After over a decade of debate about international tax reform, we might have hoped our move to territoriality would have been accompanied by a bit more rationality. The bookends of the Tax Cuts and Jobs Act — a lower corporate rate and elimination of the lockout of foreign profits — are simple, majestic policy masterstrokes. Unfortunately, they are debt-financed. And all the accompanying baggage we must live with — necessary to momentarily piece together a political and budget jigsaw puzzle 13 months ago — not only obfuscate and complicate, but in many cases obliterate, the potential economic benefits of the fundamental framework.
We have howled enough on these pages about the poorly designed base erosion and antiabuse tax (section 59A), the indefensible export subsidy that is the deduction for foreign-derived intangible income (FDII, section 250), and the minimum tax on global intangible low-taxed income (sections 78, 250, 951A, 904, and 960). Let’s step away from the details and take stock of the landscape with the advantage of a full year of cogitation and thousands of pages of proposed regulation. The focus of this article will be on five of the more dysfunctional and economically damaging aspects of our new international tax system. Some are survivors of the pre-TCJA era that have evolved and adapted to the new environment. Some have been spawned anew by the TCJA.
The spreadsheets — a total of eight — for all the tables used in this article and a minor correction to a table in a previous article are in a single Excel file.
Traps
First, the allocation of expenses to the GILTI basket (technically, the section 951A category) determines the GILTI basket foreign tax credit limitation. Most U.S. multinationals must pass through this intersection of old regulation and new statute because they will be excess credit GILTI taxpayers trying to monetize their use-them-or-lose-them GILTI basket FTCs. Because of a hastily conceived statute, most of those subject to the GILTI provisions are innocent of any type of tax avoidance. Accordingly, the IRS attempted to reduce the assignment of expenses to the GILTI basket taxpayer by releasing proposed FTC regulations on November 30, 2018. But lingering FTC limitations loom large in U.S. multinational tax planning.
Second, many large U.S. corporations — those with gross receipts over $500 million — that have GILTI subject to tax must simultaneously grapple with the BEAT, which is more likely to apply when a corporation has large amounts of base erosion payments to related parties (relative to taxable income) and large amounts of FTCs (relative to pre-credit tax liability). So on one hand, it is possible for some payments by a U.S. parent to a controlled foreign corporation — even payments made on arm’s-length terms — to incur BEAT liability at the same time they are considered part of taxable GILTI. (Also potentially subject to the BEAT are some related-party payments that become foreign income subject to U.S. tax under subpart F.) Or a U.S. multinational may be able to avoid or reduce regular U.S. income tax liability on GILTI with FTCs only to have those tax credits increase BEAT liability dollar for dollar. All of this is double taxation even when high rates of foreign tax are being paid.
Opportunities
The next three troubling aspects of our current system are at the other end of the pleasure-pain spectrum. Rather than imposing double taxation, these are taxpayer-favorable features that provide opportunities for zero tax on low-taxed foreign income or even negative U.S. effective tax rates. Negative effective tax rates should be red flags to policymakers because they mean the United States has gone beyond favorable taxation of foreign investment and is actually subsidizing foreign investment.
First among these three is the complete exclusion from U.S. tax of CFC business income (that is, GILTI as defined under section 951A) if that income is less than 10 percent of tangible depreciable assets used to produce that business income. Second, aggressive profit shifting (both out of the United States and among foreign jurisdictions) — despite a lower U.S. corporate rate, the addition of two new FTC baskets, an expanded definition of intangibles potentially subject to tax in outbound transactions (section 367(d)), and the expanded authority of the IRS to use valuation methods based on “realistic alternatives” previously struck down in court — can still generate a negative effective tax rate on foreign investment. Third, planning opportunities arise from cross-crediting within FTC baskets: By cross-crediting an excess credit, a taxpayer can invest (or shift profit) into a low- or no-tax jurisdiction and pay no additional U.S. tax.
Overview
Income in the GILTI basket is subject to regular U.S. tax at a rate of less than 21 percent for three reasons. First, for each shareholder, aggregate tested income below aggregate net deemed tangible income return (NDTIR) is exempt from tax. (This is the formal territorial component of the new system.) NDTIR is the excess (if any) of 10 percent of the basis of tangible depreciable property (qualified business asset investment, or QBAI) in CFCs with tested income less specified interest (interest paid to a CFC or another related party). Although there is wide variation, this amount for many taxpayers is a small component of total CFC income.
Second, each CFC shareholder C corporation is potentially entitled to a deduction equal to 50 percent (37.5 percent after 2025) of the sum of the GILTI inclusion (equal to tested income minus NDTIR) plus the section 78 inclusion (equal to a portion of tested foreign income taxes). The portion is determined by an inclusion percentage, equal to GILTI divided by tested income. There are limitations on the section 250 deduction for taxpayers with relatively low taxable income, and the deduction amount by statute is zero for taxpayers who are not C corporations. But it is likely that most GILTI-generating C corporations will deduct the full 50 percent.
Third, any tax due on the remaining amount is entitled to an FTC against 80 percent of tested foreign income taxes subject to an FTC limitation. This is illustrated in Figure 1, and an example is provided in Table 1.
In the example, the U.S.-shareholding parent C corporation, for simplicity’s sake, owns 100 percent of one CFC (and no ownership of any CFC with a tested loss). Total CFC income is $1,100. The statutory foreign tax rate is 9.09 percent. With no exclusions applying and no allocable deductions to nonexcluded income, the subtraction of $100 of tested foreign income tax yields $1,000 of tested foreign income. NDTIR of $200 leaves $800 of GILTI. The inclusion percentage of 80 percent (computed by dividing $800 of GILTI by $1,000 of tested income) yields $80 of section 78 inclusion. Total GILTI basket inclusion (the section 951A inclusion) is $880. In this case the full 50 percent is assumed deductible under section 250. That leaves $440 (out of the original $1,100) subject to the full U.S. corporate tax at 21 percent. Without FTCs, the U.S. regular tax would be $92.40 (which translates into an effective U.S. tax rate on CFC income of 8.4 percent).
In the plain vanilla case, with no expenses allocated to the GILTI basket and the foreign rate comfortably below the flagship foreign threshold rate of 13.125 percent, the full 80 percent of foreign tested income taxes (0.8 * $100 = $80) will be creditable, and with a $92.40 FTC limit there will be $12.40 of excess FTCs available to reduce potential U.S. tax on future low-tax GILTI. But just as most people don’t eat plain vanilla, in most cases the FTC will be further limited because interest, research, and stewardship expenses incurred by the U.S. parent will be allocated to the GILTI basket. Importantly, the increase in excess credit taxpayers because of the drop in the corporate rate from 35 percent to 21 percent is compounded by expense allocation. All these excess credit taxpayers will have unused FTCs that could provide U.S. tax relief for investment in low-tax countries. In our example, the United States imposes a modest 1.1 percent tax on CFC profit.
While simultaneously trying to avoid the taxation of foreign income as GILTI, the largest corporations must always be wary of the BEAT. Careful restructuring and deft management of allocable expenses can increase the use of FTCs, only to have their benefit negated by the BEAT. For a C corporation shareholder subject to the BEAT, every dollar of additional FTC can increase BEAT liability by a dollar.
For various foreign tax rates and inclusion percentages, Table 2 shows the results of calculations mimicking those in Table 1. Among other things, this table reminds us that the average U.S. tax rate on GILTI basket income can be relieved to some extent by NDTIR.
No. 1: Expense Allocation
As noted, the recently proposed FTC regulations provide partial relief from constricting expense allocation rules by treating income sheltered from tax by a section 250 deduction as tax-exempt income. For expense allocation purposes, this means excluding that amount of gross income in the numerators and the denominator of the allocation fraction. (See Example 24 of reg. section 1.861-8T(f)(1).) Suppose a U.S. corporation has $200 of U.S. gross income, $100 of allocable expenses, and $200 of tested income (with 0 percent foreign tax and zero NDTIR). Without tax-exempt treatment of the section 250 deduction amount, allocable expenses to the GILTI basket would be the $50 (that is, the ratio of $200 of foreign-source gross income divided by $400 of worldwide gross income times $100). With the tax-exempt treatment provided by the new regulations, allocable expenses to the GILTI basket will be determined by dropping the $100 of section 250 deduction from both the numerator and denominator of the FTC fraction. So now allocable expenses to the GILTI basket would be $33.33 — that is, the ratio of $100/$300 times $100.
Despite this significant relief, taxpayers can end up paying U.S. tax on high-tax foreign income. Besides contradicting the premise in the legislative history that any taxpayer with an aggregate average foreign tax rate of more than 13.125 percent would not pay tax on GILTI, this treatment has striking economic implications. This is not just a violation of capital import neutrality (the guiding principle of territoriality). It also violates capital export neutrality. That is, it can impose tax above the U.S. statutory rate and the foreign statutory rate. In this case, it is more onerous than a pure worldwide system. Thus, there is a disincentive for investment abroad. An example is provided in Table 3, where the U.S. rate is 21 percent and the foreign rate is 25 percent, but the effective rate of total tax on foreign income is 28.2 percent.
No. 2: BEATing at the Backdoor
The BEAT eats FTCs. Just as the benefit of FTCs can be limited by allocation of expenses to the GILTI basket and U.S. taxes can be imposed even on high-taxed foreign sources, the BEAT can effectively eliminate FTCs that reduce regular tax liability on GILTI and section 78 inclusion income taxable under section 951A.
In the example in Table 4, both the U.S. and foreign statutory rates are 21 percent. But the 25.5 percent effective rate of tax on foreign investment in the GILTI basket exceeds both because the FTCs that eliminated tax on section 951A income increased BEAT liability. The net effect is a regime that is tougher than a worldwide system and tilts the playing field against foreign investment.
No. 3: Excess QBAI
Although the FTC on the far left side of the diagram is the most significant, the economics and tax planning opportunities related to QBAI on the far right are also worth noting. Some of these are shown in Table 5. In Case 1 (the first numerical column), a U.S. multinational invests outside the United States for the first time. The rate of return on that tangible investment is only five-sevenths of NDTIR, so no GILTI is generated. (GILTI cannot be negative.) Even though the foreign tax rate is a low 5 percent, there is no U.S. tax. Unless the BEAT applies, this is unfettered territorial taxation providing an incentive to invest in and shift profit to low-tax jurisdictions.
In Case 2 (the second, third, and fourth numerical columns), a U.S. corporation at the outset has $1,000 of foreign income and $500 of NDTIR in a no-tax jurisdiction. Regular tax liability generated under section 951A yields a 5.25 percent U.S. and worldwide tax rate. If that corporation makes additional investment in a no-tax jurisdiction and the investment generates income equal to five-sevenths of NDTIR, U.S. tax is reduced because the new unused return on QBAI can shelter income on the existing investment. In effect, the taxpayer is in a situation analogous to an excess credit taxpayer — an excess QBAI taxpayer, if you will — and can generate tax benefits by making low-return investments in low-tax countries. In Case 2, the marginal effective tax rate on the new investment is -4.2 percent. The U.S. tax subsidy can be even larger, as shown in Case 3 where the new investment is subject to 7 percent foreign tax. Here the -10.4 percent U.S. marginal effective tax indicates an even larger U.S. subsidy because FTCs generated but unneeded by the additional investment reduce U.S. tax on existing investment.
No. 4: Profit Shifting Under the TCJA
In a 2013 paper, Rosanne Altshuler and Harry Grubert calculated highly negative marginal effective tax rates on tangible capital under pre-TCJA law (Altshuler and Grubert, “Fixing the System: An Analysis of Alternative Proposals for the Reform of International Tax“). A critical component of that calculation was the assumption that tangible investment in a low-tax jurisdiction yielding $100 of economic income could justify the allocation of $300 of taxable profit to that jurisdiction. The TCJA’s reduction of the domestic tax rate and taxation of GILTI have reduced these potential subsidies to foreign investment. But tangible capital can still be an anchor for excess profit shifted into low-tax jurisdictions, and under current law the possibility remains for negative effective tax rates on foreign investment.
In Table 6, a U.S. corporation at the outset has $600 of domestic profit taxed at 21 percent and no foreign presence. Later the corporation increases its tangible investment by one-third (not shown) with expansion into a zero-tax jurisdiction. All investment earns the same rate of return, so economic profit is $200 in the new location. Moreover, this tangible investment provides justification for $200 of profit shifted out of the United States into a tax haven. (This is booked foreign profit equal to double the economic profit, whereas Altshuler and Grubert assumed booked profit equal to triple the economic profit.) The $200 reduction in domestic profits reduces U.S. tax by $42. The $400 of new foreign income is reduced by $200 of NDTIR and again by a $100 section 250 deduction. This $21 of U.S. tax on foreign income results in a net tax saving of $21. With $200 of foreign economic income, this means the U.S. effective tax rate on foreign investment is -10.5 percent. If the effective rate of tax on domestic income had been 13.125 percent (because all the income shifted out of the United States was FDII under section 250), the reduction in U.S. tax would be $26.25 (instead of $42), yielding a net tax saving of $5.25 and a U.S. tax rate on foreign investment of -2.6 percent.
No. 5: Cross-Crediting
As stressed by Patrick Driessen in these pages, cross-crediting opportunities are still abundant under the new law, and cross-crediting can provide significant incentives for U.S. multinationals to direct their investment out of the United States despite the lower corporate tax rate. (Prior analysis: Tax Notes, Oct. 1, 2018, p. 81.) Under current law, most U.S. multinational corporations will have excess GILTI basket tax credits. In most cases they will be able to invest in low-tax countries and pay no U.S. tax. That’s pure territorial taxation — on the margin.
Table 7 provides an example of this. A corporate taxpayer with an average foreign tax rate of 20 percent pays zero U.S. tax at the outset. Subsequent investment also results in zero U.S. tax despite no foreign tax because the unused credits from prior investments shield the new (marginal) investment from any U.S. tax. In general, for excess credit taxpayers, the marginal tax rate on investment in a low- or zero-tax country is that foreign rate.
This could be demonstrated with an example far simpler than presented in Table 7. Hopefully, the example will be useful in serving the added purpose of providing readers with an illustration of the details in calculating section 951A regular tax liability and FTC expense allocations under the proposed regulations.
Conclusion
Although generalizations about the TCJA are treacherous, it seems likely that the new law has left the cross-border playing field tilted less in favor of foreign investment over U.S. investment. A dramatically reduced corporate tax rate, expensing of tangible investment, and a deduction for FDII combine to provide a powerful incentive for domestic capital formation. Nevertheless, there are still many cases in which taxation of foreign investment is more favorable than taxation of domestic investment. That fact, combined with the astounding complexity, the traps for the unwary, the loopholes, and the dispersion of effective tax rates that foster no apparent policy goals, leaves us hard-pressed to see how the TCJA can be considered tax “reform.”
Note: No expense allocation GILTI basket. | |
Calculate foreign tax liability: | |
Foreign tax rate | 9.09% |
Foreign income | $1,100 |
Foreign tax | $100 |
Creditable foreign tax | $80 |
Calculate U.S. tax liability on domestic and foreign-source income: | |
U.S. gross income | $0 |
U.S. expenses to be allocated | $0 |
CFC income (less exclusions and deductions, assumed zero here) | $1,100 |
Tested foreign income tax | $100 |
Tested income | $1,000 |
NDTIR (= 10 percent of QBAI - specified interest) | $200 |
GILTI (= tested income - NDTIR) | $800 |
Inclusion percentage = GILTI/(tested income) | 100% |
Section 78 dividend = incl% * tested foreign income tax | $80 |
GILTI + section 78 inclusions (= section 951A inclusion) | $880 |
Section 250 deduction (= 50 percent of section 951A inclusion) | $440 |
U.S. net taxable income on FSI (difference of prior 2 lines) | $440 |
Worldwide taxable income | $440 |
U.S. tax rate | 21% |
U.S. tax before credits | $92 |
Creditable foreign tax | $80 |
FTC limit | $92 |
FTC | $80 |
U.S. tax after credits | $12 |
Economic income | $1,100 |
Foreign tax rate | 9.1% |
U.S. tax rate | 1.1% |
Total tax rate | 10.2% |
Inclusion Percentage | Foreign Tax Rate | |||||
|---|---|---|---|---|---|---|
0% | 5% | 10% | 13.125% | 15% | 20% | |
0% | 0% | 0% | 0% | 0% | 0% | 0% |
20% | 2.1% | 0% | 0% | 0% | 0% | 0% |
40% | 4.2% | 0.2% | 0% | 0% | 0% | 0% |
60% | 6.3% | 2.3% | 0% | 0% | 0% | 0% |
80% | 8.4% | 4.4% | 0.4% | 0% | 0% | 0% |
100% | 10.5% | 6.5% | 2.5% | 0% | 0% | 0% |
Calculate foreign tax liability: | |
Foreign tax rate | 25% |
Foreign income | $200 |
Foreign tax | $50 |
Creditable foreign tax | $40 |
Calculate U.S. tax liability on domestic and foreign income: | |
U.S. gross income | $400 |
U.S. expenses to be allocated | $150 |
Tested foreign income tax | $50 |
CFC income (no exclusions or other deductions) | $200 |
Tested income | $150 |
NDTIR (= 10 percent of QBAI - specified interest) | $0 |
GILTI (= tested income - NDTIR) | $150 |
Inclusion percentage = GILTI/(tested income) | 100% |
Section 78 dividend = incl% * tested foreign income tax | $50 |
GILTI + section 78 (= section 951A inclusion) | $200 |
Section 250 deduction (= 50 percent of section 951A inclusion) | $100 |
U.S. net taxable income on FSTI (difference of prior 2 lines) | $100 |
U.S. tax (before credits) on FSTI | $21 |
Worldwide taxable income | $350 |
Worldwide tax before credits | $73.50 |
Allocation fraction for GILTI basket | 20% |
Allocated expenses | $30 |
U.S. tax rate | 21% |
U.S. tax before credits | $73.50 |
Creditable foreign tax | $40 |
FTC percentage numerator (GILTI + section 78 - section 250 - allocated expense) | $70 |
FTC percentage denominator | $350 |
FTC fraction | 20% |
FTC limit | $14.70 |
FTC | $14.70 |
U.S. tax after credits on FSTI | $6.30 |
Foreign economic income | $200 |
Foreign tax rate | 25% |
U.S. tax rate on foreign income | 3.2% |
Total tax rate on foreign income | 28.2% |
U.S. income before tax | $100 |
Foreign income before tax | $200 |
Foreign tax rate | 21% |
Foreign tax | $42 |
Tested income | $158 |
NDTIR | $0 |
GILTI | $158 |
Inclusion percentage | 100% |
Section 78 inclusion | $42 |
GILTI + section 78 | $200 |
Section 250 deduction | $100 |
Foreign taxable income | $100 |
U.S. regular tax on FSTI | $21 |
U.S. regular tax on all income (before credits) | $42 |
Base erosion payments | $100 |
Creditable foreign tax | $33.60 |
FTC limit | $21 |
FTC | $21 |
U.S. regular tax on all income after credits | $21 |
Regular taxable income | $200 |
Modified taxable income | $300 |
[1] BEAT rate times MTI | $30 |
[2] U.S. regular tax on all income before credits | $42 |
[3] FTC | $21 |
BEAT liability(= [1] - [2] + [3]) | $9 |
Regular tax liability on FSTI less FTCs | $0 |
Total U.S. tax | $9 |
Foreign tax | $42 |
Foreign income | $200 |
U.S. ETR on foreign income | 4.5% |
Total ETR on foreign income | 25.5% |
| Case 1 |
| Case 2 | Case 3 | ||
|---|---|---|---|---|---|---|
New Investment | Existing Investment | New Investment | New Total | New Investment | New Total | |
Foreign tax rate | 5% | 0% | 0% |
| 7% |
|
Foreign income | $500 | $1,000 | $500 | $1,500 | $500 | $1,500 |
Foreign tax | $25 | $0 | $0 | $0 | $35 | $35 |
Creditable foreign tax | $20 | $0 | $0 | $0 | $28 | $28 |
U.S. gross income | $0 | $0 | $0 | $0 | $0 | $0 |
U.S. expenses to be allocated | $0 | $0 | $0 | $0 | $0 | $0 |
CFC income (less exclusions) | $500 | $1,000 | $500 | $1,500 | $500 | $1,500 |
Tested foreign tax | $25 | $0 | $0 | $0 | $35 | $35 |
Tested income | $475 | $1,000 | $500 | $1,500 | $465 | $1,465 |
NDTIR | $700 | $500 | $700 | $1,200 | $700 | $1,200 |
GILTI |
| $500 |
| $300 |
| $265 |
Inclusion percentage |
| 50% |
| 20% |
| 18% |
Section 78 dividend |
| $0 |
| $0 |
| $6 |
GILTI + section 78 |
| $500 |
| $300 |
| $271 |
Section 250 deduction |
| $250 |
| $150 |
| $136 |
U.S. net taxable income on FSI |
| $250 |
| $150 |
| $136 |
Worldwide taxable income | $0 | $250 | $0 | $150 | $0 | $136 |
U.S. tax rate | 21% | 21% | 21% | 21% | 21% | 21% |
U.S. tax before credits | $0 | $53 | $0 | $32 | $0 | $28 |
Creditable foreign tax | $20 | $0 | $0 | $0 | $28 | $28 |
FTC limit | $0 | $52.50 | $0 | $31.50 | $0 | $28.49 |
FTC | $0 | $0 | $0 | $0 | $0 | $28 |
U.S. tax after credits | $0 | $52.50 | $0 | $31.50 | $0 | $0.49 |
Economic income | $500 | $1,000 | $500 | $1,500 | $500 | $1,500 |
Foreign tax rate | 5% | 0% | 0% | 0% | 7% | 2.3% |
U.S. tax rate | 0% | 5.25% | 0% | 2.1% | 0% | 0% |
Total tax rate | 5% | 5.25% | 0% | 2.1% | 7% | 2.4% |
Changes to calculate marginal tax rates: | ||||||
Foreign income | $500 |
|
| $500 |
| $500 |
Foreign tax | $25 |
|
| $0 |
| $35 |
U.S. tax after credits | $0 |
|
| -$21 |
| -$52.01 |
Tax rates on marginal investment: | ||||||
Foreign tax rate | 5% |
|
| 0% |
| 7% |
U.S. tax rate | 0% |
|
| -4.2% |
| -10.4% |
Total tax rate | 5% |
|
| -4.2% |
| -3.4% |
| Before | Investment Into Low-Tax Country | Change |
|---|---|---|---|
Calculate foreign tax liability: | |||
Foreign tax rate | 0% | 0% |
|
Foreign income | $0 | $400 | $400 |
Foreign tax | $0 | $0 |
|
Creditable foreign tax | $0 | $0 |
|
Calculate U.S. tax liability on domestic and foreign-source income: | |||
U.S. taxable income | $600 | $400 | -$200 |
U.S. expenses to be allocated | $0 | $0 |
|
CFC income (less exclusions) | n.a. | $400 | $400 |
Tested foreign tax | n.a. | $0 |
|
Tested income | n.a. | $400 | $400 |
NDTIR | n.a. | $200 |
|
GILTI | n.a. | $200 |
|
Inclusion percentage | n.a. | 50% |
|
Section 78 inclusion | n.a. | $0 |
|
GILTI + section 78 | n.a. | $200 |
|
Section 250 deduction | n.a. | $100 |
|
U.S. net taxable income on FSI | n.a. | $100 | $100 |
Worldwide taxable income | $600 | $500 | -$100 |
U.S. tax rate | 21% | 21% | 21% |
U.S. tax before credits | $126 | $105 | -$21 |
Creditable foreign tax | n.a. | $0 |
|
FTC limit | n.a. | $21 |
|
FTC | n.a. | $0 |
|
U.S. tax after credits | $126 | $105 |
|
Marginal ETR |
|
| -10.5% |
| [1] Existing Investment in U.S. and Foreign Investment Taxed at 20 Percent | [2] Additional Foreign Investment Taxed at 0 Percent (if treated independently) | [3] Combination of Prior Two Columns |
|---|---|---|---|
Shaded cells are entered values. All other cells are computed from those values. | |||
Part 1. Calculation of GILTI Tax Liability | |||
U.S. shareholder gross domestic income | $1,500 | $0 | $1,500 |
U.S. expenses to be allocated | $500 | $0 | $500 |
For each CFC with tested (positive) income: | |||
Gross income of controlled foreign corporation | $1,000 | $400 | $1,400 |
Subpart F (general basket) | $100 | $0 | $100 |
Other three exclusions (FOGEI, ECI, high-tax kick-out) | $0 | $0 | $0 |
Gross income of CFC less 5 exclusions (section 951A(c)(2)(A)) | $900 | $400 | $1,300 |
Deductions properly allocable to tested income (except income tax) (prop. reg. section 1.951A-2(c)(2)) | $0 | $0 | $0 |
“Gross tested foreign income” (MS terminology) | $900 | $400 | $1,300 |
Foreign tax rate (here exogenous, used to calculate tested income tax) | 20% | 0% | 14% |
Foreign tested income tax (section 960(d)(3)) | $180 | $0 | $180 |
Tested income (is positive after-tax nonexcluded CFC income) | $720 | $400 | $1,120 |
Qualified business asset investment (prop. reg. section 1.951A-3(b)) (ADS basis, tangible, depreciable, business) (only QBAI of CFCs with tested income enter calculations) | $3,000 | $300 | $3,300 |
“Specified interest” expense (net of interest income) (prop. reg. section 1.951A-1(c)(3)(iii)) (third-party interest expense or interest expense paid to related U.S. persons) | $0 | $0 | $0 |
Assumed here no CFCs with tested losses | |||
U.S. shareholder parent corporation (aggregate of above): | |||
Net tested income (section 951A(c)(1)) | $720 | $400 | $1,120 |
QBAI (only of CFCs with tested income) |
|
|
|
10 percent of QBAI of CFCs with tested income (section 951A(b)(2)(A)) | $300 | $30 | $330 |
Specified net interest expense of all CFCs (section 951A(b)(2)(B)) | $0 | $0 | $0 |
Net deemed tangible income return (NDTIR) (section 951A(b)(2)) | $300 | $30 | $330 |
GILTI = NTI - NDTIR (section 951A(b)(1)) (cannot be negative) | $420 | $370 | $790 |
Inclusion percentage = GILTI/(tested income) (section 960(d)(2)) | 58.3% | 92.5% | 70.5% |
Tested foreign income tax (only CFCs with tested income) (section 960(d)(3)) | $180 | $0 | $180 |
Section 78 gross-up of GILTI (= tested foreign income tax times inclusion percentage) | $105 | $0 | $127 |
Section 951A inclusion in taxable income (GILTI plus section 78 inclusion) (before section 250 deduction) | $525 | $370 | $917 |
Section 250 fraction (37.5 percent after 2025) (only for corporate shareholders) (can be limited if FDII is high enough and taxable income low enough) (section 250(a)(1)(B)(i)) | 50% | 50% | 50% |
Section 250 deduction related to GILTI (section 250(a)(1)(B)(i)) | $210 | $185 | $395 |
Section 250 deduction related to gross-up (section 250(a)(1)(B)(ii)) | $53 | $0 | $63 |
Section 250 deduction (section 250(a)(1)(B)(i) and (ii)), GILTI and gross-up (sum of prior two) (this amount under proposed FTC regs will be treated as tax-exempt in expense apportionment calculation) | $263 | $185 | $458 |
Net (after section 250 deduction) section 951A inclusion in taxable income (not going to be section 245A subgroup) | $263 | $185 | $458 |
FTC calculation for section 951A category: | |||
[a] Deemed paid foreign tax (section 960(d)(1)) (80 percent of gross-up) (with the “20% haircut”) | $84 | $0 | $102 |
[b] Foreign tax credit limitation on GILTI basket (section 904(d)(1)(A)) (from Part 2) | $43 | $38.85 | $80 |
[c] Foreign tax credit = min([a], [b]) | $43 | $0 | $80 |
[d] Excess credit (if any) (max(0, [a] - [b])) (“high” foreign tax exceeds FTC limit) (if preceding line is positive, taxpayer will see to cross-credit with low-tax 951A basket income) | $41 | $0 | $22 |
[e] Excess limit (if any) (max(0,[b]-[a])) (want to cross-credit with “high tax” GILTI) (U.S. tax on foreign income) (if preceding line is positive, taxpayers can cross-credit with high-tax 951A basket income) | $0 | $39 | $0 |
U.S. tax on foreign-source income | $0 | $39 | $0 |
FYI: | |||
U.S. tax rate on section 951A income (“gross” (before-tax) tested income) in denominator) | 0% | 9.7% | 0% |
Foreign tax rate on tested income | 20% | 0% | 14% |
Total tax rate on tested income | 20% | 9.7% | 13.8% |
Part 2. Calculation of the FTC Limitations | |||
Inputs: | |||
U.S. factory book value (assets) | $10,000 | $0 | $10,000 |
CFC stock book value (assets) | $5,000 | $500 | $5,500 |
U.S. expense to be allocated (from Part 1) | $500 | $0 | $500 |
U.S. gross income (from Part 1) | $1,500 | $0 | $1,500 |
Subpart F income (general basket) (section 904(d)(1)(C)) (from Part 1) | $100 | $0 | $100 |
Section 250 deduction (from Part 1) (assumes no reduction below 50 percent by reason of section 250(a)(1)(B)(i)) | $263 | $185 | $458 |
Section 951A (GILTI + section 78) inclusion amount in taxable income (from Part 1) | $525 | $370 | $917 |
Worldwide taxable income (U.S. - allocable expenses + SubF + 951A inclusion - section 250) (NDTIR (already removed from 951A inclusion) will end up in section 245A subgroup) | $1,363 | $185 | $1,558 |
“Tax-exempt percentage” (MS terminology) (= exempt income resulting from GILTI portion of section 250 deduction)/GILTI) (prop. reg. section 1.861-8(d)(2)(ii)(C)(2)(ii)) | 50% | 50% | 50% |
Inclusion percentage = GILTI/(tested income) (section 960(d)(2)) | 58.3% | 92.5% | 70.5% |
Characterization of CFC stock: | |||
(Under proposed regs, income sheltered by section 250 is treated as tax exempt, excluded from gross income) |
|
|
|
Assets giving rise to subpart F income (general basket) (amount here assumed) | $500 | $0 | $500 |
Non-subpart F CFC stock book value to be apportioned | $4,500 | $500 | $5,000 |
Section 951A stock (stock by reason of inclusion percentage to be treated as taxable in 951A basket) (to be divided into taxable and tax-exempt portions) | $2,625 | $463 | $3,527 |
General category stock (will be in 245A subgroup, allocated expenses will get 904(b)(4) treatment) (“Portion of the general category gross tested income stock that is not characterized as a section 951A category asset remains a gross category asset and may result in expenses being disregarded under section 904(b)(4).”) | $1,875 | $38 | $1,473 |
Tax exempt under new regs (section 250 portion of what would be taxable section 951A inclusion) (Used “tax-exempt percentage” to divide 951A stock into 245A (disregarded) and non-section 245A (taxable)) | $1,313 | $231 | $1,763 |
Non-section 245A subgroup (taxable) (GILTI + section 78) | $1,313 | $231 | $1,763 |
Allocation and apportionment of expenses for FTC limitation (section 904) purposes (tax book values, using asset method): | |||
Stock amounts for numerators: | |||
[1] Assets giving rise to subpart F income (general basket) | $500 | $0 | $500 |
[2] U.S. assets | $10,000 | $0 | $10,000 |
[3] General category stock, NDTIR, “territorial” portion, receives section 904(b)(4) treatment when calculating FTC limitation percentage | $1,875 | $38 | $1,473 |
[4] Non-section 245A (taxable) subgroup (of section 951A category) | $1,313 | $231 | $1,763 |
Total (sum of [1] thru [4] above) (denominator of expense allocation fraction) | $13,688 | $269 | $13,737 |
Allocation fractions: | |||
[1] Subpart F general category | 3.7% | 0% | 3.6% |
[2] U.S. assets | 73.1% | 0% | 72.8% |
[3] General category stock | 13.7% | 14% | 10.7% |
[4] Non-section 245A subgroup: taxable GILTI + section 78 (less tax-exempt section 250 deduction) | 9.6% | 86% | 12.8% |
Total | 100% | 100% | 100% |
U.S. expense to be allocated | $500 | — | $500 |
Allocated amounts: | |||
[1] Subpart F general category | $18 | $0 | $18 |
[2] U.S. assets | $365 | $0 | $364 |
[3] General category stock (the territorial piece) (section 245A) (not section 951A) (aka the “addback” of 245A dividends) | $68 | $0 | $54 |
[4] Non-section 245A subgroup | $48 | $0 | $64 |
Total (sum of [1] thru [4] above) | $500 | $0 | $500 |
Calculation of FTC limitation: | |||
Pre-credit U.S. tax: | |||
Worldwide taxable income (not adjusted for 904(b)(4)) (section 250 deduction and NDTIR deducted) | $1,363 | $185 | $1,558 |
U.S. tax before credits at 21 percent (section 26 U.S. tax liability) | $286 | $39 | $327 |
FTC limit for general category income (section 904(d)(1)(A)): | |||
Allocated expense to section 245A subgroup | $68.5 | $0 | $53.6 |
Allocated expense to be disregarded in FTC limit calculation under section 904(b)(4), aka the addback | $68.5 | $0 | $53.6 |
Gross income subpart F general category | $100 | $0 | $100 |
Allocated expense to subpart F general | $18.3 | $0 | $18.2 |
Numerator, sum of all gross income less all allocated expenses | $82 | $0 | $82 |
Denominator, worldwide income adjusted for 904(b)(4), with addback of “territorial” section 245A expenses | $1,431 | $185 | $1,612.1 |
FTC limit for general category income | $16.3 | $0 | $16.6 |
FTC limit for section 951A category (section 904(d)(1)(A)): | |||
Section 951A inclusion (GILTI + section 78) (before section 250 deduction) | $525 | $370 | $917 |
Section 250 deduction | $263 | $185 | $458 |
Expenses allocated to gross income (which does not include section 250) | $48 | $0 | $64 |
Numerator (taxable portion of section 951 inclusion minus allocated expenses) | $215 | $185 | $394 |
Denominator, worldwide income adjusted for 904(b)(4), with addback | $1,431 | $185 | $1,612 |
FTC limit for section 951A category income | $43 | $39 | $80 |