Oil and Gas Group Finds Proposed GILTI Regs Too Restrictive

September 12, 2019

CC:PA:LPD:PR (REG — 101828-19)
Room 5203
Internal Revenue Service
P.O. Box 7604
Ben Franklin Station
Washington, DC 20044

Re: Guidance Under Section 958 (Rules for Determining Stock Ownership) and Section 951A (Global Intangible Low-Taxed Income)

To Whom It May Concern:

On behalf of the American Petroleum Institute (“API”) and its members I am submitting comments in response to the Department of Treasury and Internal Revenue Service (“Treasury and the IRS”) proposed regulations concerning the Global Intangible Low-Taxed Income (“GILTI”) High-Tax Exception (“HTE”). API is greatly appreciative of Treasury and the IRS responding to taxpayer comments advocating for such an exception. This exception is consistent with Congressional intent and aligns the GILTI with its intended target of low-taxed, mobile foreign income. Our comments provide additional suggestions that avoid unexpected restrictions on the use of the HTE and discourage taxpayer self-help.

I. The High Tax Exception Should be Applicable to All Tax Years Beginning January 1, 2018 or Later

Section 951A(C)(2)(A)(i) defines gross tested income, for purposes of the GILTI calculation, to include “all the gross income. . . .” for the year less certain items. Treas. Reg. § 1.951A-2(C)(1)(iii) specifically excludes certain types of high-tax income which are also eligible for exclusion from the subpart F regime.¹ By limiting the GILTI HTE to income otherwise meeting the requirements for an HTE under subpart F, Treas. Reg. § 1.951A-2(C)(1)(iii) has the potential to encourage taxpayers to engage in non-intuitive subpart F tax planning to mitigate a potential GILTI tax exposure on otherwise high-taxed foreign source income.

Recognizing, at least in part, that such a result is not consistent with the intent of Congress when they added § 951A to the Internal Revenue Code, Treasury and the IRS issued proposed changes to the final GILTI regulations which include, amongst other things, an expansion of the GILTI HTE to include high-tax CFC income otherwise not expressly covered in the § 954(b)(4).²

As proposed, taxpayers are expected to apply the more restrictive GILTI HTE to income earned in years prior to the finalization of the Proposed GILTI regulations.³

Such a result is problematic for many API member companies transitioning into the post-TCJA period with pre-2018 NOLs, because § 951A does not include a credit carryover which makes it unlikely such companies will have an opportunity to avail themselves from the relief otherwise contemplated in the § 904(g) overall domestic loss (“ODL”) rules.⁴

To mitigate this transition issue for all tax years subject to the new GILTI rules, and to better implement the intent of Congress to apply GILTI to low-tax CFC income, API recommends that Treasury clarify the proposed GILTI HTE is applicable for all years beginning after December 31, 2017.

API understands the application of the GILTI HTE to the 2018 tax year could result in an increased workload for taxpayers and the IRS due to the need for amended tax returns. However, API believes the cost of the increased workload is greatly outweighed by the benefit of implementing the intent of Congress for each of the post-TCJA tax years. Furthermore, API expects the compliance burden will be negligible, due to the fact many taxpayers will need to file amended returns for 2018 in order to comply with the final regulations, including those related to GILTI.

II. Taxpayers Should be Eligible to Elect the High Tax Exception on an Annual Basis

The proposed regulations allow that, upon making a valid HTE election with respect to a CFC, a taxpayer may subsequently revoke such an election. However, if revoked, Prop. Treas. Reg. § 1.951A-2(6)(v)(D)(2)(i) imposes a sixty-month moratorium on re-electing the HTE. Many tax elections can be made or changed on an annual basis. For example, § 954(b)(4) provides Treasury with authority to determine when foreign base company income (“FBCI”) is subject to a high-rate of tax, such that the income and taxes can be excepted from Subpart-F. In that instance, Treasury provided a regulatory election on an annual basis to exclude high-tax income from FBCI.⁵ The FBCI election is an analogous situation to the GILTI HTE, and good policy would dictate a similar result. Permitting the HTE to be made or changed on an annual basis would be consistent with both the election under § 954(b)(4) and many other tax elections under the Code.

The check-the-box (“CTB”) rules generally impose a sixty-month limitation on making an election to change and entity's classification for federal income tax purposes.⁶ The stated purpose of the CTB rules was to simplify the entity classification rules “in order to reduce the burdens on both taxpayers and the Service.”⁷ However, Treasury and the IRS were also concerned that “allowing taxpayers to change their entity classification simply by filing an election could result in a significant increase in the number of organizations changing their classification, thereby increasing burdens for some taxpayers and the Service.”⁸ For example, changing an entity's classification from a corporation to a partnership could impose significant compliance burdens on a taxpayer that may need to be reviewed by the Service (e.g., reporting the liquidation of the corporation, the formation of the new partnership, and ensuring that the new partnership complies with the relevant requirements under subchapter K in the future). There are significant consequences associated with the election and with future reporting obligations for the relevant entity. The burdens associated with making or changing the HTE are simply not comparable to the significant consequences associated with changing an entity's US federal income tax characterization.

It is particularly important for many companies in the oil and gas industry for the HTE to be able to be made or changed on an annual basis. In particular, oil and gas and related refined products are generally commodities whose prices are set by market indexes. Markets for commodities can be unpredictable, with prices fluctuating, sometimes dramatically, from year to year. A taxpayer's election of the HTE which is sensible in one year may not be so in two years later due to a change in commodity prices or other circumstances that are outside the control of the taxpayer. As a consequence, a five-year limitation may significantly discourage taxpayers, particularly taxpayers in the oil and gas industry, from availing themselves of the HTE.

III. Domestic Shareholder Group (“All or Nothing” Rule)

GILTI is intended to be applied to global CFC income and is calculated on a consolidated basis for consolidated groups under Treas. Reg. § 1.951A-1(b)(4). The treatment of the GILTI inclusion is clearly contemplated to apply to a mixture of income, which is combination of low-tax and high-tax income. However, the ”all or nothing” rule in the proposed HTE effectively makes GILTI applicable only to low-taxed income, since all relevant high-tax income is required to be removed from GILTI. This is inconsistent with the legislative history.

As previously stated, one of the reasons for the proposed GILTI HTE is to better align the application of the statute with Congressional intent. The overly restrictive nature of the “all or nothing” rule makes it high unlikely that many companies will utilize the HTE, as it will effectively leave only low-tax income in GILTI. The Preamble indicates a desire to prevent taxpayers from blending high-tax and low-tax income,⁹ but this concern does not appear in the legislative history and is contrary to the operation of the GILTI rules, which calculate a GILTI inclusion by aggregating tested income and tested loss from all of a taxpayer's CFCs. If the HTE is finalized in its current form with the “all or nothing” rule, it is likely that many companies will not make the HTE election. GILTI HTE should provide taxpayers with the flexibility to apply the election to tested income from specific CFCs provided they meet the 18.9% threshold; however, they should not be required to include income from every CFC which meets the threshold.

We welcome the opportunity to discuss these comments at your convenience. You can reach me at (202) 682-8455 (comstocks@api.org) or Ken Moy at (202) 682-8311 (moyk@api.org). Thank you.

Sincerely,

Stephen Comstock
Director — Tax & Accounting Policy
API
Washington, DC