Updates to GILTI High-Tax Exception regulations

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The IRS issued final regulations to the High-Tax Exception (HTE) for Global Intangible Low-Taxed Income (GILTI) on July 20, 2020.  Although these final regulations are similar to the proposed regulations issued in June of 2019, they contain some modifications such as allowing an annual election rather than a five-year binding election and allowing for retroactive application.

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GILTI was introduced with the Tax Cuts and Jobs Act of 2017 and is a way for the IRS to tax U.S. shareholders of certain controlled foreign corporations (CFC). No longer can these U.S. shareholders defer the income earned in these foreign corporations until distributed, but they now must pay a minimum tax on these earnings.

The IRS limited the amount of foreign tax credit a U.S. shareholder may use against GILTI. As such, some U.S. shareholders may find themselves paying double tax on GILTI from countries that have a high level of tax. In order to provide some relief, the IRS allows taxpayers to make a High-Tax Exception election.

High-Tax Exception Election

A U.S. shareholder may exclude from tested income for GILTI that income which is determined to have a foreign tax rate greater than 18.9%. Under the new regulations, this is determined on a tested unit basis. A tested unit is considered a CFC, a direct or indirect interest in a pass-through entity held by a CFC, and certain branches of a CFC. The election to exclude this high-tax income is made by attaching a statement to the U.S. shareholder’s tax return and is made on an annual basis. If an election is made, it will apply to all CFCs controlled by that shareholder. Additionally, each CFC that a controlling shareholder makes a HTE election for, all other U.S. shareholders of that CFC must also make the HTE election. The election is available for tax years of foreign corporations beginning on or after July 23, 2020. If certain consistency requirements are met, the election may also be made retroactively for tax years beginning after December 31, 2017 and before July 23, 2020.

Please consult a qualified tax professional for advice.  This information is general and should not be relied on.

Jill A. Helm, CPA