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Section 962 Election of The Corporate Tax Rate by Individuals For Global Intangible Low-Taxed Income ( GILTI) And Subpart F Income Inclusions TUESDAY , JULY 10, 2018 Thomas M. Giordano-Lascari, Atty Karlin & Peebles, Los Angeles tgiordano@karlinpeebles.com William K. Norman, J.D., LL.M. (Taxation), Partner Ord & Norman, Los Angeles ontaxla@yahoo.com
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Section 962 Election of The Corporate Tax Rate by Individuals For Global Intangible Low-Taxed Income ( GILTI) And Subpart F Income Inclusions William K. Norman Thomas M. Giordano-Lascari Ord & Norman Karlin & Peebles, LLP 11377 West Olympic Boulevard, 5th Fl. 5900 Wilshire Boulevard, Suite 500 Los Angeles, CA 90064 Los Angeles, CA 90036 Telephone: (310) 473-8067 Telephone: (323) 648-4649 Facsimile: (310) 473-8140 Facsimile: (310) 388-5537 ontaxla@yahoo.com tgiordano@karlinpeebles.com
Introduction • Fundamentally, IRC § 962 allows a non-corporate US shareholder of a CFC to elect to be taxed on subpart F inclusions at the same rate as a corporate US shareholder. • Prior to the TCJA, § 962 was not significantly utilized. • The TCJA gave new importance to § 962: – First, the corporate tax rate was reduced from 35% to 21% making the differential between the highest individual tax rate (39.6%) and the corporate rate much more substantial. – Second, the introduction of GILTI drastically reduced the ability to defer foreign earnings from US tax by causing all but a modest amount of foreign income to be includible in a US shareholder’s income on an annual deemed basis (similar to traditional subpart F inclusions). • Why not just interpose a US C corporation? – Not ideal if future sale of CFC stock anticipated – Adverse foreign country consequences of transfer of CFC stock to domestic corporation – Likely not viable solution for US persons (not citizens) that will be exiting the United States in the future – Also likely not viable for US persons (including citizens) resident in foreign country where foreign country tax will be prohibitive if CFC held through a US corporation
Global Intangible Low Taxed Income (GILTI) § 951A Effective for TYs of foreign corps. beginning after 12/31/17 and the TYs of U.S. Shareholders in which or with which the TY of the foreign corp. ends. P.L. 115-97, § 14201(a) 7
GILTI ( Cont ) “U.S. Shareholder” of any CFC includes in its gross income the shareholder’s “Global Intangible Low Taxed Income” (GILTI). § 951A(a) 8
GILTI ( Cont ) Foreign corp. is a “Controlled Foreign Corporation” (CFC) only if it was a CFC at any time during the TY. See § 957 for definition of CFC. § 951A(e)(3) 9
GILTI ( Cont ) A U.S. Person is a “U.S. Shareholder” if the person owns (w/in meaning of § 958(a) i.e., directly or indirectly through foreign entities) stock in the foreign corp. on the last day in the taxable year of the foreign corp. on which it is a CFC. See § 951(b) for definition of U.S. Shareholder. § 951A(e)(2) 10
GILTI ( Cont ) GILTI = “Net CFC - “Net For Any Tested Income” Deemed U.S. Shareholder of the U.S. Tangible For Any TY Shareholder Income of the Shareholder Return” (NDTIR”) of the U.S. Shareholder >0 § 951A(b)(1) 11
GILTI ( Cont ) “Net CFC Tested Income” of a U.S. Shareholder for any TY of the Shareholder nCFC nCFC = Ʃ Aggregate of Prorata Share of - Ʃ Aggregate of Prorata Share of 1 “Tested Income” of all CFCs 1 “Tested Loss” of all CFCs wrtw wrtw the shareholder which is a the shareholder which is a U.S. U.S. Shareholder for TY Shareholder for TY of the CFC of the CFC that ends with or w/i that ends with or w/in the TY the TY of the shareholder of the shareholder >0 § 951A(c)(1) 12
GILTI ( Cont ) “Tested Loss” of a CFC for any TY of the CFC = Deductions Gross Income of the including taxes CFC computed w/o allocated to GI - regard to excluded of the CFC under items in § 951A(c)(2)(i) rules similar to § 954(b)(5) w/o (I) through (V) excluded items in § 951A(c)(2)(i) (I) through (V) < 0 § 951A(c)(2)(B)(i) 13
GILTI ( Cont ) “Tested Income” of a CFC for any TY of the CFC = Gross Income of the CFC Deductions Except: including taxes -ECI (952(b)) allocable to -Subpart F income (954) - GI of the CFC -GI excluded from under rules subpart F income as similar to § 954(b)(5) high taxed (954(b)(4)) - Dividends from “related w/o excepted persons” (954(d)(3) items < 0 § 951A(c)(2)(A) 14
GILTI ( Cont ) NDTIR of n U.S. Shareholder = .10 Ʃ QBAI Interest expense allocable to For Any TY 1 of all - “Net CFC Tested Income” to CFCs extent interest income attributable wrtw to the expense is not taken into SH is account in determining Net CFC a U.S. SH Tested Income of the shareholder used to produce Tested Income >0 § 951A(b)(2) 15
GILTI ( Cont ) QBAI 4 Aggregate adjusted tax basis ¼ Ʃ under ADS ( § 168(g) as of the close of each of a CFC = for TY 1 quarter of “Specified Tangible Property” used in t or b of CFC of a type wrtw deduction is allowable under § 167 § 951A(d)(1) 16
GILTI ( Cont ) Specified tangible property (STP) of a CFC is (except for “dual use property”) any tangible property used in the production of “tested income” § 951A(d)(1) 17
GILTI ( Cont ) “Dual use property” is tangible property used by the CFC for production of both “tested income” and income which is not tested income. § 951A(d)(2)(B) 18
GILTI ( Cont ) Specified Tangible Adjusted base of Shareholder’s Property Allocable = tangible property pro rata share to a CFC in used in t or b by the X of “tested dual use CFC for which income” of the deduction is allowed CFC wrt under § 167 tangible property Total gross income of the CFC produced by the tangible property § 951A(d)(2)(B) 19
GILTI ( Cont ) Allocation of CFC’s distributive Adjusted Adjusted basis = share of income basis of of STP of a of the partnership as X items of partnership to a percentage wrt STP held CFC partner the STP by partnership of which the CFC is a partner § 951A(d)(3) 20
GILTI ( Cont ) Deemed Paid GILTI * Aggregate Credit for = .80 Aggregate Tested Foreign GILTI Inclusion Tested X Income Tax of a U.S. Shareholder Income of CFCs of CFCs *Fraction is called “inclusion percentage”. § 960(d)(2) 21
GILTI ( Cont ) See 78 = GILTI * X Aggregate Gross Up Aggregate Tested Foreign Related Tested Income Income Tax to GILTI of CFCs of CFCs Inclusion of a U.S. Shareholder *Fraction is called “inclusion percentage”. § 960(d)(2) § 78 and § 960(d) 22
GILTI ( Cont ) “Tested Foreign Income Taxes” of a domestic (C) corporation which is a U.S. Shareholder of one or more CFCs is the sum of: Foreign income taxes paid or accrued by each CFC with “tested income” that are “properly attributable” to the “tested income” of the CFC included in GILTI. § 960(d)(3) 23
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