NAM Seeks to Fine-Tune Proposed GILTI Regs

November 26, 2018

Internal Revenue Service
Attn: CC:PA:LPD:PR (REG-104390-18)
Room 5203
Post Office Box 7604
Ben Franklin Station
Washington, DC 20044

RE: Comments on Proposed Section 951A Regulations

On behalf of the National Association of Manufacturers (NAM), this letter offers comments in response to REG-104390-18, proposed regulations implementing Section 951A of the Internal Revenue Code. The NAM is the largest industrial association in the United States representing manufacturers in every sector and in all 50 states. We appreciate this opportunity to help ensure that the implementation of the recently-enacted tax reform legislation¹ (informally known as the Tax Cuts and Jobs Act or “TCJA”) has the intended effect of spurring economic growth and innovation.

Section 951A²

The TCJA moved the United States away from its decades-old “worldwide” system for taxing international income. Under the old system, all earnings of a U.S. company were subject to U.S. tax, Irrespective of the country in which it was earned. While a deferral regime sometimes delayed the imposition of tax until earnings were brought back to the United States, our high federal income tax rates served as a disincentive to repatriation. This resulted in what has been referred to as the “lockout” effect. The TCJA addressed this issue by reducing statutory tax rates and adopting a dividend exemption system, which allows businesses to repatriate foreign earnings without an additional layer of U.S. tax.

Among the anti-base erosion measures included in the TCJA is the Global Intangible Low-Taxed Income provision, codified as new Section 951 A. Under this provision, a U.S. shareholder of a controlled foreign corporation (“CFC”) must include in its gross income the excess (if any) of the shareholder's net CFC tested income over the shareholder's net deemed tangible income return. The shareholder's net deemed tangible income return is an amount equal to 10 percent of the aggregate of the shareholder's pro rata share of the qualified QBAI of each CFC with respect to which it is a U.S. shareholder over the amount of interest expense taken into account in determining its net CFC test income for the taxable year.³

The Scope of the Pro Rata Share Anti-Abuse
Rule Should be Clarified

The proposed regulations contain a Pro Rata Share Anti-Abuse Rule, which would disregard “any transaction or arrangement that is part of a plan a principal purpose of which is the avoidance of Federal income taxation,” for purposes of determining a United States shareholder's pro rata share of a (1) CFC's subpart F income and (2) CFC items for calculating the shareholder's Global Intangible Low-Taxed Income inclusion, such as tested income and Qualified Business Asset Investment (QBAI). While the Preamble stresses that the intent for this anti-abuse rule is to catch non-economic allocations of CFC income, the plain language of the Pro Rata Share Anti-Abuse Rule would affect far more transactions.

Clarity on how taxpayers should apply the Pro Rata Share Anti-Abuse Rule is crucial to continue running business operations smoothly. The Pro Rata Share Anti-Abuse Rule could, for example, disregard a CFC's sale of assets if an unrelated purchaser negotiated terms that would close during a subsequent year for tax purposes. In addition, it is unclear whether permissible tax elections should be disregarded, such as an election to treat a foreign entity as a disregarded entity or a Section 338(g) election to step up the value of a foreign target's assets to fair market value. Furthermore, the Pro Rata Share Anti-Abuse Rule does not provide any guidance on how transactions or arrangements should be disregarded. Accordingly, we urge Treasury to clarify the scope of the Pro Rata Share Anti-Abuse Rule, including limiting both the types of transactions to which it applies and the duration for which the rule should be applied.

Section 245A and CFC Dividend Income

The proposed regulations request comments “as to whether these rules [subpart F income, tested income, tested loss] should allow a CFC a deduction, or require a CFC to take into account income, that is expressly limited to domestic corporations under the Code.” We note that the clear Congressional intent of the TCJA is to extend a dividends received deduction (DRD) to deemed dividends that are included in U.S. income due to the operation of subpart F. More specifically, according to footnote 1486 in the TJCA conference committee report, “a CFC receiving a dividend from a 10-percent owned foreign corporation that constitutes subpart F Income may be eligible for the DRD with respect to such income.”⁴ Accordingly, we urge Treasury to clarify that Section 245A applies exclusively to subpart F dividend income received by domestic corporation as well as CFCs.

The Proposed Regulations Mandatory Basis
Reduction Imposes a Significant Burden

The proposed regulation requires a mandatory decrease in the stock basis of a CFC immediately before the “disposition" of the stock. The stock basis is reduced by the “net used tested loss amount," (“NUTLA”) which is the cumulative net tested loss generated by the CFC and included in the consolidated Global Intangible Low-Taxed Income calculation over the life of the CFC. This new requirement imposes a significant burden on U.S. taxpayers, in that they would have to maintain a rolling account of tested loss/tested income, by CFC, by year, to determine if there is a NUTLA at the time of disposition. We urge Treasury to consider eliminating this requirement or implement a less burdensome alternative.

Treasury Has the Authority to Ensure that Section 951A Is
Applied in a Manner Consistent with Legislative Intent

The legislative history of Section 951A indicates that Congress intended to limit the scope of this provision to exempt from additional U.S. taxation foreign earnings that are taxed beyond a threshold rate in the local country. As the TJCA conference committee report states, “the minimum foreign tax rate, with respect to [Global Intangible Low Tax Income], at which no U.S. residual tax is owed by a domestic corporation is 13.125 percent.”⁵

When the Global Intangible Low-Taxed Income provision is integrated into the existing rules for taxing international income, taxpayers can face an additional U.S. tax on income that is subject to a foreign rate of tax well in excess of 13.125 percent. This appears inconsistent with Congressional intent. More specifically, when the Global Intangible Low-Taxed Income provision includes high-taxed foreign income, such as active business income, the overall tax rate on such income can significantly exceed 21 percent once expense allocation rules and the Base Erosion Anti-abuse Tax (the “BEAT” under Section 59A) are applied. Allocating deductions and expenses to Global Intangible Low-Taxed Income disproportionately punishes taxpayers with income subject to high foreign taxes.⁶

While beyond the scope of the proposed regulation, we urge Treasury to adopt an elective high tax exception for the Global Intangible Low-Taxed Income. Such a rule would be consistent with Congressional intent, in that taxpayers would have certainty with respect to the maximum rate of local country tax, beyond which no additional U.S. tax liability is triggered. Moreover, we note that Treasury has several sources of authority for this approach.⁷

One option would be for Treasury to craft a rebuttable presumption regulation that would characterize all CFC income as subpart F. This option is based on the subpart F high-tax exception under section 954(b)(4). In doing so, a taxpayer could then have the option of using the high-tax exception for the subpart F income. Another option would be the regulatory authority as provided under Section 951A(f) (treatment as subpart F income for certain purposes). Under this authority, Treasury could consider Global intangible Low-Taxed Income as subpart F and in doing so enable the high-tax exception to apply to Global Intangible Low-Taxed Income.

In closing, a high-tax exception would ensure that the Global Intangible Low-Taxed income provision is implemented consistent with Congressional intent to target low-taxed income, without subjecting to high-taxed foreign earnings to additional U.S. taxation.

Thank you for the opportunity to comment. If you have questions or would like to discuss this matter further, please contact me at 202-637-3077.

Sincerely,

Chris Netram
Vice President
Tax & Domestic Economic Policy
National Association of Manufacturers