The United States (US) Treasury on 13 September released proposed regulations (REG-104390-18) under the Internal Revenue Code¹ Section 951A Global Intangible Low-Taxed Income (GILTI) regime enacted in December 2017 as part of the Tax Cuts and Jobs Act (TCJA). The regulations package also includes proposed amendments and additions to the subpart F income and consolidated return regulations.

Under the GILTI regime, a US shareholder of one or more controlled foreign corporations (CFCs) generally must include currently in gross income its pro rata share of the net profits of those CFCs to the extent that the profits exceed a routine return on certain tangible depreciable assets held by the CFCs. For a corporate US shareholder, the inclusion is subject to US federal income taxation at a 21% tax rate, but is generally eligible for a 50% deduction (resulting in an effective tax rate of 10.5%). The new law applies to the first tax year of a CFC beginning after 31 December 2017, and the US shareholder's year with or within which that year ends, and all subsequent tax years.

The proposed regulations include provisions that:

• Describe how to calculate the fundamental elements underlying the GILTI inclusion (e.g., tested income and qualified business asset investment)
• Set out anti-abuse rules for certain basis "step-up" transactions for purposes of the GILTI regime
• Describe how consolidated groups compute their GILTI inclusions (including a rule generally requiring a consolidated group to compute its GILTI inclusion as a group, rather than member-by-member)
• Adopt a hybrid "aggregate/entity" approach to US partnerships and their partners for purposes of the GILTI regime

The proposed regulations do not include foreign tax credit computational rules relating to GILTI.

A Treasury official confirmed at a press conference on the day of the regulations release that there will be a total of three sets of regulations providing guidance on GILTI. Future guidance on the foreign tax credit, reportedly covering how it relates to expense allocation under GILTI, as well as guidance on the Section 250 deduction and the foreign-derived intangible income regime will be issued separately. According to the official, the foreign tax credit guidance will be issued in 60 days, and the Section 250 guidance will be released later this year.

An EY Thought Center Webcast on the proposed regulations is scheduled for 20 September 2018, from 3:00 p.m. – 4:30 p.m. EST. Register here for the webcast.

The Internal Revenue Service (IRS) also released Rev. Proc. 2018-48 on 13 September, providing guidance on how certain items of income – specifically, amounts required to be included in gross income under Section 951A and Section 986(a) as foreign currency gain – are treated for purposes of determining whether a real estate investment trust (REIT) satisfies the gross income tax under Section 856(c)(2).
Rev. Proc 2018-48 is effective for taxable years beginning after 13 September 2018. REITs may apply the rules in the revenue procedure with respect to any prior tax year, however.

The House Ways and Means Committee on 13 September approved the three-bill Tax Reform 2.0 package to: (1) make permanent individual and small business tax cuts under the TCJA that expire at the end of 2025; (2) promote savings for families and retirement; and (3) promote innovation. Chairman Kevin Brady released the legislative text of the three bills on 10 September.

House Speaker Paul Ryan said the House will vote on the package the last week in September. There are no indications, however, that the measures will be taken up in the Senate prior to the November midterm elections. Senate passage will require 60 votes because Republicans will not have use of the budget reconciliation process afforded to the TCJA last year. Retirement provisions are seen as having the best prospects of being enacted, given bipartisan interest in the subject, but only in a post-election lame-duck session.

The IRS Large Business and International division has announced the addition of two new compliance campaigns in the international tax area. The first relates to subpart F foreign base company sales income and the manufacturing branch rules. The IRS's goal is to identify and select for examination returns of US shareholders of CFCs that the IRS believes may have underreported subpart F income based on certain interpretations of the manufacturing branch rules. The second international campaign will focus on certain deductions taken on Form 1120-F: specifically, the determination of the interest expense of a foreign corporation that is allocable to their effectively connected income (ECI), and the amount of home office expense deductions allocated to ECI. According to the IRS, the second compliance campaign aims to identify aggressive positions in these areas, "such as the use of apportionment factors that may not attribute the proper amount of expenses to the calculation of effectively connected income."

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ENDNOTE

¹ All "Section" references are to the Internal Revenue Code of 1986, and the regulations promulgated thereunder.

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CONTACTS

For additional information with respect to this Alert, please contact the following:

Ernst & Young LLP, International Tax Services, Washington, DC

• Arlene Fitzpatrick
  arlene.fitzpatrick@ey.com
• Joshua Ruland
  joshua.ruland@ey.com

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ATTACHMENT

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