An additional regulation package on the GILTI provision has some taxpayers wondering if they can amend their 2018 and 2019 tax returns to receive a refund.
An additional regulation package (2020 Final Regulations) issued recently by the U.S. Treasury Department and the IRS on the global intangible low-taxed income (GILTI) provision has some taxpayers wondering if they can amend their 2018 and 2019 tax returns to receive a refund.
GILTI is a category of foreign income added to taxable income each year. Fundamentally, it’s a tax on earnings that exceed a 10% return on a company’s invested foreign tangible assets, such as machinery or equipment. The 10% standard has been set as it represents a reasonable rate of return on a company’s tangible assets. GILTI income is the excess income above that rate of return. The primary purpose of GILTI is to reduce the incentive for U.S. taxpayers to shift profits out of the country to low or zero tax jurisdictions, as these earnings will be taxed currently in the U.S.
However, many individuals who are not eligible for the 50% Section 250 deduction have found themselves penalized by the GILTI inclusion, requiring them to tax foreign earnings at their ordinary rate (sometimes as high as 40.8% federally). Finally, Treasury has issued a break for these individuals with the GILTI High-Tax Exception. It allows a United States taxpayer who is a U.S. shareholder in a CFC (controlled foreign corporation) the ability to elect to exclude income earned by a CFC if the income is taxed at a rate of more than 90% of the corporate tax rate, which is currently 18.9%. While many corporate taxpayers may not have had an inclusion of these earnings due to Section 250, many individual U.S. taxpayers not eligible for a Section 962 election, who were forced to include their foreign earnings at ordinary rates, will welcome this relief.
So, does these mean that taxpayers can seek retroactive application of the GILTI High-Tax Exception for tax years 2018 and 2019? The short answer is “yes.” To be crystal clear, taxpayers may choose to apply the 2020 Final Regulations for tax years beginning December 31, 2017 and before July 23, 2020, so long as certain consistency requirements are satisfied. The Final Regulations also allows taxpayers to take the GILTI high-tax exception annually; as such, they can evaluate their earnings on an annual basis, allowing for more flexibility.
This high-tax election could prove favorable for taxpayers who otherwise would not care to make a Section 962 election. In brief, Section 962 allows an individual who is a U.S. shareholder to elect to be taxed on amounts included in their gross income under Section 951(a) as if they were a Subchapter C corporation.
There is much provisional language in the 2020 Final Regulations for High-Tax Exception to GILTI, but ultimately it provides taxpayer-friendly guidance to generally reduce the amount of tax payable by taxpayers with interests in foreign corporations.
The 2020 Final Regulations includes vernacular provisions and requirements that at first blush may not seem straightforward. Taxpayers are encouraged to speak with their tax advisors to completely understand all elements of the Regulations and decide whether they would benefit from applying them to prior tax years.
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