The Blogging of Morin 030

The story is a bit different if the §962 election was made to reduce tax payable on GILTI. The cost of the election is that the shareholder only gets to treat an amount equal to the actual US tax paid as previously taxed, so most of the dividend will be taxable. This may not make much of a difference, however, as any tax paid where the shareholder lives will be available as a credit to offset US tax on the dividend. A domestic corporation that is a US Shareholder in a CFC is deemed to have paid the foreign taxes paid by the CFC that apply to any subpart F income . The result is that US tax will be owed on GILTI unless the foreign tax rate exceeds 26.25%, double the rate that applies to corporate shareholders.

If there is no exemption, the IRS is going to have its hands full with audits, and many of these audits won’t lead to much revenue. However, if they back off enforcement of GILTI on small businesses due to cost v. reward what is the point? The IRS might as well exempt these taxpayers so neither the IRS or the taxpayer have to lose sleep over the issue.

Note that some of Biden’s proposals, such as the higher marginal income tax rate on income above $400,000, raises revenue in the beginning of the 10-year window, but not at the end. This is because under current law, the lower 37 percent rate is already scheduled to revert to 39.6 beginning in 2026, meaning Biden’s proposal does not result in increased revenue in those years. Taxes long-term capital gains and qualified dividends at the ordinary income tax rate of 39.6 percent on income above $1 million and eliminates step-up in basis for capital gains taxation. Reverts the top individual income tax rate for taxable incomes above $400,000 from 37 percent under current law to the pre-Tax Cuts and Jobs Act level of 39.6 percent. Because GILTI of a CFC, like Subpart F income, is deemed to arise on the last day of the year in which such corporation is a CFC, a typical calendar year individual who owns a calendar year CFC does not recognize Subpart F income or GILTI until December 31 of that year.

Without a special election (§962), individual shareholders cannot offset GILTI with foreign tax credits. As mentioned above, individual shareholders are by default not allowed to utilize indirect foreign tax credits – that is, unless they make a so-called “962 election” in order to claim such credits. Under GILTI, the reduced foreign tax credit means that companies are not getting full credit for the taxes they pay already to foreign jurisdictions. Companies with foreign effective tax rates in excess of 20 percent could end up with additional U.S. tax liability on foreign profits, even though it exceeds the minimum GILTI rate of 13.125 percent.

To incentivize C corporations to grow their non-US sales, the TCJA introduced foreign-derived intangible income . FDII creates a US tax deduction based on excess returns from goods and services sold offshore by US C corporations as well as royalties collected.

There are other areas of foreign earnings under the Subpart F rules (foreign anti-deferral regime) where we look at the actual type of income without using an abstract formula, it would seem possible to do that here as well. There are many foreign businesses where the GILTI calculation is extremely burdensome when compared to overall income and operations. We have even seen taxpayers where the fee to calculate GILTI is more than the actual GILTI tax. Surely these small businesses were not the focus of this new law, and the larger businesses have the bandwidth and professionals needed to get all this extra work completed.

The GILTI rules apply a higher tax rate to GILTI attributed to individuals and trusts who own CFC stock than to C corporation shareholders. Under Section 245A, tax reform allows domestic corporations a 100% deduction for the foreign-sourced portion of dividends received from corporations specified as 10% foreign-owned if