Treasury and IRS Release Regulations on the GILTI High Tax Exclusion: The Regulations Limit the GILTI High Tax Exclusion for Current and Prior Taxable Years, but Propose a Future Election to Exclude High-Taxed Foreign Income of Commonly Owned CFCs on a QBU-by-QBU Basis

Sullivan & Cromwell LLP - July 1, 2019

On June 14, the Internal Revenue Service and the Treasury Department issued final and proposed regulations (the “Final Regulations” and the “New Proposed Regulations,” respectively) addressing the exclusion of income subject to high foreign taxes from the “global intangible low taxed income” (“GILTI”) tax introduced by the 2017 tax reform legislation. 

The Final Regulations adopt without change prior guidance that excluded high-taxed income from GILTI only if the income is excluded from subpart F income solely by reason of an election to apply the subpart F high tax exception. The New Proposed Regulations, however, would allow taxpayers to elect under the subpart F high tax exception to exclude from GILTI all income effectively taxed above 18.9% outside the United States (the “Proposed High Tax Election”). Significantly, the Proposed High Tax Election would calculate foreign tax rates separately with respect to each qualified business unit (“QBU”) of a controlled foreign corporation (“CFC”), largely preventing taxpayers from “blending” high- and low-taxed income. In addition, taxpayers would be required to make or revoke Proposed High Tax Elections simultaneously with respect to all CFCs controlled in the same percentages by the same U.S. shareholders, with a five-year period required between making and revoking an election. The Proposed High Tax Election would not be available to taxpayers until the New Proposed Regulations are finalized.