election that can be cancelled by the taxpayer, but once cancelled is binding for five years.

As the GILTI high tax exclusion is based upon authority under section 954(b)(4), and the regulations under section 954(b)(4) provide for an annual election for high taxed Subpart F income, Corning respectfully requests that Treasury and IRS replace the five-year election under the Proposed Regulations with an annual election. This would align the duration of the GILTI high tax election with the annual section 954(b)(4) Subpart F high tax election.

Analysis

The preamble to the Proposed Regulation is clear that Treasury relies upon section 954(b)(4) as the authority for the GILTI high tax election. Section 954(b)(4) and the regulations thereunder (Reg. §1.954-1(d)) provide that the election for the Subpart F high tax exception is made annually.

However, the Proposed Regulations, rather than providing an annual election for the GILTI high tax exclusion, provide that the GILTI high tax exclusion election may be made or revoked at any time, but once revoked, the U.S. shareholder cannot make the election again for five years after the revocation, and then if subsequently made, the election cannot be revoked again within five years of the subsequent election.

As the GILTI high tax exclusion is based upon authority under section 954(b)(4), Corning respectfully requests that Treasury and IRS provide that the GILTI high tax exclusion election is available annually. This would align the annual duration of the GILTI high tax election with the annual duration in the Subpart F high tax exclusion election, which is also based upon section 954(b)(4).

3. Treatment of expenses associated with high taxed excluded GILTI income

Issue and Recommendation

Expenses are generally allocated or apportioned to certain categories of income under section 861 for purposes of the determination of foreign tax credits under section 904. A question arises under section 904(b)(4) on the treatment of expenses properly attributable to high tax GILTI income that would be excluded from income under the election.

Corning respectfully requests that Treasury and IRS confirm that the expenses properly attributable to excluded high tax GILTI income should not be taken into account for purposes of section 904 per application of section 904(b)(4)(B). This follows and aligns with the treatment of expenses properly attributable to dividends under section 245A and the approach outlined by Treasury and the IRS in the proposed foreign tax credit regs (REG-105600-18).

Analysis

Overview

Corning believes that expenses properly attributable to any excluded high tax GILTI income should not be taken into account for purposes of section 904. This approach is similar to and follows the treatment of expenses properly attributable to dividends under section 245A and the approach outlined by Treasury and the IRS in the proposed foreign tax credit regs. Corning believes that taking into account for purposes of section 904 expenses that are properly attributable to any excluded high tax GILTI income is punitive and not in line with the statute or long-standing IRS policy.

Corning's position is based upon (i) the statutory language in section 904(b)(4), (ii) the proposed foreign tax credit regulations (REG-105600-18) which discuss the application and operation of section 904(b)(4), and (iii) the policy behind the allocation and apportionment of expenses as outlined in §1.861-8(a)(2). Corning's analysis follows.

Statutory language

Section 904(b)(4)(B) provides that, for purposes of determining a taxpayer's foreign tax credits under Section 904(a), the taxable income of a shareholder of a specified 10-percent owned foreign corporation, with respect to foreign source income, “shall be determined without regard to any deductions properly allocable or apportioned to (i) income (other than amounts includable under section 951(a)(1) or 951A(a)) with respect to stock of such specified 10-percent owned foreign corporation, or (ii) such stock to the extent income with respect to such stock is other than amounts includible under section 951(a)(1) or 951A(a).”

Section 904(b)(4)(B) is applicable in this case because if a taxpayer elects to exclude high tax GILTI income, any income that is excluded from section 951A(a) is not included in income under section 951A(a) and thus falls under section 904(b)(4)(B). Per section 904(b)(4)(B), expenses properly attributable to the excluded high tax GILTI income should not be taken into account for purposes of section 904(a) with respect to foreign source income as such income is not an amount “includable under section 951(a)(1) or 951A(a).”

Foreign tax credit regulations

Treasury and the IRS have recently interpreted Section 904(b)(4) in the proposed foreign tax credit regs³ to provide that income “other than amounts includable under section 951(a)(1) or 951A(a)” refers to income for which a section 245A deduction is allowed. Section 904(b)(4) should also apply to any amount excluded under the GILTI high tax exclusion, as, per the statute, such income is not includable in income under section 951(a)(1) or 951A(a). (NOTE: The election to exclude income under the GILTI high tax exclusion was not yet proposed at the time the proposed foreign tax credit regs were drafted and thus wasn't discussed in such proposed reg.)

The preamble to the proposed foreign tax credit regs discusses how section 904(b)(4)(B) applies to disregard deductions after such deductions had been allocated and apportioned under section 861. Specifically, these proposed regs provide that “[i]n contrast to section 864(e)(3), which removes the exempt income and assets from the determination before deductions are allocated and apportioned under the rules of §§1.861-8 through 1.861-17, section 904(b)(4) provides that the deductions are disregarded after they have been allocated and apportioned. Disregarding the deductions after they have been allocated and apportioned is consistent with a policy that the deductions are properly allocable and apportioned to income eligible for a section 245A deduction and, therefore, should not be apportioned to income in other separate categories or U.S. source income. By disregarding these deductions, section 904(b)(4) has the effect of computing the foreign tax credit limitation fraction in section 904(a) (but not the pre-credit U.S. tax) as if the deductions had not been allowed.”⁴ See also Prop. Reg. §1.904(b)-3(a).

Thus, with regards to expenses properly attributable to dividends that qualify for the dividends received deduction under section 245A, section 904(b)(4) operates by first determining the amount of expenses properly attributable to excluded dividends described under section 245A, and then second by disregarding such deductions for purposes of section 904(a).

As section 904(b)(4) applies to both section 245A dividends and to any amount excluded under the GILTI high tax exclusion (as neither items are income includable under section 951(a)(1) or 951A(a)), the approach and operation of section 904(b)(4) with regards to expenses properly attributable to section 245A should also apply to disregard deductions properly attributable to excluded high tax GILTI income.

In which case, the deductions properly attributable to the excluded high tax GILTI income should be disregarded for purposes of section 904(a), and such treatment “after they have been allocated and apportioned is consistent with a policy that the deductions are properly allocable and apportioned to income eligible” for an income exclusion “and, therefore, should not be apportioned to income in other separate categories or U.S. source income.”

Policy alignment

This approach is in line with the overall policy behind the allocation and apportionment of expenses under section 861. Treas. Reg. §1.861-8(a)(2) provides a basic principle that “allocations and apportionments are made on the basis of the factual relationship of deductions to gross income.” In other words, the expenses properly attributable to high taxed GILTI income must have a factual relationship with the GILTI high taxed income, which is foreign source, or they would not be properly attributable to such income. Similarly, the expenses properly attributable to domestic source have been determined based upon a factual relationship between such expenses and domestic income.

If Treasury and the IRS determine that expenses properly attributable to excluded high tax GILTI income should be taken into account (that is, not disregarded) for purposes of section 904(a), section 904(b)(4) would require that the expenses properly attributable to such income to be allocated and apportioned to domestic source since such deductions would statutorily not be allowable against other foreign source baskets. However, from a tax policy and a technical perspective,⁵ it does not appear appropriate to exclude the GILTI high tax income, which is foreign source, and then reapportion to domestic source expenses that, under section 861, had been, due to a factual relationship, properly attributed to foreign source high tax GILTI income.

Conclusion

Therefore, based upon the plain language of section 904(b)(4), the preamble of the proposed foreign tax credit rules, and the policy behind the need for a factual relationship between income and allocated and apportioned expenses as outlined in §1.861-8(a)(2), it appears that the expenses properly attributable to high tax GILTI income should not be taken into account for purposes of section 904(a) if the income to which they attach is excluded from income.

Corning respectfully requests clarification of the treatment of any expenses properly attributable to any income excluded under the GILTI high tax exception. And specifically, Corning requests confirmation that the expenses properly attributable to GILTI income excluded under the high tax GILTI exclusion election should not be taken into account for purposes of sections 904 per the rules of section 904(b)(4)(B).

4. Effective date

Issue and Recommendation

The Proposed Regulations provide that the high tax GILTI exclusion election is effective for taxable years of foreign corporations “beginning on or after the date of publication of applicable final regulations in the Federal Register.”

Corning requests that the effective date be changed to be effective for tax years ending on or after publication of such final regulations rather than for tax years beginning on or after.

Analysis

The Proposed Regulations provide an effective date for the election for tax years beginning after the date the final regulations are published in the Federal Register.

However, as (i) the exclusion election relies on statutory authority under section 954(b)(4), (ii) the exclusion of such high taxed GILTI income is referenced indirectly in the Conference Report to the Tax Cuts and Jobs Act (“TCJA”) as Congressional intent, and (iii) there is nothing in the statute (whether section 951A or 954(b)(4)) to either justify a delayed effective date or giving Treasury the discretion to delay the effective date of such election, it appears that such election should be effective in accordance with the enactment of the GILTI provisions. Section 14201(d) of the TCJA provides that the GILTI provisions are effective for “taxable years of foreign corporations beginning after December 31, 2017, and to taxable years of United States shareholders in which or with which such taxable years of foreign corporations end.”

As, however, these Proposed Regulations were published in the Federal Register in June 2019, section 7805(b)(1)(A) provides that this exclusion election could be effective for tax years ending on or after June 2019.

Corning, therefore, believes and respectfully requests that the GILTI high tax exception should be effective for taxable years of foreign corporations “ending” on or after such final regulations are published in the Federal Register rather than for tax years “beginning” on or after such publication date.

* * *

We appreciate your consideration of these comments and welcome the opportunity to discuss these issues further. If you have questions, please contact Tymon Daniels, Senior Tax Director, at (607) 974-4995 or DanielsT@Corning.com, or me at (607) 974-5690 or LemkeJA@Corning.com.

Regards,

Judith Lemke
Vice President of Tax
Corning Incorporated

cc:
The Honorable Lafayette “Chip” G. Harter III, Deputy Assistant Secretary (International Tax Affairs), Department of the Treasury
Mr. Peter Blessing, Chief Counsel, Internal Revenue Service
Mr. Thomas A. Barthold, Chief of Staff, Joint Committee on Taxation