Final GILTI Regulations Issued
Expanded High Tax Exclusion Not Currently Effective
Last Friday, Treasury issued final regulations for section 951A concerning Global Intangible Low-Taxed Income (“GILTI”), with an effective date of June 21, 2019. While Treasury retained the overall general framework of the proposed regulations, there were several areas of clarification along with items that were either not yet finalized or will require additional guidance. In a normal environment it is highly doubtful these regulations would have been issued in final form so quickly, however, the final regulations had to be effective no later than June 22, as the retroactive guidance window for the Tax Cuts and Job Act (“TCJA”) closes 18 months after the effective date of the tax law, which was December 22, 2017.
One of the most anticipated issues associated with the GILTI final regulations was the applicability of the high tax exclusion. Due to what appears to be mostly time constraints, Treasury did not expand the high tax exclusion in the final GILTI regulations. The regulations continue to include the narrow exclusion for those taxpayers who elect to exclude high tax income that would otherwise be classified as foreign base company income or insurance income. Treasury’s explanation for not expanding the application of the high tax exclusion was because, unlike most aspects of the U.S. international tax anti-deferral rules whereby an inclusion amount is based on a single item, a GILTI inclusion amount is determined based on all tested items of potentially multiple Controlled Foreign Corporations (“CFCs”).
One can infer from Treasury’s news release and preamble to the final regulations that a broader high tax exclusion should be available to taxpayers because the application of GILTI in its current form could be considered overly broad and beyond what Congress intended from a policy perspective. Pursuant to the unique application of GILTI, Treasury does not believe the current high tax exclusion election provided for in Treasury Regulation 1.954-1(d)(1) provides the necessary framework for applying the high tax exception of 954(b)(4) for a GILTI inclusion. Accordingly, Treasury issued proposed regulations, which set forth a framework under which taxpayers would be permitted to make an election under 954(b)(4) to exclude income by reason of the GILTI high tax exclusion. Until these to-be-issued new regulations are effective, however, a taxpayer may not avail themselves of the GILTI high tax exclusion except for the narrow exclusion originally published in the proposed regulations. Consequently, barring additional guidance or clarifications it does not appear at this time that taxpayers will be able to take advantage of this to-be-issued expanded high tax exclusion in their 2018 tax return.
In addition to the clarification on the availability of the high tax exclusion, the newly issued and voluminous GILTI regulations also contain additional guidance and clarifications which your Cherry Bekaert International Tax Team is currently digesting and will be providing additional notices on in the coming weeks.