The IRS has issued final and proposed regulations that provide guidance on the treatment of income earned by certain foreign corporations that is subject to a high rate of foreign tax. The guidance allows taxpayers to exclude certain high-taxed income of a controlled foreign corporation from their global intangible low-taxed income (GILTI) calculation. The GILTI high-tax exclusion (HTE) applies to tax years of foreign corporations beginning on or after July 23, 2020 and to tax years of U.S. shareholders in which or with which such tax years of foreign corporations end.

GILTI. U.S. shareholders of controlled foreign corporations (CFC) are required to include in income their share of GILTI. A CFC is a foreign corporation in which more than 50 percent of the total combined voting power of all classes of stock entitled to vote, or more than 50% of the total value of all classes of stock, is owned directly, indirectly, or constructively by U.S. shareholders. A person who is a U.S. shareholder of any CFC is required to include its share of GILTI in gross income for the tax year. The computation GILTI is complex and requires the calculation of certain tangible property, tested income of each CFC owned by U.S. shareholders, and then a single GILTI inclusion amount is determined.

The proposed regulations generally conform the rules for the subpart F high-tax exception to the rules for the GILTI HTE. The high-tax exception is income received by a CFC that is excluded under subpart F if the income is subject to an effective rate of foreign tax that is greater than 90 percent of the maximum U.S. corporate tax rate.

 The GILTI HTE applies to any item of income of the tested unit of a CFC that is subject to an effective rate of tax greater than the maximum U.S. corporate tax rate, which is 18.9 percent based on a 21 percent tax rate.

An election must be made for the GILTI HTE. The election to exclude high-taxed income from gross tested income of a CFC is generally made or revoked for a one-year period.

If you have questions about this new regulation, please contact our NYC accounting firm.