Managing Separate GILTI Calculations

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The 2017 tax act expanded Subpart F to require an inclusion in income of “global intangible low-taxed income” (GILTI) of a controlled foreign corporation (CFC). This is generally the amount of a CFC’s income in excess of its Subpart F income, reduced by 10 percent of the CFC’s depreciable tangible property (routine return).

The amount of the GILTI inclusion from several CFCs is determined in part on an aggregate basis at the level of the US shareholder that owns the CFCs. This includes combining income and losses of different CFCs owned by the US shareholder, and calculating the reduction for the aggregate amount of depreciable tangible property owned by such CFCs.

The language of the Internal Revenue Code requires making these aggregate calculations separately for each US shareholder of one or more CFCs. There currently is no rule permitting the calculation to be performed on a US consolidated group basis. This can result in a greater amount of GILTI inclusion.

For example, if one member of a consolidated group owns CFCs with overall $10 million of losses and another member of the consolidated group owns CFCs with overall income of $50 million (assume no Subpart F income), the GILTI inclusion would be $50 million (less the routine return of the CFCs calculated separately for each US shareholder). If instead all CFCs were owned under a single member of the consolidated group, the amount of the GILTI inclusion would be $40 million (less the routine return calculated on an aggregate basis for all CFC owned by the consolidated group).

If a US consolidated group owns CFCs under different domestic subsidiaries, the taxpayer should consider restructuring the ownership under a single domestic parent corporation. If such restructuring is implemented before the end of the taxable year, the GILTI rules will be applied as if the structure had existed for the entire year.

We note that the US Department of the Treasury may issue guidance permitting the GILTI calculation to be performed on a US consolidated group basis, and thus it may be prudent to wait until near the end of the year to implement any restructuring (to avoid possible unnecessary cost and time). We further note that under some circumstances the separate calculation of GILTI can provide a better tax result (such as when CFCs owned by one US shareholder are subject to high foreign income taxes and CFCs owned by another US shareholder have an overall loss).

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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