updated 2:57 PM CEST, Sep 21, 2023

'Partial' GILTI tax victory seen in latest Treasury regs regarding 'high-tax exceptions' for foreign corporations

The U.S. Treasury Department on Monday issued what it said was a "final regulation" addressing how income earned by foreign corporations that has already been subject to a high rate of foreign tax may declared, in order to "allow taxpayers to exclude certain high-taxed income of a controlled foreign corporation from their Global Intangible Low Taxed Income (GILTI) computation on an elective basis".

At the same time it and the IRS issued what was described as a proposed regulation "regarding the high-tax exception with the GILTI high-tax exclusion", and invited the public and other stakeholders to comment on it.

The final rules will reduce the U.S. tax burden for companies in certain countries that charge higher corporate tax rates than the U.S. does, such as Germany and Japan, but do nothing for companies located in such countries as Canada, which will not go down well with expat small-business owners in these places.

In its announcement on Monday, the Treasury said businesses would be allowed to apply the specific GILTI regulation it had finalized and was unveiling retroactively to the end of 2017.

Under the exemption, the 10.5% tax on global intangible low-taxed income that was contained in the TCJA, won't apply to foreign income that has already been taxed by other jurisdictions at rates of 18.9% or more.

Monte Silver low resMonte Silver, pictured left, the American tax attorney resident in Israel who has become well known in expatriate tax and legal circles for his opposition to key elements of President Trump's 2017 Tax Cuts and Jobs Act (TCJA), which introduced the GILTI tax provisions, said the latest batch of final regulations represented "not just a side dish" but "the main course for the vast majority of expat business owners" in terms of its significance.

"Unlike the relief last week, which was 100% due to our community efforts – by which I mean, not just mine – this relief is about 10% due to our effort.

"This exemption greatly benefits large corporations and they were pushing for it. We pushed for it too, from the very beginning.

Few are the wins which are 100% attributable to one person or group. That is the nature of these things."

As reported, the "relief last week" Silver referred to was another set of final GILTI regulations published by the Treasury on July 9, having to do specifically with the GILTI deduction as for foreign-derived intangible income. At the time, Silver described the Treasury's unexpected issuance of the 295-page, updated final regulations as a “huge win for our advocacy” that would “provide us small-business owners with meaningful, permanent forms of relief”.

Silver added that he is continuing with his lawsuit, filed in the U.S. District Court in the District of Columbia in June, in which he alleges that the GILTI regulations of the TCJA are procedurally invalid because the government failed to take into account their effects on small businesses before bringing them into force. The government is  required to do this under the Regulatory Flexibility Act (RFA), Silver points out in his lawsuit.

The GILTI regulations were said to have been included in Trump's 2017 tax overhaul in an attempt to discourage large U.S. multinational corporations with U.S. tax obligations from shifting and/or keeping profits outside of the U.S., by imposing tax on “foreign-sourced intangible income”.

Under the GILTI provisions, found in IRC Section 951A, each U.S. person (defined as a U.S. corporation or citizen) who is a U.S. shareholder of any controlled foreign corporation (CFC) must include their share of GILTI income in their tax return, where they calculate their “gross income” for the tax year.

GILTI income is roughly defined as the total profit of a CFC, reduced by 10% of the adjusted cost basis of the CFC’s “depreciable tangible personal property” (generally, plant and equipment, but not land).

As Silver and other expat small-business owners have been arguing since the law was published, because those who drafted the GILTI tax package failed to consider small overseas businesses, it ended up impacting individual shareholders, including American expatriates who run these entities.

Among the most controversial elements of the TCJA was a harsh and controversial one-off tax on the previously-untaxed foreign earnings of such businesses, dating all the way back to 1986. This is found in Section 965 of the Internal Revenue Code, and is separate from the GILTI provisions. 

To see the final regulation in question, which is 112 pages long, click here.

Editor's note: This is a developing story and may change during the course of the next 24 hours.