Legislators Warn of Shortcomings of Proposed GILTI Regs

January 27, 2020

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

Dear Secretary Mnuchin:

We are writing to commend the Treasury Department and the Internal Revenue Service for the hard work involved in developing multiple sets of proposed and final regulations to implement the international reforms included in the Tax Cuts and Jobs Act of 2017. These changes to move the United States towards a territorial tax system were true game changers as we continue to work to make U.S. companies that create jobs in our districts more competitive in international markets.

In this regard, the efforts of you and your team to craft final regulations implementing the Global Intangible Low Taxed Income (GILTI) provisions are particularly important, and we want to bring to your attention several issues regarding recently proposed regulations that would allow taxpayers to elect out of the GILTI regime for so-called high-taxed income. While we very' much appreciate your efforts to provide rules that would allow such an election, our understanding is that the limitations in the proposed regulations would likely mean many U.S.- based companies would not avail themselves of the election if finalized in its current form.

Therefore, we seek your help in addressing the following concerns:

• Allow the election to be made on an annual basis: Under the proposed regulations, once an election is revoked, a new election cannot be made for any controlled foreign corporation (CFC) inclusion year that begins five years after the close of the inclusion year in which the election was revoked, and a subsequent election could not be revoked for another five years. Businesses simply cannot project what the economy and their economics will be on more than an annual basis. Any “lock-out" rule makes the election prohibitive for many companies.

• Allow the election on a CFC-by-CFC basis: The proposed regulations would generally not allow taxpayers to choose which CFCs the election would apply to if the CFCs are commonly controlled by a U.S. shareholder that qualifies as a “controlling domestic shareholder group.” We understand this all-or-nothing approach is far too restrictive because it prevents taxpayers from measuring GILTI on an aggregate basis. A CFC by CFC election allows taxpayers to exclude some high-taxed foreign income and include other amounts to blend with low-taxed GILTI, which furthers the aggregation set out in the GILTI provisions.

• Apply the effective rate test at the CFC level: The proposed regulations apply the effective rate test to each business unit of the CFC instead of aggregating the income and taxes paid at the CFC level. The approach in the proposed regulations is far too complex and defies a key feature of the GILTI statute that allows aggregation of income and taxes of CFCs, rather than applying the rules on a more granular, business unit, level.

• Allow taxpayers to apply the election retroactively: The proposed regulations would apply prospectively, thus denying the benefits of the election retroactively to when the GILTI was enacted.

• Define high-taxed income as income with an effective tax rate at or above 13.125%: The proposed regulations adopt a higher effective tax rate threshold, yet Congressional intent was that high-taxed income would be measured at an effective tax rate of at least 13.125%, not the 18.9% threshold utilized in the proposed regulation.

We hope you will take these recommendations under serious consideration as you and your tenant begin drafting final high tax election regulations in order to increase their effectiveness for U.S. companies seeking to compete in global markets.

Please let us know if you would like to discuss these recommendations in more detail

Regards.

George Holding
Member of Congress

Jackie Walorski
Member of Congress

Darin LaHood
Member of Congress

Brad Wenstrup
Member of Congress

Jodey Arrington
Member of Congress

Drew Ferguson
Member of Congress

cc:
David J. Kautter, Assistant Secretary for Tax Policy
Lafayette G. Harter III, Deputy Assistant Secretary for International Tax Affairs