Power Company Seeks Retroactive Application of GILTI High-Tax Exclusion

September 10, 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 Relating to the High-Tax Exception for Global Intangible Low-Taxed Income (REG-101828-19)

Dear Sir or Madam:

The AES Corporation is a Fortune 500 global power company headquartered in Arlington, Virginia. We provide affordable, sustainable energy in 15 countries through our diverse portfolio of distribution businesses as well as thermal and renewable generation facilities. Our 2018 revenues were $11 billion, and we own and manage $33 billion in assets. Our international businesses, which comprise about two-thirds of our global portfolio, consist of tangible, fixed assets located in the countries that they serve. The international businesses are locally financed and pay local (foreign) taxes.

Section 951A created a new regime requiring a U.S. shareholder of a controlled foreign corporation ("CFC") to include in income annually the CFC's global intangible low taxed income ("GILTI"). Congress intended that the U.S. tax on GILTI income would tax low-taxed income of CFC's that presents base erosion concerns. On June 21, 2019, the Department of the Treasury ("Treasury") and the Internal Revenue Service ("IRS") published in the Federal Register proposed regulations (REG-101828-19) relating to the GILTI provisions regarding goss income that is subject to a high rate of foreign tax. Specifically, the proposed regulations include a high-tax exception (the "GILTI HTE") that allows U.S. shareholders to elect, on an all-or-nothing basis, to exclude income subject to a foreign tax rate greater than 18.9 percent (i.e., 90 percent of the current 21 percent corporate tax rate) from GILTI.

We commend the efforts of the Treasury and the IRS to issue guidance providing for the GILTI HTE. We respectfully provide the following comments to further refine the GILTI HTE proposed regulations to be closer in-line with Congressional intent.

1. GILTI HTE should apply retroactively back to the effective date of the GILTI regime

Prop. Treas. Reg. 1.951A-7(b) provides that the GILTI HTE "applies to taxable years of foreign corporations beginning on or after the date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register, and to taxable years of United States shareholders in which or with which such taxable years of foreign corporations end."

Stated differently, assuming Treasury and the IRS adopt final regulations in 2019, the GILTI HTE would not be available to calendar year taxpayers until the 2020 tax year, notwithstanding the fact that the GILTI regirne was effective for tax years ending after December 31, 2017. As a result, taxpayers would generally be left with a two-year gap period in which the GILTI HTE would not be available to provide relief from GILTI to foreign earnings subject to a high rate of foreign tax.

To align the application of the GILTI and GILTI HTE regimes, we recommend the effective date of the GILTI HTE apply retroactively back to the effective date of the GILTI regime (i.e., tax years ending after December 31, 2017).

2. The 60-month limitation to make and revoke the GILTI HTE election should be eliminated

Prop. Treas. Reg. 1.951A-2(c)(6)(v)(C) and (D) provide that the GILTI HTE applies indefinitely unless revoked by the controlling domestic shareholders. Although an initial election is revocable at any time, once revoked a new GILTI HTE election generally cannot be made for a 60-month period. If a new election is subsequently made, that new election is generally irrevocable for a 60-month period.

Such 60-month lirnitation does not reflect the primary business considerations that drive the deterrnination of whether or not a taxpayer would elect the GILTI HTE in any particular year.

Given the complex and rapidly evolving business and global tax landscape it is unusual for business activities along with any related tax results to remain consistent year-over-year. Taxpayers across all industries also face unpredictable one-off business events which may dramatically change their U.S. tax position in a given year. This uncertainty makes it challenging for any taxpayer, who may otherwise be subject to a high rate of foreign tax on their foreign earnings, to commit to an election to apply or revoke the GILTI HTE for a period which extends beyond the current tax year. This would ultimately limit the desired effect of the proposed regulations due to the uncertainty associated with making the election.

Accordingly, we recommend that the 60-month limitation on making and revoking the GILTI HTE election should be eliminated.

3. Determination of high-taxed income should apply on a CFC-by-CFC basis

Pursuant to Prop. Treas. Reg. 1.951A-2(c)(6), the determination of whether an item of income is subject to a foreign tax rate greater than 18.9 percent is based on the items of income of a qualified business unit ("QBU") of a CFC.

The QBU level approach is inconsistent with the mechanics of the broader GILTI regime. Notably, the components of GILTI and related provisions are computed for each CFC before being aggregated by the U.S. Shareholder. For instance, the net tested income or loss for each relevant QBU is combined to determine the eligible qualified business asset investment ("QBAI") at the CFC level.

Accordingly, we recommend the GILTI HTE apply based on the items of income of the CFC, instead of the QBU, to maintain consistency with the broader G1LTI regime.

We believe the recommendations above would meaningfully and appropriately improve the effective operation of the GILTI HTE.

Sincerely,

Margaret Tigre
Senior Vice President, Finance and Chief Tax Officer
The AES Corporation
Arlington, VA

cc:
Douglas Poms, International Tax Counsel, Department of the Treasury