Topic 9: GILTI & 250 Deduction

Question 1

(§951A)
Step 1: What is the first step to applying Section 951A (GILTI)? (1/8)

Answer 1

A: Determine if you are a U.S. shareholder of a controlled foreign corporation (CFC).

Question 2

(§951A)
Step 2:
How do you determine if a corporation is a CFC? (2/8)

Answer 2

It is a CFC if U.S. shareholders own more than 50% of the foreign corporation’s stock

Question 3

(§951A)
Step 3: What should you include in calculating the Net CFC Tested Income? (3/8)

Answer 3

The CFC’s gross income, excluding specified types like Subpart F income, certain dividends, and foreign oil & gas income.

Question 4

(§951A)
Step 4:
How do you calculate the Qualified Business Asset Investment (QBAI)? (4/8)

Answer 4

Average the adjusted bases of the CFC’s tangible assets at the end of each quarter, then determine 10% of this average.

Question 5

(§951A)
Step 5:How is GILTI calculated? (5/8)

Answer 5

Subtract the net deemed tangible income return (10% of QBAI) from the Net CFC Tested Income.

Question 6

(§951A)
Step 6:What do you do with the calculated GILTI? (6/8)

Answer 6

Include the GILTI amount in the U.S. shareholder’s gross income on their U.S. tax return.

Question 7

(§951A)
Step 7: Can U.S. corporations reduce their GILTI tax liability?(7/8)

Answer 7

Yes, they may be eligible for a GILTI deduction under Section 250.

Question 8

(§951A)
Step 8:How can foreign taxes affect GILTI liability? (8/8)

Answer 8

Foreign tax credits may be used to reduce the U.S. tax liability on GILTI.

Question 9

What is the purpose of §960(d)

Answer 9

To provide a “deemed paid” foreign tax credit for U.S. corporations on foreign taxes related to GILTI.

Question 10

Step 1:
How much of the foreign income taxes can be credited under §960(d)

Answer 10

960(d) grants US S’s a deemed paid foreign tax credit for a portion of the foreign taxes paid by their CFCs on income subject to GILTI. This credit is limited to 80% of the foreign taxes deemed paid.

Question 11

Step 2:
What does “inclusion percentage” mean under §960(d)?

Answer 11

The ratio of a U.S. corporation’s GILTI to the total tested income of the CFCs.

Question 12

Step 3:
§960(d)-
How do you calculate the “inclusion percentage”

Answer 12

Divide the corporation’s GILTI by the total tested income from all CFCs

Question 13

Step 4:
§960(d)-
What is the next step after finding the “inclusion percentage”?

Answer 13

Multiply the inclusion percentage by the total foreign taxes paid or accrued on the CFCs’ tested income.

Question 14

Step 5: §960(d)

What happens to the result after applying the inclusion percentage to the foreign taxes?

Answer 14

Multiply the result by 80% to determine the allowable foreign tax credit.

Question 15

Step 6: §960(d)
Can this credit be used to offset U.S. tax liability on GILTI?

Answer 15

Yes, it helps reduce the U.S. tax liability on GILTI by providing credit for foreign taxes already paid.

Question 16

How do §78 and §960(d) interact regarding GILTI inclusions?

Answer 16

A:

§960(d): Grants a deemed paid foreign tax credit of 80% of foreign taxes paid by CFCs on GILTI income.
§78: Acts as a gross-up, increasing U.S. taxable income by the full amount of foreign taxes deemed paid to avoid double benefits.
Example:
CFC income: $100
Foreign taxes: $20
GILTI inclusion: $80
Credit under §960(d): $16 (80% of $20)
Gross-up under §78: Taxable income increases by $20.
Key Point: The credit is limited to 80%, but the gross-up reflects the full foreign taxes, leading to higher U.S. tax liability.

Question 17

What is a CFC and what are the tax implications

Answer 17

CFC is a foreign corp where [U.S S’]s hold more than 50% of the voting power or value of the stock. [U.S S’er= card for definition].
Tax implications: CFCs are subject to special US tax rules like Subpart F, GILTI, which aim to prevent tax deferral on certain types of income

Question 18

What is a U. S Shareholder?

Answer 18

A US person owning 10% or more of the CFC’s stock

Question 19

What is Subpart F Income

Answer 19

It is a category of income earned by CFCs that is subject to immediate US taxation, regardless of whether it is distributed to US S’s. The rule aims to curb tax deferral on certain types of passive or mobile income

Question 20

What are the main categories of Subpart F income

Answer 20

(1) Foreign base Company Sales Income
(2) Foreign Base Company Service Income
(3) Foreign Personal Holding Company Income
(4) Insurance Income

Question 21

Explain the 4 main categories of Subpart F income

Answer 21

(1) FBCSI: Income from sales of property purchased from or sold to related parties, manufactured outside the CFCs country, & destined for use outside that country
(2) FBCSI: Income from services performed for or on behalf of related parties outside the CFCs country
(3) FPHCI: passive income like dividends, interest, royalties, rents
(4) Insurance Income: income from insuring US risk/s/ of related parties

Question 22

What are “Deemed Inclusions” in the context of CFC taxation?

Answer 22

mechanism that treats certain income earned by a CFC as if it were directly earned by the US S’er, even if no actual distribution was made. This leads to immediate US tax liability for the S’er

Question 23

How do “Deemed Inclusions” work for Subpart F income v. GILTI?

Answer 23

Subpart F: 951(a) creates a deemed inclusion for the S’s pro rata share of the CFC’s. subpart F Income
GILTI: 951A creates a deemed inclusion for the S’s GILTI, calculated as the excess of net tested income over deemed tangible income return across all CFC’s

Question 24

What is the role of 960 in Foreign Tax Credit’s for CFC income

Answer 24

960 grants US S’s deemed paid FTCs for foreign taxes paid by their CDCs on income subject to Subpart F or GILTI inclusions. This aims to alleviate double taxation

Question 25

What’s the difference between Direct and Indirect Foreign Tax Credits?

Answer 25

DIRECT: Claimed by the US TP who directly paid the Foreign taxes
INDIRECT: Claimed by the U.S S’er for foreign taxes paid by a foreign corp they own, typically arising from dividend distributions. 960 provides indirect credits for Subpart F and GILTI inclusions

Question 26

What is the limitation on foreign tax credits for GILTI Inclusions?

Answer 26

Section 960(d) limits the deemed paid foreign tax credit for GILTI inclusions to 80% of the foreign taxes paid by the CFCs. This effectively creates a minimum US tax on GILTI.

Question 27

What is the purpose of the §78 “gross-up” mechanism?

Answer 27

Section 78 increases the US shareholder’s taxable income by the full amount of foreign taxes deemed paid under Section 960. This prevents the shareholder from getting both a deduction and a credit for the same foreign taxes, ensuring they are ultimately taxed on the full pre-tax inco

Question 28

How can §78 Gross-Up create a tax cost for shareholders?

Answer 28

While 960(d) provides an 80% deemed paid credit for GILTI, Section 78 grosses up taxable income by the full amount of foreign taxes. This means shareholders may be taxed on more income than the credit they receive, resulting in a higher US tax liability.

Question 29

What is the purpose of Previously Taxed Earnings and Profits (PTEP) accounts?

Answer 29

PTEP accounts track Subpart F and GILTI inclusions that have already been taxed in the US. They prevent double taxation when these earnings are later distributed as dividends or when the CFC stock is sold

Question 30

How are PTEP accounts created and how do they work?

Answer 30

●Creation: PTEP accounts are created for each US shareholder in a CFC when they have Subpart F or GILTI inclusions.
●Impact on Dividends: Dividends from a CFC to a US shareholder are first sourced from the shareholder’s PTEP account, meaning they are generally not subject to further US tax.
●Basis Adjustments: Basis adjustments under Section 961 increase the shareholder’s basis in the CFC stock by the amount of Subpart F and GILTI inclusions, reducing potential capital gain upon sale. This increase is separate from the 960 credit or the Section 78 gross-up.

Question 31

What was the historical purpose of Section 956?

Answer 31

Section 956 aimed to prevent tax deferral by treating certain investments in US property by CFCs as deemed dividends to their US shareholders. This primarily targeted loans from CFCs to their US parents, ensuring US taxation of the funds.

Question 32

What are some limitations and exceptions to Section 956?

Answer 32

●Limited Applicability to Corporate Shareholders: Proposed regulations have largely rendered Section 956 inapplicable to corporate shareholders due to the implementation of the participation exemption system.
●Exemption for Investments in US Treasuries: Investments in US Treasury obligations are generally exempt from Section 956

Question 33

What generally do the regulations 1.951A-1 to -6 do?

Answer 33

Provide guidance on the application of GILTI rules. Cover various aspects of GILTI like: General provisions and definitions, determining tested income and tested loss, calculating qualified business asset investment, determining tested interest expense and tested interest income, addressing the treatment of GILTI inclusion acts, and outlining adjustments related to tested losses

Question 34

What is Reg 1.951A-1 about?

Answer 34

Think of it as the GILTI rulebook’s table of contents. It defines important terms like “tested income,” “deemed tangible income return,” “tested income CFC,” and “tested loss CFC.”

Question 35

Reg 1.951A-1: Tested Income

Answer 35

Basically, the foreign corporation’s profit.

Question 36

Reg 1.951A-1: Deemed tangible income return:

Answer 36

A portion of the investment in the foreign corporation that’s considered a reasonable return, and therefore not subject to GILTI.

Question 37

Reg 1.951A-1:Tested income CFC:

Answer 37

A CFC with a profit.

Question 38

Reg 1.951A-1:Tested loss CFC

Answer 38

: A CFC with a loss.

Question 39

What is Reg 1.951A-2 about?

Answer 39

This section explains how to calculate a foreign Corp’s tested income or tested loss. Think of it as figuring out the taxable portion of the profit pie.
○It identifies the income that’s subject to GILTI and separates it from other types of income.
○It allows for deducting expenses related to the GILTI income.
○It explains how to handle situations where a CFC has a loss.

Question 40

What is Reg 1.951A-3 about?

Answer 40

This section deals with tangible assets (like factories, equipment, and real estate) and how they factor into the GILTI calculation.
○It specifies what property counts as “qualified business asset investment” (QBAI).
○It provides rules for determining the value of those assets, which impacts the “deemed tangible income return.”

Question 41

What is Section 1.951A-4 about?

Answer 41

This focuses on how to calculate net interest for GILTI purposes.
○Tested interest expense: Money a CFC pays on loans.
○Tested interest income: Money a CFC earns on investments.
○1.951A-4 explains how to determine the difference between interest expense and interest income, which affects the GILTI calculation.

Question 42

What is Reg 1.951A-5 about?

Answer 42

This section explains how the GILTI income is reported on the US company’s tax return and how it’s treated for other US tax purposes.

Question 43

What is Reg 1.951A-6 about?

Answer 43

This explains how to handle tested losses incurred by CFCs and how they can potentially offset future GILTI inclusions.

Question 44

How do you calculate Tested Income or Loss for a Controlled Foreign Corporation (CFC) under §1.951A?

Answer 44

Equation for Tested Income/Loss:

Gross Tested Income
Start with CFC’s gross income
Exclude specified items (Subpart F income, effectively connected income, certain dividends)
Minus Deductions
Subtract deductions allocable to gross tested income

Question 45

How to calculate QBAI

Answer 45

Question 46

US Shareholder Level Calculations.
1-Net CFC Tested Income
2-Specified Interest Expense
3.Net Deemed Tangible Income Return NDTIR
4.GILTI Inclusion Amt

Answer 46

Question 47

What is a GILTI Inclusion Percentage

Answer 47

A ratio used to determine the amount of foreign tax credit allowed.Based on the proportion of tested income that is subject to GILTI after considering QBAI

Question 48

What is the 250 deduction ?

Answer 48

Reduces GILTI inclusion by 50% for corporate shareholders

Question 49

What is a Deemed Paid Foreign Tax Credit?

Answer 49

Allowed for GILTI inclusions, limited to 80% of the CFC’s foreign income taxes attributable to the GILTI inclusions

Question 50

What is the GILTI High-Tax Exception?
§ 954(b)(4);Reg: § 1.951A–2(c)(7)

Answer 50

: It allows U.S. shareholders to exclude certain foreign income from GILTI if that income is already taxed at a high rate overseas (usually over 18.9%).

Question 51

How often can the GILTI High-Tax Exception election be made
§ 954(b)(4);Reg: § 1.951A–2(c)(7)

Answer 51

The election is made annually, allowing flexibility each year.wha

Question 52

What is required for the GILTI High-Tax Exception election to apply?§ 954(b)(4);Reg: § 1.951A–2(c)(7)

Answer 52

he election must be applied on a unified basis across all Controlled Foreign Corporations (CFCs), not individually.

Question 53

What are “tested units” in the context of the GILTI High-Tax Exception?
§ 954(b)(4), Reg: § 1.951A–2(c)(7)

Answer 53

Tested units are specific parts of a CFC, such as branches or partnerships, that must be analyzed to determine if they qualify for the high-tax exception.