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The Mechanics and Pitfalls of GILTI and FDII

Posted on May 20, 2019
[Editor's Note:

This article originally appeared in the May 20, 2019, issue of Tax Notes.

]
Priya White
Priya White
Ramon Camacho
Ramon Camacho

Ramon Camacho is a principal and Priya White is a manager with RSM LLP.

In this article, Camacho and White explore how different types of taxpayers are affected by the rules on global intangible low-taxed income and foreign-derived intangible income.

I. Introduction

For this generation of tax professionals, December 22, 2017, will always be one of the most historic and memorable dates of their professional lifetimes. On that day, the Tax Cuts and Jobs Act was signed into law by President Trump, promising more simplicity and a transition from a worldwide taxation system with deferral to a quasi-territorial system with a participation exemption regime and current taxation of foreign earnings. However, contrary to its initial premise, the changes to the tax law have proven more complex and have introduced additional uncertainty into the U.S. federal, state, and local taxing systems.

This article will navigate through two international tax provisions introduced by the TCJA:

  1. the global intangible low-taxed income provisions under section 951A and the proposed regulations (REG-104390-18, the GILTI proposed regs) issued on September 13, 2018; and

  2. the foreign-derived intangible income provisions under section 250, the proposed foreign tax credit regulations (REG-105600-18, the FTC proposed regs) issued on November 28, 2018, and the proposed regulations (REG-104464-18, the FDII proposed regs) issued on March 4, 2019.

Notably, one set of provisions is rarely discussed without the other, as is seen from the purposeful intertwining of their respective code sections and by the pair being commonly referred to as the “carrot and stick” among tax practitioners. The GILTI regime may be viewed as the stick because it is intended to discourage U.S. multinationals from shifting their intangible property offshore to low-taxed jurisdictions, where the income derived from intangibles could otherwise escape taxation. On the other hand, the FDII provisions can be seen as the carrot because the deduction associated with this income is intended to encourage U.S. companies to bring operations producing intangible income back home. However, the application of both provisions affects a broader range of taxpayers than may have been initially contemplated by Congress. This article will examine the effect of the GILTI and FDII rules on different types of U.S. taxpayers.

II. Overview of GILTI

Before the enactment of the GILTI rules, U.S. persons were generally taxed when the anti-deferral provisions of the Internal Revenue Code required current inclusion or when foreign earnings were repatriated back to the United States. Applicable to tax years beginning after December 31, 2017, the GILTI rules will now cover a greater scope of foreign earnings than prior law, potentially making more income subject to current U.S. tax. Specifically, the rules impose an annual minimum tax of 10.5 percent on U.S. shareholders with foreign earnings generated through controlled foreign corporations. As discussed further in this article, the GILTI rules adversely affect some U.S. shareholders more than others for various reasons depending on the nature of their business operations and on the deductions or credits specifically available to them.

A. Mechanics of GILTI

Determining the amount of GILTI is by no means a straightforward task, thus increasing (rather than diminishing) the annual tax compliance burden of taxpayers with CFCs. Modeling the impact of the GILTI rules will become an important exercise and a standard practice. Moreover, this planning will become invaluable in managing GILTI exposure.

At a high level, the GILTI rules require a U.S. shareholder of any CFC to include in its gross income its share of GILTI, which generally equals net CFC tested income over the net deemed tangible income return (NDTIR).1 Net CFC tested income consists of the net income of all CFCs (that is, the sum of the tested income minus tested loss of all related CFCs).2 Tested income consists of the gross income of the CFC over deductions properly allocable to such gross income using the same principles that apply in allocating and apportioning deductions for purposes of subpart F. Gross income for purposes of determining tested income excludes specified categories of income (for example, subpart F income, effectively connected income, dividends from related parties, and some foreign oil or gas extraction income) that are already taxed on a current basis or specifically excluded.3 A tested loss occurs when a CFC’s allowable deductions exceed its gross tested income.4

NDTIR equals 10 percent of the CFCs’ qualified business asset investment (tangible depreciable assets used in the trade or business and depreciable under the alternative depreciation system) minus the interest expense allocated or apportioned to that income.5 Note that the QBAI of CFCs with tested losses cannot be included.6 That fixed return is reduced by the amount of interest expense used to determine the shareholder’s net CFC tested income, but only to the extent that the interest income attributable to such expense is not taken into account in determining the same U.S. shareholder’s net CFC tested income (for example, third-party interest expense or interest expense paid to related U.S. persons).7 Reducing the NDTIR by the interest expense in fact increases the GILTI inclusion amount subject to U.S. tax.8 The following is a simple example that demonstrates how these rules work:

Example 1: A U.S. shareholder wholly owns CFC1 with $200 of tested income, CFC2 with tested income of $100, CFC3 with tested loss of $50, total QBAI of $500 at CFC1 and CFC2, and interest expense of $40 paid to a U.S. shareholder at CFC1.The net tested CFC income is $250 and the NDTIR equals $10 (that is, the excess of $500 x 10 percent over $40). Therefore, the GILTI inclusion amount is $250 minus $10, or $240.

As seen here, the fixed return for QBAI reduces the GILTI inclusion. For those U.S. shareholders in the services industry, the reduction to the GILTI inclusion from the fixed return on QBAI will likely be lower than for CFCs operating in more asset-intensive industries (for example, manufacturing, oil, and gas), given that those CFCs are likely to have fewer high-value tangible assets like expensive machinery. Moreover, to determine the QBAI amount, U.S. shareholders must now determine their tax basis in depreciable tangible assets under the alternative depreciation system. In addition to deciphering the new rules, applying a new depreciation system for QBAI purposes may prove especially onerous for many taxpayers, and in some cases not worthwhile.

B. Benefits for Domestic C Corporations

The GILTI rules do provide some relief, but mainly to domestic C corporations. This relief comes in the form of the section 250 deduction and the section 960 deemed paid credit. Under section 250, a domestic C corporation may deduct up to 50 percent of the GILTI amount for tax years through December 31, 2025, and up to 37.5 percent for tax years after December 31, 2025. Thus, a domestic C corporation subject to the 21 percent corporate tax rate will effectively pay 10.5 percent for tax years through 2025 and 13.125 percent for tax years after 2025. This deduction will be discussed further, but it is important to note that it is limited by the amount of taxable income of the domestic C corporation.9

Moreover, domestic C corporations may take deemed paid FTCs10 against their GILTI inclusion under new section 960(d). However, the FTCs are limited to 80 percent of taxes paid or accrued by CFCs regarding tested income, and taxes paid by CFCs with a tested loss are not eligible.11 After this “haircut,” FTCs may be further reduced by the inclusion percentage (that is, the U.S. shareholder’s pro rata share of the GILTI inclusion amount divided by the aggregate tested income).12 Also, under section 78, taxpayers must “gross up” the inclusion by the amount of the deemed paid FTC. The section 78 gross-up amount is equal to the total foreign taxes paid or accrued (before the haircut) multiplied by the inclusion percentage. In addition, the TCJA creates a separate limitation basket specifically for GILTI. Taxes in this new limitation basket, unlike taxes in other baskets, cannot be carried forward or backward.13 Thus, FTCs in the GILTI basket not used in the inclusion year are lost forever.

Accordingly, a domestic C corporation may use its FTCs (after the 80 percent haircut) to offset its U.S. residual tax on GILTI when the foreign tax rate on GILTI is at least 13.125 percent. As the footnote to Joint Explanatory Statement of the Committee of Conference states, if “the foreign tax rate on GILTI is 13.125 percent, and domestic corporations are allowed a credit equal to 80 percent of foreign taxes paid, then the post-credit foreign tax rate on GILTI equals 10.5 percent (or 13.125 percent multiplied by 80 percent), which equals the effective GILTI rate of 10.5 percent. Therefore, no U.S. residual tax is owed under these conditions.”14

However, such a taxpayer is not expected to have any residual U.S. tax if that U.S. shareholder has no expenses allocable to the GILTI basket. If expenses (for example, interest expense, research and development expenses, stewardship expenses) are allocated to the GILTI basket under the U.S. expense allocation rules, the taxpayer’s ability to claim credits for foreign taxes paid on GILTI may be further limited. If this is the case, the conclusion that a foreign tax rate of at least 13.125 percent would result in zero U.S. residual tax would no longer hold true.

Until the release of the FTC proposed regulations,15 Treasury and the IRS had not addressed how such expenses should be allocated and apportioned for GILTI purposes, and therefore whether domestic C corporations would still be subject to U.S. tax on their GILTI income despite owning CFCs in high-tax jurisdictions was uncertain.

C. Applicability to Different Taxpayers

As previously discussed, the GILTI rules do not treat all taxpayers similarly, and thus tax consequences vary significantly. The following example demonstrates at a high level just how beneficial it can be to own CFCs through a domestic C corporation because of the availability of the section 250 deduction and FTCs to a domestic C corporate partner compared to ownership by a U.S. individual who generally cannot claim those benefits:

Example 2

A domestic C corporation (USCo) and a U.S. individual (Individual) own 50 percent each in a U.S. partnership (USP). USP owns 100 percent of CFC1, which has tested income of $500, and CFC2 has tested loss of $200. CFC1 paid foreign taxes of $100. The QBAI is $2,000 for CFC1, with $100 net interest expense allocable to a U.S. shareholder or to an unrelated party for CFC1.

Note that the example below does not account for expense allocations, which may further reduce the FTCs available to offset the U.S. residual tax of USCo. Consequently, USCo may in fact be subject to U.S. residual tax on its net GILTI inclusion, but not to the same extent as Individual because of the section 250 deduction and the use of FTCs available to USCo. Individual is subject to ordinary tax rates (ranging from 10 percent to 37 percent) plus the net investment income tax of 3.8 percent, thus leading to Individual being subject to a relatively high U.S. residual tax. Also note that if the CFC’s operations involved more tangible asset-intensive structures (such as those of an industrial manufacturing as opposed to a services-based company), the QBAI would be higher, and thus a higher NDTIR would be available to reduce the amount of the GILTI inclusion for both taxpayers. This example demonstrates that the tax consequences vary dramatically depending on whether the U.S. shareholder is a domestic C corporation or an individual, and that the rules adversely affect individuals who own CFCs directly or by passthrough entities.

Example 2. Illustrative Example of Impact on Taxpayers

 

USP

USCo

Individual

Tested income

$500

$250

$250

Tested loss

$200

$100

$100

Net CFC tested income

$300

$150

$150

Tested foreign income taxes

$100

$50

$50

QBAI

$2,000

$1,000

$1,000

Net interest expense

$100

$50

$50

NDTIR (10 percent of QBAI minus net interest expense)

$100

$50

$50

GILTI (net CFC tested income minus NDTIR)

$200

$100

$100

Inclusion percentage (GILTI / tested income)

 

40%

40%

Deemed paid credit before 20 percent haircut (inclusion percentage x tested foreign income taxes)

 

$20

$0

Deemed paid credit after 20 percent haircut

 

$16

$0

Grossed-up GILTI (GILTI + deemed paid credit before haircut)

 

$120

$0

50 percent deduction

 

$60

$0

Net GILTI inclusion before credit

 

$60

$100

U.S. tax on GILTI taxable income (21 percent for USCo; 37 percent + 3.8 percent net investment income tax)

 

$12.6

$40.8

FTCs available

 

$16

$0

U.S. residual tax

 

$0

$40.8

D. Potential Section 962 Election for Individuals

Individual in Example 2 may be able to cushion the effect of GILTI by making a section 962 election. That election would allow Individual to have the GILTI inclusion amount taxed as if the income had been received by a domestic corporation. Thus, Individual would be subject to the 21 percent U.S. corporate tax rate and may claim FTCs. With the issuance of the FDII proposed regulations16 in March 2019, Individual can now also avail itself of the section 250 deduction and the section 78 gross-up attributable to GILTI. The election does, however, create an additional layer of U.S. tax as distributions from the deemed corporation are generally subject to ordinary individual rates. Those distributions may qualify for reduced qualified dividend rates if other requirements are met. Although making the election may be easier than setting up an actual domestic C corporation, whether this election is the right choice for an individual taxpayer will depend on each taxpayer’s unique set of circumstances. Modeling the effect of this election is critical because once it is made, it cannot be revoked without the permission of the IRS.17

E. New Domestic C Corporation Planning

Another planning strategy for U.S. shareholders that are not C corporations but are seeking to minimize their GILTI exposure is to set up a domestic C corporation holding company and to contribute the CFCs into that domestic C corporation. Through this restructuring, the section 250 deduction and FTCs would be available to the domestic C corporation holding company. These shareholders would then no longer be subject to the GILTI rules and could defer inclusion until a distribution is made from the domestic C corporation to the U.S. shareholder.

Considering whether this structuring works for such a shareholder also requires modeling out the consequences to ensure that there are no unintended, negative implications to the shareholder(s) involved. For instance, such a transaction may result in a triggering event under section 965(i), thus inadvertently subjecting an S corporation shareholder who elected to defer their transition tax liability under the section 965(i) to recognize that liability in the year the shares are transferred.

Another commonly overlooked provision that may take shareholders by surprise is the accumulated earnings tax under section 531. This provision penalizes domestic C corporation holding companies that accumulate earnings beyond their reasonable business needs to avoid shareholder-level tax. A domestic C corporation may reduce its accumulated taxable income by an accumulated earnings credit under section 535, but otherwise must pay a 20 percent penalty on the excess. The penalty applies even if the domestic C corporation does not have any liquid assets. In those cases, a domestic C corporation may consider either declaring a section 565 consent dividend (that is, the consenting shareholders agree that specified amounts are deemed to be distributed to them) or if liquidity is not an issue, an actual cash dividend may be declared and paid to the shareholders.

F. Check-the-Box Planning

An alternative planning method that U.S. shareholders that are not C corporations may consider is using the so-called check-the-box rules to limit their GILTI exposure. For instance, the U.S. shareholder could make a check-the-box election to treat its CFCs as passthrough or foreign disregarded entities. By doing so, the U.S. shareholder would no longer have any CFCs in its structure, and thus would no longer be subject to the GILTI rules. Moreover, foreign taxes paid or accrued by the former CFC may be deemed paid by the U.S. shareholder, thereby providing the shareholder with access to FTCs. The income from the passthrough foreign entities, however, would likely be taken into account by the U.S. shareholder annually, but without the complexities of the calculation and compliance of the GILTI rules and with the advantage of full access to FTCs. As with all planning ideas discussed to this point, modeling must be performed to understand the effect on all shareholders involved, because such a structure may be less desirable to a domestic C corporation shareholder who has access to the section 250 deduction and FTCs.

III. Overview of FDII

If the GILTI regime is the stick, the FDII regime is the carrot that Congress offers to encourage domestic C corporations to generate income through the export of their products and services. Like the GILTI provisions, the FDII rules do not specifically encompass income derived from intangible assets, but generally provide a benefit for specified income generated beyond a fixed return on the corporation’s tangible assets.

Simply put, U.S. corporate taxpayers may claim a deduction of up to 37.5 percent of their FDII for tax years through December 31, 2025, after which the deduction phases down to 21.875 percent. As a result, a domestic C corporation subject to the 21 percent corporate tax rate will effectively pay federal tax on FDII equal to 13.125 percent for tax years through 2025 and 16.406 percent afterward.

A. Mechanics of FDII

Determining FDII is a complex process. Moreover, FDII cannot be determined without first determining the amount of any GILTI inclusion. Generally speaking, FDII is the amount that bears the same ratio to the deemed intangible income (DII) of a domestic C corporation as the foreign-derived deduction eligible income (FDDEI) of that corporation bears to the deduction eligible income (DEI) of the corporation.18

DEI is the excess of the gross income of a domestic C corporation over the deductions properly allocable to that income. Note that the gross income does not include subpart F income, financial services income, dividends received from a CFC by the U.S. shareholder, domestic oil and gas income, foreign branch income, or GILTI. Therefore, to compute FDII and the section 250 deduction, the amount of GILTI, if any, must be known.19

FDDEI is any DEI derived in connection with: (1) property sold by the domestic C corporation to any foreign person for foreign use; or (2) services provided to any person or regarding any property not located in the United States. Note that a sale to a foreign related party does not meet these requirements unless stringent criteria are met.20

DII is equal to DEI minus the deemed tangible income return (DTIR), which is equal to 10 percent of the domestic C corporation’s QBAI.21

This formula shows how to calculate FDII and the example following provides an illustration:

FDII = DII x (FDDEI/DEI).

Example 3:

Domestic C corporation has DEI of $200, FDDEI of $100, QBAI of $1,000.

DTIR = 10 percent x $1,000, or $100.

DII = $200 - $100, or $100.

FDDEI / DEI = $100/$200, or ½.

FDII = $100 x 0.5, or $50.

As with the GILTI provisions, there is still a lot of uncertainty regarding the determination of FDII. For instance, it is unclear how taxpayers should allocate expenses to DEI or what exactly constitutes foreign use of property and services. However, Treasury and IRS officials have promised further guidance.

B. The Section 250 Deduction

As previously mentioned, section 250 grants a deduction equal to the sum of (1) 37.5 percent of FDII plus (2) 50 percent of GILTI plus the section 78 gross-up amount. However, the total deduction cannot exceed the domestic C corporation’s taxable income.

When the deduction is limited by taxable income, the taxpayer must reduce the deduction attributable to both GILTI and FDII proportionally.22 It is unclear from these rules how the deduction and the taxable income limitation interact with other provisions. For example, does the net operating loss limit under section 172 apply in calculating taxable income for purposes of the GILTI/FDII taxable income limitation? Moreover, how does the new limitation on the deductibility of interest expense affect the taxable income limitation that applies in determining the deduction allowed for GILTI and FDII? New proposed regulations under section 163(j) provide elaborate rules for determining how 163(j) applies to CFCs in calculating the amount of the GILTI inclusion, but ambiguities still remain. After much anticipation, the FDII proposed regulations addressed this conundrum. Initially, the IRS and Treasury planned to use a simultaneous equations approach, but instead established a five-step ordering rule to determine how the taxable income limitation is computed in the GILTI, FDII, NOL, and section 163(j) context.23 Needless to say, these complex rules undermine any notion of simplicity as a tax policy goal of the TCJA.

C. Challenges to the FDII Deduction

The FDII deduction is an attractive incentive that the U.S. government is offering to domestic C corporations. However, foreign leaders have raised doubts about the legitimacy of the FDII deduction. Specifically, finance ministers from several European nations have expressed concerns that the FDII deduction acts as a subsidy that violates the base erosion and profit-shifting Action Plan 5, “Harmful Tax Practices,” minimum standards and the WTO’s subsidies and countervailing measures agreement regarding goods exports. Of course, Treasury officials have argued that the FDII deduction is consistent with these provisions and have vowed to defend the rules. Even if a foreign country challenges the FDII rules in the future, that challenge will likely take years to resolve.24 And even if the U.S. government cannot defend the FDII rules, it is unlikely that taxpayers will be forced to disgorge any tax benefits they have claimed.

Another issue yet to be addressed is the interaction of FDII, a type of export subsidy, and the export tax incentive provided to companies qualifying as interest charge domestic international sales corporations (IC-DISCs). Since the FDII and the IC-DISC regimes both provide benefits to exports, it is conceivable that the U.S. government may try to limit in some way the ability of taxpayers to claim benefits under both regimes even though current law clearly allows taxpayers to qualify for benefits under both. Future administrative guidance may provide answers to some of these questions.

IV. Recent Proposed Regulations

A. GILTI Proposed Regulations

The GILTI proposed regulations provide further details on the mechanics of the GILTI computation (such as how to calculate tested income), broad antiavoidance rules (affecting determination of QBAI and tested income), and rules for consolidated groups. These proposed regulations would apply retroactively to have the same effective date as the TCJA (that is, applicable to tax years of foreign corporations beginning after December 31, 2017). They provide significant guidance but still leave many questions unanswered. For instance, no guidance was provided on the calculation of the FTCs available regarding GILTI inclusions, how the section 78 gross-up would be characterized for FTC purposes, or how the taxable income limitation for the section 250 deduction would be determined. Moreover, it is not clear whether taxpayers must change their method of accounting to calculate tested income if they are using an impermissible method to compute earnings and profits. Arguably, tested income could be computed without regard to the methods used for E&P but that would result in maintaining two sets of books, which could be onerous. Another concern is whether a GILTI inclusion constitutes personal holding company income for purposes of the personal holding company tax. Taxpayers may argue that GILTI inclusions should be characterized on a look-through basis, which may provide relief, but there is scant authority for doing so. The preamble to the proposed regulations promised subsequent guidance, which may address these issues and more.

B. FTC Proposed Regulations

The FTC proposed regulations specifically address various issues related to the determination of FTCs, including the allocation and apportionment of deductions under section 861 to the GILTI basket. Treasury and the IRS addressed commentators’ arguments that no expenses should be allocated to the GILTI basket to assure full use of FTCs, but this suggestion was not adopted in the regulations. However, the regulations arguably meet taxpayers halfway.25

In this regard, the proposed regulations provide exempt income and exempt asset treatment regarding GILTI (including the corresponding section 78 gross-up amount) and FDII (and assets that generate such income) that is offset by the deduction allowed under section 250(a)(1) (taking into account the taxable income limitation in section 250(a)(2)(B)). Thus, when expenses are allocated and apportioned based on the gross income or asset method, the portion of GILTI reduced by a section 250 deduction (and the portion of assets that generate GILTI, that is, CFC stock) or assets are treated as exempt and are excluded for expense allocation purposes. As a result, the exclusion of these items will generally increase the taxpayer’s ability to claim credits for taxes associated with GILTI because exempt treatment will likely result in the allocation of more expenses to non-GILTI baskets, although each taxpayer should assess the effect of those rules on their own facts. Further, the proposed rules clarify that the gross income from the GILTI inclusion and the related section 78 gross-up may not necessarily end up in the GILTI basket, but may be grouped in other baskets instead, based on the underlying income giving rise to the inclusion. When this is the case, the GILTI inclusion and section 78 gross-up are apportioned ratably based on the relative amounts of gross income in the different income groupings.26 This set of proposed regulations introduces enormous and unprecedented complexity to the calculation of the FTC, and taxpayers should closely analyze their potential impact.

C. FDII Proposed Regulations

The FDII proposed regulations provide computational guidance and proposed ordering rules for determining the taxable income limitation discussed earlier, as well as insight into which taxpayers are eligible for the deduction, types of qualifying transactions, and documentation required to support the deduction. Moreover, the proposed rules include an antiavoidance rule under which transfers of QBAI by a domestic C corporation to a related party may be disregarded depending on the nature and timing of the transfer.

As previously mentioned, individuals making a section 962 election can use the section 250 deduction to reduce their GILTI exposure and related section 78 gross-up in a manner similar to the way a domestic C corporation could. Moreover, a domestic corporation subject to section 511 or the unrelated business income tax may claim the deduction subject to specified limitations.27 The regulations also allow a domestic C corporation partner of a partnership to take its distributive share of the partnership’s assets and income to determine the FDII deduction.28

The proposed regulations also provide clarification regarding which sales of property or services qualify for the FDII deduction. Generally, the term “sale” includes any lease, license, exchange, or disposition (including a transfer of property resulting in gain or an income inclusion under section 367) of property to a foreign party for foreign use.29 Further, what constitutes foreign use under the proposed rules depends on whether the property transferred is considered general property or intangible property.30 For services to qualify, a domestic C corporation must render them to a person located outside the United States and this determination depends on four groupings of services, defined based on the type of service provided and the type of recipient.31 If a transaction has elements of both a sale and a service, the proposed regulations clarify that the transaction is classified according to its “overall predominant character.”32 Moreover, some sales of property or services to the government may qualify for the FDII deduction.33

As if the complexities of tax reform and numerous new compliance requirements were not enough, the FDII proposed regulations also require different forms of documentation to support each transaction. For example, to support benefits regarding the sale of property, the seller must obtain documentation establishing the recipient’s status as a foreign person. The documentation must be procured by the return filing date and no earlier than one year before the sale or service, and the seller or renderer must not know or have reason to know that the documentation is incorrect or unreliable.34

V. Compliance Matters

Although Congress may have hoped that the TCJA would simplify the tax law, it can be argued that the opposite has in fact been achieved. Not only have the international tax rules themselves become more intricate, but additional reporting rules have been introduced to further complicate matters. For GILTI purposes, two reporting requirements have been added to an already perplexing calculation. First, taxpayers must now file Form 8992, “U.S. Shareholder Calculation of Global Intangible Low-Taxed Income.” Second, Schedule I-1, “Information for Global Intangible Low-Taxed Income,” has been added to Form 5471, “Information Return of U.S. Persons With Respect to Certain Foreign Corporations.” Form 5471 has increased from approximately eight to 15 pages, and Form 8993, “Section 250 Deduction for Foreign-Derived Intangible Income (FDII) and Global Intangible Low-Taxed Income (GILTI),” has been released to report the section 250 deduction. Additional reporting complexities may be encountered if partnership returns are involved. Future return filing seasons will likely be much busier and more challenging as taxpayers and their advisers grapple with new laws, reporting requirements, and guidance released regarding the compliance process.

VI. A Look Forward

The TCJA has created a labyrinth for taxpayers and their tax advisers, encouraging increased cooperation between them to navigate new tax laws and the voluminous regulatory guidance that interprets them. In addition to creating new complexity and uncertainties, the TCJA has increased taxpayers’ compliance burdens. Taxpayers may mitigate adverse effects of the law by using tax planning strategies and careful analysis of their particular situations. Taxpayers that seek to mitigate their exposure to the GILTI regime should consider reclassifying their CFCs as passthrough entities, the use of the section 962 election for individual taxpayers, and taking steps to convert GILTI into subpart F income, among other measures. Taxpayers that want to take advantage of the FDII regime may consider interposing a domestic C corporation into the structure (or converting an existing passthrough entity to corporate status) or transferring intangibles and related income back to the United States. Transfer pricing between related parties may play a beneficial role by allocating profits between domestic and foreign jurisdictions to produce a favorable result. Furthermore, taxpayers should consider whether it is possible to take advantage of the 10.5 percent tax rate that applies to GILTI as opposed to the 13.125 percent rate that applies to FDII (taking into account the cost of restructuring and any subsequent impact on the business). Overall, the best strategy will depend on the unique facts and circumstances of each taxpayer, and detailed analysis is paramount to successful planning, now more than ever.

FOOTNOTES

7 Section 951A(b)(2)(B). See also the GILTI proposed regulations and the corresponding preamble published in the Federal Register under “Guidance Related to Section 951A (Global Intangible Low-Taxed Income),” 26 C.F.R. Part 1 (Oct. 10, 2018).

10 A domestic C corporation may take a deemed paid FTC on foreign taxes treated as paid by the domestic C corporation, but actually paid by a foreign corporation, when the domestic C corporation receives a dividend from the foreign corporation. The domestic C corporation must meet the stock ownership requirements.

14 Joint Explanatory Statement of the Committee of Conference, H.R. Rep. No. 115-466, at 1526 (Dec. 15, 2017).

15 The FTC proposed regulations and the corresponding preamble were published in the Federal Register under “Guidance Related to the Foreign Tax Credit, Including Guidance Implementing Changes Made by the Tax Cuts and Job Act,” 26 C.F.R. Part 1 (Dec. 7, 2018).

16 The FDII proposed regulations and the corresponding preamble were published in the Federal Register under “Deduction for Foreign-Derived Intangible Income and Global Intangible Low-Taxed Income,” 26 C.F.R. Part 1 (Mar. 6, 2019).

17 Severiano Ortiz and Alec Miller, “Cushioning the Double-Tax Blow: The Section 962 Election,” RSM US LLP Insight Article (Sept. 21, 2018).

23 See preamble to FDII proposed regulations at 9-11.

24 Ryan Finley, “FDII’s Ineffectiveness Responsible for Lack of WTO Challenges,” Tax Notes Int’l, Nov. 12, 2018, p. 744.

25 See preamble to the FTC proposed regulations at 6.

26 See preamble to the FTC proposed regulations at 16, and prop. reg. section 1.861-8(e)(14).

27 See preamble to FDII proposed regulations at 16, and prop. reg. section 1.250(b)-1(g).

28 Id. at 15. See also prop. reg. section 1.250(b)-1(e)(1).

29 Id. at 19. See also section 250(b)(5)(E) and prop. reg. section 1.250(b)-3(b)(7).

30 Id. at 27. See also prop. reg. section 1.250(b)-4(d) and (e).

31 Id. at 34. See also prop. reg. section 1.250(b)-5(b) and (c)(4) through (7).

32 Id. at 23. See also prop. reg. section 1.250-3(e).

33 Id. at 20-21. See also prop. reg. section 1.250(b)-3(b)(2).

34 Id. at 22-23.

END FOOTNOTES

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