GILTI High Tax Exclusion Final Regulations: Tested Units, Controlled CFC Groups

Simply put, the final GILTI High Foreign Tax Exclusion Regulations under IRC Section 951A permit a U.S. taxpayer to elect to exclude from its inclusion of GILTI items of income subject to a high effective rate of foreign tax. Under the final regulations, income is viewed as subject to a high rate of foreign tax if the effective foreign rate exceeds 90 percent of the highest U.S. corporate income tax rate then in effect during the relevant year (i.e., greater than 18.9 percent, assuming the highest relevant U.S. corporate income tax rate then in effect is 21 percent). Once the exclusion election is made, it applies to all "related" CFCs under a consistency requirement.

Most aspects of the final regulations follow the original proposals. There are, however, striking differences. For example, the final regulations dispose of the qualified business unit (QBU) as a metric and instead apply the exclusion based on newly defined "tested units" of a foreign corporation. This standard is intended to more accurately match foreign taxes to items of income and minimize the inappropriate blending of income items subject to different foreign tax rates.

With the final regulations, proposed regulations were released under IRC Section 954(b)(4) (REG-127732-19) that conform the Subpart F Income "High-Tax Exception" to the finalized GILTI High Tax Exclusion. Applying that exception on a tested-unit basis would similarly minimize blending of items of income subject to different rates of foreign tax and more generally result in greater Subpart F Income inclusions. If and when finalized, a unitary election would apply for purposes of both the GILTI High Tax Exclusion and the Subpart F Income High Tax Exception.

On the upside, the final regulations allow an annual election rather than the five-year binding election originally proposed in 2019. On the downside, the election is an all or none election for certain commonly controlled CFCs.

One thing is certain: businesses and their advisers now need to undertake massive calculations and carefully analyze their existing tax postures and effective foreign tax rates to take full advantage of the tax-saving opportunities presented by these final GILTI High Tax Exclusion Regulations.

The benefits of foreign tax credits, combining CFCs, weighing Subpart F vs. GILTI taxation, understanding tested units, and deciding whether to apply the final regulations retroactively are just a few of many challenges to consider when implementing these rules. The final regulations have important implications for the Subpart F Income High Tax Exception under Section 954(b)(4), upon which the GILTI High Tax Exclusion rules were founded.

Listen as our panel of international taxation experts guides you through the major considerations of the GILTI High Tax Exclusion Regulations, including hands-on examples calculating and applying the GILTI HTE rules, when and how to apply the final regulations retroactively, and when forgoing this election may minimize overall tax liability.

1. Background and tax policies underlying the application of the longstanding Subpart F Income High Foreign Tax Exception, and the new GILTI High Foreign Tax Exclusion
2. Final July 2020 regulations
   1. Modifications from the 2019 proposed regulations
   2. Calculations and examples
   3. Retroactive elections
3. July 2020 proposed regulations
4. Planning opportunities
5. Avoiding tax pitfalls

The panel will review these and other important issues:

• How to calculate whether income is subject to a high effective foreign tax rate
• Understanding the ramifications of the "consistency" requirement
• When is it best to forgo the election to exclude high-taxed income?
• What savings opportunities exist before the effective date of the proposed regulations?
• What is a testing unit?
• Which taxpayers should apply the regulations retroactively?
• How does the use of foreign tax credits impact the decision to elect the exclusion?
• How is the Subpart F Income High Tax Exception impacted by these final regulations?

Learning Objectives

After completing this course, you will be able to:

• Verify how to calculate whether income is subject to a high effective foreign tax rate
• Ascertain how final and proposed regulations impact the Subpart F Income High Tax Exception
• Identify GILTI and its interaction with Subpart F
• Decide whether an IRC 962 election is beneficial or could result in a tax increase
• Determine what qualifies as a "testing unit"
• Understand the reporting requirements of Form 5471, Schedule J

• Field of Study: Taxes
• Level of Knowledge: Intermediate
• Advance Preparation: None
• Teaching Method: Seminar/Lecture
• Delivery Method: Group-Internet (via computer)
• Attendance Monitoring Method: Attendance is monitored electronically via a participant's PIN and through a series of attendance verification prompts displayed throughout the program
• Prerequisite: Three years+ business or public firm experience preparing complex tax forms and schedules, supervising other preparers or accountants. Specific knowledge and understanding of international taxation including residency determination, foreign entity classifications, application of treaty benefits, as well as GILTI, Subpart F, and the related Section 250 deductions.

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