Does GILTI Have a High Tax Exclusion?

If you would have asked that question a month ago the answer would have been a resounding “NO”. With the recent issuance of new proposed GILTI regulations if you ask that question now the answer would be YES.

Back in October when the IRS issued the first package of GILTI regulations, those proposed regulations limited the application of the High Tax Exclusion to income of the Controlled Foreign Corporation (CFC) that would be Subpart F but for the high tax exclusion. This interpretation excluded all other income that would not be Subpart F initially or would be excluded from Subpart F under another exclusion. In other words if you had a CFC that never had Subpart F income, none of its income would be exempt from GILTI under the High Tax Exclusion.

Many commentators on these proposed regulations asserted that the legislative history of the GILTI provision indicates that this provision was only intended to tax income that was subject to a low tax in the foreign jurisdiction. The very name of the provision Global Intangible Low Taxed Income – Low Taxed hinting to that intent.

In response to these comments and in respect of the clear legislative intent, on June 14, the IRS issued additional proposed regulations related to GILTI. These proposed regulations allow for a High Tax Exclusion election. This is not an automatic exclusion it is elective. The election would be made by the US Controlling Shareholder and would bind any other US shareholders of the CFC. Furthermore all of the CFC’s owned by the US Shareholder making the election will be bound by the election as well.

The proposed regulations address the mechanics of making this election and also the mechanics for determining which income meets the high tax exclusion criteria. The test for the High Taxed income will be based on QBU by QBU (Qualified Business Unit) and not CFC by CFC per se.

While this is much welcome news for many US taxpayers that are US shareholders in CFCs, taxpayers must proceed with caution and not default to the election. Several issues to consider before making this election:

  • The election is binding on the CFC until the taxpayer elects out of the High Tax Exclusion and there is a sixty month time constraint on revoking the election;
  • For some taxpayers with multiple CFCs there may be a bigger benefit in taking a Foreign Tax Credit if there are buckets of high tax income and low taxed income; and
  • The proposed regulations have a prospective effective date which definitely excludes 2018 and possibly 2019 depending on the timing of when the regulations are finalized, taxpayers would have to consider if the election can be made prior to the effective date of the regulations.

To discuss whether or not the High Tax Exclusion election is tax efficient for you reach out to our International Tax services team by filling out the form below.


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