[Federal Register Volume 84, Number 120 (Friday, June 21, 2019)]
[Proposed Rules]
[Pages 29114-29133]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-12436]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-101828-19]
RIN 1545-BP15
Guidance Under Section 958 (Rules for Determining Stock
Ownership) and Section 951A (Global Intangible Low-Taxed Income)
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking.
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[[Page 29115]]
SUMMARY: This document contains proposed regulations regarding the
treatment of domestic partnerships for purposes of determining amounts
included in the gross income of their partners with respect to foreign
corporations. In addition, this document contains proposed regulations
under the global intangible low-taxed income provisions regarding gross
income that is subject to a high rate of foreign tax. The proposed
regulations would affect United States persons that own stock of
foreign corporations through domestic partnerships and United States
shareholders of foreign corporations.
DATES: Written or electronic comments and requests for a public hearing
must be received by September 19, 2019.
ADDRESSES: Send submissions to: Internal Revenue Service, CC:PA:LPD:PR
(REG-101828-19), Room 5203, Post Office Box 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may be hand-delivered Monday through
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
101828-19), Courier's Desk, Internal Revenue Service, 1111 Constitution
Avenue NW, Washington, DC 20024, or sent electronically, via the
Federal eRulemaking Portal at www.regulations.gov (indicate IRS and
REG-101828-19).
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations
under Sec. Sec. 1.951-1, 1.956-1, and 1.958-1, Joshua P. Roffenbender
at (202) 317-6934; concerning the proposed regulations under Sec. Sec.
1.951A-0, 1.951A-2, 1.951A-7, and 1.954-1, Jorge M. Oben at (202) 317-
6934; concerning the proposed regulations under Sec. 1.1502-51,
Katherine H. Zhang at (202) 317-6848 or Kevin M. Jacobs at (202) 317-
5332; concerning submissions of comments or requests for a public
hearing, Regina Johnson at (202) 317-6901 (not toll free numbers).
SUPPLEMENTARY INFORMATION:
Background
I. Subpart F Before Enactment of Section 951A
The Revenue Act of 1962 (the ``1962 Act''), Public Law 87-834, sec.
12, 76 Stat. at 1006, enacted subpart F of part III, subchapter N,
chapter 1 of the 1954 Internal Revenue Code (``subpart F''), as
amended. See sections 951 through 965 of the Internal Revenue Code
(``Code'').\1\ Congress created the subpart F regime to limit the use
of corporations organized in low-tax jurisdictions for the purposes of
obtaining indefinite deferral of U.S. tax on certain earnings--
generally earnings that are passive or highly mobile--that would
otherwise be subject to Federal income tax. H.R. Rep. No. 1447 at 57-58
(1962); S. Rep. No. 1881 at 78-80 (1962). Subpart F generally requires
a United States shareholder (as defined in section 951(b)) (``U.S.
shareholder'') to include in its gross income (``subpart F inclusion'')
its pro rata share of subpart F income (as defined in section 952)
earned by a controlled foreign corporation (``CFC'') (as defined in
section 957(a)) and its pro rata share of earnings and profits
(``E&P'') invested in certain United States property by the CFC. See
section 951(a)(1)(A) and (B) and section 956(a). For purposes of both
section 951(a)(1)(A) and (B), the determination of a U.S. shareholder's
pro rata share of any amount with respect to a CFC is determined by
reference to the stock of the CFC that the shareholder owns (within the
meaning of section 958(a)). See sections 951(a)(1) and (2) and 956(a).
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\1\ Except as otherwise stated, all section references in this
preamble are to the Internal Revenue Code.
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Section 957(a) defines a CFC as any foreign corporation if U.S.
shareholders own (within the meaning of section 958(a)), or are
considered as owning by applying the ownership rules of section 958(b),
more than 50 percent of the total combined voting power or value of
stock of such corporation on any day during the taxable year of such
foreign corporation. Section 951(b) defines a U.S. shareholder of a
foreign corporation as a United States person (``U.S. person'') that
owns (within the meaning of section 958(a)), or is considered as owning
by applying the ownership rules of section 958(b), at least 10 percent
of the total combined voting power or value of stock of the foreign
corporation. Section 957(c) generally defines a U.S. person by
reference to section 7701(a)(30), which defines a U.S. person as a
citizen or resident of the United States, a domestic partnership, a
domestic corporation, and certain estates and trusts.
Stock owned within the meaning of section 958(a) is stock owned
directly and stock owned indirectly under section 958(a)(2). Section
958(a)(2) provides that stock owned, directly or indirectly, by or for
a foreign corporation, foreign partnership, foreign trust, or foreign
estate is considered to be owned proportionately by its shareholders,
partners, or beneficiaries. Section 958(a)(2) does not provide rules
addressing stock owned by domestic entities, including domestic
partnerships.
Section 958(b) provides in relevant part that the constructive
ownership rules of section 318(a) apply, with certain modifications,
for purposes of determining whether any U.S. person is a U.S.
shareholder or any foreign corporation is a CFC. These rules apply to
treat a person as owning the stock owned, directly or indirectly, by
another person, generally without regard to whether the person to or
from which stock is attributed is domestic or foreign. In particular,
section 318(a)(2)(A) provides in relevant part that stock owned,
directly or indirectly, by or for a partnership is considered as owned
proportionately by its partners, and section 318(a)(3)(A) provides that
stock owned, directly or indirectly, by or for a partner is considered
as owned by the partnership. Further, in determining stock treated as
owned by partners of a partnership under section 318(a)(2)(A), section
958(b)(2) provides in relevant part that a partnership that owns,
directly or indirectly, more than 50 percent of the voting power of a
corporation is considered as owning all the stock entitled to vote.
However, a U.S. person that is a U.S. shareholder of a CFC by reason of
constructive ownership under section 958(b), but that does not own
stock in the CFC within the meaning of section 958(a), does not have a
subpart F inclusion with respect to the CFC.
II. Treatment of Domestic Partnerships as Entities or Aggregates of
Their Partners, in General
For purposes of applying a particular provision of the Code, a
partnership may be treated as either an entity separate from its
partners or as an aggregate of its partners. Under an aggregate
approach, the partners of a partnership, and not the partnership, are
treated as owning the partnership's assets and conducting the
partnership's operations. Under an entity approach, the partnership is
respected as separate and distinct from its partners, and therefore the
partnership, and not the partners, is treated as owning the
partnership's assets and conducting the partnership's operations. Based
upon the authority of subchapter K and the policies underlying a
particular provision of the Code, a partnership is treated as an
aggregate of its partners or as an entity separate from its partners,
depending on which characterization is more appropriate to carry out
the scope and purpose of the Code provision. See H.R. Rep. No. 83-2543,
at 59 (1954) (Conf. Rep.) (``Both the House provisions and the Senate
amendment provide for the use of the `entity' approach in the treatment
of transactions between a partner and a partnership . . . . No
inference is
[[Page 29116]]
intended, however, that a partnership is to be considered as a separate
entity for the purpose of applying other provisions of the internal
revenue laws if the concept of the partnership as a collection of
individuals is more appropriate for such provisions.''). See also Casel
v. Commissioner, 79 T.C. 424, 433 (1982) (``When the 1954 Code was
adopted by Congress, the conference report . . . clearly stated that
whether an aggregate or entity theory of partnerships should be applied
to a particular Code section depends upon which theory is more
appropriate to such section.''); Holiday Village Shopping Center v.
United States, 5 Cl. Ct. 566, 570 (1984), aff'd 773 F.2d 276 (Fed. Cir.
1985) (``[T]he proper inquiry is not whether a partnership is an entity
or an aggregate for purposes of applying the internal revenue laws
generally, but rather which is the more appropriate and more consistent
with Congressional intent with respect to the operation of the
particular provision of the Internal Revenue Code at issue.''); Sec.
1.701-2(e)(1) (``The Commissioner can treat a partnership as an
aggregate of its partners in whole or in part as appropriate to carry
out the purpose of any provision of the Internal Revenue Code . . .
.'').
Consistent with this authority under subchapter K, the Treasury
Department and the IRS have adopted an aggregate approach to
partnerships to carry out the purpose of various provisions, including
international provisions, of the Code. For example, regulations under
section 871 treat domestic and foreign partnerships as aggregates of
their partners in applying the 10 percent shareholder test of section
871(h)(3) to determine whether interest paid to a partnership would be
considered portfolio interest under section 871(h)(2). See Sec. 1.871-
14(g)(3)(i). An aggregate approach to partnerships was also adopted in
regulations issued under section 367(a) to address the transfer of
property by a domestic or foreign partnership to a foreign corporation
in an exchange described in section 367(a)(1). See Sec. 1.367(a)-
1T(c)(3)(i)(A). Similarly, the Treasury Department and the IRS adopted
an aggregate approach to foreign partnerships for purposes of applying
the regulations under section 367(b). See Sec. 1.367(b)-2(k); see also
Sec. Sec. 1.367(e)-1(b)(2) (treating stock and securities of a
distributing corporation owned by or for a partnership (domestic or
foreign) as owned proportionately by its partners) and 1.861-9(e)(2)
(requiring certain corporate partners to apportion interest expense,
including the partner's distributive share of partnership interest
expense, by reference to the partner's assets).
III. Treatment of Domestic Partnerships as Entities or Aggregates for
Purposes of Subpart F Before the Tax Cuts and Jobs Act
Since the enactment of subpart F, domestic partnerships have
generally been treated as entities, rather than as aggregates of their
partners, for purposes of determining whether U.S. shareholders own
more than 50 percent of the stock (by voting power or value) of a
foreign corporation and thus whether a foreign corporation is a CFC.
See Sec. 1.701-2(f), Example 3 (concluding that a foreign corporation
wholly owned by a domestic partnership is a CFC for purposes of
applying the look-through rules of section 904(d)(3)). In addition,
domestic partnerships have generally been treated as entities for
purposes of treating a domestic partnership as the U.S. shareholder
that has the subpart F inclusion with respect to such foreign
corporation. But cf. Sec. Sec. 1.951-1(h) and 1.965-1(e) (treating
certain domestic partnerships owned by CFCs as foreign partnerships for
purposes of determining the U.S. shareholder that has the subpart F
inclusion with respect to CFCs owned by such domestic partnerships). If
a domestic partnership is treated as the U.S. shareholder with the
subpart F inclusion, then each partner of the partnership has a
distributive share of the partnership's subpart F inclusion, regardless
of whether the partner itself is a U.S. shareholder. See section 702.
This entity treatment is consistent with the inclusion of a
domestic partnership in the definition of a U.S. person in section
7701(a)(30), which term is used in the definition of U.S. shareholder
by reference to section 957(c). It is also consistent with the
legislative history to section 951, which describes domestic
partnerships as being included within the definition of a U.S. person
and, therefore, a U.S. shareholder. See, for example, S. Rep. No. 1881
at 80 n.1 (1962) (``U.S. shareholders are defined in the bill as `U.S.
persons' with 10-percent stockholding. U.S. persons, in general, are
U.S. citizens and residents and domestic corporations, partnerships and
estates or trusts.''). Furthermore, entity treatment is consistent with
sections 958(b) and 318(a)(3)(A), which treat a partnership (including
a domestic partnership) as owning the stock owned by its partners for
purposes of determining whether the foreign corporation is owned more
than 50 percent by U.S. shareholders.
In contrast to the historical treatment of domestic partnerships as
entities for purposes of subpart F, foreign partnerships are generally
treated as aggregates of their partners for purposes of determining
stock ownership under section 958(a). See section 958(a)(2).
Accordingly, whether a foreign corporation owned by a foreign
partnership is a CFC is determined based on the proportionate amount of
stock owned by domestic partners of the partnership and, if the foreign
corporation is a CFC, partners that are U.S. shareholders have the
subpart F inclusion with respect to the CFC.
IV. Section 951A
A. In general
The Tax Cuts and Jobs Act, Public Law 115-97 (the ``Act'')
established a participation exemption system for the taxation of
certain foreign income by allowing a domestic corporation a 100 percent
dividends received deduction for the foreign-source portion of a
dividend received from a specified 10 percent-owned foreign
corporation. See section 14101(a) of the Act and section 245A. The
Act's legislative history expresses concern that the new participation
exemption could heighten the incentive to shift profits to low-tax
foreign jurisdictions or tax havens absent base erosion protections.
See S. Comm. on the Budget, Reconciliation Recommendations Pursuant to
H. Con. Res. 71, S. Print No. 115-20, at 370 (2017) (``Senate
Explanation''). For example, without appropriate limits, domestic
corporations might be incentivized to shift income to low-taxed foreign
affiliates, and the income could potentially be distributed back to
domestic corporate shareholders without the imposition of any U.S. tax.
See id. To prevent base erosion, the Act retained the subpart F regime
and enacted section 951A, which applies to taxable years of foreign
corporations beginning after December 31, 2017, and to taxable years of
U.S. shareholders in which or with which such taxable years of foreign
corporations end.
Section 951A requires a U.S. shareholder of any CFC for any taxable
year to include in gross income the shareholder's global intangible
low-taxed income (``GILTI inclusion'') for such taxable year in a
manner similar to a subpart F inclusion for many purposes of the Code.
See sections 951A(a) and (f)(1)(A); H.R. Rep. No. 115-466, at 641
(2017) (Conf. Rep.) (``[A] U.S. shareholder of any CFC must include in
gross income for a taxable year its [GILTI] in a manner generally
similar to inclusions of subpart F income.'').
[[Page 29117]]
Similar to a subpart F inclusion, the determination of a U.S.
shareholder's GILTI inclusion begins with the calculation of relevant
items--such as tested income, tested loss, and qualified business asset
investment--of each CFC owned by the shareholder (``tested items'').
See section 951A(c)(2) and (d) and Sec. Sec. 1.951A-2 through -4. A
U.S. shareholder then determines its pro rata share of each of these
CFC-level tested items in a manner similar to a U.S. shareholder's pro
rata share of subpart F income under section 951(a)(2). See section
951A(e)(1) and Sec. 1.951A-1(d).
In contrast to a subpart F inclusion, however, a U.S. shareholder's
pro rata shares of the tested items of a CFC are not amounts included
in gross income, but rather are amounts taken into account by the U.S.
shareholder in determining the amount of its GILTI inclusion for the
taxable year. Section 951A(b) and Sec. 1.951A-1(c). Thus, a U.S.
shareholder does not compute a separate GILTI inclusion amount under
section 951A(a) with respect to each CFC for a taxable year, but rather
computes a single GILTI inclusion amount by reference to all of its
CFCs.
Section 951A itself does not contain specific rules regarding the
treatment of domestic partnerships and their partners for purposes of
GILTI. However, proposed regulations under section 951A that were
published in the Federal Register on October 10, 2018, (REG-104390-18,
83 FR 51072) (``GILTI proposed regulations'') reflect a hybrid approach
that treats a domestic partnership that is a U.S. shareholder with
respect to a CFC (``U.S. shareholder partnership'') as an entity with
respect to some partners but as an aggregate of its partners with
respect to others. Under the hybrid approach, with respect to partners
that are not U.S. shareholders of a CFC owned by a domestic
partnership, a U.S. shareholder partnership calculates a GILTI
inclusion amount and its partners have a distributive share of such
amount (if any). See proposed Sec. 1.951A-5(b)(1). However, with
respect to partners that are themselves U.S. shareholders of a CFC
owned by a domestic partnership (``U.S. shareholder partners''), the
partnership is treated in the same manner as a foreign partnership,
with the result that the U.S. shareholder partners are treated as
proportionately owning, within the meaning of section 958(a), stock
owned by the domestic partnership for purposes of determining their own
GILTI inclusion amounts. See proposed Sec. 1.951A-5(c). In the
preamble to the GILTI proposed regulations, the Treasury Department and
the IRS rejected a pure entity approach to section 951A, because
treating a domestic partnership as the section 958(a) owner of stock in
all cases would frustrate the GILTI framework by creating unintended
planning opportunities for well advised taxpayers and traps for the
unwary. However, the Treasury Department and the IRS also did not adopt
a pure aggregate approach to domestic partnerships for GILTI because
such an approach would be inconsistent with the existing treatment of
domestic partnerships as entities for purposes of subpart F.
The Treasury Department and the IRS received many comments in
response to the hybrid approach of the GILTI proposed regulations. The
comments generally advised against adopting the hybrid approach due
primarily to concerns with complexity and administrability arising from
the treatment of a partnership as an entity with respect to some
partners but as an aggregate with respect to other partners. The
comments also generally advised against adopting a pure entity approach
because such an approach would result in different treatment for
similarly situated taxpayers depending on whether a U.S. shareholder
owned stock of a foreign corporation through a domestic partnership or
a foreign partnership, which is treated as an aggregate of its partners
for purposes of determining CFC status and section 958(a) ownership.
The majority of comments on this issue recommended at least some form
of aggregate approach for domestic partnerships for purposes of the
GILTI regime; some of these comments suggested that an aggregate
approach is supported by analogy to other situations where regulations
apply an aggregate approach to partnerships. See, for example,
Sec. Sec. 1.954-1(g)(1) and 1.871-14(g)(3)(i).
In response to these comments, the Treasury Department and the IRS
are issuing final regulations under section 951A in the Rules and
Regulations section of this issue of the Federal Register (``GILTI
final regulations'') that treat stock owned by a domestic partnership
as owned within the meaning of section 958(a) by its partners for
purposes of determining a partner's GILTI inclusion amount under
section 951A. The Treasury Department and the IRS concluded that
applying an aggregate approach for purposes of determining a partner's
GILTI inclusion amount under section 951A is necessary to ensure that,
consistent with the purpose and operation of section 951A, a single
GILTI inclusion amount is determined for each taxpayer based on its
economic interests in all of its CFCs. The GILTI final regulations
apply to taxable years of foreign corporations beginning after December
31, 2017, and to taxable years of U.S. shareholders in which or with
which such taxable years of foreign corporations end.
Some comments also recommended adopting an aggregate approach for
purposes of section 951, especially if the GILTI final regulations
adopt an aggregate approach. These comments generally asserted that
there is insufficient policy justification for treating domestic
partnerships differently than foreign partnerships for purposes of U.S.
shareholder and CFC determinations because the choice of law under
which a partnership is organized should be irrelevant. In this regard,
these comments criticized entity treatment of domestic partnerships
because it results in each partner including in income its distributive
share of a domestic partnership's subpart F inclusion with respect to a
CFC, even if that partner is not a U.S. shareholder itself and thus
would not have had a subpart F inclusion with respect to such CFC if
the domestic partnership were instead foreign.
B. High-Tax Gross Tested Income
Section 951A(c)(2)(A)(i) provides that the gross tested income of a
CFC for a taxable year is all the gross income of the CFC for the year,
determined without regard to certain items. See also Sec. 1.951A-
2(c)(1). In particular, section 951A(c)(2)(A)(i)(III) excludes from
gross tested income any gross income excluded from foreign base company
income (as defined in section 954) (``FBCI'') or insurance income (as
defined in section 953) of a CFC by reason of the exception under
section 954(b)(4) (the ``GILTI high tax exclusion'').
The GILTI proposed regulations clarified that the GILTI high tax
exclusion applies only to income that is excluded from FBCI and
insurance income solely by reason of an election made to exclude the
income under the high tax exception of section 954(b)(4) and Sec.
1.954-1(d)(5). See proposed Sec. 1.951A-2(c)(1)(iii).
Numerous comments requested that the scope of the GILTI high tax
exclusion be expanded in the final regulations. These comments asserted
that the legislative history to section 951A indicates that Congress
intended that income of a CFC should be taxed as GILTI only if it is
subject to a low rate of foreign tax, regardless of whether the income
is active or passive. Comments also suggested that the GILTI high tax
exclusion does not require that income be excluded ``solely'' by reason
of section 954(b)(4). The comments argued
[[Page 29118]]
that the GILTI high tax exclusion could be interpreted to exclude any
item of income that would be FBCI or insurance income, but for another
exception to FBCI (for instance, the active financing exception under
section 954(h) and the active insurance exception under section
954(i)). Of the comments recommending an expansion of the GILTI high
tax exclusion, some recommended that the GILTI high tax exclusion apply
to income taxed at a rate above 13.125 percent, while others
recommended that the GILTI high tax exclusion apply to income taxed at
a rate above 90 percent of the maximum rate of tax specified in section
11, or 18.9 percent. The comments recommended that the GILTI high tax
exclusion be applied either on a CFC-by-CFC basis or an item-by-item
basis.
Alternatively, comments recommended that the scope of the GILTI
high tax exclusion be expanded under section 951A(f) by treating, on an
elective basis, a GILTI inclusion as a subpart F inclusion that is
potentially excludible from FBCI or insurance income under section
954(b)(4), or by modifying the GILTI high tax exclusion to exclude any
item of income subject to a sufficiently high effective foreign tax
rate such that it would be excludible under section 954(b)(4) if it
were FBCI or insurance income. Other comments recommended the creation
of a rebuttable presumption that all income of a CFC is subpart F
income, regardless of whether such income is of a character included in
FBCI or insurance income, and therefore, if the taxpayer chose not to
rebut the presumption, the income would be excluded from gross tested
income either because it is included in subpart F income (and thus
excluded from gross tested income by reason of the subpart F exclusion
under section 951A(c)(2)(A)(i)(II)) or because the income is excluded
from subpart F income by reason of section 954(b)(4) (and thus excluded
from gross tested income by reason of the GILTI high tax exclusion).
The GILTI final regulations adopt the GILTI high tax exclusion of
the proposed regulations without change.
Explanation of Provisions
I. Partnerships
A. Adoption of Aggregate Treatment for Purposes of Section 951
After considering the alternatives, the Treasury Department and the
IRS have concluded that, to be consistent with the treatment of
domestic partnerships under section 951A, a domestic partnership should
also generally be treated as an aggregate of its partners in
determining stock owned under section 958(a) for purposes of section
951. Therefore, the proposed regulations provide that, for purposes of
sections 951 and 951A, and for purposes of any provision that applies
by reference to sections 951 and 951A (for example, sections 959, 960,
and 961), a domestic partnership is not treated as owning stock of a
foreign corporation within the meaning of section 958(a). See proposed
Sec. 1.958-1(d)(1). Furthermore, the proposed regulations provide
that, for purposes of determining the stock owned under section 958(a)
by a partner of a domestic partnership, a domestic partnership is
treated in the same manner as a foreign partnership. See id. This rule
does not apply, however, for purposes of determining whether any U.S.
person is a U.S. shareholder, whether a U.S. shareholder is a
controlling domestic shareholder (as defined in Sec. 1.964-1(c)(5)),
or whether a foreign corporation is a CFC. See proposed Sec. 1.958-
1(d)(2). Accordingly, under the proposed regulations, a domestic
partnership that owns a foreign corporation is treated as an entity for
purposes of determining whether the partnership and its partners are
U.S. shareholders, whether the partnership is a controlling domestic
shareholder, and whether the foreign corporation is a CFC, but the
partnership is treated as an aggregate of its partners for purposes of
determining whether, and to what extent, its partners have inclusions
under sections 951 and 951A and for purposes of any other provision
that applies by reference to sections 951 and 951A.
For purposes of subpart F, a foreign partnership is explicitly
treated as an aggregate of its partners, and rules regarding this
aggregate treatment are relatively well-developed and understood.
Therefore, rather than developing a new standard for the treatment of a
domestic partnership as an aggregate of its partners, the Treasury
Department and the IRS have determined that it would be simpler and
more administrable to adopt, by reference, the rules related to foreign
partnerships for this limited purpose. The GILTI final regulations
adopt the same approach for purposes of section 951A. See Sec. 1.951A-
1(e). As a result, under the proposed regulations, stock owned directly
or indirectly by or for a domestic partnership will generally be
treated as owned proportionately by its partners for purposes of
sections 951(a) and 951A and any provision that applies by reference to
sections 951 and 951A.
The Treasury Department and the IRS have determined that, as a
result of the enactment of the GILTI regime, it is no longer
appropriate to treat domestic partnerships as entities that are
separate from their owners for purposes of determining whether, and to
what extent, a partner has an inclusion under section 951. Congress
intended for the subpart F and GILTI regimes to work in tandem by
providing that both regimes apply to U.S. shareholders of CFCs, that
GILTI is included in a U.S. shareholder's gross income in a manner
similar to a subpart F inclusion for many purposes of the Code, and
that gross income taken into account in determining the subpart F
income of a CFC is not taken into account in determining the tested
income of such CFC (and, therefore, in determining the GILTI inclusion
amount of a U.S. shareholder of such CFC). See section
951A(c)(2)(i)(II) and 951A(f); see also Senate Explanation at 373
(``Although GILTI inclusions do not constitute subpart F income, GILTI
inclusions are generally treated similarly to subpart F inclusions.'').
As a result, treating domestic partnerships inconsistently for subpart
F and GILTI purposes would be inconsistent with legislative intent.
Furthermore, inconsistent approaches to the treatment of domestic
partnerships for purposes of subpart F and GILTI would introduce
substantial complexity and uncertainty, particularly with respect to
foreign tax credits, previously taxed earnings and profits (``PTEP'')
and related basis rules, or any other provision the application of
which turns on the owner of stock under section 958(a) and, thus, the
U.S. person that has the relevant inclusion. For example, if a domestic
partnership were treated as an aggregate of its partners for purposes
of GILTI but as an entity for purposes of subpart F, regulations would
need to address separately the maintenance of PTEP accounts at the
domestic partnership level for subpart F and the maintenance of PTEP
accounts at the partner level for GILTI. Similarly, regulations would
need to provide separate rules for basis adjustments under section 961
with respect to a domestic partnership and its CFCs depending on
whether an amount was included under section 951 or section 951A. The
increased complexity of regulations resulting from treating domestic
partnerships differently for purposes of subpart F and GILTI would, in
turn, increase the burden on taxpayers to comply with, and on the IRS
to administer, such regulations. Conversely, aggregate treatment of
domestic partnerships in determining section 958(a) stock ownership for
purposes of determining a partner's
[[Page 29119]]
inclusion under both the GILTI and subpart F regimes will result in
substantial simplification, as compared to disparate treatment, and
will harmonize the two regimes.
The Treasury Department and the IRS also considered extending
aggregate treatment for all purposes of subpart F, including for
purposes of determining whether a foreign corporation is a CFC under
section 957(a). However, the Treasury Department and the IRS determined
that an approach that treats a domestic partnership as an aggregate for
purposes of determining CFC status is inconsistent with relevant
statutory provisions. As discussed in part III of the Background
section of this preamble, the Code clearly contemplates that a domestic
partnership can be a U.S. shareholder under section 951(b), including
by attribution from its partners. See sections 7701(a)(30), 957(c),
951(b), 958(b), 318(a)(2)(A), and 318(a)(3)(A). An approach that treats
a domestic partnership as an aggregate for purposes of determining CFC
status would not give effect to the statutory treatment of a domestic
partnership as a U.S. shareholder.
By contrast, neither section 958(a) nor any other provision of the
Code specifies whether and to what extent a domestic partnership should
be treated as an entity or an aggregate for purposes of determining
stock ownership under section 958(a) for purposes of sections 951 and
951A. According to the legislative history to the 1962 Act, section
958(a) is a ``limited rule of stock ownership for determining the
amount taxable to a United States person,'' whereas section 958(b) is
``a broader set of constructive rules of ownership for determining
whether the requisite ownership by United States persons exists so as
to make a corporation a controlled foreign corporation or a United
States person has the requisite ownership to be liable for tax under
section 951(a).'' S. Rep. No. 1881 at 254 (1962). In light of the
changes adopted in the Act (including the introduction of the GILTI
regime), it is consistent with the intent of the Act to provide that
domestic partnerships are treated in the same manner as foreign
partnerships under section 958(a)(2) for purposes of sections 951(a)
and 951A and any provision that applies by reference to sections 951
and 951A. As discussed in parts II and IV.A. of the Background section
of this preamble, a domestic partnership may be treated as an aggregate
of its partners or as an entity separate from its partners for purposes
of a provision, depending on which characterization is more appropriate
to carry out the purpose of the provision. In this regard, the Treasury
Department and the IRS have determined that treating a domestic
partnership as an aggregate for purposes of sections 951 and 951A is
appropriate because the partners of the partnership generally are the
ultimate taxable owners of the CFC and thus their inclusions under
sections 951 and 951A are properly computed at the partner level
regardless of whether the partnership is foreign or domestic.
Based on the foregoing, the Treasury Department and the IRS have
determined that a domestic partnership should be treated consistently
as an aggregate of its partners in determining the ownership of stock
within the meaning of section 958(a) for purposes of sections 951 and
951A, and any provision that applies by reference to section 951 or
section 951A, except for purposes of determining whether a U.S. person
is a U.S. shareholder, whether a U.S. shareholder is a controlling
domestic shareholder (as defined in Sec. 1.964-1(c)(5)), and whether a
foreign corporation is a CFC. See proposed Sec. 1.958-1(d). This
aggregate treatment does not apply for any other purposes of the Code,
including for purposes of section 1248. However, the Treasury
Department and the IRS request comments on other provisions in the Code
that apply by reference to ownership within the meaning of section
958(a) for which aggregate treatment for domestic partnerships would be
appropriate. The Treasury Department and the IRS also request comments
on whether, and for which purposes, the aggregate treatment for
domestic partnerships should be extended to the determination of the
controlling domestic shareholders (as defined in Sec. 1.964-1(c)(5))
of a CFC, such that some or all of the partners who are U.S.
shareholders of the CFC, rather than the partnership, make any
elections applicable to the CFC for purposes of sections 951 and 951A.
B. Applicability Date and Comment Request With Respect to Transition
The proposed regulations are proposed to apply to taxable years of
foreign corporations beginning on or after the date of publication of
the Treasury decision adopting these rules as final regulations in the
Federal Register (the ``finalization date''), and to taxable years of a
U.S. person in which or with which such taxable years of foreign
corporations end. See proposed Sec. 1.958-1(d)(4). With respect to
taxable years of foreign corporations beginning before the finalization
date, the proposed regulations provide that a domestic partnership may
apply Sec. 1.958-1(d), as included in the final regulations, for
taxable years of a foreign corporation beginning after December 31,
2017, and for taxable years of a domestic partnership in which or with
which such taxable years of the foreign corporation end (the
``applicable years''), provided that the partnership, domestic
partnerships that are related (within the meaning of section 267 or
707) to the partnership, and certain partners consistently apply Sec.
1.958-1(d) with respect to all foreign corporations whose stock they
own within the meaning of section 958(a) (generally determined without
regard to Sec. 1.958-1(d)). See proposed Sec. 1.958-1(d)(4). A
domestic partnership may rely on proposed Sec. 1.958-1(d) with respect
to taxable years beginning after December 31, 2017, and beginning
before the date that these regulations are published as final
regulations in the Federal Register, provided that the partnership,
domestic partnerships that are related (within the meaning of section
267 or 707) to the partnership, and certain partners consistently apply
proposed Sec. 1.958-1(d) with respect to all foreign corporations
whose stock they own within the meaning of section 958(a) (generally
determined without regard to proposed Sec. 1.958-1(d)). See id.
Once proposed Sec. 1.958-1(d) applies as a final regulation, Sec.
1.951A-1(e) and Sec. 1.951-1(h) (providing an aggregate treatment of
domestic partnerships, but only for purposes of section 951A and
limited subpart F purposes, respectively) would be unnecessary because
the scope of those regulations would effectively be subsumed by Sec.
1.958-1(d). Therefore, the proposed regulations would revise the
applicability dates of Sec. 1.951A-1(e) and Sec. 1.951-1(h), so that
those provisions do not apply once the final regulations under section
958 apply.
Historically, domestic partnerships have been treated as owning
stock within the meaning of section 958(a) for purposes of determining
their subpart F inclusions, and thus PTEP accounts were maintained, and
related basis adjustments were made, at the partnership level. Upon the
finalization of the proposed regulations, domestic partnerships will
cease to be treated as owning stock of foreign corporations under
section 958(a) for purposes of determining a subpart F inclusion, and
instead their partners will be treated as owning stock under section
958(a). The Treasury Department and the IRS request comments on
appropriate rules for the transition to the aggregate approach to
domestic partnerships described in the proposed regulations. Comments
are specifically requested as to necessary adjustments to PTEP and
[[Page 29120]]
related basis amounts and capital accounts after finalization. In
addition, comments are requested as to whether aggregate treatment of
domestic partnerships should be extended to other ``pass-through''
entities, such as certain trusts or estates.
Comments are also requested with respect to the application of the
PFIC regime after finalization, and whether elections (including
elections under sections 1295 and 1296) and income inclusions under the
PFIC rules are more appropriately made at the level of the domestic
partnership or at the level of the partners. Specifically, the Treasury
Department and the IRS are considering the operation of the PFIC regime
where U.S. persons are partners of a domestic partnership that owns
stock of a foreign corporation that is a PFIC, some of those partners
might themselves be U.S. shareholders of the foreign corporation, and
the foreign corporation might not be treated as a PFIC with respect to
such U.S. shareholders under section 1297(d) if the foreign corporation
is also a CFC. Comments should consider how any recommended approach
would interact with the determinations of a partner's basis in its
interest and capital accounts determined and maintained in accordance
with Sec. 1.704-1(b)(2).
II. GILTI High Tax Exclusion
A. Expansion To Exclude Other High-Taxed Income
In response to comments, the Treasury Department and the IRS have
determined that the GILTI high tax exclusion should be expanded (on an
elective basis) to include certain high-taxed income even if that
income would not otherwise be FBCI or insurance income. In particular,
the Treasury Department and the IRS have determined that taxpayers
should be permitted to elect to apply the exception under section
954(b)(4) with respect to certain classes of income that are subject to
high foreign taxes within the meaning of that provision. Before the
Act, such an election would have had no effect with respect to items of
income that were excluded from FBCI or insurance income for other
reasons. Nevertheless, section 954(b)(4) is not explicitly restricted
in its application to an item of income that first qualifies as FBCI or
insurance income; rather, the provision applies to ``any item of income
received by a controlled foreign corporation.'' Therefore, any item of
gross income, including an item that would otherwise be gross tested
income, could be excluded from FBCI or insurance income ``by reason
of'' section 954(b)(4) if the provision is one of the reasons for such
exclusion, even if the exception under section 954(b)(4) is not the
sole reason. Any item thus excluded from FBCI or insurance income by
reason of section 954(b)(4) would then also be excluded from gross
tested income under the GILTI high tax exclusion, as modified in these
proposed regulations.
The legislative history evidences an intent to exclude high-taxed
income from gross tested income. See Senate Explanation at 371 (``The
Committee believes that certain items of income earned by CFCs should
be excluded from the GILTI, either because they should be exempt from
U.S. tax--as they are generally not the type of income that is the
source of base erosion concerns--or are already taxed currently by the
United States. Items of income excluded from GILTI because they are
exempt from U.S. tax under the bill include foreign oil and gas
extraction income (which is generally immobile) and income subject to
high levels of foreign tax.''). The proposed regulations, which permit
taxpayers to electively exclude a CFC's high-taxed income from gross
tested income, are consistent, therefore, with this legislative
history. Furthermore, an election to exclude a CFC's high-taxed income
from gross tested income allows a U.S. shareholder to ensure that its
high-taxed non-subpart F income is eligible for the same treatment as
its high-taxed FBCI and insurance income, and thus eliminates an
incentive for taxpayers to restructure their CFC operations in order to
convert gross tested income into FBCI for the sole purpose of availing
themselves of section 954(b)(4) and, thus, the GILTI high tax
exclusion.
For the foregoing reasons, the proposed regulations provide that an
election may be made for a CFC to exclude under section 954(b)(4), and
thus to exclude from gross tested income, gross income subject to
foreign income tax at an effective rate that is greater than 90 percent
of the rate that would apply if the income were subject to the maximum
rate of tax specified in section 11 (18.9 percent based on the current
rate of 21 percent). See proposed Sec. 1.951A-2(c)(6)(i). The election
is made by the CFC's controlling domestic shareholders with respect to
the CFC for a CFC inclusion year by attaching a statement to an amended
or filed return in accordance with forms, instructions, or
administrative pronouncements. See proposed Sec. 1.951A-2(c)(6)(v)(A).
If an election is made with respect to a CFC, the election applies to
exclude from gross tested income all the CFC's items of income for the
taxable year that meet the effective rate test in proposed Sec.
1.951A-2(c)(6)(iii) and is binding on all the U.S. shareholders of the
CFC. See proposed Sec. 1.951A-2(c)(6)(v)(B). The election is effective
for a CFC for the CFC inclusion year for which it is made and all
subsequent CFC inclusion years of the CFC unless revoked by the
controlling domestic shareholders of the CFC. See proposed Sec.
1.951A-2(c)(6)(v)(C).
An election may generally be revoked by the controlling domestic
shareholders of the CFC for any CFC inclusion year. See proposed Sec.
1.951A-2(c)(6)(v)(D)(1). However, upon revocation for a CFC inclusion
year, a new election generally cannot be made for any CFC inclusion
year of the CFC that begins within sixty months after the close of the
CFC inclusion year for which the election was revoked, and that
subsequent election cannot be revoked for a CFC inclusion year that
begins within sixty months after the close of the CFC inclusion year
for which the subsequent election was made. See proposed Sec. 1.951A-
2(c)(6)(v)(D)(2)(i). An exception to this 60-month limitation may be
permitted by the Commissioner with respect to a CFC if the CFC
undergoes a change of control. See proposed Sec. 1.951A-
2(c)(6)(v)(D)(2)(ii).
Finally, if a CFC is a member of a controlling domestic shareholder
group, the election applies with respect to each member of the
controlling domestic shareholder group. See proposed Sec. 1.951A-
2(c)(6)(v)(E)(1). A ``controlling domestic shareholder group'' is
defined as two or more CFCs if more than 50 percent of the stock (by
voting power) of each CFC is owned (within the meaning of section
958(a)) by the same controlling domestic shareholder (or persons
related to such controlling domestic shareholder) or, if no single
controlling domestic shareholder owns (within the meaning of section
958(a)) more than 50 percent of the stock (by voting power) of each
corporation, more than 50 percent of the stock (by voting power) of
each corporation is owned (within the meaning of section 958(a)) in the
aggregate by the same controlling domestic shareholders and each
controlling domestic shareholder owns (within the meaning of section
958(a)) the same percentage of stock in each CFC. See proposed Sec.
1.951A-2(c)(6)(v)(E)(2). Accordingly, an election made under proposed
Sec. 1.951A-2(c)(6)(v) applies with respect to each item of income of
each CFC in a group of commonly controlled CFCs that meets the
effective rate test in proposed Sec. 1.951A-2(c)(6)(iii). The Treasury
Department and the IRS request comments on the manner and terms of
[[Page 29121]]
the election for the exception from gross tested income, including
whether the limitations with respect to revocations and the consistency
requirements should be modified, such as by allowing the election to be
made on an item-by-item or a CFC-by-CFC basis.
In general, the relevant items of income for purposes of the
election under section 954(b)(4) pursuant to proposed Sec. 1.951A-
2(c)(6) are all items of gross tested income attributable to a
qualified business unit (``QBU''). See proposed Sec. 1.951A-
2(c)(6)(ii)(A)(1). For example, a CFC that owns a disregarded entity
that qualifies as a QBU may have one item of income with respect to the
CFC itself (which is a per se QBU) and another item of income with
respect to the disregarded entity. The proposed regulations provide
that the gross income attributable to a QBU is determined by reference
to the items of gross income reflected on the books and records of the
QBU, determined under Federal income tax principles, except that income
attributable to a QBU must be adjusted to account for certain
disregarded payments. See proposed Sec. 1.951A-2(c)(6)(ii)(A)(2). The
proposed regulations provide an example to illustrate the application
of this rule. See proposed Sec. 1.951A-2(c)(6)(vi).
Comments are requested on whether additional rules are needed to
properly account for other instances in which the income base upon
which foreign tax is imposed does not match the items of income
reflected on the books and records of the QBU determined under Federal
income tax principles. For example, comments are requested on whether
special rules are needed for associating taxes with income with respect
to partnerships (including hybrid partnerships), disregarded entities,
or reverse hybrid entities, and how to address circumstances in which
QBUs are permitted to share losses or determine tax liability based on
combined income for foreign tax purposes. Comments are also requested
as to whether all of a CFC's QBUs located within a single foreign
country or possession should be combined for purposes of performing the
effective rate test in proposed Sec. 1.951A-2(c)(6)(iii) and whether
the definition of QBU should be modified for purposes of the GILTI high
tax exclusion in respect of the requirement to have a trade or
business, maintain books and records, or other rules relating to QBUs.
Under Sec. 1.954-1(d)(3), the determination of taxes paid or
accrued with respect to an item of income for purposes of the exception
under section 954(b)(4) is determined for each U.S. shareholder based
on the amount of foreign income taxes that would be deemed paid under
section 960 if the item of income were included by the U.S. shareholder
under section 951(a)(1)(A). Calculating the effective tax rate for
purposes of the election under section 954(b)(4) with respect to gross
tested income by reference to section 960(d) would not be consistent
with the aggregate nature of the computation under section 960(d).
Furthermore, the Treasury Department and the IRS have determined that
the Act's change to section 960(a) from a pooling based approach to an
annual attribution of taxes to income requires revising Sec. 1.954-
1(d)(3). Therefore, the proposed regulations provide that for purposes
of both the exception under section 954(b)(4) and the GILTI high tax
exclusion, the effective rate of foreign tax imposed on an item of
income is determined solely at the CFC level by allocating and
apportioning the foreign income taxes paid or accrued by the CFC in the
current year to the CFC's gross income in that year based on the rules
described in the regulations under section 960 for determining foreign
income taxes ``properly attributable'' to income. See Sec. 1.960-1(d),
as proposed to be amended in 83 FR 63257 (December 7, 2018).
To the extent foreign income taxes are allocated and apportioned to
items of income that are excluded from gross tested income by the GILTI
high tax exclusion, none of those foreign income taxes are properly
attributable to tested income and thus none are allowed as a deemed
paid credit under section 960. See Sec. 1.960-1(e), as proposed to be
amended in 83 FR 63259 (December 7, 2018). In addition, if an item of
income is excluded from gross tested income by reason of the GILTI high
tax exclusion, the property used to produce that income, because not
used in the production of gross tested income, does not qualify as
specified tangible property, in whole or in part, and therefore the
adjusted basis in the property is not taken into account in determining
qualified business asset investment. See Sec. 1.951A-3(b) and (c)(1).
The proposed regulations also clarify the scope of each item of
income under Sec. 1.954-1(c)(1)(iii), consistent with the rules under
Sec. 1.960-1(d)(2)(ii)(B), as proposed to be amended in 83 FR 63257
(December 7, 2018).
B. Applicability Date
The changes related to the election to exclude a CFC's gross income
subject to high foreign income taxes under section 954(b)(4) are
proposed to apply to taxable years of foreign corporations beginning on
or after the date that final regulations are published in the Federal
Register, and to taxable years of U.S. shareholders in which or with
which such taxable years of foreign corporations end.
Special Analyses
I. Regulatory Planning and Review--Economic Analysis
Executive Orders 13771, 13563, and 12866 direct agencies to assess
costs and benefits of available regulatory alternatives and, if
regulation is necessary, to select regulatory approaches that maximize
net benefits, including potential economic, environmental, public
health and safety effects, distributive impacts, and equity. Executive
Order 13563 emphasizes the importance of quantifying both costs and
benefits, reducing costs, harmonizing rules, and promoting flexibility.
The Executive Order 13771 designation for any final rule resulting from
the proposed regulation will be informed by comments received. The
preliminary Executive Order 13771 designation for this proposed rule is
regulatory.
The proposed regulation has been designated by the Office of
Information and Regulatory Affairs (OIRA) as subject to review under
Executive Order 12866 pursuant to the Memorandum of Agreement (MOA,
April 11, 2018) between the Treasury Department and the Office of
Management and Budget regarding review of tax regulations. OIRA has
designated this proposed regulation as economically significant under
section 1(c) of the MOA. Accordingly, these proposed regulations have
been reviewed by the Office of Management and Budget. For more detail
on the economic analysis, please refer to the following analysis.
A. Need for the Proposed Regulations
The proposed regulations are required to provide a mechanism by
which taxpayers can elect the high tax exception of section 954(b)(4)
in order to exclude certain high-taxed income from taxation under
section 951A and to conform the treatment of domestic partnerships for
purposes of the subpart F regime with the treatment of domestic
partnerships for purposes of section 951A.
B. Background
The Tax Cuts and Jobs Act (the ``Act'') established a system under
which certain earnings of a foreign corporation can be repatriated to a
corporate U.S. shareholder without U.S. tax. See section 14101(a) of
the Act and section 245A. However, Congress recognized
[[Page 29122]]
that, without any base protection measures, this system, known as a
participation exemption system, could incentivize taxpayers to allocate
income--in particular, mobile income from intangible property that
would otherwise be subject to the full U.S. corporate tax rate--to
controlled foreign corporations (``CFCs'') operating in low- or zero-
tax jurisdictions. See Senate Explanation at 365. Therefore, Congress
enacted section 951A in order to subject intangible income earned by a
CFC to U.S. tax on a current basis, similar to the treatment of a CFC's
subpart F income under section 951(a)(1)(A). However, in order to not
harm the competitive position of U.S. corporations relative to their
foreign peers, the global intangible low tax income (``GILTI'') of a
corporate U.S. shareholder is effectively taxed at a reduced rate by
reason of the deduction under section 250 (with the resulting U.S. tax
further reduced by a portion of foreign tax credits under section
960(d)). Id.
The GILTI final regulations generally provide structure and clarity
for the implementation of section 951A. However, the Treasury
Department and the IRS determined that there remained two outstanding
issues pertinent to the implementation of GILTI. The first of these
issues pertains to the GILTI high tax exclusion under section
951A(c)(2)(A)(i)(III), which excludes from gross tested income any
gross income excluded from foreign base company income (``FBCI'') (as
defined in section 954) and insurance income (as defined in section
953) by reason of section 954(b)(4). The GILTI proposed regulations
limited the application of the exclusion to income that would be
included in FBCI or insurance income but for the high tax exception of
section 954(b)(4). See proposed Sec. 1.951A-2(c)(1)(iii). However,
comments to the GILTI proposed regulations recommended that the statute
be interpreted so that the GILTI high tax exclusion applies on an
elective basis to a broader category of income, that is, any income
that is subject to a high rate of foreign tax. Other comments suggested
that because taxpayers have the ability to structure transactions so
that they would qualify as FBCI or insurance income, the regulations
should allow a taxpayer to elect to treat all income, or all high-taxed
income, as FBCI or insurance income, with the result that such income
would then be excluded from gross tested income under the GILTI high
tax exclusion. Comments noted that, under the narrower application of
the exclusion under the GILTI proposed regulations, taxpayers would be
incentivized to affirmatively plan into subpart F income to permit such
taxpayers to elect the high tax exception under section 954(b)(4) with
respect to such income or to allow taxpayers to carry foreign tax
credits attributable to such income to another taxable year under
section 904(c). However, restructuring activities to convert gross
tested income into subpart F income may cost significant time and money
and is economically inefficient. The GILTI final regulations adopt this
narrower application. See proposed Sec. 1.951A-2(c)(1)(iii). However,
the preamble to the GILTI final regulations indicated that proposed
regulations would be issued to propose a framework under which
taxpayers would be permitted to make an election to apply the high tax
exception of section 954(b)(4) with respect to income that would
otherwise be gross tested income in order to exclude that income from
gross tested income by reason of the GILTI high tax exclusion.
The second of these issues pertains to the treatment of domestic
partnerships for purposes of the subpart F regime. A U.S. shareholder
of a CFC is required to include in gross income its pro rata share of
the CFC's subpart F income under section 951(a)(1)(A), the amount
determined under section 956, under section 951(a)(1)(B), and its GILTI
inclusion amount under section 951A(a). Since the enactment of subpart
F, domestic partnerships have generally been treated as entities
separate from their partners, rather than as aggregates of their
partners, for purposes of the subpart F regime, including for purposes
of treating a domestic partnership as the U.S. shareholder that has the
subpart F inclusion with respect to a CFC owned by the partnership.
However, the GILTI final regulations generally adopt an aggregate
approach to domestic partnerships for purposes of section 951A and the
section 951A regulations. See Sec. 1.951A-1(e)(1). Because the GILTI
final regulations apply only for purposes of section 951A, absent the
proposed regulations, a domestic partnership would still be treated as
an entity for purposes of the subpart F regime. This inconsistency in
the treatment of a domestic partnership for the purposes of section
951A and for purposes of the subpart F regime is problematic because it
necessitates complicated coordination rules which could greatly
increase compliance and administrative burden. Therefore, the proposed
regulations conform the treatment of domestic partnerships for purposes
of the subpart F regime with the treatment of domestic partnerships for
purposes of section 951A.
C. Economic Analysis
1. Baseline
The Treasury Department and the IRS have assessed the benefits and
costs of the proposed regulations relative to a no-action baseline
reflecting anticipated Federal income tax-related behavior in the
absence of these proposed regulations.
2. Summary of Economic Effects
To assess the economic effects of the proposed regulations, the
Treasury Department and the IRS considered economic effects arising
from two provisions of the proposed regulations. These are (i) effects
arising from the provision that provides substance and clarity
regarding the application of the GILTI high tax exclusion in
951A(c)(2)(A)(i)(III) and (ii) simplification and coordination effects
arising from conforming the treatment of domestic partnerships for
purposes of subpart F with their treatment for purposes of section
951A.
The Treasury Department and the IRS have not undertaken
quantitative estimates of these effects because any such quantitative
estimates would be highly uncertain. For example, the proposed
regulations include provisions that permit controlling domestic
shareholders of CFCs to elect to apply the high tax exception of
section 954(b)(4) to items of gross income that are subject to a
foreign tax rate that is greater than 18.9 percent (based on the
current U.S. corporate tax rate of 21 percent) for purposes of
excluding such income from gross tested income under the GILTI high tax
exclusion. Whether controlling domestic shareholders will choose to
make the election will depend on their specific facts and
circumstances, such as their U.S. expenses allocated to section 951A
category income, their foreign tax credit position, and the
distribution of their foreign activity between high- and low-tax
jurisdictions.\2\ Because GILTI is new,
[[Page 29123]]
the Treasury Department and the IRS do not have readily available data
to project these items in this context. Furthermore, the election would
be made with respect to qualified business units (QBUs) rather than
with respect to CFCs or specific items of income, and the Treasury
Department and the IRS do not have readily available data on activities
at the QBU level. In addition, due to the taxpayer-specific nature of
the factors influencing a decision to utilize the GILTI high-tax
exclusion, the Treasury Department and the IRS do not have readily
available data or models to predict the marginal effective tax rates
that would prevail under these provisions for the varied forms of
foreign investments that taxpayers might consider and thus cannot
predict with reasonable precision the difference in economic activity,
relative to the baseline, that might be undertaken by taxpayers based
on this election.
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\2\ Specifically, the U.S. tax system reduces double taxation on
a U.S. shareholder's GILTI inclusion amount by crediting a portion
of certain foreign taxes paid by CFCs against the U.S. tax on the
U.S. shareholder's GILTI inclusion amount. However, the U.S. foreign
tax credit regime requires taxpayers to allocate U.S. deductible
expenses, including interest, research and experimentation, and
general and administrative expenses, to their foreign source income
in the categories described in section 904(d) when determining the
allowable foreign tax credits. The allocated expenses reduce net
foreign source income within the section 904(d) categories, which
can reduce allowable foreign tax credits. This may result in a
smaller foreign tax credit than would be allowed if the limitation
on foreign tax credits was determined based only on the local
country tax assessed on the tested income taken into account in
determining GILTI. The election to apply the high tax exception of
section 954(b)(4) with respect to any high-taxed income allows
taxpayers to eliminate the need to use foreign tax credits to reduce
GILTI tax liability on such income by removing such income from
gross tested income; however, taxpayers choosing the election will
not be able to use the foreign tax credits associated with that
income against other section 951A category income, and they will not
be able to use the tangible assets owned by high tax QBUs in their
QBAI computation. Therefore, taxpayers will have to evaluate their
individual facts and circumstances to determine whether they should
make the election.
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The proposed regulations also contain provisions to conform the
treatment of domestic partnerships for purposes of subpart F with their
treatment for purposes of section 951A. Under the proposed regulations,
the tax treatment of domestic partners that are U.S. shareholders of a
CFC owned by the domestic partnership differs from the tax treatment of
domestic partners that are not U.S. shareholders of such CFC. The
Treasury Department and the IRS do not have readily available data to
identify these types of partners. The Treasury Department and the IRS
further do not have readily available data or models to predict with
reasonable precision the set of marginal effective tax rates that
taxpayers might face under these provisions nor the effects of those
marginal effective tax rates on economic activity relative to the
baseline.
With these considerations in mind, parts I.C.3.a.ii and iii of this
Special Analyses section explain the rationale behind the proposed
regulations' approach to the GILTI high tax exclusion and qualitatively
evaluate the alternatives considered. Part 1.C.3.b of this Special
Analyses section explains the rationale for the coordination in the
treatment of domestic partnerships and qualitatively evaluates the
alternatives considered.
3. Economic Effects of Specific Provisions
The Treasury Department and IRS solicit comments on each of the
items discussed in this Special Analyses section and on any other items
of the proposed regulations not discussed in this section. The Treasury
Department and the IRS particularly solicit comments that provide data,
other evidence, or models that could enhance the rigor of the process
by which the final regulations might be developed.
a. Exclusion of Income Subject to High Rate of Foreign Tax
i. Description
The proposed regulations permit U.S. shareholders of CFCs to make
an election under section 954(b)(4) with respect to high-taxed income
in order to exclude such income from gross tested income under the
GILTI high tax exclusion. Under section 954(b)(4), high-taxed income is
defined as income subject to a foreign effective tax rate greater than
90 percent of the maximum U.S. corporate tax rate (18.9 percent based
on the current U.S. corporate tax rate of 21 percent). Under the
proposed regulations, the determination as to whether income is high-
taxed is made at the QBU level. However, an election made with respect
to a CFC applies with respect to each high-taxed QBU of the CFC
(including potentially the CFC itself), and a U.S. shareholder that
makes the election with respect to a CFC generally must make the same
election with respect to each of its CFCs. In general, the election may
be made or revoked at any time, except that, if a U.S. shareholder
revokes an election with respect to a CFC, the U.S. shareholder cannot
make the election again within five years after the revocation, and
then if subsequently made, the election cannot be revoked again within
five years of the subsequent election.
ii. Alternatives Considered for Determining the Scope of the GILTI High
Tax Exclusion
The Treasury Department and the IRS considered a number of options
to address the types of income excluded from gross tested income by the
GILTI high tax exclusion. The options were (i) to exclude from gross
tested income only income that would be subpart F income but for the
high tax exception of section 954(b)(4); (ii) in addition to excluding
the aforementioned income, to exclude from gross tested income on an
elective basis an item of gross income that is excluded by reason of
another exception to subpart F, if such income is subject to a foreign
effective tax rate greater than 18.9 percent; and (iii) to exclude from
gross tested income on an elective basis any item of gross income
subject to a foreign effective tax rate greater than 18.9 percent. The
Treasury Department and the IRS considered the other recommended
options discussed in part IV.B of the Background section, but
determined that those other options are not authorized by the relevant
statutory provisions.
The first option considered was to exclude from gross tested income
only income that would be FBCI or insurance income but for the high tax
exception of section 954(b)(4), which is the interpretation of the
GILTI high tax exclusion in the GILTI proposed regulations. This narrow
approach is consistent with a reasonable interpretation of the
statutory text, which excludes from gross tested income only income
that is excluded from subpart F income ``by reason of section
954(b)(4).'' Moreover, this approach is consistent with current
regulations under section 954, which permit an election under section
954(b)(4) only with respect to income that is not otherwise excluded
from subpart F income by reason of another exception (for example,
section 954(c)(6) or 954(h)). However, under this approach, taxpayers
with high-taxed gross tested income would have incentives to
restructure their foreign operations in order to convert their gross
tested income into subpart F income. For instance, a taxpayer could
restructure its operations to have a CFC purchase personal property
from, or sell personal property to, a related person without
substantially contributing to the manufacture of the property in its
country of incorporation, with the result that the CFC's income from
the disposition of the property is foreign base company sales income
within the meaning of section 954(d). Any such restructuring may be
unduly costly and only available to certain taxpayers. Further, such
reorganization to realize a specific income treatment suggests that tax
instead of business considerations are determining business structures.
This can lead to higher compliance costs and inefficient investment.
Therefore, the Treasury Department and the IRS rejected this option.
The second option considered was to broaden the application of the
GILTI high tax exclusion to allow taxpayers to elect under the high tax
exception of section 954(b)(4) to exclude from gross
[[Page 29124]]
tested income an item of gross income that is subject to a foreign
effective tax rate greater than 18.9 percent, if such income was also
excluded from FBCI or insurance income by reason of another exception
to subpart F. Under this interpretation, income such as active
financing income that is excluded from subpart F income under section
954(h), active rents or royalties that are excluded from subpart F
income under 954(c)(2)(A), and related party payments that are excluded
from subpart F income under section 954(c)(6) could also be excluded
from gross tested income under the GILTI high tax exclusion if such
items of income are high taxed within the meaning of section 954(b)(4).
This broader approach represents a plausible interpretation of the
GILTI high tax exclusion; that is, that an item of income could be
excluded both ``by reason of section 954(b)(4)'' and by reason of
another exception. However, this approach would provide taxpayers the
ability to exclude their CFCs' high-taxed income that would be subpart
F income but for an exception (for example, active financing income),
while denying taxpayers the same ability with respect to their CFCs'
high-taxed income that is not subpart F income in the first instance
(for example, active business income), without any general economic
benefit from such differential treatment. Furthermore, taxpayers with
items of high-taxed income that are not subpart F income would still be
incentivized to restructure their foreign operations in order to
convert their high-taxed gross tested income into subpart F income,
which poses the same compliance costs and inefficiencies as the first
option. Therefore, the Treasury Department and the IRS rejected this
option.
The third option, which is adopted in the proposed regulations, is
to provide an election to broaden the scope of the high tax exception
under section 954(b)(4) for purposes of the GILTI high tax exclusion to
apply to any item of income that is subject to a foreign effective tax
rate greater than 18.9 percent. The proposed regulations permit
controlling domestic shareholders of CFCs to elect to apply the high
tax exception under section 954(b)(4) to items of gross income that
would not otherwise be FBCI or insurance income. If this high tax
exception is elected, the GILTI high tax exclusion will exclude the
item of gross income from gross tested income. Under the election, an
item of gross income is subject to a high rate of foreign tax if, after
taking into account properly allocable expenses, the net item of income
is subject to a foreign effective tax rate greater than 90 percent of
the maximum U.S. corporate tax rate (18.9 percent based on the current
U.S. corporate tax rate of 21 percent). This option therefore
establishes a framework for applying the high tax exception under
section 954(b)(4), including rules to determine the scope of an item of
income that would otherwise be gross tested income to which the
election applies and to determine the rate of foreign tax on such item.
The approach chosen by the proposed regulations is consistent with
the legislative history to section 951A, which evidences an intent to
tax low-taxed income of CFCs that presents base erosion concerns. The
approach is also supported by a reasonable interpretation of the high
tax exception of section 954(b)(4), which applies to ``any item of
income'' of a CFC, not just income that would otherwise be FBCI or
insurance income. Furthermore, contrary to the first two options, this
approach permits all similarly situated taxpayers with CFCs subject to
a high rate of foreign tax to make the election with respect to such
income to exclude it from gross tested income, and reduces the
incentive for taxpayers to restructure their operations to convert
their high-taxed gross tested income into subpart F income for U.S. tax
purposes.
For taxpayers that make the election, this approach reduces the
taxpayers' cost of capital on foreign investment by reducing U.S. tax
on such taxpayers' GILTI relative to the baseline. At the margin, the
lower cost of capital may increase foreign investment by U.S.-parented
firms. Further, removing high-taxed tested income from the GILTI tax
base could change the incentives for the location of tangible assets.
The magnitude of these effects is highly uncertain because of the
uncertainty surrounding the number and attributes of the taxpayers that
will find it advantageous to make the election and because the
relationship between the marginal effective tax rate at the QBU level
and foreign investment by U.S. taxpayers is not well known. In
addition, the impact of tax considerations on taxpayer investment
decisions depends on a number of international tax provisions, many of
which interact in complex ways.
iii. Alternatives Considered for Determining High-Taxed Income
The Treasury Department and the IRS next considered options for
determining whether an item of income is subject to the foreign
effective tax rate described in section 954(b)(4). The options
considered were (i) apply the determination on an item-by-item basis;
(ii) apply the determination on a CFC-by-CFC basis; or (iii) apply the
determination on a QBU-by-QBU basis.
The first option was to determine whether income is high-taxed
income within the meaning of section 954(b)(4) on an item-by-item
basis. This approach would be consistent with the language of section
954(b)(4), which applies to an ``item of income'' of a CFC that is
sufficiently high tax. However, this approach would be complex and
difficult to administer because it would require analyzing each item of
income to determine whether, under Federal tax principles, such item is
subject to a sufficiently high foreign effective tax rate. In fact, for
this reason, the current regulations that implement the high tax
exception of section 954(b)(4) for purposes of subpart F income do not
require an item-by-item determination and aggregate all items of income
into separate categories of income for purposes of determining whether
each such category is high tax. See Sec. 1.954-1(d)(2). Therefore, the
Treasury Department and the IRS rejected this option.
The second option was to apply the determination based on all the
items of income of the CFC. On the one hand, this approach would
minimize complexity and would be relatively easy to administer. On the
other hand, this approach could permit inappropriate tax planning, such
as combining operations subject to different rates of tax into a single
CFC. This would have the effect of ``blending'' the rates of foreign
tax imposed on the income, which could result in low- or non-taxed
income being excluded as high-taxed income by being blended with much
higher-taxed income. The low-taxed income in this scenario is precisely
the sort of base erosion-type income that the legislative history
describes section 951A as intending to tax, and such tax motivated
planning behavior is economically inefficient.
The third option, which is adopted in the proposed regulations, is
to apply the high tax exception based on the items of gross income of a
QBU of the CFC. Under this approach, the net income that is taxed by
the foreign jurisdiction in each QBU must be determined. For example,
if a CFC earned $100x of tested income through a QBU in Country A and
was taxed at a 30 percent rate and earned $100x of tested income
through another QBU in Country B and was taxed at 0 percent, the
blended rate of tax on all of the CFC's tested income is 15 percent
($30x tax/$200x tested income). However, if the high tax exception
applies to each of a CFC's
[[Page 29125]]
QBUs based on the income earned by that QBU then the blending of
different rates would be minimized. Although applying the high tax
exception on the basis of a QBU, rather than the CFC as a whole, may be
more complex and administratively burdensome under certain
circumstances, it more accurately pinpoints income subject to a high
rate of foreign tax and therefore continues to subject to tax the low-
taxed base erosion-type income that the legislative history describes
section 951A as intending to tax. Accordingly, the proposed regulations
apply the high tax exception of section 954(b)(4) based on the items of
net income of each QBU of the CFC.
iv. Affected Taxpayers
The proposed regulations potentially affect those taxpayers that
have at least one CFC with at least one QBU (including, potentially,
the CFC itself) that has high-taxed income. A taxpayer with CFCs that
have a mix of high-taxed and low-taxed income (determined on a QBU-by-
QBU basis) will need to evaluate the benefit of eliminating any tax
under section 951A with respect to high-taxed income with the costs of
forgoing the use of such taxes against other section 951A category
income and the use of tangible assets in the computation of QBAI.
Taxpayers with CFCs that have only low-taxed income are not eligible to
elect the high tax exception and hence are unaffected by this
provision.
The Treasury Department and the IRS estimate that there are
approximately 4,000 business entities (corporations, S corporations,
and partnerships) with at least one CFC that pays a foreign effective
tax rate above 18.9 percent. The Treasury Department and the IRS
further estimate that, for the partnerships with at least one CFC that
pays a foreign effective tax rate greater than 18.9 percent, there are
approximately 1,500 partners that have a large enough share to
potentially qualify as a 10 percent U.S. shareholder of the CFC.\3\ The
4,000 business entities and the 1,500 partners provide an approximate
estimate of the number of taxpayers that could potentially be affected
by an election into the high tax exception. The figure is approximate
since there is an imperfect correspondence between high-taxed CFCs and
high-taxed QBUs, and, furthermore, not all taxpayers that are eligible
for the election would choose to make the election. The Treasury
Department and the IRS do not have readily available data to determine
how many of these taxpayers would benefit from the election.
---------------------------------------------------------------------------
\3\ Data are from IRS's Research, Applied Analytics, and
Statistics division based on E-file data available in the Compliance
Data Warehouse, for tax years 2015 and 2016. The counts include
Category 4 and Category 5 IRS Form 5471 filers. Category 4 filers
are U.S. persons who had control of a foreign corporation during the
annual accounting period of the foreign corporation. Category 5
filers are U.S. shareholders who own stock in a foreign corporation
that is a CFC and who owned that stock on the last day in the tax
year of the foreign corporation in that year in which it was a CFC.
For full definitions, see https://www.irs.gov/pub/irs-pdf/i5471.pdf.
---------------------------------------------------------------------------
Tabulations from the IRS Statistics of Income 2014 Form 5471 file
\4\ further indicate that approximately 85 percent of earnings and
profits before taxes of CFCs are subject to an average foreign
effective tax rate that is less than or equal to 18.9 percent,
accounting for approximately 30 percent of CFCs. The data indicate
several examples of jurisdictions with effective tax rates above 18.9
percent, such as France, Italy, and Japan. However, information is not
readily available to determine how many QBUs are part of the same CFC
and what the effective foreign tax rates are with respect to such QBUs.
Furthermore, the determination of whether or not to elect the high tax
exception will be made at the shareholder (not CFC) level, after having
evaluated the full impact of doing so across all of the shareholder's
CFCs. Taxpayers potentially more likely to elect the high tax exception
are those taxpayers with CFCs that only operate in high-tax
jurisdictions.
---------------------------------------------------------------------------
\4\ The IRS Statistics of Income Tax Stats report on Controlled
Foreign Corporations can be accessed here: https://www.irs.gov/statistics/soi-tax-stats-controlled-foreign-corporations.
---------------------------------------------------------------------------
b. Domestic Partnership Treatment for Subpart F
i. Description
Under the statute, a U.S. shareholder of a CFC is required to
include in gross income its pro rata share of the CFC's subpart F
income under section 951(a)(1)(A), the amount determined under section
956, under section 951(a)(1)(B), and its GILTI inclusion amount under
section 951A. The Code does not explicitly prescribe the treatment of
domestic partnerships and their partners for purposes of subpart F.
However, domestic partnerships have generally been treated as entities
separate from their partners, rather than as aggregates of their
partners, for purposes of subpart F, including for purposes of
determining the amount included in the gross income of the domestic
partnership (and the distributive share of such amount of its domestic
partners) under section 951(a). The GILTI final regulations adopt an
aggregate approach to domestic partnerships, but this aggregate
treatment applies only for purposes of section 951A.
ii. Alternatives Considered
The Treasury Department and the IRS considered two options for the
treatment of domestic partnerships for purposes of subpart F. The first
option was to retain the entity approach to domestic partnerships for
purposes of subpart F. While this approach would be consistent with the
longstanding entity approach to domestic partnerships for purposes of
subpart F inclusions, it would result in domestic partnerships being
treated inconsistently for purposes of subpart F and section 951A,
despite both regimes applying to U.S. shareholders and their CFCs. This
inconsistent treatment of domestic partnerships could result in a
domestic partnership including subpart F income in gross income under
section 951(a) and its partners including GILTI in their gross income
under section 951A(a), which would introduce substantial complexity and
uncertainty in the application of provisions that require basis and E&P
adjustments with respect to CFCs and their U.S. shareholders for
amounts included in income under sections 951(a) and 951A(a). This
option would also continue the inconsistent treatment of domestic
partnerships and foreign partnerships (which generally are treated as
aggregates) for purposes of the subpart F rules, despite the lack of a
substantial policy justification for treating domestic partners of a
partnership differently based upon the law under which the partnership
is created or organized. In this regard, this option would require
``small'' partners of a domestic partnership (that is, partners that
are not themselves U.S. shareholders of CFCs owned by the domestic
partnership) to include in income their distributive share of the
domestic partnership's subpart F inclusion with respect to CFCs of
which the small partners are not themselves U.S. shareholders. In
contrast, if the domestic partnership were instead a foreign
partnership, the small partners would not include any amount in gross
income under section 951(a) (or a distributive share of such amount)
with respect to CFCs of which such partners were not U.S. shareholders.
The second option would adopt an aggregate approach to domestic
partnerships by treating stock owned by a domestic partnership as being
owned proportionately by its partners for purposes of determining the
U.S.
[[Page 29126]]
shareholder that has the subpart F inclusion. This approach is
consistent with the approach adopted for section 951A in the GILTI
final regulations. Under this approach, a domestic partnership would
not be the U.S. shareholder of a foreign corporation that includes
subpart F income in its gross income under section 951(a). Instead,
only the partners of the domestic partnership that are U.S.
shareholders of a CFC owned through the domestic partnership would
include subpart F income of the CFC in their gross income.
This approach is supported by public comments requesting
harmonization of the treatment of domestic partnerships for purposes of
the GILTI and subpart F regimes. The harmonization of the treatment of
domestic partnerships for purposes of the GILTI and subpart F regimes
is expected to result in substantial simplification of related rules
(for example, previously taxed earnings and profits and related basis
rules), consistency in the treatment of domestic partnerships and
foreign partnerships, and the reduction of burden (both administrative
burden and tax liability) on taxpayers that are small partners. This
third option is effectuated in the proposed regulations by using the
existing framework for foreign partnerships, which is well-developed
and more administrable than a new framework.
iii. Affected Taxpayers
The Treasury Department and the IRS estimate that there were
approximately 7,000 U.S. partnerships with CFCs that e-filed at least
one Form 5471 as Category 4 or 5 filers in 2015 and 2016.\5\ The
identified partnerships had approximately 2 million partners, as
indicated by the number of Schedules K-1 filed by the partnerships.
This number includes both domestic and foreign partners, so it
substantially overstates the number of partners that would be affected
by the proposed regulations, which potentially affect only domestic
partners.\6\ The proposed regulations affect domestic partners that are
U.S. shareholders of a CFC owned by the domestic partnership because
such partners will determine their subpart F inclusion amount by
reference to their pro rata shares of subpart F income of CFCs owned by
the partnership. Domestic partners that are not U.S. shareholders of a
CFC owned by the domestic partnership will neither determine their own
subpart F inclusion amount by reference to their pro rata shares of
subpart F income of CFCs owned by the partnership nor include in their
income a distributive share of the partnership's subpart F inclusion
amount. This latter group is likely to be a substantial portion of
domestic partners given the high number of partners per partnership,
and they will have lower compliance costs as a result of the proposed
regulations. Because it is not possible to precisely identify these
types of partners based on available data, this number is an upper
bound of partners who would have been affected by this rule had this
rule been in effect in 2015 or 2016.
---------------------------------------------------------------------------
\5\ Data are from IRS's Research, Applied Analytics, and
Statistics division based on data available in the Compliance Data
Warehouse. Category 4 filer includes a U.S. person who had control
of a foreign corporation during the annual accounting period of the
foreign corporation. Category 5 includes a U.S. shareholder who owns
stock in a foreign corporation that is a CFC and who owned that
stock on the last day in the tax year of the foreign corporation in
that year in which it was a CFC. For full definitions, see https://www.irs.gov/pub/irs-pdf/i5471.pdf.
\6\ This analysis is based on the tax data readily available to
the Treasury Department at this time. Some variables may be
available on tax forms that are not available for statistical
purposes. Moreover, with new tax provisions, such as section 951A,
relevant data may not be available for a number of years for
statistical purposes.
---------------------------------------------------------------------------
II. Paperwork Reduction Act
The collection of information in these proposed regulations is in
proposed Sec. 1.951A-2(c)(6)(v). The collection of information in
proposed Sec. 1.951A-2(c)(6)(v) is an election that a controlling
domestic shareholder of a CFC may make to apply the high tax exception
of section 954(b)(4) to gross income of a CFC. The election is made by
attaching a statement to an original or amended income tax return in
order to elect to apply the high tax exception of section 954(b)(4) to
gross income of a CFC. For purposes of the Paperwork Reduction Act of
1995 (44 U.S.C. 3507(d)) (``PRA''), the reporting burden associated
with proposed Sec. 1.951A-2(c)(6)(v) will be reflected in the PRA
submission associated with income tax returns in the Form 990 series,
Form 1120 series, Form 1040 series, Form 1041 series, and Form 1065
series (see chart at the end of this part II for the current status of
the PRA submissions for these forms). In 2018, the IRS released and
invited comments on drafts of the above five forms in order to give
members of the public advance notice and an opportunity to submit
comments. The IRS received no comments on the portions of the forms
that relate to section 951A during the comment period. Consequently,
the IRS made the forms available in late 2018 and early 2019 for use by
the public. The IRS is contemplating making additional changes to forms
to take into account these proposed regulations.
The IRS estimates the number of affected filers to be the
following:
Tax Forms Impacted
------------------------------------------------------------------------
Forms to which
Collection of information Number of respondents the information
(estimated) may be attached
------------------------------------------------------------------------
Sec. 1.951A-2(c)(6)(v) 25,000-35,000 Form 990 series,
Election to apply the high Form 1120
tax exception of section series, Form
954(b)(4) to gross income of 1040 series,
a CFC. Form 1041
series, and
Form 1065
series.
------------------------------------------------------------------------
Source: MeF, DCS, and IRS's Compliance Data Warehouse.
This estimate is based on filers of income tax returns with a Form
5471, ``Information Return of U.S. Persons With Respect to Certain
Foreign Corporations,'' attached because only filers that are U.S.
shareholders of CFCs would be subject to the information collection
requirements.
The current status of the PRA submissions related to the tax forms
that will be revised as a result of the information collection in
proposed Sec. 1.951A-2(c)(6)(v) is provided in the accompanying table.
The reporting burdens associated with the information collection in the
proposed regulations are included in the aggregated burden estimates
for OMB control numbers 1545-0123 (which represents a total estimated
burden time for all forms and schedules for corporations of 3.157
billion hours and total estimated monetized costs of $58.148 billion
($2017)), 1545-0074 (which represents a
[[Page 29127]]
total estimated burden time, including all other related forms and
schedules for individuals, of 1.784 billion hours and total estimated
monetized costs of $31.764 billion ($2017)), 1545-0092 (which
represents a total estimated burden time, including all other related
forms and schedules for trusts and estates, of 307,844,800 hours and
total estimated monetized costs of $9.950 billion ($2016)), and 1545-
0047 (which represents a total estimated burden time, including all
other related forms and schedules for tax-exempt organizations, of
50.450 million hours and total estimated monetized costs of
$1,297,300,000 ($2017)). The overall burden estimates provided for
these OMB control numbers are aggregate amounts that relate to the
entire package of forms associated with the applicable OMB control
number and will in the future include, but not isolate, the estimated
burden of the tax forms that will be revised as a result of the
information collection in the proposed regulations. These numbers are
therefore unrelated to the future calculations needed to assess the
burden imposed by the proposed regulations. These burdens have been
reported for other regulations related to the taxation of cross-border
income and the Treasury Department and the IRS urge readers to
recognize that these numbers are duplicates and to guard against
overcounting the burden that international tax provisions imposed prior
to the Act. No burden estimates specific to the forms affected by the
proposed regulations are currently available. The Treasury Department
and the IRS have not estimated the burden, including that of any new
information collections, related to the requirements under the proposed
regulations. The Treasury Department and the IRS estimate PRA burdens
on a taxpayer-type basis rather than a provision-specific basis. Those
estimates would capture both changes made by the Act and those that
arise out of discretionary authority exercised in the final
regulations.
The Treasury Department and the IRS request comments on all aspects
of information collection burdens related to the proposed regulations,
including estimates for how much time it would take to comply with the
paperwork burdens described above for each relevant form and ways for
the IRS to minimize the paperwork burden. Proposed revisions (if any)
to these forms that reflect the information collections contained in
these proposed regulations will be made available for public comment at
https://apps.irs.gov/app/picklist/list/draftTaxForms.htm and will not
be finalized until after these forms have been approved by OMB under
the PRA.
----------------------------------------------------------------------------------------------------------------
Form Type of filer OMB No.(s) Status
----------------------------------------------------------------------------------------------------------------
Forms 990............................ Tax exempt entities (NEW 1545-0047 Approved by OIRA 12/21/2018
Model). until 12/31/2019. The form
will be updated with OMB
number 1545-0047 and the
corresponding PRA Notice on
the next revision.
--------------------------------------------------------------------------
Link: https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=201811-1545-003 003
--------------------------------------------------------------------------
Form 1040............................ Individual (NEW Model)... 1545-0074 Limited Scope submission (1040
only) approved on 12/7/2018
until 12/31/2019. Full ICR
submission for all forms in 6/
2019. 60 Day FRN not
published yet for full
collection.
--------------------------------------------------------------------------
Link: https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=201808-1545-031 031
--------------------------------------------------------------------------
Form 1041............................ Trusts and estates....... 1545-0092 Submitted to OIRA for review
on 9/27/2018.
--------------------------------------------------------------------------
Link: https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=201806-1545-014 014
--------------------------------------------------------------------------
Form 1065 and 1120................... Business (NEW Model)..... 1545-0123 Approved by OIRA 12/21/2018
until 12/31/2019.
--------------------------------------------------------------------------
Link: https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=201805-1545-019 019
----------------------------------------------------------------------------------------------------------------
III. Regulatory Flexibility Act
It is hereby certified that these proposed regulations will not
have a significant economic impact on a substantial number of small
entities within the meaning of section 601(6) of the Regulatory
Flexibility Act (5 U.S.C. chapter 6).
Section 951A generally affects U.S. shareholders of CFCs. The
reporting burden in proposed Sec. 1.951A-2(c)(6)(v) affects
controlling domestic shareholders of a CFC that elect to apply the high
tax exception of section 954(b)(4) to gross income of a CFC.
Controlling domestic shareholders are generally U.S. shareholders who,
in the aggregate, own more than 50 percent of the total combined voting
power of all classes of stock of the foreign corporation entitled to
vote. As an initial matter, foreign corporations are not considered
small entities. Nor are U.S. taxpayers considered small entities to the
extent the taxpayers are natural persons or entities other than small
entities. Thus, proposed Sec. 1.951A-2(c)(6)(v) generally only affects
small entities if a U.S. taxpayer that is a U.S. shareholder of a CFC
is a small entity.
Examining the gross receipts of the e-filed Forms 5471 that is the
basis of the 25,000--35,000 respondent estimates, the Treasury
Department and the IRS have determined that the tax revenue from
section 951A estimated by the Joint Committee on Taxation for
businesses of all sizes is less than 0.3 percent of gross receipts as
shown in the table below. Based on data for 2015 and 2016, total gross
receipts for all businesses with gross receipts under $25 million is
$60 billion while those over $25 million is $49.1 trillion. Given that
tax on GILTI inclusion amounts is correlated with gross receipts, this
results in businesses with less than $25 million in gross receipts
accounting for approximately 0.01 percent of the tax revenue. Data are
not readily available to determine the sectoral breakdown of these
entities. Based on this analysis, smaller businesses are not
significantly impacted by these proposed regulations.
[[Page 29128]]
--------------------------------------------------------------------------------------------------------------------------------------------------------
2017 2018 2019 2020 2021 2022 2023 2024 2025 2026
(billion) (billion) (billion) (billion) (billion) (billion) (billion) (billion) (billion) (billion)
--------------------------------------------------------------------------------------------------------------------------------------------------------
JCT tax revenue........................... 7.7 12.5 9.6 9.5 9.3 9.0 9.2 9.3 15.1 21.2
Total gross receipts...................... 30,727 53,870 566,676 59,644 62,684 65,865 69,201 72,710 76,348 80,094
Percent................................... 0.03 0.02 0.02 0.02 0.01 0.01 0.01 0.01 0.02 0.03
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: Research, Applied Analytics and Statistics division (IRS), Compliance Data Warehouse (IRS) (E-filed Form 5471, category 4 or 5, C and S
corporations and partnerships); Conference Report, at 689.
The data to assess the number of small entities potentially
affected by proposed Sec. 1.951A-2(c)(6)(v) are not readily available.
However, businesses that are U.S. shareholders of CFCs are generally
not small businesses because the ownership of sufficient stock in a CFC
in order to be a U.S. shareholder generally entails significant
resources and investment. The Treasury Department and the IRS welcome
comments on whether the proposed regulations would affect a substantial
number of small entities in any particular industry.
Regardless of the number of small entities potentially affected by
proposed Sec. 1.951A-2(c)(6)(v), the Treasury Department and the IRS
have concluded that there is no significant economic impact on such
entities as a result of proposed Sec. 1.951A-2(c)(6)(v). As discussed
above, smaller businesses are not significantly impacted by the
proposed regulations. Furthermore, the requirements in proposed Sec.
1.951A-2(c)(6)(v) apply only if a taxpayer chooses to make an election
to apply a favorable rule. Consequently, the Treasury Department and
the IRS have determined that proposed Sec. 1.951A-2(c)(6)(v) will not
have a significant economic impact on a substantial number of small
entities. Accordingly, it is hereby certified that the collection of
information requirements of proposed Sec. 1.951A-2(c)(6)(v) would not
have a significant economic impact on a substantial number of small
entities. Notwithstanding this certification, the Treasury Department
and the IRS invite comments from the public on the impact of proposed
Sec. 1.951A-2(c)(6)(v) on small entities.
The treatment of domestic partnerships as an aggregate of their
partners in these proposed regulations for purposes of subpart F would
reduce the burden on partners that are not U.S. shareholders of a CFC
owned by the partnership because these partners will no longer be
required to include in income a distributive share of subpart F income.
The proposed regulations would also reduce burden on domestic
partnerships that hold CFCs because these partnerships would no longer
be required to calculate their partners' distributive share of subpart
F income, resulting in compliance cost savings for the affected
partnerships. As described in section II of this Special Analyses
section, the Treasury Department and the IRS estimate that there are
approximately 7,000 U.S. partnerships with CFCs that e-filed at least
one Form 5471 as Category 4 or 5 filers in 2015 and 2016.\7\ The
identified partnerships had approximately 2 million domestic and
foreign partners. However, this figure overstates the number of
partners that would be affected by the proposed regulations, because
the proposed regulations would not affect foreign partners of the
affected U.S. partnerships. Of affected U.S. partnerships, business
entities are a minority of the affected domestic partners. Because data
to identify the size of domestic partners that are business entities
are not readily available, this number is a high upper bound and is
magnitudes greater than the number of affected domestic partners that
are small businesses. Consequently, the Treasury Department and the IRS
have determined that the proposed regulations will not have a
significant economic impact on a substantial number of small entities.
Accordingly, it is hereby certified that the proposed regulations would
not have a significant economic impact on a substantial number of small
entities.
---------------------------------------------------------------------------
\7\ Data are from IRS's Research, Applied Analytics, and
Statistics division based on data available in the Compliance Data
Warehouse. Category 4 filer includes a U.S. person who had control
of a foreign corporation during the annual accounting period of the
foreign corporation. Category 5 includes a U.S. shareholder who owns
stock in a foreign corporation that is a CFC and who owned that
stock on the last day in the tax year of the foreign corporation in
that year in which it was a CFC. For full definitions, see https://www.irs.gov/pub/irs-pdf/i5471.pdf.
---------------------------------------------------------------------------
Pursuant to section 7805(f) of the Code, this notice of proposed
rulemaking has been submitted to the Chief Counsel for Advocacy of the
Small Business Administration for comment on its impact on small
businesses.
IV. Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates Reform Act of 1995 requires
that agencies assess anticipated costs and benefits and take certain
other actions before issuing a final rule that includes any Federal
mandate that may result in expenditures in any one year by a state,
local, or tribal government, in the aggregate, or by the private
sector, of $100 million in 1995 dollars, updated annually for
inflation. In 2019, that threshold is approximately $154 million. These
proposed regulations do not include any Federal mandate that may result
in expenditures by state, local, or tribal governments, or by the
private sector in excess of that threshold.
V. Executive Order 13132: Federalism
Executive Order 13132 (entitled ``Federalism'') prohibits an agency
from publishing any rule that has federalism implications if the rule
either imposes substantial, direct compliance costs on state and local
governments, and is not required by statute, or preempts state law,
unless the agency meets the consultation and funding requirements of
section 6 of the Executive Order. These proposed regulations do not
have federalism implications and do not impose substantial direct
compliance costs on state and local governments or preempt state law
within the meaning of the Executive Order.
Comments and Requests for Public Hearing
Before the proposed regulations are adopted as final regulations,
consideration will be given to any comments that are submitted timely
to the IRS as prescribed in this preamble under the ADDRESSES heading.
The Treasury Department and the IRS request comments on all aspects of
the proposed regulations and on changes to forms related to the
proposed regulations. See also parts I.B and II.A of the Explanation of
Provisions section (requesting specific comments related to the
aggregate approach to domestic partnerships and GILTI high tax
exclusion, respectively).
All comments will be available at www.regulations.gov or upon
request. A public hearing will be scheduled if requested in writing by
any person that timely submits written comments. If a public hearing is
scheduled, then notice of the date, time, and place for the public
hearing will be published in the Federal Register.
[[Page 29129]]
Drafting Information
The principal authors of these regulations are Joshua P.
Roffenbender and Jorge M. Oben of the Office of Associate Chief Counsel
(International). However, other personnel from the Treasury Department
and the IRS participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805.
0
Par. 2. Section 1.951-1 is amended by adding paragraph (a)(4) and
revising the last sentence of paragraph (i) to read as follows:
Sec. 1.951-1 Amounts included in gross income of United States
shareholders.
* * * * *
(a) * * *
(4) See Sec. 1.958-1(d)(1) for ownership of stock of a foreign
corporation through a domestic partnership for purposes of sections 951
and 951A and for purposes of any other provision that applies by
reference to section 951 or 951A.
* * * * *
(i) * * * Paragraph (h) of this section applies to taxable years of
domestic partnerships ending on or after May 14, 2010, but does not
apply to determine the stock of a controlled foreign corporation owned
(within the meaning of section 958(a)) by a United States person for
taxable years of the controlled foreign corporation beginning on or
after the date of publication of the Treasury decision adopting these
rules as final regulations in the Federal Register, and for taxable
years of United States persons in which or with which such taxable
years of the controlled foreign corporation end.
0
Par. 3. Section 1.951A-0 is amended by adding entries for Sec. 1.951A-
7(a), Sec. 1.951A-7(b), and Sec. 1.951A-7(c) to read as follows:
Sec. 1.951A-0 Outline of section 951A regulations.
* * * * *
Sec. 1.951A-7 Applicability dates.
(a) In general.
(b) High tax exclusion.
(c) Domestic partnerships.
0
Par. 4. Section 1.951A-2 is amended by revising paragraph (c)(1)(iii)
and adding paragraph (c)(6) to read as follows:
Sec. 1.951A-2 Tested income and tested loss.
* * * * *
(c) * * *
(1) * * *
(iii) Gross income excluded from the foreign base company income
(as defined in section 954) or the insurance income (as defined in
section 953) of the corporation by reason of the exception described in
section 954(b)(4) pursuant to an election under Sec. 1.954-1(d), or a
tentative gross tested income item of the corporation that qualifies
for the exception described in section 954(b)(4) pursuant to an
election under paragraph (c)(6) of this section,
* * * * *
(6) Election for application of high tax exception of section
954(b)(4)--(i) In general. For purposes of section 951A(c)(2)(A)(i)(II)
and paragraph (c)(1)(iii) of this section, a tentative gross tested
income item of a controlled foreign corporation for a CFC inclusion
year qualifies for the exception described in section 954(b)(4) if--
(A) An election made under paragraph (c)(6)(v)(A) of this section
is effective with respect to the controlled foreign corporation for the
CFC inclusion year; and
(B) The tentative net tested income item with respect to the
tentative gross tested income item was subject to foreign income taxes
at an effective rate that is greater than 90 percent of the rate that
would apply if the income were subject to the maximum rate of tax
specified in section 11.
(ii) Definitions--(A) Tentative gross tested income item--(1) In
general. A single tentative gross tested income item with respect to a
controlled foreign corporation for a CFC inclusion year is the
aggregate of all items of gross income attributable to a single
qualified business unit (QBU) of the controlled foreign corporation in
such CFC inclusion year that would be gross tested income without
regard to this paragraph (c)(6) and that would be in a single tested
income group (as defined in Sec. 1.960-1(d)(2)(ii)(C)). For this
purpose, a QBU is defined in section 989(a) and the regulations under
that section, and a controlled foreign corporation's QBUs includes QBUs
owned by the controlled foreign corporation in addition to the QBU that
is the controlled foreign corporation. Therefore, a controlled foreign
corporation may have multiple tentative gross tested income items.
(2) Income attributable to a QBU. Gross income is attributable to a
QBU if the gross income is properly reflected on the books and records
of the QBU. Such gross income must be determined under Federal income
tax principles, except that the principles of Sec. 1.904-4(f)(2)(vi)
(without regard to the exclusion described in Sec. 1.904-
4(f)(2)(vi)(C)(1)) apply to adjust gross income of a QBU to reflect
disregarded payments.
(B) Tentative net tested income item. A tentative net tested income
item with respect to a tentative gross tested income item is determined
by allocating and apportioning deductions (not including any items
described in Sec. 1.951A-2(c)(5)) to the tentative gross tested income
item under the principles of Sec. 1.960-1(d)(3) by treating each
single tentative gross tested income item as gross income in a separate
tested income group.
(iii) Effective rate at which taxes are imposed. For a CFC
inclusion year of a controlled foreign corporation, the effective rate
with respect to the controlled foreign corporation's tentative net
tested income items is determined separately for each such item. The
effective rate at which taxes are imposed on a tentative net tested
income item is--
(A) The U.S. dollar amount of foreign income taxes paid or accrued
with respect to the tentative net tested income item, determined by
applying paragraph (c)(6)(iv) of this section; divided by
(B) The U.S. dollar amount of the tentative net tested income item,
increased by the amount of foreign income taxes referred to in
paragraph (c)(6)(iv) of this section.
(iv) Taxes paid or accrued with respect to a tentative net tested
income item. For a CFC inclusion year, the amount of foreign income
taxes paid or accrued by a controlled foreign corporation with respect
to a tentative net tested income item of the controlled foreign
corporation for purposes of this paragraph (c)(6) is the U.S. dollar
amount of the controlled foreign corporation's current year taxes (as
defined in Sec. 1.960-1(b)(4)) that would be allocated and apportioned
under the principles of Sec. 1.960-1(d)(3)(ii) to the tentative net
tested income item by treating such tentative net tested income item as
being in a separate tested income group. If the principles of Sec.
1.904-4(f)(2)(vi) apply to adjust the gross income of a QBU to account
for disregarded payments as provided in paragraph (c)(6)(ii)(A)(2) of
this section, the principles of Sec. 1.904-6(a)(2) apply to allocate
and apportion foreign income
[[Page 29130]]
taxes imposed by reason of the disregarded payments. Except to the
extent provided in the next sentence, the amount of foreign income
taxes paid or accrued with respect to a tentative net tested income
item, determined in the manner provided in this paragraph (c)(6), will
not be affected by a subsequent reduction in foreign income taxes
attributable to a distribution to shareholders of all or part of such
income. To the extent the foreign income taxes paid or accrued by the
controlled foreign corporation are reasonably certain to be returned by
the foreign jurisdiction imposing such taxes to a shareholder, directly
or indirectly, through any means (including, but not limited to, a
refund, credit, payment, discharge of an obligation, or any other
method) on a subsequent distribution to such shareholder, the foreign
income taxes are not treated as paid or accrued for purposes of this
paragraph (c)(6)(iv).
(v) Rules regarding the election--(A) Manner of making election. An
election is made under this paragraph (c)(6)(v)(A) with respect to a
controlled foreign corporation for a CFC inclusion year--
(1) By the controlling domestic shareholders (as defined in Sec.
1.964-1(c)(5)), by attaching a statement to such effect with an
original or amended income tax return for the U.S. shareholder
inclusion year of each controlling domestic shareholder in which or
with which such CFC inclusion year ends, and including any additional
information required by applicable administrative pronouncements; or
(2) In accordance with the rules provided in forms or instructions.
(B) Scope of election. An election made under paragraph
(c)(6)(v)(A) of this section that is effective with respect to a
controlled foreign corporation for a CFC inclusion year applies with
respect to each tentative gross tested income item of the controlled
foreign corporation for the CFC inclusion year and is binding on all
United States shareholders of the controlled foreign corporation.
(C) Duration of election. An election made under paragraph
(c)(6)(v)(A) of this section is effective for a CFC inclusion year of a
controlled foreign corporation for which the election is made and all
subsequent CFC inclusion years of such corporation unless revoked by
the controlling domestic shareholders of the controlled foreign
corporation under paragraph (c)(6)(v)(D)(1) of this section.
(D) Revocation of election--(1) In general. Except as provided in
paragraph (c)(6)(v)(D)(2) of this section, the election made under
paragraph (c)(6)(v)(A) of this section with respect to a controlled
foreign corporation for a CFC inclusion year is revoked by the
controlling domestic shareholders of the controlled foreign corporation
in the same manner as prescribed for an election in paragraph
(c)(6)(v)(A) of this section.
(2) Limitations by reason of revocation--(i) In general. Except as
provided in paragraph (c)(6)(v)(D)(2)(ii) of this section, if an
election with respect to a controlled foreign corporation for a CFC
inclusion year is revoked under paragraph (c)(6)(v)(D)(1) of this
section, a new election cannot be made under paragraph (c)(6)(v)(A) of
this section with respect to the controlled foreign corporation for any
CFC inclusion year that begins within sixty months following the close
of the CFC inclusion year for which the previous election was revoked,
and such subsequent election cannot be revoked under paragraph
(c)(6)(v)(D)(1) of this section with respect to the controlled foreign
corporation for any CFC inclusion year that begins within sixty months
following the close of the CFC inclusion year for which the subsequent
election was made.
(ii) Exception for change of control. The Commissioner may permit a
controlled foreign corporation to make an election under paragraph
(c)(6)(v)(A) of this section or revoke an election under paragraph
(c)(6)(v)(D)(1) of this section with respect to any CFC inclusion year
within the sixty-month period described in paragraph (c)(6)(v)(D)(2)(i)
of this section if more than 50 percent of the total combined voting
power of all classes of the stock of the controlled foreign corporation
entitled to vote as of the beginning of such CFC inclusion year are
owned (within the meaning of section 958(a)) by persons that did not
own any interests in the controlled foreign corporation as of the close
of the CFC inclusion year for which the prior election or revocation
with respect to the controlled foreign corporation became effective.
For purposes of the preceding sentence, a person includes any person
bearing a relationship described in section 267(b) or 707(b)(1) with
respect to the person.
(E) Rules applicable to controlling domestic shareholder groups--
(1) In general. In the case of a controlled foreign corporation that is
a member of a controlling domestic shareholder group, an election is
made under paragraph (c)(6)(v)(A) of this section or revoked under
paragraph (c)(6)(v)(D)(1) of this section with respect to each member
of the controlling domestic shareholder group (including any member
that joins the controlling domestic shareholder group after the
election or revocation) and the rules in paragraphs (c)(6)(v)(A)
through (D) of this section apply by reference to the controlling
domestic shareholder group.
(2) Definition of controlling domestic shareholder group. For
purposes of paragraph (c)(6)(v)(E)(1) of this section, the term
controlling domestic shareholder group means two or more controlled
foreign corporations (each a member) if more than 50 percent of the
total combined voting power of all classes of the stock of each
corporation is owned (within the meaning of section 958(a)) by the same
controlling domestic shareholder or, if no single controlling domestic
shareholder owns (within the meaning of section 958(a)) more than 50
percent of the total combined voting power of all classes of the stock
of each corporation, more than 50 percent of the total combined voting
power of all classes of the stock of each corporation is owned (within
the meaning of section 958(a)) by the same controlling domestic
shareholders and each controlling domestic shareholder owns (within the
meaning of section 958(a)) the same percentage of stock in each
controlled foreign corporation. For purposes of the preceding sentence,
a controlling domestic shareholder includes any person bearing a
relationship described in section 267(b) or 707(b)(1) to the
controlling domestic shareholder.
(vi) Example. The following example illustrates the application of
this paragraph (c)(6).
(A) Example: Effect of disregarded payments between QBUs--(1)
Facts--(i) FP, a controlled foreign corporation organized in Country
A, conducts a trade or business in Country A (the Country A
Business) and reflects items of income, gain, loss, and expense
attributable to the Country A Business on the books and records of
FP's home office. Under Sec. 1.989(a)-1(b)(2)(i)(A), FP is a QBU.
FP's functional currency is the U.S. dollar. FP has a calendar year
taxable year in both the United States and Country A. An election is
made under paragraph (c)(6)(v)(A) of this section that is effective
for FP's CFC inclusion year.
(ii) FP owns FDE, a Country B disregarded entity (within the
meaning of Sec. 1.904-4(f)(3)(i)). FDE conducts activities in
Country B that constitute a trade or business within the meaning of
Sec. 1.989(a)-1(c) (the Country B Business), and reflects items of
income, gain, loss, and expense attributable to the Country B
Business on the books and records of FDE. Under Sec. 1.989(a)-
1(b)(2)(ii)(B), the Country B Business conducted through FDE is a
QBU. The Country B Business's functional currency is the U.S.
dollar. FDE has a calendar year taxable year in Country B.
(iii) On Date A in Year 1, FDE accrues $100x of interest income
from X, an
[[Page 29131]]
unrelated third party, and reflects the accrual on the books and
records of the Country B business. FP excludes the $100x from
foreign personal holding company income by reason of section 954(h).
Subsequently, on Date B in Year 1, FDE accrues and pays $20x of
interest to FP. FP reflects the interest income item on the books
and records of the Country A Business. FDE reflects the $20x of
interest expense on the books and records of the Country B Business.
(iv) Country A imposes no tax on income. Country B imposes a 25%
tax on income. For Country B income tax purposes, FDE (which is not
disregarded under Country B income tax principles) recognizes $80x
of taxable income ($100x interest income, less a $20x deduction for
the interest paid to FP). Accordingly, FDE incurs a Country B income
tax liability with respect to Year 1, the U.S. dollar amount of
which is $20x. For Federal income tax purposes, if FDE were not a
disregarded entity (within the meaning of Sec. 1.904-4(f)(3)(i)),
FP would recognize $20x of income in Year 1, and FDE would recognize
$80x of taxable income in Year 1. Other than the $20x expense
accrued with respect to the income tax imposed by Country B, FP
incurs no deductions in Year 1 for Federal income tax purposes.
(2) Analysis--(i) Under paragraph (c)(6)(ii)(A)(1) of this
section, a separate tentative gross tested income item must be
determined with respect to FP's Country A Business and Country B
Business (each of which is a QBU). To determine the separate
tentative gross tested income items with respect to its Country A
Business and Country B Business, FP must determine the gross income
that is attributable to the Country A Business and the Country B
Business under paragraph (c)(6)(ii)(A)(2) of this section. Without
regard to the $20x interest payment from FDE to FP, gross income
attributable to the Country A Business would be $0 (that is, $20x of
interest income reflected on the books and records of the Country A
Business, reduced by $20x attributable to a payment that is
disregarded for Federal income tax purposes). Similarly, without
regard to the $20x interest payment from FDE to FP, gross income
attributable to the Country B Business would be $100x (that is,
$100x of interest income reflected on the books and records of the
Country B Business, unreduced by the $20x payment from FDE to FP).
However, the $20x payment from FDE to FP is a disregarded payment
within the meaning of Sec. 1.904-4(f)(3)(ii), and would, under the
principles of Sec. 1.904-4(f)(2)(vi) (without regard to the
exclusion described in Sec. 1.904-4(f)(2)(vi)(C)(1)), adjust the
gross income of the Country A Business from $0 to $20x and the gross
income of the Country B Business from $100x to $80x (in each case,
by virtue of the $20x disregarded interest payment from FDE to FP).
Accordingly, FP's tentative gross tested income attributable to the
Country A Business is $20x and its tentative gross tested income
attributable to the Country B Business is $80x.
(ii) Under paragraph (c)(6)(ii)(B) of this section, because
there are no deductions allocated or apportioned under Sec. 1.960-
1(d)(3) to the tentative gross tested income items of the Country A
Business, FP's tentative net tested income item attributable to the
Country A Business is $20x. Taking into account the $20x deduction
for Country B income taxes that are allocable to the Country B
Business under Sec. 1.960-1(d)(3), FP's tentative net tested income
item attributable to the Country B Business is $60x under paragraph
(c)(6)(ii)(B) of this section (tentative gross tested income of $80x
less the $20x deduction).
(iii) Under paragraphs (c)(6)(iii) and (iv) of this section, for
Year 1 (a CFC inclusion year of FP), the effective rate with respect
to FP's $60x tentative net tested income item attributable to its
Country B Business is 25%: $20x (the U.S. dollar amount of the
Country B taxes accrued with respect to FP's tentative tested net
income item attributable to the Country B Business) divided by $80x
(the U.S. dollar amount of FP's $60x tentative net tested income
item, increased by the $20x amount of Country B income taxes accrued
with respect to that tentative net tested income item), expressed as
a percentage. Therefore, FP's tentative net tested income item
attributable to the Country B Business was subject to foreign income
taxes at an effective rate (25%) that is greater than 18.9% (which
is 90% of the rate that would apply if the income were subject to
the maximum rate of tax specified in section 11, which is 21%).
Accordingly, the requirement of paragraph (c)(6)(i)(B) of this
section is satisfied with respect to FP's tentative gross tested
income item attributable to the Country B Business in Year 1.
Further, the requirement of paragraph (c)(6)(i)(A) of this section
is satisfied because an election described in paragraph (c)(6)(v)(A)
of this section was made with respect to FP for Year 1. Accordingly,
FP's $80x item of tentative gross tested income attributable to its
Country B Business qualifies for the high tax exception of section
954(b)(4) under paragraph (c)(6)(i) of this section.
(iv) FP's $20x item of tentative net tested income attributable
to its Country A Business is not subject to foreign income tax, and
therefore does not satisfy the requirement of paragraph (c)(6)(i)(B)
of this section. Accordingly, FP's $20x item of tentative gross
tested income attributable to the Country A Business does not
qualify for the high tax exception of section 954(b)(4) under
paragraph (c)(6)(i) of this section.
0
Par. 5. Section 1.951A-7 is revised to read as follows:
Sec. 1.951A-7 Applicability dates.
(a) In general. Except as otherwise provided in this section,
sections 1.951A-1 through 1.951A-6 apply to taxable years of foreign
corporations beginning after December 31, 2017, and to taxable years of
United States shareholders in which or with which such taxable years of
foreign corporations end.
(b) High tax exclusion. Section 1.951A-2(c)(1)(iii) and (c)(6)
applies to taxable years of foreign corporations beginning on or after
the date of publication of the Treasury decision adopting these rules
as final regulations in the Federal Register, and to taxable years of
United States shareholders in which or with which such taxable years of
foreign corporations end.
(c) Domestic partnerships. Section 1.951A-1(e) applies to taxable
years of foreign corporations beginning after December 31, 2017, and
before the date of publication of the Treasury decision adopting these
rules as final regulations in the Federal Register, and to taxable
years of United States persons in which or with which such taxable
years of foreign corporations end.
0
Par. 6. Section 1.954-1 is amended by:
0
1. Adding ``or'' to the end of paragraph (c)(1)(iii)(A)(2)(ii).
0
2. Removing and reserving paragraphs (c)(1)(iii)(A)(2)(iii) and (iv).
0
3. Adding paragraphs (c)(1)(iii)(A)(3) and (c)(1)(iv).
0
4. Removing the language ``foreign base company oil related income, as
defined in section 954(g), or'' in the second sentence of paragraph
(d)(1) introductory text.
0
5. Adding a new sentence after the fourth sentence in paragraph (d)(1)
introductory text.
0
6. Removing the language ``imposed by a foreign country or countries''
in paragraph (d)(1)(ii).
0
7. Removing the language ``in a chain of corporations through which a
distribution is made'' in the first sentence in paragraph (d)(2)
introductory text.
0
8. Removing the language ``(or deemed paid or accrued)'' in paragraph
(d)(2)(i).
0
9. Revising the heading and the first sentence of paragraph (d)(3)(i).
0
10. Removing the second sentence of paragraph (d)(3)(i).
0
11. Removing and reserving paragraphs (d)(4)(iii) and (d)(7).
The additions and revisions read as follows:
Sec. 1.954-1 Foreign base company income.
* * * * *
(c) * * *
(1) * * *
(iii) * * *
(A) * * *
(3) Amount of a single item. For purposes of paragraph
(c)(1)(iii)(A) of this section, the aggregate amount from all
transactions that falls within a single separate category (as defined
in Sec. 1.904-5(a)(4)(v)) and is described in paragraph
(c)(1)(iii)(A)(1)(i) of this section is a single item of income.
Similarly, the aggregate amount from all transactions that falls within
a single separate category (as defined in Sec. 1.904-5(a)(4)(v)) and
is described in each one
[[Page 29132]]
of paragraphs (c)(1)(iii)(A)(1)(ii) through (c)(1)(iii)(A)(1)(v) of
this section is in each case a separate single item of income. The same
principles apply for transactions described in each one of paragraphs
(c)(1)(iii)(A)(2)(i) through (v) of this section.
* * * * *
(iv) Treatment of deductions or loss attributable to disqualified
basis. For purposes of paragraph (c)(1)(i) of this section (and in the
case of insurance income, paragraph (a)(6) of this section), in
determining the amount of a net item of foreign base company income or
insurance income, deductions or loss described in Sec. 1.951A-2(c)(5)
are not allocated and apportioned to gross foreign base company income
or gross insurance income.
(d) * * *
(1) * * * For rules concerning the application of the high tax
exception of sections 954(b)(4) and 951A(c)(2)(A)(i)(III) to tentative
gross tested income items, see Sec. 1.951A-2(c)(1)(iii) and (c)(6). *
* *
* * * * *
(3) * * *
(i) In general. The amount of foreign income taxes paid or accrued
by a controlled foreign corporation with respect to a net item of
income for purposes of section 954(b)(4) and this paragraph (d) is the
U.S. dollar amount of the controlled foreign corporation's current year
taxes (as defined in Sec. 1.960-1(b)(4)) that are allocated and
apportioned under Sec. 1.960-1(d)(3)(ii) to the subpart F income group
(as defined in Sec. 1.960-1(d)(2)(ii)(B)) that corresponds with the
net item of income. * * *
* * * * *
0
Par. 7. Section 1.954-1, as proposed to be amended at 83 FR 63200
(December 7, 2018), is further amended by:
0
1. Removing and reserving paragraph (d)(3)(ii).
0
2. Redesignating paragraphs (h)(1) and (h)(2) as paragraphs (h)(2) and
(h)(3), respectively.
0
3. Adding a new paragraph (h)(1).
0
4. Removing the language ``Paragraphs (d)(3)(i) and (ii)'' in newly
redesignated paragraph (h)(2) and adding ``The last two sentences in
paragraph (d)(3)(i)'' in its place.
The addition reads as follows:
Sec. 1.954-1 Foreign base company income.
* * * * *
(h) * * *
(1) Paragraphs (c)(1)(iii)(A)(3) and (c)(1)(iv) of this section and
portion of paragraph (d)(3)(i) of this section. Paragraphs
(c)(1)(iii)(A)(3) and (c)(1)(iv) of this section and the first sentence
of paragraph (d)(3)(i) of this section apply to taxable years of a
controlled foreign corporation beginning on or after the date of
publication of the Treasury decision adopting these rules as final
regulations in the Federal Register.
* * * * *
0
Par. 8. Section 1.956-1, as amended May 23, 2019, at 84 FR 23717,
effective July 22, 2019, is further amended by revising the first
sentence of paragraph (g)(4) to read as follows:
Sec. 1.956-1 Shareholder's pro rata share of the average of the
amounts of United States property held by a controlled foreign
corporation.
* * * * *
(g) * * *
(4) Paragraphs (a)(2) and (3) of this section apply to taxable
years of controlled foreign corporations beginning on or after July 22,
2019, and to taxable years of a United States shareholder in which or
with which such taxable years of the controlled foreign corporations
end, but the last sentence of paragraph (a)(2)(i) and paragraphs
(a)(2)(iii) and (a)(3)(iv) of this section do not apply to taxable
years of controlled foreign corporations beginning on or after the date
of publication of the Treasury decision adopting these rules as final
regulations in the Federal Register, and to taxable years of a United
States shareholder in which or with which such taxable years of the
controlled foreign corporations end. * * *
* * * * *
0
Par. 9. Section 1.958-1 is amended by:
0
1. Redesignating paragraph (d) as paragraph (e).
0
2. Adding a new paragraph (d).
The addition reads as follows:
Sec. 1.958-1 Direct and indirect ownership of stock.
* * * * *
(d) Stock owned through domestic partnerships--(1) In general.
Except as otherwise provided in paragraph (d)(2) of this section, for
purposes of section 951 and section 951A, and for purposes of any other
provision that applies by reference to section 951 or section 951A, a
domestic partnership is not treated as owning stock of a foreign
corporation within the meaning of section 958(a). When the preceding
sentence applies, a domestic partnership is treated in the same manner
as a foreign partnership under section 958(a)(2) and paragraph (b) of
this section for purposes of determining the persons that own stock of
the foreign corporation within the meaning of section 958(a).
(2) Non-application for determination of status as United States
shareholder or controlled foreign corporation. Paragraph (d)(1) of this
section does not apply for purposes of determining whether any United
States person is a United States shareholder (as defined in section
951(b)), whether any United States shareholder is a controlling
domestic shareholder (as defined in Sec. 1.964-1(c)(5)), or whether
any foreign corporation is a controlled foreign corporation (as defined
in section 957(a)).
(3) Examples. The following examples illustrate the application of
this paragraph (d).
(i) Example 1--(A) Facts. USP, a domestic corporation, and
Individual A, a United States citizen unrelated to USP, own 95% and
5%, respectively, of PRS, a domestic partnership. PRS owns 100% of
the single class of stock of FC, a foreign corporation.
(B) Analysis--(1) CFC and United States shareholder
determinations. Under paragraph (d)(2) of this section, the
determination of whether PRS, USP, and Individual A (each a United
States person) are United States shareholders of FC and whether FC
is a controlled foreign corporation is made without regard to
paragraph (d)(1) of this section. PRS, a United States person, owns
100% of the total combined voting power or value of the FC stock
within the meaning of section 958(a). Accordingly, PRS is a United
States shareholder under section 951(b), and FC is a controlled
foreign corporation under section 957(a). USP is a United States
shareholder of FC because it owns 95% of the total combined voting
power or value of the FC stock under sections 958(b) and
318(a)(2)(A). Individual A, however, is not a United States
shareholder of FC because Individual A owns only 5% of the total
combined voting power or value of the FC stock under sections 958(b)
and 318(a)(2)(A).
(2) Application of sections 951 and 951A. Under paragraph (d)(1)
of this section, for purposes of sections 951 and 951A, PRS is not
treated as owning (within the meaning of section 958(a)) the FC
stock; instead, PRS is treated in the same manner as a foreign
partnership for purposes of determining the FC stock owned by USP
and Individual A under section 958(a)(2) and paragraph (b) of this
section. Therefore, for purposes of sections 951 and 951A, USP is
treated as owning 95% of the FC stock under section 958(a), and
Individual A is treated as owning 5% of the FC stock under section
958(a). USP is a United States shareholder of FC, and therefore USP
determines its income inclusions under section 951 and 951A based on
its ownership of FC stock under section 958(a). However, because
Individual A is not a United States shareholder of FC, Individual A
does not have an income inclusion under section 951 with respect to
FC or a pro rata share of any amount of FC for purposes of section
951A.
(ii) Example 2--(A) Facts. USP, a domestic corporation, and
Individual A, a United States citizen, own 90% and 10%,
[[Page 29133]]
respectively, of PRS1, a domestic partnership. PRS1 and Individual
B, a nonresident alien individual, own 90% and 10%, respectively, of
PRS2, a domestic partnership. PRS2 owns 100% of the single class of
stock of FC, a foreign corporation. USP, Individual A, and
Individual B are unrelated to each other.
(B) Analysis--(1) CFC and United States shareholder
determination. Under paragraph (d)(2) of this section, the
determination of whether PRS1, PRS2, USP, and Individual A (each a
United States person) are United States shareholders of FC and
whether FC is a controlled foreign corporation is made without
regard to paragraph (d)(1) of this section. PRS2 owns 100% of the
total combined voting power or value of the FC stock within the
meaning of section 958(a). Accordingly, PRS2 is a United States
shareholder under section 951(b), and FC is a controlled foreign
corporation under section 957(a). Under sections 958(b) and
318(a)(2)(A), PRS1 is treated as owning 90% of the FC stock owned by
PRS2. Accordingly, PRS1 is a United States shareholder under section
951(b). Further, under section 958(b)(2), PRS1 is treated as owning
100% of the FC stock for purposes of determining the FC stock
treated as owned by USP and Individual A under section 318(a)(2)(A).
Therefore, USP is treated as owning 90% of the FC stock under
section 958(b) (100% x 100% x 90%), and Individual A is treated as
owning 10% of the FC stock under section 958(b) (100% x 100% x 10%).
Accordingly, both USP and Individual A are United States
shareholders of FC under section 951(b).
(2) Application of sections 951 and 951A. Under paragraph (d)(1)
of this section, for purposes of sections 951 and 951A, PRS1 and
PRS2 are not treated as owning (within the meaning of section
958(a)) the FC stock; instead, PRS1 and PRS2 are treated in the same
manner as foreign partnerships for purposes of determining the FC
stock owned by USP and Individual A under section 958(a)(2) and
paragraph (b) of this section. Therefore, for purposes of
determining the amount included in gross income under sections 951
and 951A, USP is treated as owning 81% (100% x 90% x 90%) of the FC
stock under section 958(a), and Individual A is treated as owning 9%
(100% x 90% x 10%) of the FC stock under section 958(a). Because USP
and Individual A are both United States shareholders of FC, USP and
Individual A determine their respective inclusions under sections
951 and 951A based on their ownership of FC stock under section
958(a).
(4) Applicability date. Paragraphs (d)(1) through (3) of this
section apply to taxable years of foreign corporations beginning on or
after the date of publication of the Treasury decision adopting these
rules as final regulations in the Federal Register, and to taxable
years of United States persons in which or with which such taxable
years of foreign corporations end. For taxable years that precede the
taxable years described in the preceding sentence, a domestic
partnership may apply those paragraphs to taxable years of a foreign
corporation beginning after December 31, 2017, and to taxable years of
the domestic partnership in which or with which such taxable years of
the foreign corporation end, provided that the partnership, its
partners that are United States shareholders of the foreign
corporation, and other domestic partnerships that bear relationships
described in section 267(b) or 707(b) to the partnership (and their
United States shareholder partners) consistently apply paragraph (d) of
this section with respect to all foreign corporations whose stock the
domestic partnerships own within the meaning of section 958(a)
(determined without regard to paragraph (d)(1) of this section).
* * * * *
0
Par. 10. Section 1.1502-51 is amended by revising the last sentence in
paragraph (b) and adding paragraph (g)(2) to read as follows:
Sec. 1.1502-51 Consolidated section 951A.
* * * * *
(b) * * * In addition, see Sec. 1.958-1(d).
* * * * *
(g) * * *
(2) The last sentence of paragraph (b) of this section. The last
sentence of paragraph (b) of this section applies to taxable years of
United States shareholders described in Sec. 1.958-1(d)(4).
Kirsten Wielobob,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2019-12436 Filed 6-14-19; 4:15 pm]
BILLING CODE 4830-01-P