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Friday, February 23, 2018

High Tax Kickout from GILTI Inclusion for CFC's May Be Too Restrictive

The new Tax Act added new Code Section 951A. This provision creates a new class of income of a CFC that is taxed currently to U.S. shareholders. That class is "global intangible low-taxed income" or "GILTI." 

GILTI starts broad - it is all gross income of the CFC, and then is cut back with certain exclusions (and is also reduced by certain deductions and an amount equal to 10% of all depreciable tangible assets). One of those exclusions is for high taxed income per Code §951A(c)(2)(A)(i)(III), which reads:
"any gross income excluded from the foreign base company income (as defined in section 954) and the insurance income (as defined in section 953) of such corporation by reason of section 954(b)(4)."
Code §954(b)(4) is an exception from Subpart F income for foreign base income and insurance income that is highly taxed by a foreign jurisdiction. It reads:
 "For purposes of subsection (a) and section 953, foreign base company income and insurance income shall not include any item of income received by a controlled foreign corporation if the taxpayer establishes to the satisfaction of the Secretary that such income was subject to an effective rate of income tax imposed by a foreign country greater than 90 percent of the maximum rate of tax specified in section 11."
So here is the question - does the high tax kickout from GILTI include all of the CFC's income that is subject to a high foreign tax, or is it limited to removing from GILTI only foreign base company income and insurance income that would otherwise be included as Subpart F income (but for being highly taxed)?

Tracking the above provisions, the better interpretation appears to be that the high tax kickout from GILTI only covers income that comes within the definitions of foreign base company income and insurance income.

This borders on the nonsensical, and leaves one wondering whether this is a technical error by Congress that is in need of correction. Why should income that is NOT foreign base company income or insurance income lose out on being excluded from current taxation, when income that is far closer to disfavored Subpart F character obtains the exclusion? If there is a policy reason for this, it is pretty obscure. This suggests that the exclusion of non-FBCI and non-insurance income is an error and not an intended effect. This is belied by the committee reports which do not acknowledge that there should be a distinction based on classes of income along these lines. Further, the pass-through taxation of highly taxed income is adverse to the title of the label for the income that is subjected to pass through treatment - i.e., "globably intangible low-taxed income." 

Here is my proposed statutory fix - modify Code §951A(c)(2)(A)(i)(III) to instead read: "any gross income that would be excluded from the foreign base company income (as defined in section 954) and the insurance income (as defined in section 953) of such corporation by reason of section 954(b)(4) regardless of whether that gross income actually is foreign base company income or insurance income."

Hopefully, this will be brought to the attention of Congress and dealt with in a technical correctons bill. 
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