GILTI: U.S. Tax Regulations Announced

Tax Alert – U.S.

June 27, 2019

GILTI: U.S. Tax Regulations Announced

On June 14, 2019, the United States Treasury Department released final Global Intangible Low-Taxed Income (GILTI) regulations that adopted the October 2018 proposed high-tax exclusion rules without modification. In addition, new, and possibly favourable, proposed regulations were introduced which expand the high-tax exception to GILTI.

GILTI was presented as part of the 2017 U.S. tax reform and its intent was to discourage U.S. multinationals shifting income from intangible assets, such as patents and copyrights, to foreign low-tax jurisdictions. The GILTI regime taxes foreign earnings of Controlled Foreign Corporations (CFC) at a minimum rate of 10.5 percent, eliminating the potentially indefinite deferral of U.S. tax on such earnings.

The scope of GILTI is wide-ranging and has caught more than just income from intangibles. It captures ordinary income from trade in goods and services and it applies to U.S. citizens living abroad who control companies domiciled in foreign countries, like Canada. While individuals were unintended targets, they are clearly caught by this legislation.

For U.S. citizens living in Canada, until the latest proposed regulations, there were limited ways of dealing with the problem. One was the payment of dividends by the company, although that solution had reduced application following the introduction of Internal Revenue Code Section 965 (i.e. the “transition tax”). The Internal Revenue Service also issued rules on Previously Taxed Earnings and Profits that would often cause the foreign tax credit system to fail – the tax was put in one “basket” and the income in another, so that no credit would be available.

As an alternative, a U.S. citizen could elect to be taxed on GILTI in much the same manner as a U.S. corporation. many cases, this calculation would largely or completely eliminate the tax. However, the cost of filing this would be quite high.

Newly Proposed Regulations

The new proposals have now expanded the scope of “high-taxed” income and this income is exempt from GILTI altogether.

If the U.S. controlling shareholders elect, income subject to foreign (e.g. Canadian) tax of 18.9 percent or higher will not be considered GILTI. This election extends to all members of a Controlling Domestic Shareholder Group (CDSG,

which is defined as two or more CFCs where more than 50 percent of the voting power is held by the same U.S. shareholder or related group).

An election is binding on all U.S. shareholders of that CFC. A controlling shareholder may revoke an election; in this case, the election cannot be made again for 60 months.

These rules are expected to be applied prospectively to taxation years beginning after the proposed regulations are finalized. While the proposed GILTI high-tax exception is welcome news, deciding whether to make the election, once it is available, may not be simple. Numerous factors would need to be considered on a case-by-case basis to determine whether the GILTI high-tax exception election would be beneficial.

Final Regulations

Final GILTI regulations apply to partnerships, S corporations and their partners or shareholders under an aggregate approach where GILTI is computed at the partner or shareholder level and not the entity level.

The aggregate approach is effective retroactive to CFC tax years beginning in 2018. Partnerships and S corporations that have already filed their 2018 Form 1065 or 1120-S under the former proposed regulation hybrid method may need to file amended returns.

For more information, contact your local MNP U.S. Tax Advisor or visit MNP.ca.