Guidance Related to Section 951A (Global Intangible Low-Taxed Income), 51072-51111 [2018-20304]
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Federal Register / Vol. 83, No. 196 / Wednesday, October 10, 2018 / Proposed Rules
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG–104390–18]
RIN 1545–BO54
Guidance Related to Section 951A
(Global Intangible Low-Taxed Income)
Internal Revenue Service (IRS),
Treasury.
ACTION: Notice of proposed rulemaking.
AGENCY:
This document contains
proposed regulations implementing
section 951A of the Internal Revenue
Code. Section 951A was added to the
Internal Revenue Code by the Tax Cuts
and Jobs Act, which was enacted on
December 22, 2017. This document also
contains proposed regulations under
sections 951, 1502, and 6038. These
proposed regulations would affect
United States shareholders of controlled
foreign corporations.
DATES: Written or electronic comments
and requests for a public hearing must
be received by November 26, 2018.
ADDRESSES: Send submissions to:
Internal Revenue Service,
CC:PA:LPD:PR (REG–104390–18), Room
5203, Post Office Box 7604, Ben
Franklin Station, Washington, DC
20044. Submissions may be handdelivered Monday through Friday
between the hours of 8 a.m. and 4 p.m.
to CC:PA:LPD:PR (indicate REG–
104390–18), Courier’s Desk, Internal
Revenue Service, 1111 Constitution
Avenue NW, Washington, DC 20224, or
sent electronically, via the Federal
eRulemaking Portal at
www.regulations.gov (IRS REG–104390–
18).
FOR FURTHER INFORMATION CONTACT:
Concerning proposed regulations
§§ 1.951–1, 1.951A–0 through 1.951A–7,
1.6038–2, and 1.6038–5, Melinda E.
Harvey or Michael Kaercher at (202)
317–6934; concerning proposed
regulations §§ 1.1502–12, 1.1502–13,
1.1502–32, and 1.1502–51, Austin
Diamond-Jones at (202) 317–6847 or
Kevin M. Jacobs at (202) 317–5332;
concerning submissions of comments or
requests for a public hearing, Regina L.
Johnson at (202) 317–6901 (not toll free
numbers).
SUPPLEMENTARY INFORMATION:
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SUMMARY:
Background
This document contains proposed
amendments to 26 CFR part 1 under
sections 951, 951A, 1502, and 6038 (the
‘‘proposed regulations’’). Added to the
Internal Revenue Code (‘‘Code’’) by
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section 14201(a) of the Tax Cuts and
Jobs Act, Public Law 115–97 (2017)
(‘‘the Act’’), section 951A requires a
United States shareholder (‘‘U.S.
shareholder’’) of any controlled foreign
corporation (‘‘CFC’’) for any taxable year
to include in gross income the
shareholder’s global intangible lowtaxed income (‘‘GILTI’’) for such taxable
year. Section 14201(d) of the Act
provides that section 951A 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. The
proposed regulations under section
951A provide guidance for U.S.
shareholders to determine the amount of
GILTI to include in gross income
(‘‘GILTI inclusion amount’’).
Section 14201(b) of the Act added two
new foreign tax credit provisions
relating to GILTI—section 960(d)
provides a foreign tax credit for taxes
properly attributable to tested income
taken into account by a domestic
corporation under section 951A, and
section 904(d)(1)(A) provides that any
amount included in gross income under
section 951A (other than passive
category income) is treated as a separate
category of income for purposes of
section 904. In addition, section
14202(a) of the Act added section 250 to
the Code providing domestic
corporations a deduction equal to a
percentage of their GILTI inclusion
amount and foreign-derived intangible
income, subject to a taxable income
limitation. The proposed regulations do
not include any rules relating to foreign
tax credits or the deduction under
section 250. Rules relating to foreign tax
credits and the deduction under section
250 will be included in separate notices
of proposed rulemaking. It is anticipated
that the proposed regulations relating to
foreign tax credits will provide rules for
assigning the section 78 gross-up
attributable to foreign taxes deemed
paid under section 960(d) to the
separate category described in section
904(d)(1)(A).
Before the Act, section 951(b) defined
a U.S. shareholder of a foreign
corporation as a United States person
(‘‘U.S. person’’) that holds at least 10
percent of the total combined voting
power of all classes of stock entitled to
vote in a foreign corporation. Section
14214(a) of the Act amended this
definition to include a U.S. person that
holds at least 10 percent of the total
value of shares of all classes of stock of
the foreign corporation. Section
14215(a) of the Act amended section
951(a)(1) to eliminate the requirement
that a foreign corporation must be a CFC
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for an uninterrupted period of 30 days
or more in order to give rise to an
inclusion under section 951(a)(1) (the
‘‘30-day requirement’’). These
amendments apply to taxable years of
foreign corporations beginning after
December 31, 2017, and to taxable years
of U.S. shareholders with or within
which such taxable years of foreign
corporations end. See sections 14214(b)
and 14215(b) of the Act. The proposed
regulations under section 951
incorporate these amendments into the
regulations and provide other guidance
necessary for U.S. shareholders to
coordinate subpart F and GILTI.
Explanation of Provisions
I. Section 951A
A. Overview
The Act established a participation
exemption 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
that, without any base protection
measures, the 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 CFCs operating
in low- or zero-tax jurisdictions. See
Senate Committee on the Budget, 115th
Cong., Reconciliation Recommendations
Pursuant to H. Con. Res. 71, at 365
(Comm. Print 2017) (‘‘Senate
Explanation’’). 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, GILTI of a corporate
U.S. shareholder is 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.
Also, due to the administrative
difficulty in identifying income
attributable to intangible assets, in
contrast to income from tangible assets,
intangible income (and thus GILTI) is
determined for purposes of section
951A based on a formulaic approach,
under which a 10-percent return is
attributed to certain tangible assets
(‘‘qualified business asset investment’’
or ‘‘QBAI’’) and then each dollar of
certain income above such ‘‘normal
return’’ is effectively treated as
intangible income. Id. at 366.
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Federal Register / Vol. 83, No. 196 / Wednesday, October 10, 2018 / Proposed Rules
Section 951A(a) provides that a U.S.
shareholder of any CFC for a taxable
year must include in gross income its
GILTI for that year. A GILTI inclusion
is treated in a manner similar to a
section 951(a)(1)(A) inclusion of a CFC’s
subpart F income for many purposes of
the Code. See section 951A(f)(1).
However, a GILTI inclusion is
determined in a manner that is
fundamentally different from that of an
inclusion under section 951(a)(1)(A).
Subpart F income is determined at the
level of a CFC, and then a U.S.
shareholder that owns stock directly or
indirectly in the CFC generally includes
in gross income its pro rata share of the
CFC’s subpart F income. The amount of
the shareholder’s section 951(a)(1)(A)
inclusion with respect to one CFC is not
taken into account in determining the
shareholder’s section 951(a)(1)(A)
inclusion with respect to another CFC.
A U.S. shareholder’s pro rata share of a
CFC’s subpart F income is generally the
final step in determining its section
951(a)(1)(A) inclusion.
Similar to an inclusion under section
951(a)(1)(A), the determination of a U.S.
shareholder’s GILTI inclusion amount
begins with the calculation of certain
items of each CFC owned by the
shareholder, such as tested income,
tested loss, or QBAI. A U.S. shareholder
then determines its pro rata share of
each of these CFC-level items in a
manner similar to a shareholder’s pro
rata share of subpart F income under
section 951(a)(2). See section
951A(e)(1). However, in contrast to an
inclusion under section 951(a)(1)(A), the
U.S. shareholder’s pro rata shares of
these items are not amounts included in
gross income, but rather amounts taken
into account by the shareholder in
determining the GILTI included in the
shareholder’s gross income. The U.S.
shareholder aggregates (and then nets or
multiplies) its pro rata share of each of
these items into a single shareholderlevel amount—for example, aggregate
tested income reduced by aggregate
tested loss becomes net CFC tested
income and aggregate QBAI multiplied
by 10 percent becomes deemed tangible
income return. A shareholder’s GILTI
inclusion amount for a taxable year is
then calculated by subtracting one
aggregate shareholder-level amount
from another—the shareholder’s net
deemed tangible income return (‘‘net
DTIR’’) is the excess of deemed tangible
income return over certain interest
expense, and, finally, its GILTI
inclusion amount is the excess of its net
CFC tested income over its net DTIR.
As explained above, a U.S.
shareholder does not compute a
separate GILTI inclusion amount with
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respect to each CFC for a taxable year,
but rather computes a single GILTI
inclusion amount by reference to all its
CFCs. Cf. section 951A(f)(2) (allocating
the U.S. shareholder’s GILTI inclusion
amount to each tested income CFC for
purposes of various sections of the
Code). Because a U.S. shareholder’s
GILTI inclusion amount is determined
based on the relevant items of all the
CFCs of which it is a U.S. shareholder,
the effect of the provision is generally to
ensure that a U.S. shareholder is taxed
on its GILTI wherever (and through
whichever CFC) derived. See, for
example, Senate Explanation at 366
(‘‘The Committee believes that
calculating GILTI on an aggregate basis,
instead of on a CFC-by-CFC basis,
reflects the interconnected nature of a
U.S. corporation’s global operations and
is a more accurate way of determining
a U.S. corporation’s global intangible
income.’’).
The proposed regulations under
section 951A follow an outline similar
to the description in this overview.
Proposed §§ 1.951A–2 through 1.951A–
4 provide detailed guidance on items
determined at the CFC level—that is,
tested income and tested loss, QBAI,
and the items necessary to determine
the amount of certain interest expense
that reduces net DTIR. Proposed
§ 1.951A–1(d) provides rules for
determining the U.S. shareholder’s pro
rata share of these CFC-level items.
Finally, proposed § 1.951A–1(c)
provides rules describing the
aggregation of the U.S. shareholder’s pro
rata share amounts to determine the
shareholder’s GILTI inclusion amount.
B. General Rules and Definitions
1. Inclusion of GILTI in Gross Income
Proposed § 1.951A–1 provides general
rules to determine a U.S. shareholder’s
GILTI inclusion amount and associated
definitions. Some of the definitions
distinguish between a CFC’s taxable
year and a U.S. shareholder’s taxable
year. For example, a ‘‘U.S. shareholder
inclusion year’’ refers to the relevant
taxable year of the U.S. shareholder and
is defined as a taxable year of the U.S.
shareholder that includes a CFC
inclusion date (as that term is defined
in the proposed regulations) of the CFC.
See proposed § 1.951A–1(e)(4). A ‘‘CFC
inclusion year’’ refers to the relevant
taxable year of the CFC beginning after
December 31, 2017 (the effective date of
section 951A for a foreign corporation
that is a CFC). See proposed § 1.951A–
1(e)(2).
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2. Determination of Net DTIR
Proposed § 1.951A–1(c)(3) defines net
DTIR, which is computed at the U.S.
shareholder level based on QBAI (as
defined in proposed § 1.951A–3(b)) held
by the shareholder’s CFCs and offsets
the shareholder’s net CFC tested income
for purposes of determining the
shareholder’s GILTI inclusion amount.
A CFC’s QBAI is equal to its aggregate
average adjusted bases in specified
tangible property, which is defined as
tangible property used in the production
of tested income. See section
951A(d)(2)(A) and proposed § 1.951A–
3(c)(1). Consistent with the statute and
the conference report accompanying the
Act (‘‘Conference Report’’), the
proposed regulations clarify that a
tested loss CFC does not have specified
tangible property. See H.R. Rep. No.
115–466, at 642, fn. 1536 (2017) (Conf.
Rep.) and proposed § 1.951A–3(b),
(c)(1), and (g)(1). Accordingly, for
purposes of calculating its GILTI
inclusion amount, a U.S. shareholder
does not take into account the tangible
property of a tested loss CFC in
calculating its aggregate pro rata share of
QBAI, its deemed tangible income
return, or its net DTIR.
3. Determination of Pro Rata Share
Section 951A(e)(1) provides that, for
purposes of determining a U.S.
shareholder’s GILTI inclusion amount,
the shareholder’s pro rata share of a
CFC’s tested income, tested loss, and
QBAI ‘‘shall be determined under the
rules of section 951(a)(2) in the same
manner as such section applies to
subpart F income.’’ Accordingly, the
proposed regulations incorporate the
pro rata share rules of section 951(a)(2)
and § 1.951–1(b) and (e), with
appropriate modifications to account for
the differences between subpart F
income, on the one hand, and tested
income, tested loss, and QBAI, on the
other. Similar to the determination of a
U.S. shareholder’s pro rata share of
subpart F income, proposed § 1.951A–
1(d)(1) provides that a U.S.
shareholder’s pro rata share of any CFC
item necessary for calculating its GILTI
inclusion amount is determined by
reference to the stock such shareholder
owns (within the meaning of section
958(a)) in the CFC (‘‘section 958(a)
stock’’) as of the close of the CFC’s
taxable year, including section 958(a)
stock treated as owned by the U.S.
shareholder through a domestic
partnership under proposed § 1.951A–
5(c). See section I.F of this Explanation
of Provisions for an explanation of
proposed rules for domestic
partnerships and their partners.
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In several places, the provisions of
proposed § 1.951A–1(d) reference
section 951(a)(2) and proposed § 1.951–
1(e), which amends existing § 1.951–
1(e). See section II.A of this Explanation
of Provisions for an explanation of the
proposed modifications to § 1.951–1(e).
Comments requested guidance on how
to determine a preferred shareholder’s
pro rata share of CFC items for purposes
of GILTI. Rules relating to the allocation
of tested income to preferred stock are
included in proposed § 1.951A–1(d)(2)
by cross-reference to proposed § 1.951–
1(e). In addition, the proposed
regulations provide rules relating to a
preferred shareholder’s pro rata share of
tested loss and QBAI.
A U.S. shareholder’s pro rata share of
tested income generally is determined
in the same manner as its pro rata share
of subpart F income under section
951(a)(2) and § 1.951–1(b) and (e) (that
is, based on the relative amount that
would be received by the shareholder in
a year-end hypothetical distribution of
all the CFC’s current year earnings). See
proposed § 1.951A–1(d)(2)(i). For
purposes of determining a U.S.
shareholder’s pro rata share of a CFC’s
QBAI, the amount of QBAI distributed
in the hypothetical distribution of
section 951(a)(2)(A) and § 1.951–1(e) is
generally proportionate to the amount of
the CFC’s tested income distributed in
the hypothetical distribution. See
proposed § 1.951A–1(d)(3)(i). However,
a special rule in the proposed
regulations provides that if a CFC’s
QBAI exceeds 10 times its tested
income, so that the amount of QBAI
allocated to preferred stock would
exceed 10 times the tested income
allocated to the preferred stock under
the general proportionate allocation
rule, the excess amount of QBAI is
allocated solely to the CFC’s common
stock. See proposed § 1.951A–1(d)(3)(ii).
The proposed cap on QBAI allocated to
a preferred shareholder (10 times tested
income) is derived from the statutory
cap on the amount of QBAI that may be
used to compute GILTI (10 percent of
aggregate QBAI). These rules in the
proposed regulations ensure that the
notional ‘‘normal return’’ associated
with the CFC’s QBAI generally flows to
the shareholders in a manner consistent
with their economic rights in the
earnings of the CFC. For illustration, see
proposed § 1.951A–1(d)(3)(iii),
Examples 1 and 2.
For purposes of determining a U.S.
shareholder’s pro rata share of a CFC’s
tested loss, the amount distributed in
the hypothetical distribution is the
amount of the tested loss, rather than
the CFC’s current earnings and profits,
and the tested loss is distributed solely
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with respect to the CFC’s common
stock, except in certain cases involving
dividend arrearages with respect to
preferred stock and common stock with
no liquidation value. See proposed
§ 1.951A–1(d)(4)(i) through (iii). In the
latter case, the proposed regulations
provide that any amount of tested loss
that would otherwise be distributed in
the hypothetical distribution to a class
of common stock that has no liquidation
value is instead distributed to the most
junior class of equity with a positive
liquidation value to the extent of the
liquidation value. See proposed
§ 1.951A–1(d)(4)(iii). In subsequent
years, tested income is allocated to any
class of stock to the extent that tested
loss was allocated to such class in prior
years under this special rule. See
proposed § 1.951A–1(d)(2)(ii). In
addition, the proposed regulations
provide that section 951(a)(2)(B) is
applied to reduce tested losses, but
modified to treat the amount of a
dividend received by another person as
equal to the amount of the tested loss,
without regard to whether an actual
dividend is made by the tested loss CFC.
See proposed § 1.951A–1(d)(4)(i)(D).
The effect of this rule is to reduce a
shareholder’s pro rata share of tested
loss in proportion to the number of days
the shareholder did not own the stock
of the tested loss CFC within the
meaning of section 958(a). Each of these
modifications is intended to ensure that
the tested loss of a CFC is allocated to
each U.S. shareholder in an amount
commensurate with the economic loss
borne by the shareholder by reason of
the tested loss.
Proposed § 1.951A–1(d)(5) and (6)
provide rules for determining a
shareholder’s pro rata share of ‘‘tested
interest expense’’ and ‘‘tested interest
income.’’ Tested interest expense and
tested interest income are defined in
proposed § 1.951A–4, which is
discussed in section I.E of this
Explanation of Provisions. A U.S.
shareholder’s pro rata share of a CFC’s
tested interest expense for a taxable year
equals the amount by which the CFC’s
tested interest expense reduces the
shareholder’s pro rata share of tested
income, increases the shareholder’s pro
rata share of tested loss, or both.
Conversely, a U.S. shareholder’s pro rata
share of tested interest income for a
taxable year equals the amount by
which the CFC’s tested interest income
increases the shareholder’s pro rata
share of tested income, reduces the
shareholder’s pro rata share of tested
loss, or both. For example, tested
interest income could both increase a
U.S. shareholder’s pro rata share of
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tested income and decrease its pro rata
share of tested loss if a CFC with tested
income for a taxable year would have,
without regard to the tested interest
income, a tested loss for the taxable
year.
The Department of the Treasury
(‘‘Treasury Department’’) and the IRS
request comments on the proposed
approaches for determining a U.S.
shareholder’s pro rata share of a CFC’s
QBAI and tested loss, including how (or
whether) to allocate tested loss of a CFC
when no class of CFC stock has positive
liquidation value.
4. Foreign Currency Translation
Because GILTI is computed at the U.S.
shareholder level, the tested income,
tested loss, tested interest expense,
tested interest income, and QBAI of a
CFC that uses a functional currency
other than the U.S. dollar must be
translated into U.S. dollars. The
appropriate exchange rate under section
989(b)(3) for income inclusions under
section 951(a)(1)(A) is the average
exchange rate for the taxable year of the
foreign corporation. GILTI inclusion
amounts are similar to section
951(a)(1)(A) inclusions in that both
inclusions are determined based on
certain income (and, in the case of
GILTI, certain losses) of the CFC for the
taxable year of the CFC that ends with
or within the taxable year of the U.S.
shareholder. Therefore, the proposed
regulations prescribe the same
translation rule that is used for subpart
F income for translating a pro rata share
of tested income, tested loss, tested
interest expense, tested interest income,
and QBAI. See proposed § 1.951A–
1(d)(1). Similarly, a U.S. shareholder’s
GILTI inclusion amount that is allocated
to a tested income CFC under section
951A(f)(2) is translated from U.S. dollars
into the CFC’s functional currency using
the average exchange rate for the taxable
year of the tested income CFC. See
proposed § 1.951A–6(b)(2)(iii).
C. Tested Income and Tested Loss
1. Determination of Gross Income and
Allowable Deductions
Under section 951A(c)(2), tested
income and tested loss are determined
by beginning with a CFC’s gross income,
excluding certain items (gross income
after exclusions, ‘‘gross tested income’’),
and then subtracting properly allocable
deductions determined using rules
similar to the rules of section 954(b)(5).
While section 951A does not
specifically address which expenses of
a CFC are allowable as a deduction,
existing rules under § 1.952–2 apply to
determine the gross income and
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deductions of a CFC taken into account
in determining its subpart F income.
The Treasury Department and the IRS
have determined that due to the
similarities between gross tested income
and subpart F income (for example,
gross tested income and subpart F
income are both determined at the CFC
level and taxed to a U.S. shareholder on
a current basis), and the overlap
between CFCs impacted by GILTI and
subpart F (since a CFC can have both
tested income and subpart F income),
the determinations of gross income and
allowable deductions for GILTI should
be made in a manner similar to the
determination of subpart F income.
Accordingly, the proposed regulations
require that the gross income and
allowable deduction determinations are
made under the rules of § 1.952–2. See
proposed § 1.951A–2(c)(2). Under
§ 1.952–2(a)(1) and proposed § 1.951A–
2(c)(2), subject to the special rules in
§ 1.952–2(c), tested income or tested
loss of a CFC is determined by treating
the CFC as a domestic corporation
taxable under section 11 and by
applying the principles of section 61
and the regulations thereunder.
Therefore, only items of deduction that
would be allowable in determining the
taxable income of a domestic
corporation may be taken into account
for purposes of determining a CFC’s
tested income or tested loss. If an item
of a CFC would be disallowed as a
deduction in determining the CFC’s
taxable income if the CFC were a
domestic corporation, the item cannot
be taken into account for purposes of
determining the tested income or tested
loss of the CFC even if the item reduces
the CFC’s earnings and profits.
The Treasury Department and the IRS
request comments on the application of
the rules under § 1.952–2 for purposes
of determining subpart F income, tested
income, and tested loss. In particular,
comments are requested as to whether
these rules should allow a CFC a
deduction, or require a CFC to take into
account income, that is expressly
limited to domestic corporations under
the Code. For example, questions have
arisen as to whether a CFC could be
entitled to a dividends received
deduction under section 245A, even
though section 245A by its terms
applies only to dividends received by a
domestic corporation. See Conf. Rep. at
599, fn. 1486. The Treasury Department
and the IRS also welcome comments on
other approaches to determining tested
income or tested loss, including
whether additional modifications
should be made to § 1.952–2 for
purposes of calculating GILTI.
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Comments have also requested
guidance on the interactions of section
163(j) and section 267A with section
951A. Issues related to sections 163(j),
245A, and 267A will be addressed in
future guidance.
2. Income Excluded From Foreign Base
Company Income and Insurance Income
by Reason of Section 954(b)(4)
As noted in section I.C.1 of this
Explanation of Provisions, section
951A(c)(2) requires that the gross
income of the CFC for the taxable year
be determined without regard to certain
items. One of these items is gross
income excluded from foreign base
company income (as defined in section
954) or insurance income (as defined in
section 953) of the CFC by reason of
electing the exception under section
954(b)(4) (‘‘high-tax exception’’). In
response to comments, the proposed
regulations clarify that this exclusion
applies only to income that is excluded
from foreign base company income and
insurance income solely by reason of an
election made to exclude the income
under the high-tax exception of section
954(b)(4). Accordingly, the exclusion
does not apply to income that would not
otherwise be subpart F income or to
categories of income that do not
constitute subpart F income due to
exceptions other than the high-tax
exception (for example, as a result of an
exception to foreign personal holding
company income under section
954(c)(6) or section 954(h)).
3. Gross Income Taken Into Account in
Determining Subpart F Income
Another item excluded from gross
tested income is gross income taken into
account in determining a corporation’s
subpart F income. Comments have
requested guidance on the interaction
between the earnings and profits
limitation to subpart F income under
section 952(c), including the recapture
rule in section 952(c)(2), and the
determination of gross tested income for
purposes of section 951A. The Treasury
Department and the IRS have
determined that any income described
in section 952(a) is ‘‘taken into account
in determining subpart F income’’
regardless of whether the section 952(c)
limitation applies, and therefore should
not be included in gross tested income.
Conversely, the recapture of subpart F
income under section 952(c)(2), even if
by reason of earnings and profits
attributable to gross tested income, does
not result in excluding any amount from
gross tested income. Therefore, the
proposed regulations provide that tested
income and tested loss are determined
without regard to the application of
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section 952(c). See proposed § 1.951A–
2(c)(4).
4. Determination of Allowable
Deductions Properly Allocable to Gross
Tested Income
Section 951A(c)(2)(A)(ii) provides that
tested income and tested loss are
determined by subtracting from a CFC’s
gross tested income ‘‘the deductions
(including taxes) properly allocable to
such gross income under rules similar to
the rules of section 954(b)(5) (or to
which such deductions would be
allocable if there were such gross
income).’’ Regulations under section
954(b)(5) require taxpayers to determine
net subpart F income by properly
allocating and apportioning deductions
to the various categories of subpart F
income. For this purpose, § 1.954–1(c)
provides that taxpayers must first
determine the gross amount of each item
of income in a category of income (as
described in § 1.954–1(c)(1)(iii)) and
then allocate and apportion expenses to
these categories under the principles of
sections 861, 864, and 904(d).
Accordingly, in order to apply the
principles of section 954(b)(5) to section
951A (as required under section
951A(c)(2)(A)(ii)), the proposed
regulations provide that allowable
deductions determined under the
principles of § 1.952–2 are allocated and
apportioned to gross tested income
under the principles of section 954(b)(5)
and § 1.954–1(c), treating gross tested
income that falls within a single
separate category (as defined in § 1.904–
5(a)(1)) as an additional category of
income for this purpose. See proposed
§ 1.951A–2(c)(3).
Section I.D.5 of this Explanation of
Provisions describes a rule that
disregards basis in specified tangible
property created in certain taxable
transfers occurring before the effective
date of section 951A for purposes of
calculating QBAI. See § 1.951A–3(h)(2).
These rules are cross-referenced in
proposed § 1.951A–2(c)(5) to disallow
any loss or deduction related to such
stepped up-basis in any depreciable or
amortizable property (including, for
example, intangible property) for
purposes of calculating tested income or
tested loss.
D. QBAI
1. QBAI and Specified Tangible
Property
Proposed § 1.951A–3(b) provides that
a tested income CFC’s QBAI for any
taxable year is the average of the CFC’s
aggregate adjusted bases as of the close
of each quarter in specified tangible
property that is used in a trade or
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business of the corporation and of a type
with respect to which a deduction is
allowable under section 167. In general,
specified tangible property is tangible
property used in the production of
tested income. See proposed § 1.951A–
3(c)(1). Tangible property is defined as
property for which the depreciation
deduction provided by section 167(a) is
eligible to be determined under section
168 (even if the CFC has elected not to
apply section 168). See proposed
§ 1.951A–3(c)(2). The proposed
regulations define tangible property by
reference to whether the property can be
depreciated under section 168 because,
unlike section 167, section 168 applies
only to tangible property, and there is a
substantial amount of guidance
delineating property subject to section
168.
Property that is used in the
production of both gross tested income
and gross income that is not gross tested
income (‘‘dual use property’’) is
proportionately treated as specified
tangible property. See proposed
§ 1.951A–3(d)(1). Generally, the
proportion is determined based on the
relative amount of gross tested income
to income other than gross tested
income that the property generates for
the taxable year. See proposed
§ 1.951A–3(d)(2)(i). A special rule is
provided for determining the proportion
of the property treated as specified
tangible property if the property
generates no directly identifiable
income (for example, because the
property is used in general and
administrative functions that contribute
to the generation of all the income of the
CFC). See proposed § 1.951A–3(d)(2)(ii).
Under § 1.167(a)–2, the depreciation
allowance for tangible property applies
only to that part of the property which
is subject to wear and tear, to decay or
decline from natural causes, to
exhaustion, and to obsolescence.
Accordingly, for purposes of section
951A, property that may be in part
depreciable qualifies as specified
tangible property to the extent it is
depreciable. For example, precious
metal used in a manufacturing process
may be considered specified tangible
property in part because it is
depreciable in part. See Rev. Rul. 2015–
11, 2015–21 I.R.B. 975.
2. Determination of Adjusted Basis of
Specified Tangible Property
Proposed § 1.951A–3(e) provides rules
to determine the adjusted basis of
specified tangible property for purposes
of determining QBAI. The general rule
in proposed § 1.951A–3(e)(1), like
section 951A(d)(3), provides that the
adjusted basis in any property is
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determined by using the alternative
depreciation system under section
168(g) (‘‘ADS’’) and allocating the
depreciation deduction with respect to
the property ratably to each day during
the period in the taxable year to which
the depreciation relates. ADS applies for
purposes of determining QBAI
irrespective of whether the basis of the
property is determined using another
depreciation method for other purposes
of the Code.
The Treasury Department and the IRS
recognize that taxpayers may hold
specified tangible property that was
acquired before December 22, 2017, that
was not depreciated using ADS. Section
951A(d) does not distinguish between
property acquired before December 22,
2017, and property acquired on or after
December 22, 2017. The Treasury
Department and the IRS have concluded
that, regardless of the date acquired, the
adjusted basis in specified tangible
property should be determined under
ADS in order for the U.S. shareholder’s
pro rata share of QBAI to be properly
determined and not distorted.
Therefore, the proposed regulations
provide that when determining QBAI,
the adjusted basis in property placed in
service before December 22, 2017, is
determined using ADS as if this system
had applied from the date that the
property was placed in service. See
proposed § 1.951A–3(e)(3).
3. Short Taxable Year
Net DTIR is intended to reduce a U.S.
shareholder’s GILTI inclusion amount
by an annual return on specified
tangible property. To ensure that the net
DTIR of a CFC with a taxable year of less
than 12 months (a ‘‘short taxable year’’)
reflects an annual return, the proposed
regulations provide a methodology to
reduce the QBAI of a CFC with a short
taxable year to an amount that, if
annualized, would produce an amount
equal to the QBAI for a 12-month
taxable year. See proposed § 1.951A–
3(f).
4. Specified Tangible Property Held
Through a Partnership
Section 951A(d)(3) 1 (the ‘‘partnership
QBAI paragraph’’) states that if a CFC
holds an interest in a partnership at the
close of the CFC’s taxable year, the CFC
takes into account under section
951A(d)(1) its ‘‘distributive share of the
aggregate of the partnership’s adjusted
bases (determined as of such date in the
hands of the partnership)’’ in specified
tangible property in computing its
QBAI. The partnership QBAI paragraph
1 As enacted, section 951A(d) contains two
paragraphs designated as paragraph (3).
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further provides that a CFC’s
‘‘distributive share of the adjusted basis
of any property shall be the controlled
foreign corporation’s distributive share
of income with respect to such
property.’’
The statutory language ‘‘distributive
share of the aggregate of the
partnership’s adjusted basis’’ is
ambiguous because the term
‘‘distributive share’’ is used in
subchapter K of the Code with respect
to income, gain, loss, and credits of a
partnership, but not the bases of assets.
A partner of a partnership has a basis in
its partnership interest (‘‘outside
basis’’), while the partnership has a
separate basis in the assets of the
partnership (‘‘inside basis’’). The
proposed regulations therefore use the
term ‘‘share’’ (rather than ‘‘distributive
share’’) when referring to the amount of
the inside basis of a partnership asset
that a partner that is a CFC may include
in its QBAI.
The partnership QBAI paragraph
provides that a CFC ‘‘shall take into
account’’ under section 951A(d)(1) the
CFC’s distributive share of the basis in
partnership specified tangible property.
Because section 951A(d)(1) requires an
averaging of basis over the close of each
quarter of the taxable year of the CFC,
and the term ‘‘distributive share’’ as it
pertains to basis is ambiguous, it is
unclear based on the statute how a CFC
determines its distributive share of the
basis of partnership specified tangible
property for purposes of determining its
QBAI. One interpretation of the
partnership QBAI paragraph is that a
CFC partner’s QBAI is increased by an
amount equal to the CFC partner’s share
of the basis that the partnership has in
its specified tangible property as of the
close of the CFC partner’s taxable year.
However, that interpretation would be
contrary to the requirement in section
951A(d)(1) that the CFC’s bases in
specified tangible property be averaged
over four quarters. Furthermore, giving
the term ‘‘distributive share’’ effect, the
amount determined at the end of the
CFC partner’s taxable year should be
reduced for any period during the
taxable year when the partnership did
not own the property, whereas a CFC
partner of a partnership that disposed of
property before the close of the CFC’s
taxable year would receive no QBAI
benefit if there were a single
measurement date. In addition, a
requirement that a partnership’s basis in
specified tangible property be measured
on the last day of a CFC partner’s
taxable year could be burdensome for
partnerships that have one or more CFC
partners with taxable years that do not
coincide with the partnership’s taxable
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year and, in those cases, would have the
effect of decoupling the CFC partner’s
share of the basis of partnership
property used to compute the CFC
partner’s QBAI from the CFC partner’s
distributive share of the partnership’s
income from the property that is taken
into account in computing the CFC
partner’s tested income. Moreover,
because depreciation is treated as
reducing the adjusted basis of property
on each day during the taxable year,
calculating a partnership’s basis on the
final day of the CFC partner’s taxable
year will generally result in an
artificially low basis relative to
calculating average adjusted basis over
the course of the partnership’s taxable
year. For the foregoing reasons, the
proposed regulations determine a CFC
partner’s share of the partnership’s
adjusted basis in specified tangible
property by reference to the
partnership’s average adjusted basis in
the property as of the close of each
quarter of the partnership’s taxable year
that ends with or within the CFC’s
taxable year. See proposed § 1.951A–
3(g)(3).
A partner that is a CFC takes into
account its share of the adjusted basis of
specified tangible property held by a
partnership in computing QBAI if,
among other things, the property ‘‘is
used in the production of tested income
(determined with respect to such
controlled foreign corporation’s
distributive share of income with
respect to such property).’’ Section
951A(d)(3)(C). Consistent with the
general rule for QBAI, only a tested
income CFC can increase its QBAI by
reason of specified tangible property
owned by a partnership. See proposed
§ 1.951A–3(g)(1). Further, consistent
with the parenthetical in the
partnership QBAI paragraph, the
proposed regulations provide that a CFC
partner determines its share of the
partnership’s average adjusted basis in
specified tangible property based on the
amount of its distributive share of the
gross income produced by the property
that is included in the CFC partner’s
gross tested income relative to the total
amount of gross income produced by
the property. See proposed § 1.951A–
3(g)(2). The proposed regulations
incorporate the dual use property rule of
section 951A(d)(2)(B) in the context of
specified tangible property owned
indirectly through a partnership and
include similar rules for addressing
specified tangible property that does not
produce any directly identifiable
income. The calculation is performed
separately for each item of specified
tangible property held by the
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partnership, taking into account the CFC
partner’s distributive share of income
with respect to such property.
The Treasury Department and the IRS
request comments on the proposed
approach to specified tangible property
held through a partnership, including
the rules addressing specified tangible
property that does not produce directly
identifiable income.
5. Anti-Abuse Provisions
Section 951A(d)(4) provides that
‘‘[t]he Secretary shall issue such
regulations or other guidance as the
Secretary determines appropriate to
prevent the avoidance of the purposes of
this subsection, including regulations or
other guidance which provide for the
treatment of property if—(A) such
property is transferred, or held,
temporarily, or (B) the avoidance of the
purposes of this paragraph is a factor in
the transfer or holding of such
property.’’ The Conference Report
describes the scope of section
951A(d)(4), stating that ‘‘[t]he conferees
intend that non-economic transactions
intended to affect tax attributes of CFCs
and their U.S. shareholders (including
amounts of tested income and tested
loss, tested foreign income taxes, net
deemed tangible income return, and
QBAI) to minimize tax under this
provision be disregarded.’’ Conf. Rep. at
645. One specific example illustrated in
the Conference Report is a transaction
that occurs after the measurement date
of post-1986 earnings and profits under
section 965 but before the first taxable
year for which section 951A is effective
in order to increase a CFC’s QBAI. Id.
Consistent with section 951A(d)(4)
and the Conference Report, as well as
the Secretary’s broad authority under
section 7805(a) to ‘‘prescribe all needful
rules and regulations for the
enforcement of’’ the Code, the proposed
regulations provide that specified
tangible property of a tested income
CFC is disregarded for purposes of
determining the tested income CFC’s
average aggregate basis in specified
tangible property if the tested income
CFC acquires the property with a
principal purpose of reducing the GILTI
inclusion amount of a U.S. shareholder
and holds the property temporarily but
over at least one quarter end. See
proposed § 1.951A–3(h)(1). For this
purpose, property held for less than a
twelve month period that includes at
least one quarter end during the taxable
year of a tested income CFC is treated
as temporarily held and acquired with
a principal purpose of reducing the
GILTI inclusion amount of a U.S.
shareholder. Id.
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The Treasury Department and the IRS
are aware that taxpayers are engaging in
transactions like the ones described in
the Conference Report involving taxable
transfers of property from one CFC to
another CFC before the first taxable year
of the transferor CFC to which section
951A applies in order to provide the
transferee CFC with a stepped-up basis
in the transferred property that, for
example, may increase a U.S.
shareholder’s amount of QBAI with
respect to the CFC for periods when it
is subject to section 951A. See Conf.
Rep. at 645. The stepped-up basis may
also reduce the transferee CFC’s tested
income or increase its tested loss (for
example, due to increased depreciation
or amortization deductions) during
periods when it is subject to section
951A. The Treasury Department and the
IRS have determined that it would be
inappropriate for a taxpayer to reduce
its GILTI inclusion amount for any
taxable year by reason of a stepped-up
basis in CFC assets attributable to
transactions between related CFCs
during the period after December 31,
2017, but before the effective date of
section 951A. Accordingly, the
proposed regulations disallow the
benefit of a stepped-up basis in
specified tangible property transferred
between related CFCs during the period
before the transferor CFC’s first
inclusion year for purposes of
calculating the transferee CFC’s QBAI.
See proposed § 1.951A–3(h)(2). As
discussed in section I.C.4 of this
Explanation of Provisions, these rules
are also cross-referenced in proposed
§ 1.951A–2(c)(5) to disregard a steppedup basis in any property that is
depreciable or amortizable for purposes
of calculating tested income and tested
loss.
The U.S. tax results claimed with
respect to transactions that fall outside
the scope of the anti-abuse rules in the
proposed regulations may, nonetheless,
be challenged under other statutory
provisions or judicial doctrines.
E. Specified Interest Expense
To calculate a U.S. shareholder’s net
DTIR, section 951A(b)(2)(B) provides
that 10 percent of the aggregate of the
shareholder’s pro rata share of the QBAI
of each CFC (defined as ‘‘deemed
tangible income return’’ in proposed
§ 1.951A–1(c)(3)(ii)) is reduced by ‘‘the
amount of interest expense taken into
account under subsection (c)(2)(A)(ii) in
determining such shareholder’s net CFC
tested income for the taxable year to the
extent the interest income attributable to
such expense is not taken into account
in determining such shareholder’s net
CFC tested income.’’ Deductions taken
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into account under section
951A(c)(2)(A)(ii) are deductions
(including taxes) that are properly
allocable to gross tested income for
purposes of calculating tested income
and tested loss. Thus, only a U.S.
shareholder’s pro rata share of interest
expense that is currently deductible and
properly allocable to gross tested
income is taken into account for
purposes of determining the interest
expense described in section
951A(b)(2)(B). For purposes of the
proposed regulations, interest expense
described in section 951A(b)(2)(B) is
referred to as ‘‘specified interest
expense.’’ See proposed § 1.951A–
1(c)(3)(iii).
Specified interest expense is a U.S.
shareholder-level determination which
is net of ‘‘attributable’’ interest income
taken into account by the U.S.
shareholder. Specifically, specified
interest expense of a U.S. shareholder is
its pro rata share of interest expense
properly allocable to gross tested
income reduced by its pro rata share of
interest income included in gross tested
income to the extent attributable to such
interest expense. The effect of this
formulation is to count against net DTIR
only a U.S. shareholder’s pro rata share
of interest expense allocable to gross
tested income to the extent that the
related interest income is not also
reflected in the U.S. shareholder’s pro
rata share of the tested income of
another CFC, such as in the case of
third-party interest expense or interest
expense paid to related U.S. persons.
The amount of interest income
‘‘attributable’’ to interest expense is not
defined in section 951A(b)(2)(B).
Accordingly, it is necessary to define
this concept in the proposed
regulations. A definition that
incorporates a strict tracing approach
would require a U.S. shareholder to
determine each item of interest expense
with respect to each debt instrument of
each of its CFCs to determine whether,
and to what extent, the interest income
with respect to that debt instrument is
taken into account by the U.S.
shareholder in determining the
shareholder’s net CFC tested income.
However, the Treasury Department and
the IRS have determined that a tracing
approach for specified interest expense
would be administratively burdensome
and difficult to reconcile with the
framework of section 951A, which
generally requires a determination of
CFC-level items followed by a second
determination of U.S. shareholder-level
aggregate pro rata shares of such items.
A tracing approach for specified interest
expense would necessitate a hybrid
determination, in which the relevant
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item—‘‘attributable’’ interest income—
could not be determined at the level of
the CFC, but rather would require a
matching at the U.S. shareholder level
of the shareholder’s pro rata share of
each item of interest expense with its
pro rata share of each item of interest
income attributable to such interest
expense. A tracing approach would
create particular complexity with
respect to interest paid between CFCs
that are owned by different U.S.
shareholders in different proportions or
with respect to interest for which the
accrual of the expense and inclusion of
the income occur in separate taxable
years.
The Treasury Department and the IRS
have instead determined that a netting
approach to specified interest expense
accomplishes the purpose of the
specified interest expense rule in a more
administrable manner and is consistent
with the requirement that ‘‘attributable’’
interest income be netted against
interest expense. Therefore, the
proposed regulations provide that a U.S.
shareholder’s specified interest expense
is the excess of its aggregate pro rata
share of the tested interest expense of
each CFC over its aggregate pro rata
share of the tested interest income of
each CFC. See proposed § 1.951A–
1(c)(3)(iii). Tested interest expense and
tested interest income are generally
defined by reference to all interest
expense and interest income that is
taken into account in determining a
CFC’s tested income or tested loss. See
proposed § 1.951A–4(b)(1) and (2).
Comments have questioned whether
interest expense of a captive finance
CFC must be taken into account for
purposes of determining a U.S.
shareholder’s specified interest expense,
or whether the related interest income
from unrelated customers may be
available to offset such interest expense.
Under a netting approach to the
computation of specified interest
expense, without modifications,
whether a CFC’s active banking business
increases or reduces the specified
interest expense of a U.S. shareholder
relative to other taxpayers depends on
whether the third-party expense related
to such business is greater than or less
than interest income related to such
business. The Treasury Department and
the IRS have determined that a U.S.
shareholder’s specified interest expense,
and therefore its net DTIR and its GILTI
inclusion amount, should not depend
on whether the U.S. shareholder has one
or more CFCs engaged in the active
conduct of a financing or insurance
business, as long as the interest expense
of the CFC is incurred exclusively to
fund such business with unrelated
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persons and thus not incurred, for
instance, to fund the acquisition of
specified tangible property. Therefore,
the proposed regulations exclude from
the definition of tested interest expense
any interest expense of a CFC that is an
eligible controlled foreign corporation
(within the meaning of section
954(h)(2)) or a qualifying insurance
company (within the meaning of section
953(e)(3)) (‘‘qualified CFC’’), except to
the extent of the qualified CFC’s assets
unrelated to its financing or insurance
business and any interest income
received by the qualified CFC from
loans to certain related persons (interest
expense described in this sentence,
‘‘qualified interest expense’’). See
proposed § 1.951A–4(b)(1)(iii). Further,
the proposed regulations exclude from
the definition of tested interest income
any interest income of a qualified CFC
included in the gross tested income of
the qualified CFC for the CFC inclusion
year that is excluded from subpart F
income due to the active financing
exception of section 954(h) or the active
insurance exception of section 954(i)
(‘‘qualified interest income’’). See
proposed § 1.951A–4(b)(2)(iii).
For purposes of determining specified
interest expense, interest income and
interest expense are defined broadly to
encompass any amount treated as
interest under the Code or regulations,
and any other amount incurred or
recognized in a transaction or series of
integrated or related transactions in
which the use or forbearance of funds is
secured for a period of time if the
expense or loss is predominately
incurred in consideration of the time
value of money. See proposed § 1.951A–
4(b)(1)(ii) and (2)(ii).
Comments requested clarification of
whether the interest expense of a tested
loss CFC is used in the determination of
specified interest expense. Regardless of
whether interest expense increases
tested loss or reduces tested income, the
expense is ‘‘taken into account. . .in
determining the shareholder’s net CFC
tested income’’ within the meaning of
section 951A(b)(2)(B). In addition, if a
tested loss CFC’s interest expense were
not taken into account for purposes of
determining specified interest expense,
a taxpayer could easily avoid specified
interest expense by incurring offshore
debt through a tested loss CFC.
Therefore, the proposed regulations
confirm that any interest expense taken
into account for purposes of
determining the tested income or tested
loss of a CFC is also taken into account
in determining a U.S. shareholder’s
specified interest expense.
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F. Domestic Partnerships and Their
Partners
Comments requested guidance on the
treatment of domestic partnerships that
own stock of CFCs. Section 951A itself
does not contain any specific rules on
domestic partnerships and their
partners that directly or indirectly own
stock of CFCs. Accordingly, proposed
§ 1.951A–5 provides this guidance to
domestic partnerships and their
partners on how to compute their GILTI
inclusion amounts. This guidance also
applies to S corporations and their
shareholders, which are treated as
partnerships and partners for purposes
of sections 951 through 965. See section
1373.
A domestic partnership is a U.S.
person by definition under section
7701(a)(4) and (30) and can therefore be
a U.S. shareholder of a CFC under
section 951(b). Under current law, a
domestic partnership that is a U.S.
shareholder includes in gross income its
section 951(a)(1)(A) inclusion with
respect to a CFC, and its partners
include in gross income their
distributive share of such inclusion.
However, as noted in section I.A of this
Explanation of Provisions, there is no
analog in section 951(a)(1)(A) to the U.S.
shareholder-level determinations
required by section 951A, and thus the
level at which the section 951(a)(1)(A)
determination is made—whether at the
level of the partnership or its partners—
does not generally affect the amount of
the inclusion, if the partnership and its
partners are all U.S. shareholders. On
the other hand, the GILTI inclusion
amount is an aggregation of the U.S.
shareholder’s pro rata shares of tested
income, tested loss, QBAI, tested
interest expense, and tested interest
income of each of its CFCs. Thus, the
level at which the GILTI calculation is
made dictates the CFC items to be taken
into account by the shareholder, and
each of these items can impact the
shareholder’s GILTI inclusion amount.
The Treasury Department and the IRS
considered a number of approaches to
applying section 951A with respect to
domestic partnerships and their
partners. A pure aggregate approach to
the treatment of domestic partnerships
and their partners would treat the
partnership as an aggregate of its
partners, so that each partner would
calculate its own GILTI inclusion
amount taking into account its pro rata
share of CFC items through the
partnership. However, a pure aggregate
approach might also be interpreted by
taxpayers to exempt small partners of a
domestic partnership from the GILTI
regime entirely, a result that is not
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clearly contemplated in section 951A or
its legislative history and is inconsistent
with section 951.
The Treasury Department and the IRS
also considered a pure entity approach.
Under a pure entity approach, the
domestic partnership would determine
its own GILTI inclusion amount, and
each partner would take into gross
income its distributive share of such
amount. In the case of a partner that is
a U.S. shareholder of CFCs owned by
the partnership and other CFCs outside
the partnership, a pure entity approach
would effectively fragment the
shareholder’s GILTI inclusion amount
into multiple GILTI inclusion amounts
by separating the items of the CFCs
owned by the shareholder through the
partnership from the items of the CFCs
owned by the shareholder outside the
partnership, including through other
domestic partnerships. An approach
that dramatically alters a U.S.
shareholder’s inclusion under section
951A for a taxable year depending on
the legal structure by which the
shareholder owns each CFC presents
both an inappropriate planning
opportunity as well as a trap for the
unwary. Such an approach is also
inconsistent with the structure of
section 951A, which requires an
aggregation of all relevant items of a
shareholder’s CFCs in order to compute
a single GILTI inclusion amount for a
U.S. shareholder. As discussed in
section III.A of this Explanation of
Provisions, the Treasury Department
and the IRS relied on similar
considerations in concluding that the
relevant items of each CFC owned
directly or indirectly by members of a
consolidated group should be taken into
account in determining the GILTI
inclusion amount of each member of
that group.
In addition, the Treasury Department
and the IRS have concluded that other
provisions that are related to, and
interdependent with, section 951A
should apply at the level of a domestic
corporate partner. Section 960(d)
provides a domestic corporation that is
a U.S. shareholder a credit for foreign
taxes paid by a CFC that are properly
attributable to tested income ‘‘taken into
account’’ by the domestic corporation,
and determines the amount of that
credit by reference to the corporation’s
aggregate pro rata share of tested
income. See section 960(d)(2)(B) and (3).
A domestic partnership is not eligible to
claim deemed paid credits under
section 960(d). Furthermore, under a
pure entity approach, a domestic
corporate partner of a domestic
partnership may not be eligible for a
deemed paid credit by reason of its
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distributive share of the partnership’s
GILTI inclusion because a partner
would not have a pro rata share of the
tested income of any CFC owned by the
partnership, and thus it would not take
into account the tested income of any
such CFC. Similarly, only a domestic
corporation is eligible for a section 250
deduction. Nonetheless, the Conference
Report indicates that the domestic
corporate partners of a domestic
partnership should get the benefit of a
section 250 deduction, which is
consistent with an aggregate approach.
See Conf. Rep. at 623, fn. 1517.
Based on the foregoing, the Treasury
Department and the IRS have
determined that the approach that best
harmonizes the treatment of domestic
partnerships and their partners across
all provisions of the GILTI regime
(sections 250, 951A, and 960(d)) is
neither a pure aggregate nor a pure
entity approach. Rather, the most
harmonious approach treats a domestic
partnership as an entity with respect to
partners that are not U.S. shareholders
of any CFC owned by the partnership,
but treats the partnership as an
aggregate for purposes of partners that
are themselves U.S. shareholders with
respect to one or more CFCs owned by
the partnership. This approach ensures
that each non-U.S. shareholder partner
takes into income its distributive share
of the domestic partnership’s GILTI
inclusion amount (similar to subpart F),
while permitting a partner that is itself
a U.S. shareholder to determine a single
GILTI inclusion amount by reference to
all its CFCs, whether owned directly or
through a partnership, as well as
allowing a corporate U.S. shareholder to
calculate a foreign tax credit under
section 960(d) with respect to each such
CFC and to compute a section 250
deduction with respect to its GILTI
inclusion amount determined by
reference to each such CFC.
Therefore, the proposed regulations
provide that, in general, a domestic
partnership that is a U.S. shareholder of
one or more CFCs (‘‘U.S. shareholder
partnership’’) computes its own GILTI
inclusion amount in the same manner as
any other U.S. shareholder, and each
partner takes into account its
distributive share of the domestic
partnership’s GILTI inclusion amount
under section 702 and § 1.702–
1(a)(8)(ii). See proposed § 1.951A–5(b).
However, for purposes of section 951A
and the proposed regulations, a partner
that is itself a U.S. shareholder (within
the meaning of section 951(b)) (‘‘U.S.
shareholder partner’’) of one or more
CFCs owned directly or indirectly by a
domestic partnership (‘‘partnership
CFC’’) is treated as owning
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proportionately section 958(a) stock in
each such partnership CFC as if the
partnership were a foreign partnership.
See proposed § 1.951A–5(c). As a result,
a partner that is itself a U.S. shareholder
of a CFC owned by a domestic
partnership computes its GILTI
inclusion amount for a taxable year by
taking into account its proportionate
share of the partnership’s pro rata share
of each of the relevant items—tested
income, tested loss, QBAI, tested
interest income, and tested interest
expense—of such CFC. This rule applies
regardless of whether the domestic
partnership itself has a GILTI inclusion
amount for the taxable year. See
proposed § 1.951A–5(g), Example 6. In
the case that a partner is treated as
owning the section 958(a) stock of one
or more partnership CFCs, the partner’s
distributive share of the partnership’s
GILTI inclusion amount is determined
solely by reference to partnership CFCs
in which the partner is not a U.S.
shareholder. See proposed § 1.951A–
5(c) and (g), Example 3. A U.S.
shareholder partnership is therefore
required to provide to its partners their
distributive share of the partnership’s
GILTI inclusion amount, as well as
provide to each U.S. shareholder partner
the partner’s proportionate share of the
partnership’s pro rata share (if any) of
each CFC tested item of each
partnership CFC of the partnership, and
forms and instructions will be updated
accordingly. See proposed § 1.951A–
5(f).
To illustrate the differences between
the approach taken in the proposed
regulations and the pure entity
approach, consider a domestic
partnership (PRS) with two domestic
corporate partners, US1 and US2,
owning 5 percent and 95 percent of
PRS, respectively. PRS owns 100
percent of the single class of stock of
FS1, a CFC with tested income of $100x,
and 100 percent of the single class of
stock of FS2, a CFC with tested loss of
$50x. US2 also owns 100 percent of the
single class of stock of FS3, a CFC with
tested loss of $20x. Under a pure entity
approach, US2’s distributive share of
PRS’s GILTI inclusion amount would be
$47.50x (95% × ($100x¥$50x)), and
US2’s pro rata share of FS3’s tested loss
of $20x would be unused. Under the
proposed regulations, US2, because it is
a U.S. shareholder partner with respect
to FS1 and FS2, aggregates its
proportionate share of the tested income
and tested loss of FS1 and FS2 with its
pro rata share of the tested loss of FS3
in determining its GILTI inclusion
amount of $27.50x ((95% ×
($100x¥$50x))¥$20x). Accordingly,
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under a pure entity approach, US2
would be incentivized to reorganize its
ownership structure (for example, by
liquidating PRS or contributing the
stock of FS3 to PRS) in order to obtain
the full benefit of the tested loss of FS3.
Under the proposed regulations,
however, US2 has the same GILTI
inclusion amount whether it owns its
CFCs directly or through one or more
partnerships.
The Treasury Department and the IRS
request comments as to whether any
other approach to the treatment of
domestic partnerships and their
partners for purposes of section 951A,
including a pure entity approach or a
pure aggregate approach, would more
appropriately harmonize the provisions
of the GILTI regime than the approach
of the proposed regulations, particularly
in light of the administrative and
compliance burdens associated with any
other approach and the approach of the
proposed regulations. In addition, the
Treasury Department and the IRS
request comments on adjustments
required by reason of computing a GILTI
inclusion amount, in whole or in part,
at the level of the partner of a domestic
partnership, including adjustments to
the partner’s basis in its partnership
interest, the partner’s section 704(b)
capital account, the partnership’s basis
in CFC stock under section 961, and a
CFC’s previously taxed earnings and
profits with respect to the partner or
partnership under section 959.
G. Treatment of GILTI Inclusion
Amount and Adjustments to Earnings
and Profits and Basis
1. Treatment of GILTI as Subpart F
Income for Certain Purposes
A U.S. shareholder’s GILTI inclusion
amount is not an inclusion under
section 951(a)(1)(A). Nevertheless, for
purposes of some provisions, GILTI
inclusion amounts are treated similarly
to section 951(a)(1)(A) inclusions.
Section 951A(f)(1)(A) provides that any
GILTI included in gross income is
treated in the same manner as an
amount included under section
951(a)(1)(A) for purposes of applying
sections 168(h)(2)(B), 535(b)(10), 851(b),
904(h)(1), 959, 961, 962, 993(a)(1)(E),
996(f)(1), 1248(b)(1), 1248(d)(1),
6501(e)(1)(C), 6654(d)(2)(D), and
6655(e)(4).
Section 951A(f)(1)(B) grants the
Secretary authority to provide rules
applying section 951A(f)(1)(A) to other
provisions of the Code. A comment
requested clarification as to whether
GILTI inclusion amounts are net
investment income under section 1411.
Pursuant to the authority in section
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951A(f)(1)(B), the proposed regulations
provide that a GILTI inclusion amount
is treated in the same manner as an
amount included under section
951(a)(1)(A) for purposes of applying
section 1411. See proposed § 1.951A–
6(b)(1). Thus, for example, a U.S.
shareholder that has made an election
pursuant to § 1.1411–10(g) with respect
to a CFC to treat amounts included in
gross income under section 951(a)(1)(A)
as net investment income and to apply
the basis adjustment rules of sections
961(a) and (b) with respect to such
amounts for section 1411 purposes
should also treat the portion of the U.S.
shareholder’s GILTI inclusion amount
treated as being with respect to the CFC
under section 951A(f)(2) and proposed
§ 1.951A–6(b)(2) as net investment
income.
Comments have requested that
regulations clarify that an inclusion
under section 951A is determined
before an inclusion under section
951(a)(1)(B). The Treasury Department
and the IRS have determined that
clarification is unnecessary. Because a
GILTI inclusion amount is treated as a
section 951(a)(1)(A) inclusion for
purposes of section 959, the
determination of the amount included
under section 951(a)(1)(B) is made after
the determination of the amount of a
section 951(a)(1)(A) inclusion and the
GILTI inclusion amount. See section
959(a)(2) and (f)(1). The Treasury
Department and the IRS intend to issue
a separate notice of proposed
rulemaking to update the regulations
under sections 959 and 961 to account
for the Act’s modifications to the U.S.
international tax system, including the
enactment of section 245A.
The characterization of GILTI
inclusions for purposes of determining
the unrelated business taxable income
of tax-exempt entities will be addressed
in separate guidance. The Treasury
Department and the IRS request
comments on other areas in which the
characterization of a GILTI inclusion
amount is relevant, and whether it is
appropriate in those areas to treat a
GILTI inclusion amount in the same
manner as a section 951(a)(1)(A)
inclusion or in some other manner (for
example, as a dividend).
2. Interaction With Sections
163(e)(3)(B)(i) and 267(a)(3)(B)
Section 267(a)(3)(B) generally
provides that a deduction for an item
payable to a related CFC is not allowed
until paid, except to the extent that an
amount attributable to that item is
includible (determined without regard
to properly allocable deductions and
qualified deficits) in the gross income of
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a U.S. shareholder. Section
163(e)(3)(B)(i) provides a similar rule for
original issue discount on a debt
instrument held by a related CFC.
The Treasury Department and the IRS
have determined that deductions should
not be deferred under sections
163(e)(3)(B)(i) and 267(a)(3)(B) to the
extent an item is taken into account in
determining a U.S. shareholder’s GILTI
inclusion amount. Accordingly, the
proposed regulations provide that a
deduction is allowed under sections
163(e)(3)(B)(i) and 267(a)(3)(B) for an
item taken into account in determining
the net CFC tested income of a U.S.
shareholder, including a U.S.
shareholder treated under the proposed
regulations as owning section 958(a)
stock of a CFC owned by a domestic
partnership. See proposed § 1.951A–
6(c)(1). In the case of a U.S. shareholder
that is a domestic partnership, this rule
applies only to the extent that one or
more U.S. persons (other than domestic
partnerships) that are direct or indirect
partners of the domestic partnership
include in gross income their
distributive share of the partnership’s
GILTI inclusion amount or the item is
taken into account by a U.S. shareholder
partner of the domestic partnership by
reason of § 1.951A–5(c). See proposed
§ 1.951A–6(c)(2).
3. Basis Adjustments for the Use of
Tested Losses
In determining a U.S. shareholder’s
net CFC tested income, the U.S.
shareholder’s pro rata share of a tested
loss of one CFC may offset the
shareholder’s pro rata share of tested
income of another CFC. Under the
statute, such a use of a tested loss does
not reduce the U.S. shareholder’s basis
in the stock of the tested loss CFC,
increase the stock basis of the tested
income CFC, or affect the earnings and
profits of either the tested loss CFC or
the tested income CFC.
The Treasury Department and the IRS
have determined that in certain cases
the lack of adjustments to stock basis of
a tested loss CFC can lead to
inappropriate results. For example, if
the U.S. shareholder’s basis in the stock
of the tested loss CFC is not reduced to
reflect the use of the tested loss to offset
tested income taken into account by the
U.S. shareholder, the U.S. shareholder
would recognize a second and
duplicative benefit of the loss—either
through the recognition of a loss or the
reduction of gain—if the stock of the
tested loss CFC is disposed of. See
Charles Ilfeld Co. v. Hernandez, 292
U.S. 62 (1934) (denying the loss on
stock of subsidiaries upon liquidation
when operating losses were previously
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claimed from the subsidiaries’
operations because ‘‘[i]f allowed, this
would be the practical equivalent of
double deduction’’); U.S. v. Skelly Oil.
Co., 394 U.S. 678 (1969) (‘‘the Code
should not be interpreted to allow
respondent ‘the practical equivalent of a
double deduction’’’ (citing Charles Ilfeld
Co.)); § 1.161–1. On the other hand, in
the case of a corporate U.S. shareholder,
but not in the case of an individual, gain
recognized on the disposition of a CFC
attributable to offset tested income
would, in most cases, be eliminated as
a result of the application of section
964(e) or section 1248(a) and (j), to the
extent the gain is recharacterized as a
dividend that is eligible for the
dividends received deduction under
section 245A. Accordingly, proposed
§ 1.951A–6(e) generally provides that in
the case of a corporate U.S. shareholder
(excluding regulated investment
companies and real estate investment
trusts), for purposes of determining the
gain, loss, or income on the direct or
indirect disposition of stock of a CFC,
the basis of the stock is reduced by the
amount of tested loss that has been used
to offset tested income in calculating net
CFC tested income of the U.S.
shareholder. The basis reduction is only
made at the time of the disposition and
therefore does not affect the stock basis
prior to a disposition. Requiring the
basis reduction only at the time of the
disposition prevents the use of tested
losses alone from causing the
recognition of gain if the reduction
exceeds the amount of stock basis.
The basis adjustments apply only to
the extent a ‘‘net’’ tested loss of the
controlled foreign corporation has been
used. This limitation is intended to
ensure that the reduction applies only to
the extent necessary to eliminate the
duplicative loss in the stock. For
example, if a $100x tested loss of a CFC
(CFC1) offsets $100x of tested income of
another CFC (CFC2) in one year in
determining a U.S. shareholder’s net
CFC tested income, and in the next year
CFC1 has $20x of tested income that is
offset by a $20x tested loss of CFC2,
then the $100x used tested loss
attributable to the CFC1 stock from the
first year is reduced by the $20x of its
tested income from the second year that
was offset by the tested loss of CFC2,
resulting in a ‘‘net’’ used tested loss of
$80x. See proposed § 1.951A–6(e)(2).
Similar adjustments apply when the
tested loss CFC is treated as owned by
the U.S. shareholder through certain
intervening foreign entities by reason of
section 958(a)(2) to prevent the indirect
use of the duplicative loss through the
disposition of interests in those
intervening entities. The regulations
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provide an exception to those rules in
certain cases when the tested loss CFC
and the CFC that generated the tested
income that is offset by the tested loss
are in the same section 958(a)(2)
ownership chain; adjustments are not
appropriate in these cases because there
is no duplicative loss to the extent the
shares of both CFCs are directly or
indirectly disposed of. See proposed
§ 1.951A–6(e)(1)(ii).
A direct disposition of the stock of a
CFC can result in the indirect
disposition of the stock of one or more
lower-tier CFCs. See proposed
§ 1.951A–6(e)(6)(ii)(B). In such a case,
basis adjustments may be made to both
the stock of the upper-tier CFC and the
stock of the lower-tier CFCs.
Accordingly, the proposed regulations
provide ordering rules for making these
adjustments that, in general, are
intended to prevent gain resulting from
a basis adjustment attributable to the
use of a single tested loss from being
taken into account more than once. See
proposed § 1.951A–6(e)(1)(iv).
The proposed regulations also include
rules that take into account certain
nonrecognition transactions involving
CFCs, such as the acquisition of CFC
stock by a domestic corporation and
transactions described in section 381.
See proposed § 1.951A–6(e)(4)(ii) and
(e)(5). These rules are intended to
prevent the elimination or avoidance of
the basis adjustments through these
types of transactions.
Finally, the proposed regulations
provide a special rule to address
dispositions of CFC stock by another
CFC that is not wholly owned by a
single domestic corporation. See
proposed § 1.951A–6(e)(7). This rule,
which is consistent with proposed
§ 1.961–3(b) and Revenue Ruling 82–16,
1982–1 C.B. 106, is intended to ensure
that the appropriate amount of subpart
F income is taken into account by U.S.
shareholders of the CFC as a result of
the disposition.
The Treasury Department and the IRS
request comments on these rules,
including whether additional
adjustments to stock basis or earnings
and profits should be made to account
for a used tested loss or offset tested
income (for example, whether
adjustments should be provided that are
consistent with those set forth in
proposed § 1.965–2(d) and (f) (REG–
104226–18, 83 FR 39514, August 9,
2018)). Comments are also requested on
whether similar rules should apply to
non-corporate U.S. shareholders, taking
into account the fact that non-corporate
U.S. shareholders are not entitled to a
dividends received deduction under
section 245A. Additionally, comments
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are requested as to whether the
definition of ‘‘disposition’’ should be
modified. For example, the Treasury
Department and the IRS are considering
broadening the term to include
transactions that do not involve an
actual transfer of stock but might result
in taxable gain but for the presence of
tax basis in CFC stock. Examples of such
transactions include distributions
subject to section 301(c)(2) or 1059.
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II. Section 951
A. Pro Rata Share Rules
Section 1.951–1(e) was revised in
2005 and 2006 to address certain
avoidance structures, such as structures
that resulted in non-economic
allocations of subpart F income to
shareholders of CFCs that are not U.S.
shareholders. The Treasury Department
and the IRS have become aware of
additional avoidance structures. For
example, the existing regulations
require an allocation of earnings and
profits between classes of stock with
discretionary distribution rights based
on the fair market value of the stock.
While this rule appropriately allocates
subpart F income in some cases (for
example, involving multiple classes of
common stock), some taxpayers have
attempted to improperly allocate
subpart F income by applying these
rules to certain structures involving
shares with preferred liquidation and
distribution rights. Similar avoidance
structures involve cumulative preferred
stock with dividends that compound
less frequently than annually.
This notice of proposed rulemaking
proposes to amend § 1.951–1(e) to
address these avoidance structures,
which implicate section 951A as well as
section 951. The proposed regulations
clarify that, for purposes of determining
a U.S. shareholder’s pro rata share of
subpart F income, earnings and profits
for the taxable year are first
hypothetically distributed among the
classes of stock and then hypothetically
distributed to each share in the class on
the hypothetical distribution date,
which is the last day of the CFC’s
taxable year on which it is a CFC. In lieu
of prescribing a determination based on
fair market value, the proposed
regulations provide that the amount of
earnings and profits that would be
distributed with respect to classes of
stock is based on all relevant facts and
circumstances. See proposed § 1.951–
1(e)(3). In addition, the proposed
regulations disregard any transaction or
arrangement that is part of a plan a
principal purpose of which is to reduce
a U.S. shareholder’s pro rata share of the
subpart F income of a CFC. See
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proposed § 1.951–1(e)(6). This rule also
applies for purposes of determining a
U.S. shareholder’s pro rata share of
amounts for purposes of calculating the
shareholder’s GILTI inclusion amount.
Id. As a result of adding this broader
rule, the proposed regulations do not
include the specific anti-avoidance rule
involving section 304 transactions in
existing § 1.951–1(e)(3)(v).
The proposed regulations also modify
§ 1.951–1(e) in specific ways to take into
account section 951A. For example, the
proposed regulations provide that a U.S.
shareholder’s pro rata share of a CFC’s
subpart F income is determined by
reference to the shareholder’s
proportionate share of the total current
earnings and profits that would be
distributed in the hypothetical
distribution. In addition to determining
a U.S. shareholder’s pro rata share of a
CFC’s subpart F income, § 1.951–1(e)
also applies for purposes of determining
the shareholder’s pro rata share of the
CFC’s tested income. See also proposed
§ 1.951A–1(d)(2). However, because
tested income is not limited to the
earnings and profits of a CFC, and
because a CFC’s tested loss increases its
earnings and profits for purposes of
determining the subpart F income
limitation in section 952(c)(1), the
earnings and profits allocated in the
hypothetical distribution may exceed
the earnings and profits of the CFC
computed under section 964.
Accordingly, the hypothetical
distribution in the proposed regulations
is based on the greater of the section 964
earnings and profits or the sum of the
subpart F income (increased by reason
of any tested loss add-back under
section 951A(c)(2)(B)(ii) and proposed
§ 1.951A–6(d)) and tested income of the
CFC.
B. Partnership Blocker Structures
Notice 2010–41, 2010–22 I.R.B. 715,
stated that forthcoming regulations
would treat a domestic partnership as a
foreign partnership for purposes of
identifying the U.S. shareholder of a
CFC required to include in gross income
its pro rata share of the CFC’s subpart
F income in the circumstances
described in the notice. The Treasury
Department and the IRS have
determined that the same rules should
also apply to identify the U.S.
shareholder of a CFC for purposes of
section 951A. Accordingly, the
proposed regulations treat certain
controlled domestic partnerships as
foreign partnerships for purposes of
identifying a U.S. shareholder for
purposes of sections 951 through 964.
See also proposed § 1.965–1(e) (REG–
104226–18, 83 FR 39514, August 9,
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2018) (adopting a similar partnership
blocker rule for purposes of the section
965 regulations).
C. Other Modifications
The proposed regulations also update
§ 1.951–1 consistent with the
modification in the Act of the definition
of a U.S. shareholder and the
elimination in the Act of the 30-day
requirement. See proposed § 1.951–1(a)
and (g)(1).
III. Section 1502
A. In General
Section 1502 provides the Secretary
authority to
prescribe such regulations as he may deem
necessary in order that the tax liability of any
affiliated group of corporations making a
consolidated return and of each corporation
in the group, both during and after the period
of affiliation, may be returned, determined,
computed, assessed, collected, and adjusted,
in such manner as clearly to reflect the
income-tax liability and the various factors
necessary for the determination of such
liability, and in order to prevent avoidance
of such tax liability.
A consolidated group member’s
inclusion of subpart F income under
section 951(a)(1)(A) is determined at the
member level. However, as discussed in
section I.A of this Explanation of
Provisions, a section 951(a)(1)(A)
inclusion with respect to a CFC is
determined solely by reference to the
subpart F income of the CFC, and
therefore determining a member’s
section 951(a)(1)(A) inclusion solely by
reference to a CFC the stock of which is
owned (within the meaning of section
958(a)) by the member is not distortive
of the consolidated group’s income tax
liability. As a result, the location of the
CFC within the group generally has no
effect on the consolidated group’s
income tax liability by reason of section
951(a)(1)(A). In contrast, section 951A
requires an aggregate, U.S. shareholderlevel calculation, under which a
member’s pro rata share of the relevant
items of one CFC can increase or
decrease a member’s GILTI inclusion
amount otherwise resulting from its
ownership of another CFC. Accordingly,
a determination of a member’s GILTI
inclusion amount solely based on its pro
rata share of the items of a CFC the stock
of which is owned (within the meaning
of section 958(a)) by that member may
not result in a clear reflection of the
consolidated group’s income tax
liability. For example, a consolidated
group could segregate one CFC with
tested interest expense under one
member and another CFC with QBAI
under another member, thereby
increasing the net DTIR of the second
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member relative to the consolidated
group’s net DTIR if determined at a
group level. Alternatively, a strict,
separate-entity application of section
951A could inappropriately increase a
consolidated group’s income tax
liability, because one member’s excess
pro rata share of tested losses or QBAI
over tested income would be
unavailable to reduce another member’s
GILTI inclusion amount.
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B. Section 1.1502–51
In response to comments, the
Treasury Department and the IRS have
determined that a member’s GILTI
inclusion amount should be determined
by reference to the relevant items of
each CFC owned by members of the
same consolidated group. As discussed
in section I.A of this Explanation of
Provisions, a U.S. shareholder includes
in gross income its GILTI inclusion
amount for any taxable year. GILTI
inclusion amount is defined under
proposed § 1.951A–1(c)(1) as, with
respect to a U.S. shareholder for a
taxable year of the shareholder, the
excess (if any) of the shareholder’s net
CFC tested income over the
shareholder’s net DTIR for the taxable
year. Under proposed § 1.1502–51, this
definition applies equally to a U.S.
shareholder that is a member of a
consolidated group. However,
consistent with the authority in section
1502, the proposed regulations provide
special definitions of net CFC tested
income and net DTIR in order to clearly
reflect the income tax liability of the
consolidated group. Specifically, the
proposed regulations provide that, to
determine a member’s GILTI inclusion
amount, the pro rata shares of tested
loss, QBAI, tested interest expense, and
tested interest income of each member
are aggregated, and then a portion of
each aggregate amount is allocated to
each member of the group that is a U.S.
shareholder of a tested income CFC
based on the proportion of such
member’s aggregate pro rata share of
tested income to the total tested income
of the consolidated group. See proposed
§ 1.1502–51(e).
As discussed in section I.G.3 of this
Explanation of Provisions, proposed
§ 1.951A–6(e) provides that the adjusted
basis of the stock of a CFC is adjusted
immediately before its disposition.
Proposed § 1.1502–51(c) provides
special rules for making these
adjustments to the adjusted basis of the
stock of a CFC owned by a member in
a manner that reflects the special
definitions applicable to members.
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C. Section 1.1502–32
Section 1.1502–32 provides rules for
adjusting the basis of the stock of a
subsidiary owned by another member to
reflect, among other items, the
subsidiary’s items of income.
Accordingly, no new rules are necessary
to adjust the basis of the stock of a
member because of a GILTI inclusion.
However, as previously discussed,
proposed §§ 1.951A–6(e) and 1.1502–
51(c) provide rules for adjusting the
basis of the stock of a CFC immediately
before its disposition. As a result,
proposed § 1.1502–32(b)(3)(ii)(E) and
(iii)(C) provide for adjustments to the
basis of the stock of a member to reflect
those rules. Specifically, the proposed
rules treat a portion of a member’s offset
tested income amount as tax-exempt
income and all of a member’s used
tested loss amount as a noncapital,
nondeductible expense.
As previously discussed, the Treasury
Department and the IRS have
determined that in the case of a
corporate U.S. shareholder, gain
recognized on the disposition of stock of
a CFC attributable to offset tested
income would, in most cases, be
eliminated as a result of the application
of section 964(e)(4) or section 1248(a)
and (j), to the extent the gain or income
is eligible for the dividends received
deduction under section 245A. In order
to not incentivize a sale of the stock of
a CFC over a sale of stock of a member,
proposed § 1.1502–32(b)(3)(ii)(F)
provides that a member is also treated
as receiving tax-exempt income
immediately before another member
recognizes income, gain, deduction, or
loss with respect to a share of the first
member’s stock. The amount of this
additional tax-exempt income is the net
offset tested income amount allocable to
the shares of any CFC owned by the first
member to the extent that a distribution
of such amount would have been
characterized as a dividend eligible for
a section 245A deduction and not
subject to section 1059.
The Treasury Department and the IRS
request comments regarding the
coordination of the rules of proposed
§§ 1.951A–6(e) and 1.1502–51(c) with
the investment adjustment regime of
§ 1.1502–32. Comments are specifically
requested on: (1) Whether the amount of
the adjustments to the basis of member
stock should be limited to the amount
of the adjustments to the basis of the
stock of a CFC under the rules of
proposed § 1.951A–6(e); (2) whether the
adjustments to the basis of member
stock should all be made on a current
basis, made to the extent of the basis
adjustments provided in proposed
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§ 1.951A–6(e) on a current basis with
any remaining adjustments being made
at the time of a disposition of stock of
a CFC or of a member, or made only at
the time of a disposition of the stock of
a CFC or of a member; and (3) whether
rules should provide that a deduction
under section 245A should not be
treated as tax-exempt income to the
extent that the underlying dividend is
attributable to offset tested income for
which basis adjustments have already
been made. Additionally, comments are
specifically requested as to whether
there are any circumstances in which
there should be a deemed disposition of
the stock of a CFC owned by a member,
such that the rules of proposed
§ 1.951A–6(e) would apply, including,
but not limited to, a deconsolidation or
taxable disposition of the stock of a
member that owns (directly or
indirectly) the stock of a CFC to either
a person outside of the consolidated
group or to another member, and a
transfer of the stock of a member in an
intercompany transaction that is a
nonrecognition transaction. Similarly,
comments are specifically requested as
to whether there are other transactions
that should be described in the
definition of transferred shares in
proposed § 1.1502–32(b)(3)(ii)(F)(1),
such as a deemed disposition pursuant
to § 1.1502–19(c)(1)(iii)(B). Lastly,
comments are specifically requested as
to whether any other adjustments are
necessary to prevent the duplication of
gain or loss resulting from a member’s
ownership of a CFC, including
situations where a member owning a
CFC joins another consolidated group.
In response to comments received, no
new rules are being proposed under
§ 1.1502–33, which provides rules for
adjusting the earnings and profits of a
subsidiary and any member owning
stock of the subsidiary. The Treasury
Department and the IRS request
comments on whether additional rules
under § 1.1502–33 or any other
regulations issued under section 1502
are necessary.
IV. Sections 1.6038–2(a) and 1.6038–5
Under section 6038(a)(1), U.S. persons
that control foreign corporations must
file certain information returns with
respect to those corporations. Before the
Act, a U.S. shareholder would not have
had an income inclusion under section
951(a)(1) with respect to a foreign
corporation unless the corporation had
been a CFC for an uninterrupted period
of at least 30 days during the taxable
year. While section 6038 does not limit
the reporting requirements to foreign
corporations that a U.S. person controls
for an uninterrupted period of at least
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30 days, § 1.6038–2(a) does provide for
such a limit. To coordinate with the
amendment to section 951(a)(1) that
removed the 30-day requirement, this
notice of proposed rulemaking proposes
to revise § 1.6038–2(a) to provide that
certain information reporting is required
for U.S. persons that control a foreign
corporation at any time during an
annual accounting period.
Section 6038(a)(4) allows the
Secretary to require any U.S.
shareholder of a CFC to provide
information required under section
6038(a)(1), which includes information
that is similar to the listed information
in section 6038(a)(1)(A) through
(a)(1)(E), as well as information that
‘‘the Secretary determines to be
appropriate to carry out the provisions
of this title.’’ In order to effectively
administer and enforce section 951A,
the Treasury Department and the IRS
have determined that, in general, U.S.
shareholders must file a new Schedule
I–1, Information for Global Intangible
Low-Taxed Income, to Form 5471,
Information Return of U.S. Persons With
Respect To Certain Foreign
Corporations, as well as new Form 8992,
U.S Shareholder Calculation of Global
Intangible Low-Taxed Income (GILTI),
to provide the information that a U.S.
shareholder needs with respect to each
of its CFCs to determine the U.S.
shareholder’s GILTI inclusion amount
for a taxable year. Proposed § 1.6038–5
provides the filing requirements for new
Form 8992.
V. Applicability Dates
Consistent with the applicability date
of section 951A, proposed §§ 1.951–
1(e)(1)(ii)(B), 1.951A–1 through 1.951A–
6, 1.1502–32(b)(3)(ii)(E), (b)(3)(ii)(F),
and (b)(3)(iii)(C), and 1.1502–51 are
proposed to 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. See section
7805(b)(2). Proposed § 1.951–1(e) (pro
rata share of subpart F income) (other
than § 1.951–1(e)(1)(ii)(B)) is proposed
to apply to taxable years of U.S.
shareholders ending on or after October
3, 2018. See section 7805(b)(1)(B).
Consistent with the applicability date of
the modification to section 951 in the
Act, proposed § 1.951–1(a) (controlled
foreign corporations) and § 1.951–1(g)
(definition of U.S. shareholder) are
proposed to apply to taxable years of
foreign corporations beginning after
December 31, 2017, and to taxable years
of U.S. shareholders with or within
which such taxable years of foreign
corporations end. See section
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7805(b)(2). Proposed § 1.951–1(h)
(special rule for partnership blocker
structure) is proposed to apply to
taxable years of domestic partnerships
ending on or after May 14, 2010. See
Notice 2010–41 and section
7805(b)(1)(C). Although proposed
§ 1.951–1(h) applies for purposes of
both section 951 and section 951A, the
only practical effect of applying this
rule to taxable years of domestic
partnerships ending on or after May 14,
2010, and before January 1, 2018,
concerns the application of section 951.
The proposed rule does not have
relevance to the application of section
951A until the first taxable year of a
CFC owned by a domestic partnership
beginning after December 31, 2017 (the
effective date of section 951A).
Proposed § 1.6038–2(a) (information
returns required of U.S. persons with
respect to annual accounting periods of
certain foreign corporations) and
proposed § 1.6038–5 (information
returns required of certain U.S. persons
to report amounts determined with
respect to certain foreign corporations
for GILTI purposes) are proposed to
apply to taxable years of foreign
corporations beginning on or after
October 3, 2018. See sections 6038(a)(3)
and 7805(b)(1)(B).
Special Analyses
Regulatory Planning and Review—
Economic Analysis
Executive Orders 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, of
reducing costs, of harmonizing rules,
and of promoting flexibility. The
Executive Order 13771 designation for
any final rule resulting from these
proposed regulations will be informed
by comments received.
The proposed regulations have 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 (April 11, 2018) between the
Treasury Department and the Office of
Management and Budget regarding
review of tax regulations. OIRA has
determined that the proposed
rulemaking is significant. Accordingly,
the proposed regulations have been
reviewed by OIRA. For more detail on
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the economic analysis, please refer to
the following analysis.
A. Overview
The proposed regulations provide
taxpayers with computational,
definitional, and anti-avoidance
guidance regarding the application of
section 951A. They provide guidance
for U.S. shareholders to determine the
amount of GILTI to include in gross
income and how to compute the
components of GILTI. Among other
benefits, this clarity helps ensure that
taxpayers all calculate GILTI in a similar
manner, which promotes efficiency and
equity contingent on the provisions of
the overall Code.
The proposed regulations under
sections 951A, 1502, and 6038
(proposed §§ 1.951A–1 through 1.951A–
7, 1.1502–12, 1.1502–13, 1.1502–32, and
1.1502–51, and 1.6038–5) provide
details for taxpayers (including
members of a consolidated group)
regarding the computation of certain
components of GILTI (for example,
tested income and tested loss, QBAI, net
deemed tangible income return, and
specified interest expense), describe the
consequences of a GILTI inclusion for
purposes of other sections of the Code,
and detail the reporting requirements
associated with GILTI. These proposed
regulations further establish anti-abuse
rules to prevent taxpayers from taking
measures to inappropriately reduce
their GILTI through certain transfers of
property. They also disallow certain
losses that reduce GILTI from being
used a second time.
The proposed regulations under
sections 951 and 6038 (proposed
§§ 1.951–1 and 1.6038–2) prevent
taxpayers from avoiding an inclusion of
subpart F income under section 951(a)
or the inclusion of GILTI under section
951A through certain artificial
arrangements involving the ownership
of CFC stock, coordinate the calculation
of a U.S. shareholder’s subpart F with
its GILTI, and conform the regulations
to other amendments in the Act,
including a modification to the
definition of U.S. shareholder for
purposes of sections 951(a) and 951A
and the elimination of the 30-day CFC
status requirement. This economic
analysis describes the economic benefits
and costs of the proposed regulations.
B. Economic Analysis of the Proposed
Regulations
1. Background
Because section 951A is a new Code
section, many of the details behind the
relevant terms and necessary
calculations required for the
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computation of a U.S. shareholder’s
GILTI inclusion amount would benefit
from greater specificity. Thus, as is
expected after the passage of major tax
reform legislation, the regulations
answer open questions and provide
detail and specificity for the definitions
and concepts described in section 951A,
so that U.S. shareholders can readily
and accurately determine their GILTI
inclusion amounts. For example, the
regulations provide definitions of
crucial terms, such as tested income,
tested loss, specified tangible property,
and specified interest expense.
As discussed in section I.A. of the
Explanation of Provisions, although a
GILTI inclusion is treated similarly to
an inclusion of subpart F income for
some purposes, it is determined in a
manner fundamentally different from
that of a subpart F inclusion. Therefore,
in some cases it is appropriate for the
regulations to rely on subpart F
principles, but in other cases different
rules are necessary. For example, the
regulations apply subpart F rules for
purposes of (1) determining a U.S.
shareholder’s pro rata share of certain
items of a CFC, (2) translating foreign
currency to U.S. dollars, (3) determining
gross income and allowable deductions,
and (4) allocating and apportioning
allowable deductions to gross tested
income. However, it would be
inappropriate to rely on subpart F rules
for the GILTI computations that are
performed at the U.S. shareholder level
because subpart F income is determined
solely at the level of a CFC. For
example, the regulations provide detail
on how a U.S. shareholder determines
its specified interest expense at the
shareholder level based on the interest
expense and interest income of each
CFC owned by the shareholder.
Additionally, the proposed
regulations provide rules regarding the
interaction of certain aspects of section
951A with other provisions. For
example, they clarify that, regarding the
interaction of the earnings and profits
limitation (including recapture) for
subpart F income and the determination
of gross tested income, tested income
and tested loss are computed without
regard to the earnings and profits
limitation in section 952(c). In addition,
the proposed regulations provide that
GILTI inclusion amounts are considered
net investment income under section
1411. Finally, the proposed regulations
provide that certain deductions between
related parties are not deferred under
sections 163(e)(3)(B)(i) and 267(a)(3)(B)
to the extent the income is taken into
account in determining a U.S.
shareholder’s GILTI inclusion amount.
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Section 951A provides the Secretary
of the Treasury the authority to issue
regulations and other guidance to
prevent the avoidance of the purposes of
section 951A(d). As such, regulations
under §§ 1.951A–2 and 1.951A–3
provide that certain transactions that
reduce a U.S. shareholder’s GILTI
inclusion amount, for example, by
increasing a CFC’s qualified business
asset investment (QBAI) or decreasing a
CFC’s tested income, will be
disregarded for purposes of the GILTI
computation.
Further, the Treasury Department and
the IRS have determined that, in the
absence of any adjustment,
inappropriate results may arise in cases
that a U.S. shareholder’s pro rata share
of the tested loss of one CFC offsets the
shareholder’s pro rata share of the tested
income of another CFC in determining
the shareholder’s GILTI inclusion
amount. In particular, a U.S.
shareholder disposing of the stock of a
tested loss CFC could recognize second,
duplicative benefits from a single
economic loss. Therefore, the proposed
regulations provide that, when
determining gain or loss on the
disposition of the stock of a tested loss
CFC, the U.S. shareholder’s basis in the
stock of the tested loss CFC is reduced
by the cumulative amount of tested
losses that were used to offset tested
income in determining the shareholder’s
net CFC tested income.
The statute is silent on the
computation of GILTI for members of a
consolidated group and for domestic
partnerships and their partners. Absent
these regulations, there would be
uncertainty among taxpayers as to
whether to calculate a GILTI inclusion
amount at the level of a member or its
consolidated group, or at the level of a
domestic partnership or its partners.
Without guidance, different taxpayers
would likely take different positions on
these matters. The proposed regulations
provide clarity by (1) determining the
GILTI inclusion amount of each member
of a consolidated group by taking into
account the relevant items of each CFC
owned by members of such group, and
(2) providing guidance on the
computation of the GILTI inclusion
amount of domestic partnerships and
their partners.
Finally, these proposed regulations
provide reporting requirements
necessary to properly administer and
enforce section 951A. In particular, the
Treasury Department and the IRS have
determined that U.S. shareholders must
file a new Schedule I–1, Information for
Global Intangible Low-Taxed Income,
associated with Form 5471, Information
Return of U.S. Persons With Respect To
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Certain Foreign Corporations, as well as
new Form 8992, U.S Shareholder
Calculation of Global Intangible LowTaxed Income (GILTI), in order to
provide the information that a U.S.
shareholder is using with respect to
each of its CFCs to determine the U.S.
shareholder’s GILTI inclusion amount
for a taxable year. The proposed
regulations also provide that a U.S.
shareholder partnership must include
on its Schedule K–1, associated with
Form 1065, U.S. Return of Partnership
Income, certain information necessary
for its partners to determine their
distributive share of the partnership’s
GILTI inclusion amount or, in the case
of U.S. shareholder partners, to
determine their own GILTI inclusion
amounts. Finally, to coordinate with the
amendment to section 951(a)(1) that
removed the 30-day CFC status
requirement for subpart F inclusions,
the proposed regulations provide that
certain information reporting is required
for U.S. persons that control a foreign
corporation at any time during an
annual accounting period.
2. Anticipated Benefits and Costs of the
Proposed Regulations
a. Baseline
The Treasury Department and the IRS
have assessed the benefits and costs of
the proposed regulations against a
baseline—the way the world would look
in the absence of the proposed
regulations.
b. Anticipated Benefits
The Treasury Department and the IRS
expect that the certainty and clarity
provided by these proposed regulations,
relative to the baseline, will enhance
U.S. economic performance under the
statute. Because a tax has not previously
been imposed on GILTI and the statute
is silent on certain aspects of definitions
and calculations, taxpayers can
particularly benefit from enhanced
specificity regarding the relevant terms
and necessary calculations they are
required to apply under the statute. In
the absence of this enhanced specificity,
similarly situated taxpayers might
interpret the statutory rules of section
951A differently, potentially resulting in
inequitable outcomes. For example,
different taxpayers might pursue
income-generating activities based on
different assumptions about whether
that income will be counted as GILTI,
and some taxpayers may forego specific
investments that other taxpayers deem
worthwhile based on different
interpretations of the tax consequences
alone. The guidance provided in these
regulations helps to ensure that
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taxpayers face more uniform incentives
when making economic decisions, a
tenet of economic efficiency. Consistent
reporting across taxpayers also increases
the IRS’s ability to consistently enforce
the tax rules, thus increasing equity and
decreasing opportunities for tax evasion.
For example, the proposed regulations
provide a definition of specified interest
expense that adopts a netting approach.
Alternatives would be to adopt a tracing
approach or to remain silent. The
Treasury Department and the IRS
rejected a tracing approach because it
would be more burdensome for
taxpayers due to the complexity of
matching, at the U.S. shareholder-level,
of the shareholder’s pro rata share of
each item of interest expense with its
pro rata share of each item of interest
income. The Treasury Department and
the IRS also rejected the option of
remaining silent because if taxpayers
relied on statutory language alone,
taxpayers would adopt different
approaches because the statute does not
define what ‘‘attributable’’ means,
leaving it open to differing
interpretations.
As discussed above, there are
similarities between GILTI and subpart
F. Where appropriate, these proposed
regulations rely on rules already
developed under subpart F. Since
taxpayers to whom GILTI applies are
already subject to the subpart F regime,
it is less costly to them to apply rules
they are already familiar with, and they
will benefit in reduced time and cost
spent learning new rules. For example,
the proposed regulations apply existing
subpart F rules for determining
allowable deductions for GILTI
purposes. By relying on existing
infrastructure, the proposed regulations
allow taxpayers to use the same analysis
that they already conduct for subpart F
purposes. For additional discussion of
the rules for determining allowable
deductions, see section I.C.1 of the
Explanation of Provisions section.
The Treasury Department and the IRS
next considered the benefits and costs of
providing these specific proposed terms,
calculations, and other details regarding
GILTI. In developing these proposed
regulations, the Treasury Department
and the IRS have generally aimed to
apply the principle that an
economically efficient tax system would
treat income derived from similar
economic decisions similarly, to the
extent consistent with the statute and
considerations of administrability of the
tax system. Similar economic decisions,
in the context of GILTI, are those that
involve property of a similar degree of
immobility and that demonstrate active
business operations and presence in any
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particular jurisdiction. See, for example,
Senate Explanation, at 366.
An economically efficient tax system
would also generally keep the choice
among businesses’ ownership and
organizational structures neutral
contingent on the provisions of the
corporate income tax and other tax
provisions that may affect
organizational structure. The Treasury
Department and the IRS expect that the
proposed regulations, in providing that
GILTI be generally calculated on a
consolidated group basis and at the
partner level in the case of partners that
are U.S. shareholders of one or more
partnership CFCs, will ensure that
shareholders face uniform tax treatment
on their GILTI-relevant investments
regardless of ownership or
organizational structure, thus
encouraging market-driven as opposed
to tax-driven structuring decisions. If, as
an alternative policy approach, GILTI
were determined solely at the level of a
member (in the case of consolidated
groups) or solely at the level of a
partnership (in the case of domestic
partnerships and their partners), many
taxpayers would be compelled to
reorganize their ownership structures
just to obtain the full aggregation of CFC
attributes as envisioned by Congress.
Yet other taxpayers would be
incentivized to reorganize in an attempt
to avoid full aggregation so as to reduce
their inclusion below an amount that
accurately reflects their GILTI. For an
illustration, see section I.F of the
Explanation of Provisions. Therefore,
the Treasury Department and the IRS
propose that GILTI be calculated on a
consolidated group basis and at the
partner level in the case of partners that
are U.S. shareholders of one or more
partnership CFCs. The preamble
discusses further why those approaches
were taken, as well as describing
alternative approaches considered. The
Treasury Department and the IRS
request comments on this proposed
approach.
c. Anticipated Impacts on
Administrative and Compliance Costs
Because the statute requires payment
of tax regardless of the issuance of
regulations or instructions, the new
forms, revisions to existing forms, and
proposed regulations can lower the
burden on taxpayers of determining
their tax liability. The Treasury
Department and the IRS expect that the
proposed regulations will reduce the
costs for taxpayers to comply with the
Act, relative to the baseline of no
promulgated regulations. The proposed
regulations require that each U.S.
shareholder partnership provide to each
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partner its distributive share of the
partnership’s GILTI inclusion amount
and, if the partner is a U.S. shareholder
of one or more partnership CFCs, the
partner’s proportionate share of the
partnership’s pro rata share of each
relevant item of the partnership CFC.
Under the baseline, the burden would
potentially have fallen on each partner,
who would be required to determine its
own distributive share of the
partnership’s GILTI inclusion amount
or, if a U.S. shareholder of a partnership
CFC, determine its own GILTI inclusion
amount by reference to the partnership’s
pro rata share of items of the
partnership CFC. While this latter
burden is difficult to assess, because it
is unclear how partners would calculate
these amounts in the absence of a
determination by the partnership and it
is similarly unclear what efforts might
be made by the partnership to help the
partners fulfill this obligation, the
Treasury Department and the IRS expect
that it would be significantly greater
than the burden incurred under the
proposed regulations.
Proposed § 1.6038–2(a) increases
record-keeping requirements for
taxpayers because it requires all
taxpayers to file Form 5471 if they held
stock in a CFC during the taxable year
regardless of the duration of the holding
period, rather than only if they held the
stock for a 30-day period under the
current regulation. The changes in the
proposed regulation derive directly from
statutory changes to the holding period
requirement in the Act.
C. Paperwork Reduction Act
The collections of information in
these proposed regulations with respect
to section 951A are in proposed
§§ 1.951A–5(f) and 1.6038–5. A separate
collection of information applicable to
controlling U.S. shareholders of a
foreign corporation is in proposed
§ 1.6038–2(a).
The collection of information in
proposed § 1.6038–5 is mandatory for
each U.S. shareholder (including a U.S.
shareholder partner) that owns (within
the meaning of section 958(a)) stock of
a CFC. The collection of information in
proposed § 1.6038–5 is satisfied by
submitting a new reporting form, Form
8992, U.S. Shareholder Calculation of
Global Intangible Low-Taxed Income
(GILTI), with an income tax return. In
addition, for those U.S. shareholders
that are required to file Form 5471,
Information Return of U.S. Persons with
Respect to Certain Foreign Corporations,
a new Schedule I–1, Information for
Global Intangible Low-Taxed Income,
has been added. For purposes of the
Paperwork Reduction Act of 1995 (44
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U.S.C. 3507(d)) (‘‘PRA’’), the reporting
burden associated with proposed
§ 1.6038–5 will be reflected in the IRS
Form 14029, Paperwork Reduction Act
Submission, associated with Form 5471
(OMB control number 1545–0704) and
the new Form 8992 (OMB control
number 1545–0123).
The collection of information in
proposed § 1.951A–5(f) requires each
U.S. shareholder partnership to provide
to its partners their distributive share of
the partnership’s GILTI inclusion
amount, as well as provide to each U.S.
shareholder partner their proportionate
share of the partnership’s pro rata share
(if any) of each CFC tested item of each
partnership CFC of the partnership. The
Treasury Department and the IRS
anticipate revising Schedule K–1 (Form
1065), Partner’s Share of Income,
Deductions, Credits, etc., or its
instructions to require the provision of
this information. For purposes of the
PRA, the reporting burden associated
with proposed § 1.951A–5(f) will be
reflected in the IRS Form 14029,
Paperwork Reduction Act Submission,
associated with Schedule K–1 (Form
1065, OMB control number 1545–0123).
The collection of information
currently required from a U.S. person
that controls a foreign corporation is
revised by proposed § 1.6038–2(a).
Section 1.6038–2(a) presently requires
only those U.S. persons with
uninterrupted control of a foreign
corporation for 30 days or more during
the shareholder’s annual accounting
period to file Form 5471 for that period.
51087
Consistent with statutory changes in the
Act, the revised collection of
information in proposed § 1.6038–2(a)
eliminates the 30-day holding period as
a precondition to reporting and requires
every U.S. person that controls a foreign
corporation at any time during an
annual accounting period to file Form
5471 for that period. For purposes of the
PRA, the reporting burden associated
with proposed § 1.6038–2(a) will be
reflected in the IRS Form 14029,
Paperwork Reduction Act Submission,
associated with Form 5471.
When available, drafts of IRS forms
are posted for comment at https://
apps.irs.gov/app/picklist/list/
draftTaxForms.html.
RELATED NEW OR REVISED TAX FORMS
Schedule I–1 (Form 5471) ...........................................................................................
Form 8992 ...................................................................................................................
Form 1065/1120S, Schedule K ...................................................................................
Form 5471 (30 days) ...................................................................................................
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D. Regulatory Flexibility Act
It is hereby certified that this notice
of proposed rulemaking 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).
The domestic small business entities
that are subject to section 951A and this
notice of proposed rulemaking are those
domestic small business entities that are
U.S. shareholders of a CFC.2 Generally,
a U.S. shareholder is any U.S. person
that owns 10 percent or more of a
foreign corporation’s stock, measured
either by value or voting power. A CFC
is a foreign corporation in which more
than 50 percent of its stock is owned by
U.S. shareholders, again measured
either by value or voting power. Data
about the number of domestic small
business entities potentially affected by
these regulations are not readily
available.
The domestic small business entities
that are subject to the requirements of
proposed § 1.951A–5(f) or 1.6038–5 of
this notice of proposed rulemaking are
U.S. shareholders of one or more CFCs.
2 The Treasury Department and the IRS estimate
that there are 25,000–35,000 respondents of all sizes
that are likely to file Schedule I–1, Form 5471. Only
a small proportion of these are likely to be small
businesses. The Treasury Department and the IRS
request comments on the number of small
businesses that are likely to file Schedule I–1.
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Revision of
existing form
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✓
........................
........................
........................
........................
✓
✓
The Treasury Department and the IRS
do not have data to assess the number
of small entities potentially affected by
§ 1.951A–5(f) or 1.6038–5. 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. Therefore,
the Treasury Department and the IRS do
not believe that a substantial number of
domestic small business entities will be
subject to proposed § 1.951A–5(f) or
1.6038–5. Consequently, the Treasury
Department and the IRS do not believe
that proposed § 1.951A–5(f) or 1.6038–
5 will have a significant economic
impact on a substantial number of
domestic small business entities.
Therefore, a Regulatory Flexibility
Analysis under the Regulatory
Flexibility Act is not required with
respect to the collection of information
requirements of proposed § 1.951A–5(f)
or 1.6038–5.
Existing § 1.6038–2(a) requires only
those U.S. persons with uninterrupted
control of a foreign corporation for 30
days or more during the shareholder’s
annual accounting period to file Form
5471 for that period. Proposed § 1.6038–
2(a) eliminates the 30-day holding
period as a precondition to reporting
and requires every U.S. person that
controls a foreign corporation at any
time during an annual accounting
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Number of respondents
(estimated)
25,000–35,000
25,000–35,000
8,000–12,000
<1,000
period to file Form 5471 for that period.
As a result, those U.S. shareholders that
control a foreign corporation for less
than 30 days will now be required to file
Form 5471 pursuant to proposed
§ 1.6038–2(a). The domestic small
business entities subject to the
requirements of proposed § 1.6038–2(a)
are those domestic small business
entities that control a foreign
corporation at any time during a taxable
year. For these purposes, a domestic
small business entity controls a foreign
corporation by owning more than 50
percent of that foreign corporation’s
stock, measured either by voting power
or value. The Treasury Department and
the IRS do not believe that a substantial
number of domestic small business
entities that are controlling shareholders
of a foreign corporation will become
Form 5471 filers due to the information
collection in proposed § 1.6038–2(a) for
the following reasons. First, significant
resources and investment are required
for a U.S. person to own and operate a
business in a foreign country as a
corporation. Second, the Treasury
Department and the IRS believe that
satisfying the stock ownership
requirement for control for purposes of
proposed § 1.6038–2(a) requires a
potential outlay of significant resources
and investment, including active
involvement in managing the foreign
corporation due to controlling
ownership of the corporation, such that
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few domestic small business entities are
likely to control foreign corporations for
purposes of proposed § 1.6038–2(a). For
these reasons, the Treasury Department
and the IRS do not believe it likely that
a domestic small business entity would
have controlling ownership of a foreign
corporation for less than a 30-day period
in a taxable year. As a result, the
Treasury Department and the IRS do not
believe that a substantial number of
domestic small business entities will be
affected by the proposed § 1.6038–2(a)
eliminating the 30-day holding period
as a precondition to filing Form 5471.
Consequently, the Treasury Department
and the IRS do not believe that
proposed § 1.6038–2(a) will have a
significant economic impact on a
substantial number of domestic small
business entities. Therefore, a
Regulatory Flexibility Analysis under
the Regulatory Flexibility Act is not
required with respect to the
requirements of proposed § 1.6038–2(a).
Notwithstanding this certification, the
Treasury Department and the IRS invite
comments from the public about the
impact of this proposed rule on small
entities.
Pursuant to section 7805(f), 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. The IRS
invites the public to comment on this
certification.
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E. 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 2018, that
threshold is approximately $150
million. This rule does 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.
F. 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. This
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proposed rule does not have federalism
implications and does 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 specifically
on the issues identified in sections I.B.3,
I.C.1, I.D.4, I.F, I.G.1, I.G.3, and III.C of
the Explanations of Provisions. 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.
Drafting Information
The principal authors of the proposed
regulations are Melinda E. Harvey and
Michael Kaercher of the Office of
Associate Chief Counsel (International)
and Austin Diamond-Jones and Kevin
M. Jacobs of the Office of Associate
Chief Counsel (Corporate). However,
other personnel from the IRS and the
Treasury Department participated in the
development of the proposed
regulations.
Statement of Availability of IRS
Documents
IRS Revenue Procedures, Revenue
Rulings, notices, and other guidance
cited in this document are published in
the Internal Revenue Bulletin (or
Cumulative Bulletin) and are available
from the Superintendent of Documents,
U.S. Government Printing Office,
Washington, DC 20402, or by visiting
the IRS website at https://www.irs.gov.
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
Paragraph 1. The authority citation
for part 1 is amended by adding entries
■
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in numerical order to read in part as
follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.951–1 also issued under 26
U.S.C. 7701(a). * * *
Sections 1.951A–2 and 1.951A–3 also
issued under 26 U.S.C. 951A(d). * * *
Section 1.951A–5 also issued under 26
U.S.C. 6031.
Section 1.951A–6 also issued under 26
U.S.C. 951A(f)(1)(B). * * *
Section 1.1502–51 also issued under 26
U.S.C. 1502. * * *
Section 1.6038–2 also issued under 26
U.S.C. 6038. * * *
Section 1.6038–5 also issued under 26
U.S.C. 6038. * * *
Par. 2. Section 1.951–1 is amended
by:
■ 1. Revising the introductory language
in paragraph (a).
■ 2. Revising paragraphs (e) and (g)(1).
■ 3. Adding paragraphs (h) and (i).
The revisions and additions read as
follows:
■
§ 1.951–1 Amounts included in gross
income of United States shareholders.
(a) In general. If a foreign corporation
is a controlled foreign corporation
(within the meaning of section 957) at
any time during any taxable year of such
corporation, every person—
*
*
*
*
*
(e) Pro rata share of subpart F income
defined—(1) In general—(i)
Hypothetical distribution. For purposes
of paragraph (b) of this section, a United
States shareholder’s pro rata share of a
controlled foreign corporation’s subpart
F income for a taxable year is the
amount that bears the same ratio to the
corporation’s subpart F income for the
taxable year as the amount of the
corporation’s current earnings and
profits that would be distributed with
respect to the stock of the corporation
which the United States shareholder
owns (within the meaning of section
958(a)) for the taxable year bears to the
total amount of the corporation’s current
earnings and profits that would be
distributed with respect to the stock
owned by all the shareholders of the
corporation if all the current earnings
and profits of the corporation for the
taxable year (not reduced by actual
distributions during the year) were
distributed (hypothetical distribution)
on the last day of the corporation’s
taxable year on which such corporation
is a controlled foreign corporation
(hypothetical distribution date).
(ii) Determination of current earnings
and profits. For purposes of this
paragraph (e), the amount of current
earnings and profits of a controlled
foreign corporation for a taxable year is
treated as the greater of the following
two amounts:
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(A) The earnings and profits of the
corporation for the taxable year
determined under section 964; or
(B) The sum of the subpart F income
(as determined under section 952 and
increased as provided under section
951A(c)(2)(B)(ii) and § 1.951A–6(d)) of
the corporation for the taxable year and
the tested income (as defined in section
951A(c)(2)(A) and § 1.951A–2(b)(1)) of
the corporation for the taxable year.
(2) One class of stock. If a controlled
foreign corporation for a taxable year
has only one class of stock outstanding,
the amount of the corporation’s current
earnings and profits distributed in the
hypothetical distribution with respect to
each share in the class of stock is
determined as if the hypothetical
distribution were made pro rata with
respect to each share in the class of
stock.
(3) More than one class of stock. If a
controlled foreign corporation for a
taxable year has more than one class of
stock outstanding, the amount of the
corporation’s current earnings and
profits distributed in the hypothetical
distribution with respect to each class of
stock is determined under this
paragraph (e)(3) based on the
distribution rights of each class of stock
on the hypothetical distribution date,
and then further distributed pro rata
with respect to each share in the class
of stock. Subject to paragraphs (e)(4)
through (6) of this section, the
distribution rights of a class of stock are
determined taking into account all facts
and circumstances related to the
economic rights and interest in the
current earnings and profits of the
corporation of each class, including the
terms of the class of stock, any
agreement among the shareholders and,
where appropriate, the relative fair
market value of shares of stock.
(4) Special rules—(i) Redemptions,
liquidations, and returns of capital.
Notwithstanding the terms of any class
of stock of the controlled foreign
corporation or any agreement or
arrangement with respect thereto, no
amount of current earnings and profits
is distributed in the hypothetical
distribution with respect to a particular
class of stock to the extent that a
distribution of such amount would
constitute a distribution in redemption
of stock (even if such redemption would
be treated as a distribution of property
to which section 301 applies pursuant
to section 302(d)), a distribution in
liquidation, or a return of capital.
(ii) Certain cumulative preferred
stock. If a controlled foreign corporation
has outstanding a class of redeemable
preferred stock with cumulative
dividend rights and dividend arrearages
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that do not compound at least annually
at a rate that equals or exceeds the
applicable Federal rate (as defined in
section 1274(d)(1)) (AFR), the amount of
the corporation’s current earnings and
profits distributed in the hypothetical
distribution with respect to the class of
stock may not exceed the amount of
dividends actually paid during the
taxable year with respect to the class of
stock plus the present value of the
unpaid current dividends with respect
to the class determined using the AFR
that applies on the date the stock is
issued for the term from such issue date
to the mandatory redemption date and
assuming the dividends will be paid at
the mandatory redemption date. For
purposes of this paragraph (e)(4)(ii), if
the class of preferred stock does not
have a mandatory redemption date, the
mandatory redemption date is the date
that the class of preferred stock is
expected to be redeemed based on all
facts and circumstances.
(iii) Dividend arrearages. If there is an
arrearage in dividends for prior taxable
years with respect to a class of preferred
stock of a controlled foreign
corporation, an amount of the
corporation’s current earnings and
profits is distributed in the hypothetical
distribution to the class of preferred
stock by reason of the arrearage only to
the extent the arrearage exceeds the
accumulated earnings and profits of the
controlled foreign corporation
remaining from prior taxable years
beginning after December 31, 1962, as of
the beginning of the taxable year, or the
date on which such stock was issued,
whichever is later. If there is an
arrearage in dividends for prior taxable
years with respect to more than one
class of preferred stock, the previous
sentence is applied to each class in
order of priority, except that the
accumulated earnings and profits
remaining after the applicable date are
reduced by the earnings and profits
necessary to satisfy arrearages with
respect to classes of stock with a higher
priority. For purposes of this paragraph
(e)(4)(iii), the amount of any arrearage is
determined by taking into account the
time value of money principles in
paragraph (e)(4)(ii) of this section.
(5) Restrictions or other limitations on
distributions—(i) In general. A
restriction or other limitation on
distributions of an amount of earnings
and profits by a controlled foreign
corporation is not taken into account in
determining the amount of the
corporation’s current earnings and
profits distributed in a hypothetical
distribution to a class of stock of the
controlled foreign corporation.
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(ii) Definition. For purposes of
paragraph (e)(5)(i) of this section, a
restriction or other limitation on
distributions includes any limitation
that has the effect of limiting the
distribution of an amount of earnings
and profits by a controlled foreign
corporation with respect to a class of
stock of the corporation, other than
currency or other restrictions or
limitations imposed under the laws of
any foreign country as provided in
section 964(b).
(iii) Exception for certain preferred
distributions. For purposes of paragraph
(e)(5)(i) of this section, the right to
receive periodically a fixed amount
(whether determined by a percentage of
par value, a reference to a floating
coupon rate, a stated return expressed in
terms of a certain amount of U.S. dollars
or foreign currency, or otherwise) with
respect to a class of stock the
distribution of which is a condition
precedent to a further distribution of
earnings and profits that year with
respect to any class of stock (not
including a distribution in partial or
complete liquidation) is not a restriction
or other limitation on the distribution of
earnings and profits by a controlled
foreign corporation.
(iv) Illustrative list of restrictions and
limitations. Except as provided in
paragraph (e)(5)(iii) of this section,
restrictions or other limitations on
distributions include, but are not
limited to—
(A) An arrangement that restricts the
ability of a controlled foreign
corporation to pay dividends on a class
of stock of the corporation until a
condition or conditions are satisfied (for
example, until another class of stock is
redeemed);
(B) A loan agreement entered into by
a controlled foreign corporation that
restricts or otherwise affects the ability
to make distributions on its stock until
certain requirements are satisfied; or
(C) An arrangement that conditions
the ability of a controlled foreign
corporation to pay dividends to its
shareholders on the financial condition
of the corporation.
(6) Transactions and arrangements
with a principal purpose of reducing pro
rata shares. For purposes of this
paragraph (e), any transaction or
arrangement that is part of a plan a
principal purpose of which is the
avoidance of Federal income taxation,
including, but not limited to, a
transaction or arrangement to reduce a
United States shareholder’s pro rata
share of the subpart F income of a
controlled foreign corporation, which
transaction or arrangement would avoid
Federal income taxation without regard
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to this paragraph (e)(6), is disregarded in
determining such United States
shareholder’s pro rata share of the
subpart F income of the corporation.
This paragraph (e)(6) also applies for
purposes of the pro rata share rules
described in § 1.951A–1(d) that
reference this paragraph (e), including
the rules in § 1.951A–1(d)(3) that
determine the pro rata share of qualified
business asset investment based on the
pro rata share of tested income.
(7) Examples. The application of this
section is illustrated by the examples in
this paragraph (e)(7).
(i) Common facts for examples in
paragraph (e)(7). Except as otherwise
stated, the following facts are assumed
for purposes of the examples.
(A) FC1 is a controlled foreign
corporation.
(B) USP1, USP2, and USP3 are
domestic corporations and United States
shareholders of FC1.
(C) Individual A is a foreign
individual, and FC2 is a foreign
corporation.
(D) All persons use the calendar year
as their taxable year.
(E) Any ownership of FC1 by any
shareholder is for all of Year 1.
(F) The common shareholders of FC1
are entitled to dividends when declared
by FC1’s board of directors.
(G) There are no accrued but unpaid
dividends with respect to preferred
shares, and common shares have
positive liquidation value.
(H) FC1 makes no distributions during
Year 1.
(I) There are no other facts and
circumstances related to the economic
rights and interest of any class of stock
in the current earnings and profits of a
foreign corporation, and no transaction
or arrangement was entered into as part
of a plan a principal purpose of which
is the avoidance of Federal income
taxation.
(J) FC1 does not have tested income
within the meaning of section
951A(c)(2)(A) and § 1.951A–2(b)(1) or
tested loss within the meaning of
section 951A(c)(2)(B) and § 1.951A–
2(b)(2).
(ii) Example 1: Single class of stock— (A)
Facts. FC1 has outstanding 100 shares of one
class of stock. USP1 owns 60 shares of FC1.
USP2 owns 40 shares of FC1. For Year 1, FC1
has $1,000x of earnings and profits and
$100x of subpart F income within the
meaning of section 952.
(B) Facts. Analysis. FC1 has one class of
stock. Therefore, under paragraph (e)(2) of
this section, FC1’s current earnings and
profits of $1,000x are distributed in the
hypothetical distribution pro rata to each
share of stock. Accordingly, under paragraph
(e)(1) of this section, for Year 1, USP1’s pro
rata share of FC1’s subpart F income is $60x
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($100x × $600x/$1,000x) and USP2’s pro rata
share of FC1’s subpart F income is $40x
($100x × $400x/$1,000x).
(iii) Example 2: Common and preferred
stock— (A) Facts. FC1 has outstanding 70
shares of common stock and 30 shares of 4%
nonparticipating, voting preferred stock with
a par value of $10x per share. USP1 owns all
of the common shares. Individual A owns all
of the preferred shares. For Year 1, FC1 has
$100x of earnings and profits and $50x of
subpart F income within the meaning of
section 952. In Year 1, FC1 distributes as a
dividend $12x to Individual A with respect
to Individual A’s preferred shares.
(B) Analysis. The distribution rights of the
preferred shares are not a restriction or other
limitation within the meaning of paragraph
(e)(5) of this section. Under paragraph (e)(3)
of this section, the amount of FC1’s current
earnings and profits distributed in the
hypothetical distribution with respect to
Individual A’s preferred shares is $12x and
with respect to USP1’s common shares is
$88x. Accordingly, under paragraph (e)(1) of
this section, USP1’s pro rata share of FC1’s
subpart F income is $44x ($50x × $88x/
$100x) for Year 1.
(iv) Example 3: Restriction based on
cumulative income— (A) Facts. FC1 has
outstanding 10 shares of common stock and
400 shares of 2% nonparticipating, voting
preferred stock with a par value of $1x per
share. USP1 owns all of the common shares.
FC2 owns all of the preferred shares. USP1
and FC2 cause the governing documents of
FC1 to provide that no dividends may be
paid to the common shareholders until FC1
cumulatively earns $100,000x of income. For
Year 1, FC1 has $50x of earnings and profits
and $50x of subpart F income within the
meaning of section 952. In Year 1, FC1
distributes as a dividend $8x to FC2 with
respect to FC2’s preferred shares.
(B) Analysis. The agreement restricting
FC1’s ability to pay dividends to common
shareholders until FC1 cumulatively earns
$100,000x of income is a restriction or other
limitation within the meaning of paragraph
(e)(5) of this section. Therefore, the
restriction is disregarded for purposes of
determining the amount of FC1’s current
earnings and profits distributed in the
hypothetical distribution to a class of stock.
The distribution rights of the preferred shares
are not a restriction or other limitation within
the meaning of paragraph (e)(5) of this
section. Under paragraph (e)(3) of this
section, the amount of FC1’s current earnings
and profits distributed in the hypothetical
distribution with respect to FC2’s preferred
shares is $8x and with respect to USP1’s
common shares is $42x. Accordingly, under
paragraph (e)(1) of this section, USP1’s pro
rata share of FC1’s subpart F income is $42x
for Year 1.
(v) Example 4: Redemption rights— (A)
Facts. FC1 has outstanding 40 shares of
common stock and 10 shares of 4%
nonparticipating, voting preferred stock with
a par value of $50x per share. Pursuant to the
terms of the preferred stock, FC1 has the right
to redeem at any time, in whole or in part,
the preferred stock. FC2 owns all of the
preferred shares. USP1, wholly owned by
FC2, owns all of the common shares. For
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Year 1, FC1 has $100x of earnings and profits
and $100x of subpart F income within the
meaning of section 952. In Year 1, FC1
distributes as a dividend $20x to FC2 with
respect to FC2’s preferred shares.
(B) Analysis. If FC1 were treated as having
redeemed any preferred shares, the
redemption would be treated as a
distribution to which section 301 applies
under section 302(d) due to FC2’s
constructive ownership of the common
shares. However, under paragraph (e)(4)(i) of
this section, no amount of earnings and
profits is distributed in the hypothetical
distribution to the preferred shareholders on
the hypothetical distribution date as a result
of FC1’s right to redeem, in whole or in part,
the preferred shares. FC1’s redemption rights
with respect to the preferred shares cannot
affect the distribution of current earnings and
profits in the hypothetical distribution to
FC1’s shareholders. As a result, the amount
of FC1’s current earnings and profits
distributed in the hypothetical distribution
with respect to FC2’s preferred shares is $20x
and with respect to USP1’s common shares
is $80x. Accordingly, under paragraph (e)(1)
of this section, USP1’s pro rata share of FC1’s
subpart F income is $80x for Year 1.
(vi) Example 5: Shareholder owns common
and preferred stock— (A) Facts. FC1 has
outstanding 40 shares of common stock and
60 shares of 6% nonparticipating, nonvoting
preferred stock with a par value of $100x per
share. USP1 owns 30 shares of the common
stock and 15 shares of the preferred stock
during Year 1. The remaining 10 shares of
common stock and 45 shares of preferred
stock of FC1 are owned by Individual A. For
Year 1, FC1 has $1,000x of earnings and
profits and $500x of subpart F income within
the meaning of section 952.
(B) Analysis. Under paragraph (e)(5)(iii) of
this section, the right of the holder of the
preferred stock to receive 6% of par value is
not a restriction or other limitation within
the meaning of paragraph (e)(5) of this
section. The amount of FC1’s current
earnings and profits distributed in the
hypothetical distribution with respect to
FC1’s preferred shares is $360x (0.06 × $100x
× 60) and with respect to its common shares
is $640x ($1,000x¥$360x). As a result, the
amount of FC1’s current earnings and profits
distributed in the hypothetical distribution to
USP1 is $570x, the sum of $90x ($360x × 15/
60) with respect to its preferred shares and
$480x ($640x × 30/40) with respect to its
common shares. Accordingly, under
paragraph (e)(1) of this section, USP1’s pro
rata share of the subpart F income of FC1 is
$285x ($500x × $570x/$1,000x).
(vii) Example 6: Subpart F income and
tested income— (A) Facts. FC1 has
outstanding 700 shares of common stock and
300 shares of 4% nonparticipating, voting
preferred stock with a par value of $100x per
share. USP1 owns all of the common shares.
USP2 owns all of the preferred shares. For
Year 1, FC1 has $10,000x of earnings and
profits, $2,000x of subpart F income within
the meaning of section 952, and $9,000x of
tested income within the meaning of section
951A(c)(2)(A) and § 1.951A–2(b)(1).
(B) Analysis—(1) Pro rata share of subpart
F income. The current earnings and profits of
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FC1 determined under paragraph (e)(1)(ii) of
this section are $11,000x, the greater of FC1’s
earnings and profits as determined under
section 964 ($10,000x) or the sum of FC1’s
subpart F income and tested income ($2,000x
+ $9,000x). The amount of FC1’s current
earnings and profits distributed in the
hypothetical distribution with respect to
USP2’s preferred shares is $1,200x (.04 ×
$100x × 300) and with respect to USP1’s
common shares is $9,800x
($11,000x¥$1,200x). Accordingly, under
paragraph (e)(1) of this section, USP1’s pro
rata share of FC1’s subpart F income is
$1,782x ($2,000x × $9,800x/$11,000x), and
USP2’s pro rata share of FC1’s subpart F
income is $218x ($2,000x × $1,200x/
$11,000x).
(2) Pro rata share of tested income. The
same analysis applies for the hypothetical
distribution with respect to the tested income
as under paragraph (ii)(A) of this Example 6
with respect to the subpart F income.
Accordingly, under § 1.951A–1(d)(2), USP1’s
pro rata share of FC1’s tested income is
$8,018x ($9,000x × $9,800x/$11,000x), and
USP2’s pro rata share of FC1’s tested income
is $982x ($9,000x × $1,200x/$11,000x) for
Year 1.
(viii) Example 7: Subpart F income and
tested loss— (A) Facts. The facts are the same
as in paragraph (A) of Example 6, except that
for Year 1, FC1 has $8,000x of earnings and
profits, $10,000x of subpart F income within
the meaning of section 952 (but without
regard to the limitation in section 952(c)),
and $2,000x of tested loss within the
meaning of section 951A(c)(2)(B) and
§ 1.951A–2(b)(2). Under section
951A(c)(2)(B)(ii) and § 1.951A–6(d), the
earnings and profits of FC1 are increased for
purposes of section 952 by the amount of
FC1’s tested loss. Accordingly, taking into
account section 951A(c)(2)(B)(ii) and
§ 1.951A–6(d), the subpart F income of FC1
is $10,000x.
(B) Analysis—(1) Pro rata share of subpart
F income. The current earnings and profits
determined under paragraph (e)(1)(ii) of this
section are $10,000x, the greater of the
earnings and profits of FC1 determined under
section 964 ($8,000x) or the sum of FC1’s
subpart F income and tested income
($10,000x + $0). The amount of FC1’s current
earnings and profits distributed in the
hypothetical distribution with respect to
USP2’s preferred shares is $1,200x (.04 ×
$100x × 300) and with respect to Corp A’s
common shares is $8,800x
($10,000x¥$1,200x). Accordingly, under
paragraph (e)(1) of this section, for Year 1,
USP1’s pro rata share of FC1’s subpart F
income is $8,800x and USP2’s pro rata share
of FC1’s subpart F income is $1,200x.
(2) Pro rata share of tested loss. The
current earnings and profits determined
under § 1.951A–1(d)(4)(i)(B) are $2,000x, the
amount of FC1’s tested loss. Under § 1.951A–
1(d)(4)(i)(C), the entire $2,000x tested loss is
distributed in the hypothetical distribution
with respect to USP1’s common shares.
Accordingly, USP1’s pro rata share of the
tested loss is $2,000x.
*
*
*
(g) * * *
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(1) In general. For purposes of
sections 951 through 964, the term
‘‘United States shareholder’’ means,
with respect to a foreign corporation, a
United States person (as defined in
section 957(c)) who owns within the
meaning of section 958(a), or is
considered as owning by applying the
rules of ownership of section 958(b), 10
percent or more of the total combined
voting power of all classes of stock
entitled to vote of such foreign
corporation, or 10 percent or more of the
total value of shares of all classes of
stock of such foreign corporation.
*
*
*
*
*
(h) Special rule for partnership
blocker structures—(1) In general. For
purposes of sections 951 through 964, a
controlled domestic partnership is
treated as a foreign partnership in
determining the stock of a controlled
foreign corporation owned (within the
meaning of section 958(a)) by a United
States person if the following conditions
are satisfied—
(i) Without regard to this paragraph
(h), the controlled domestic partnership
owns (within the meaning of section
958(a)) stock of a controlled foreign
corporation; and
(ii) If the controlled domestic
partnership (and all other controlled
domestic partnerships in the chain of
ownership of the controlled foreign
corporation) were treated as foreign—
(A) The controlled foreign corporation
would continue to be a controlled
foreign corporation; and
(B) At least one United States
shareholder of the controlled foreign
corporation would be treated as owning
(within the meaning of section 958(a))
stock of the controlled foreign
corporation through another foreign
corporation that is a direct or indirect
partner in the controlled domestic
partnership.
(2) Definition of a controlled domestic
partnership. For purposes of paragraph
(h)(1) of this section, the term controlled
domestic partnership means, with
respect to a United States shareholder
described in paragraph (h)(1)(ii)(B) of
this section, a domestic partnership that
is controlled by the United States
shareholder and persons related to the
United States shareholder. For purposes
of this paragraph (h)(2), control
generally is determined based on all the
facts and circumstances, except that a
partnership will be deemed to be
controlled by a United States
shareholder and related persons in any
case in which those persons, in the
aggregate, own (directly or indirectly
through one or more partnerships) more
than 50 percent of the interests in the
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partnership capital or profits. For
purposes of this paragraph (h)(2), a
related person is, with respect to a
United States shareholder, a person that
is related to the United States
shareholder within the meaning of
section 267(b) or 707(b)(1).
(3) Example— (i) Facts. USP, a domestic
corporation, owns all of the stock of CFC1
and CFC2. CFC1 and CFC2 own 60% and
40%, respectively, of the interests in the
capital and profits of DPS, a domestic
partnership. DPS owns all of the stock of
CFC3. Each of CFC1, CFC2, and CFC3 is a
controlled foreign corporation. USP, DPS,
CFC1, CFC2, and CFC3 all use the calendar
year as their taxable year. For Year 1, CFC3
has $100x of subpart F income (as defined
under section 952) and $100x of earnings and
profits.
(ii) Analysis. DPS is a controlled domestic
partnership with respect to USP within the
meaning of paragraph (h)(2) of this section
because more than 50% of the interests in its
capital or profits are owned by persons
related to USP within the meaning of section
267(b) (that is, CFC1 and CFC2), and thus
DPS is controlled by USP and related
persons. Without regard to paragraph (h) of
this section, DPS is a United States
shareholder that owns (within the meaning of
section 958(a)) stock of CFC3, a controlled
foreign corporation. If DPS were treated as
foreign, CFC3 would continue to be a
controlled foreign corporation, and USP
would be treated as owning (within the
meaning of section 958(a)) stock in CFC3
through CFC1 and CFC2, which are both
partners in DPS. Thus, under paragraph
(h)(1) of this section, DPS is treated as a
foreign partnership for purposes of
determining the stock of CFC3 owned (within
the meaning of section 958(a)) by USP.
Accordingly, USP’s pro rata share of CFC3’s
subpart F income for Year 1 is $100x, and
USP includes in its gross income $100x
under section 951(a)(1)(A). DPS is not a
United States shareholder of CFC3 for
purposes of sections 951 through 964.
(i) Applicability dates. Paragraphs (a),
(e)(1)(ii)(B), and (g)(1) of this section
apply to taxable years of foreign
corporations beginning after December
31, 2017, and to taxable years of United
States shareholders with or within
which such taxable years of foreign
corporations end. Except for paragraph
(e)(1)(ii)(B), paragraph (e) of this section
applies to taxable years of United States
shareholders ending on or after October
3, 2018. Paragraph (h) of this section
applies to taxable years of domestic
partnerships ending on or after May 14,
2010.
*
*
*
*
*
■ Par. 3. Section 1.951A–0 is added to
read as follows:
§ 1.951A–0 Outline of section 951A
regulations.
This section lists the headings for
§§ 1.951A–1 through 1.951A–7.
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§ 1.951A–1
Federal Register / Vol. 83, No. 196 / Wednesday, October 10, 2018 / Proposed Rules
General provisions.
(a) Overview.
(1) In general.
(2) Scope.
(b) Inclusion of global intangible lowtaxed income.
(c) Determination of GILTI inclusion
amount.
(1) In general.
(2) Definition of net CFC tested
income.
(3) Definition of net deemed tangible
income return.
(i) In general.
(ii) Definition of deemed tangible
income return.
(iii) Definition of specified interest
expense.
(4) Determination of GILTI inclusion
amount for consolidated groups.
(d) Determination of pro rata share.
(1) In general.
(2) Tested income.
(i) In general.
(ii) Special rule for prior allocation of
tested loss.
(3) Qualified business asset
investment.
(i) In general.
(ii) Special rule for preferred stock in
case of excess QBAI.
(iii) Examples.
(4) Tested loss.
(i) In general.
(ii) Special rule in case of accrued but
unpaid dividends.
(iii) Special rule for stock with no
liquidation value.
(iv) Examples.
(5) Tested interest expense.
(6) Tested interest income.
(e) Definitions.
(1) CFC inclusion date.
(2) CFC inclusion year.
(3) Section 958(a) stock.
(4) U.S. shareholder inclusion year.
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§ 1.951A–2
Tested income and tested loss.
(a) Scope.
(b) Definitions related to tested
income and tested loss.
(1) Tested income and tested income
CFC.
(2) Tested loss and tested loss CFC.
(c) Rules relating to the determination
of tested income and tested loss.
(1) Definition of gross tested income.
(2) Determination of gross tested
income and allowable deductions.
(3) Allocation of deductions to gross
tested income.
(4) Nonapplication of section 952(c).
(i) In general.
(ii) Example.
(5) Disregard of basis in property
related to certain transfers during the
disqualified period.
(i) In general.
(ii) Definition of specified property.
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(iii) Definition of disqualified basis.
(iv) Example.
§ 1.951A–3 Qualified business asset
investment.
(a) Scope.
(b) Definition of qualified business
asset investment.
(c) Specified tangible property.
(1) In general.
(2) Tangible property.
(d) Dual use property.
(1) In general.
(2) Dual use ratio.
(3) Example.
(e) Determination of adjusted basis of
specified tangible property.
(1) In general.
(2) Effect of change in law.
(3) Specified tangible property placed
in service before enactment of section
951A.
(f) Special rules for short taxable
years.
(1) In general.
(2) Determination of quarter closes.
(3) Reduction of qualified business
asset investment.
(4) Example.
(g) Partnership property.
(1) In general.
(2) Definitions related to partnership
QBAI.
(i) In general.
(ii) Partnership QBAI ratio.
(iii) Partnership specified tangible
property.
(3) Determination of adjusted basis.
(4) Examples.
(h) Anti-abuse rules for certain
transfers of property.
(1) Disregard of basis in specified
tangible property held temporarily.
(2) Disregard of basis in specified
tangible property related to transfers
during the disqualified period.
(i) In general.
(ii) Determination of disqualified
basis.
(A) In general.
(B) Definition of qualified gain
amount.
(C) Definition of disqualified transfer.
(D) Definition of disqualified period.
(E) Related person.
(iii) Examples.
§ 1.951A–4 Tested interest expense and
tested interest income.
(a) Scope.
(b) Definitions related to specified
interest expense.
(1) Tested interest expense.
(i) In general.
(ii) Interest expense.
(iii) Qualified interest expense.
(iv) Qualified CFC.
(2) Tested interest income.
(i) In general.
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(ii) Interest income.
(iii) Qualified interest income.
(c) Examples.
§ 1.951A–5 Domestic partnerships and
their partners.
(a) Scope.
(b) In general.
(1) Determination of GILTI inclusion
amount of a U.S. shareholder
partnership.
(2) Determination of distributive share
of U.S. shareholder partnership’s GILTI
inclusion amount of partner other than
a U.S. shareholder partner.
(c) Determination of GILTI inclusion
amount of a U.S. shareholder partner.
(d) Tiered U.S. shareholder
partnerships.
(e) Definitions.
(1) CFC tested item.
(2) Partnership CFC.
(3) U.S. shareholder partner.
(4) U.S. shareholder partnership.
(f) Reporting requirement.
(g) Examples.
§ 1.951A–6 Treatment of GILTI inclusion
amount and adjustments to earnings and
profits and basis related to tested loss
CFCs.
(a) Scope.
(b) Treatment as subpart F income for
certain purposes.
(1) In general.
(2) Allocation of GILTI inclusion
amount to tested income CFCs.
(i) In general.
(ii) Example.
(iii) Translation of portion of GILTI
inclusion amount allocated to tested
income CFC.
(c) Treatment as an amount includible
in the gross income of a United States
person.
(1) In general.
(2) Special rule for a United States
shareholder that is a domestic
partnership.
(d) Increase of earnings and profits of
tested loss CFC for purposes of section
952(c)(1)(A).
(e) Adjustments to basis related to net
used tested loss.
(1) In general.
(i) Disposition of stock of a controlled
foreign corporation.
(ii) Disposition of stock of an uppertier controlled foreign corporation.
(iii) Disposition of an interest in a
foreign entity other than a controlled
foreign corporation.
(iv) Order of application of basis
reductions.
(v) No duplicative adjustments.
(2) Net used tested loss amount.
(i) In general.
(ii) Used tested loss amount.
(3) Net offset tested income amount.
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(i) In general.
(ii) Offset tested income amount.
(4) Attribution to stock.
(i) In general.
(ii) Nonrecognition transactions.
(5) Section 381 transactions.
(6) Other definitions.
(i) Domestic corporation.
(ii) Disposition.
(7) Special rule for disposition by
controlled foreign corporation less than
100 percent owned by a single domestic
corporation.
(8) Special rules for members of a
consolidated group.
(9) Examples.
§ 1.951A–7
Applicability dates.
Par. 4. Section 1.951A–1 is added to
read as follows:
■
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§ 1.951A–1
General provisions.
(a) Overview—(1) In general. This
section and §§ 1.951A–2 through
1.951A–7 (collectively, the section 951A
regulations) provide rules to determine
a United States shareholder’s income
inclusion under section 951A and
certain definitions for purposes of
section 951A and the section 951A
regulations. This section provides
general rules for determining a United
States shareholder’s inclusion of global
intangible low-taxed income. Section
1.951A–2 provides rules for determining
a controlled foreign corporation’s tested
income or tested loss. Section 1.951A–
3 provides rules for determining a
controlled foreign corporation’s
qualified business asset investment.
Section 1.951A–4 provides rules for
determining a controlled foreign
corporation’s tested interest expense
and tested interest income. Section
1.951A–5 provides rules relating to the
application of section 951A and the
section 951A regulations to domestic
partnerships and their partners. Section
1.951A–6 provides rules relating to the
treatment of the inclusion of global
intangible low-taxed income for certain
purposes and adjustments to earnings
and profits and basis of a controlled
foreign corporation related to a tested
loss. Section 1.951A–7 provides dates of
applicability.
(2) Scope. Paragraph (b) of this section
provides the general rule requiring a
United States shareholder to include in
gross income its global intangible lowtaxed income for a U.S. shareholder
inclusion year. Paragraph (c) of this
section provides rules for determining
the amount of a United States
shareholder’s global intangible lowtaxed income for the U.S. shareholder
inclusion year, including a rule for the
application of section 951A and the
section 951A regulations to
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consolidated groups. Paragraph (d) of
this section provides rules for
determining a United States
shareholder’s pro rata share of certain
items for purposes of determining the
United States shareholder’s global
intangible low-taxed income. Paragraph
(e) of this section provides additional
general definitions for purposes of this
section and the section 951A
regulations.
(b) Inclusion of global intangible lowtaxed income. Each person who is a
United States shareholder (as defined in
section 951(b)) of any controlled foreign
corporation (as defined in section 957)
and owns section 958(a) stock (as
defined in paragraph (e)(3) of this
section) in any such controlled foreign
corporation includes in gross income in
the U.S. shareholder inclusion year (as
defined in paragraph (e)(4) of this
section) the shareholder’s GILTI
inclusion amount (as defined in
paragraph (c) of this section), if any, for
the U.S. shareholder inclusion year.
(c) Determination of GILTI inclusion
amount—(1) In general. Except as
provided in paragraph (c)(4) of this
section, the term GILTI inclusion
amount means, with respect to a United
States shareholder and a U.S.
shareholder inclusion year, the excess
(if any) of—
(i) The shareholder’s net CFC tested
income (as defined in paragraph (c)(2) of
this section) for the year, over
(ii) The shareholder’s net deemed
tangible income return (as defined in
paragraph (c)(3) of this section) for the
year.
(2) Definition of net CFC tested
income. The term net CFC tested income
means, with respect to a United States
shareholder and a U.S. shareholder
inclusion year, the excess (if any) of—
(i) The aggregate of the shareholder’s
pro rata share of the tested income of
each tested income CFC (as defined in
§ 1.951A–2(b)(1)) for the year, over
(ii) The aggregate of the shareholder’s
pro rata share of the tested loss of each
tested loss CFC (as defined in § 1.951A–
2(b)(2)) for the year.
(3) Definition of net deemed tangible
income return—(i) In general. The term
net deemed tangible income return
means, with respect to a United States
shareholder and a U.S. shareholder
inclusion year, the excess (if any) of—
(A) The shareholder’s deemed
tangible income return (as defined in
paragraph (c)(3)(ii) of this section) for
the year, over
(B) The shareholder’s specified
interest expense (as defined in
paragraph (c)(3)(iii) of this section) for
the year.
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(ii) Definition of deemed tangible
income return. The term deemed
tangible income return means, with
respect to a United States shareholder
and a U.S. shareholder inclusion year,
10 percent of the aggregate of the
shareholder’s pro rata share of the
qualified business asset investment (as
defined in § 1.951A–3(b)) of each tested
income CFC for the year.
(iii) Definition of specified interest
expense. The term specified interest
expense means, with respect to a United
States shareholder and a U.S.
shareholder inclusion year, the excess
(if any) of—
(A) The aggregate of the shareholder’s
pro rata share of the tested interest
expense (as defined in § 1.951A–4(b)(1))
of each controlled foreign corporation
for the year, over
(B) The aggregate of the shareholder’s
pro rata share of the tested interest
income (as defined in § 1.951A–4(b)(2))
of each controlled foreign corporation
for the year.
(4) Determination of GILTI inclusion
amount for consolidated groups. For
purposes of section 951A and the
section 951A regulations, a member of
a consolidated group (as defined in
§ 1.1502–1(h)) determines its GILTI
inclusion amount under the rules
provided in § 1.1502–51.
(d) Determination of pro rata share—
(1) In general. For purposes of
paragraph (c) of this section, each
United States shareholder that owns
section 958(a) stock in a controlled
foreign corporation as of a CFC
inclusion date (as defined in paragraph
(e)(1) of this section) determines for a
U.S. shareholder inclusion year that
includes such CFC inclusion date its pro
rata share (if any) of the controlled
foreign corporation’s tested income,
tested loss, qualified business asset
investment, tested interest expense, and
tested interest income (each a CFC
tested item), as applicable, for the CFC
inclusion year (as defined in paragraph
(e)(2) of this section). Except as
otherwise provided in this paragraph
(d), a United States shareholder’s pro
rata share of each CFC tested item is
determined independently of its pro rata
share of any other CFC tested item.
Except as modified in this paragraph
(d), a United States shareholder’s pro
rata share of any CFC tested item is
determined under the rules of section
951(a)(2) and § 1.951–1(b) and (e) in the
same manner as those provisions apply
to subpart F income. Under section
951(a)(2) and § 1.951–1(b) and (e), as
modified by this paragraph (d), a United
States shareholder’s pro rata share of
any CFC tested item for a U.S.
shareholder inclusion year is
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determined with respect to the section
958(a) stock of the controlled foreign
corporation owned by the United States
shareholder on the CFC inclusion date.
A United States shareholder’s pro rata
share of any CFC tested item is
translated into United States dollars
using the average exchange rate for the
CFC inclusion year of the controlled
foreign corporation. Paragraphs (d)(2)
through (5) of this section provide rules
for determining a United States
shareholder’s pro rata share of each CFC
tested item of a controlled foreign
corporation.
(2) Tested income—(i) In general.
Except as provided in paragraph
(d)(2)(ii) of this section, a United States
shareholder’s pro rata share of the tested
income of each tested income CFC for
a U.S. shareholder inclusion year is
determined under section 951(a)(2) and
§ 1.951–1(b) and (e), substituting ‘‘tested
income’’ for ‘‘subpart F income’’ each
place it appears, other than in § 1.951–
1(e)(1)(ii)(B).
(ii) Special rule for prior allocation of
tested loss. In any case in which tested
loss has been allocated to any class of
stock in a prior CFC inclusion year
under paragraph (d)(4)(iii) of this
section, tested income is first allocated
to each such class of stock in the order
of its liquidation priority to the extent
of the excess (if any) of the sum of the
tested loss allocated to each such class
of stock for each prior CFC inclusion
year under paragraph (d)(4)(iii) of this
section, over the sum of the tested
income allocated to each such class of
stock for each prior CFC inclusion year
under this paragraph (d)(2)(ii).
Paragraph (d)(2)(i) of this section
applies for purposes of determining a
United States shareholder’s pro rata
share of the remainder of the tested
income, except that, for purposes of the
hypothetical distribution of section
951(a)(2)(A) and § 1.951–1(b) and (e),
the amount of current earnings and
profits of the tested income CFC is
reduced by the amount of tested income
allocated under the first sentence of this
paragraph (d)(2)(ii). For an example of
the application of this paragraph (d)(2),
see Example 2 of paragraph (d)(4)(iv) of
this section.
(3) Qualified business asset
investment—(i) In general. Except as
provided in paragraph (d)(3)(ii) of this
section, a United States shareholder’s
pro rata share of the qualified business
asset investment of a tested income CFC
for a U.S. shareholder inclusion year
bears the same ratio to the total
qualified business asset investment of
the tested income CFC for the CFC
inclusion year as the United States
shareholder’s pro rata share of the tested
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income of the tested income CFC for the
U.S. shareholder inclusion year bears to
the total tested income of the tested
income CFC for the CFC inclusion year.
(ii) Special rule for preferred stock in
case of excess QBAI. If a tested income
CFC’s qualified business asset
investment for a CFC inclusion year
exceeds 10 times its tested income for
the CFC inclusion year (such excess,
excess QBAI), a United States
shareholder’s pro rata share of the tested
income CFC’s qualified business asset
investment is the sum of its pro rata
share determined under paragraph
(d)(3)(i) of this section without regard to
the excess QBAI, plus its pro rata share
determined under paragraph (d)(3)(i) of
this section solely with respect to the
excess QBAI and without regard to
tested income allocated to any share of
preferred stock of the tested income CFC
under paragraph (d)(2) of this section.
(iii) Examples. The following
examples illustrate the application of
paragraphs (d)(2) and (3) of this section.
See also § 1.951–1(e)(7), Example 6
(illustrating a United States
shareholder’s pro rata share of tested
income).
(A) Example 1— (1) Facts. FS, a controlled
foreign corporation, has outstanding 70
shares of common stock and 30 shares of 4%
nonparticipating, cumulative preferred stock
with a par value of $10x per share. P Corp,
a domestic corporation and a United States
shareholder of FS, owns all of the common
shares. Individual A, a United States
shareholder, owns all of the preferred shares.
Both FS and P Corp use the calendar year as
their taxable year. Individual A and P Corp
are shareholders of FS for all of Year 4. At
the beginning of Year 4, FS had no dividend
arrearages with respect to its preferred stock.
For Year 4, FS has $100x of earnings and
profits, $120x of tested income, and no
subpart F income within the meaning of
section 952. FS also has $750x of qualified
business asset investment for Year 4.
(2) Analysis—(i) Determination of pro rata
share of tested income. For purposes of
determining P Corp’s pro rata share of FS’s
tested income under paragraph (d)(2) of this
section, the amount of FS’s current earnings
and profits for purposes of the hypothetical
distribution described in § 1.951–1(e)(1)(i) is
$120x, the greater of its earnings and profits
as determined under section 964 ($100x) or
the sum of its subpart F income and tested
income ($0 + $120x). Under paragraph (d)(2)
of this section and § 1.951–1(e)(3), the
amount of FS’s current earnings and profits
distributed in the hypothetical distribution is
$12x (.04 × $10x × 30) with respect to
Individual A’s preferred shares and $108x
($120x¥$12x) with respect to P Corp’s
common shares. Accordingly, under
paragraph (d)(2) of this section and § 1.951–
1(e)(1), Individual A’s pro rata share of FS’s
tested income is $12x, and P Corp’s pro rata
share of FS’s tested income is $108x for Year
4.
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(ii) Determination of pro rata share of
qualified business asset investment. The
special rule of paragraph (d)(3)(ii) of this
section does not apply because FS’s qualified
business asset investment of $750x does not
exceed $1,200x, which is 10 times FS’s tested
income of $120x. Accordingly, under the
general rule of paragraph (d)(3)(i) of this
section, Individual A’s and P Corp’s pro rata
share of FS’s qualified business asset
investment bears the same ratio to FS’s total
qualified business asset investment as
Individual A’s and P Corp’s pro rata share,
respectively, of FS’s tested income bears to
FS’s total tested income. Thus, Individual A’s
pro rata share of FS’s qualified business asset
investment is $75x ($750x × $12x/$120x),
and P Corp’s pro rata share of FS’s qualified
business asset investment is $675x ($750x ×
$108x/$120x).
(B) Example 2— (1) Facts. The facts are the
same as in paragraph (1) of Example 1,
except that FS has $1,500x of qualified
business asset investment for Year 4.
(2) Analysis. (i) Determination of pro rata
share of tested income. The analysis and the
result are the same as in paragraph (2)(i) of
Example 1.
(ii) Determination of pro rata share of
qualified business asset investment. The
special rule of paragraph (d)(3)(ii) of this
section applies because FS’s qualified
business asset investment of $1,500x exceeds
$1,200x, which is 10 times FS’s tested
income of $120x. Under paragraph (d)(3)(ii)
of this section, Individual A’s and P Corp’s
pro rata share of FS’s qualified business asset
investment is the sum of their pro rata share
determined under paragraph (d)(3)(i) of this
section without regard to the excess QBAI
plus their pro rata share with respect to the
excess QBAI but without regard to tested
income allocated to preferred stock under
paragraph (d)(2) of this section. Without
regard to the excess QBAI of $300x,
Individual A’s pro rata share of FS’s qualified
business asset investment is $120x ($1,200x
× $12x/$120x), and P Corp’s pro rata share
of FS’s qualified business asset investment is
$1,080x ($1,200x × $108x/$120x). Solely
with respect to the excess QBAI and without
regard to tested income allocated to the
preferred stock under paragraph (d)(2) of this
section, Individual A’s pro rata share of FS’s
qualified business asset investment is $0
($300x × $0/$108x), and P Corp’s pro rata
share of FS’s qualified business asset
investment is $300x ($300x × $108x/$108x).
Thus, Individual A’s pro rata share of FS’s
qualified business asset investment is $120x
($120x + $0), and P Corp’s pro rata share of
FS’s qualified business asset investment is
$1,380x ($1,080x + $300x).
(4) Tested loss—(i) In general. A
United States shareholder’s pro rata
share of the tested loss of each tested
loss CFC for a U.S. shareholder
inclusion year is determined under
section 951(a)(2) and § 1.951–1(b) and
(e) with the following modifications—
(A) ‘‘Tested loss’’ is substituted for
‘‘subpart F income’’ each place it
appears;
(B) For purposes of the hypothetical
distribution described in section
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951(a)(2)(A) and § 1.951–1(e)(1)(i), the
amount of current earnings and profits
of a controlled foreign corporation for a
CFC inclusion year is treated as being
equal to the tested loss of the tested loss
CFC for the CFC inclusion year;
(C) Except as provided in paragraphs
(d)(4)(ii) and (iii) of this section, the
hypothetical distribution described in
section 951(a)(2)(A) and § 1.951–
1(e)(1)(i) is treated as made solely with
respect to the common stock of the
tested loss CFC; and
(D) The amount of the dividend
received by any other person for
purposes of section 951(a)(2)(B) and
§ 1.951–1(b)(1)(ii) is treated as being
equal to the amount of the tested loss of
the tested loss CFC for the CFC
inclusion year (regardless of whether, or
the extent to which, the other person
actually receives a dividend).
(ii) Special rule in case of accrued but
unpaid dividends. If a tested loss CFC’s
earnings and profits that have
accumulated since the issuance of
preferred shares are reduced below the
amount necessary to satisfy any accrued
but unpaid dividends with respect to
such preferred shares, then the amount
by which the tested loss reduces the
earnings below the amount necessary to
satisfy the accrued but unpaid
dividends is distributed in the
hypothetical distribution described in
section 951(a)(2)(A) and § 1.951–
1(e)(1)(i) with respect to the preferred
stock of the tested loss CFC and the
remainder of the tested loss is
distributed with respect to the common
stock of the tested loss CFC.
(iii) Special rule for stock with no
liquidation value. If a tested loss CFC’s
common stock has a liquidation value of
zero and there is at least one other class
of equity with a liquidation preference
relative to the common stock, then the
tested loss is distributed in the
hypothetical distribution described in
section 951(a)(2)(A) and § 1.951–
1(e)(1)(i) with respect to the most junior
class of equity with a positive
liquidation value to the extent of such
liquidation value. Thereafter, tested loss
is distributed with respect to the next
most junior class of equity to the extent
of its liquidation value and so on. All
determinations of liquidation value are
to be made as of the beginning of the
CFC inclusion year of the tested loss
CFC.
(iv) Examples.The following examples
illustrate the application of this
paragraph (d)(4). See also § 1.951–
1(e)(7), Example 7 (illustrating a United
States shareholder’s pro rata share of
subpart F income and tested loss).
(A) Example— (1) Facts. FS, a controlled
foreign corporation, has outstanding 70
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shares of common stock and 30 shares of 4%
nonparticipating, cumulative preferred stock
with a par value of $10x per share. P Corp,
a domestic corporation and a United States
shareholder of FS, owns all of the common
shares. Individual A, a United States citizen
and a United States shareholder, owns all of
the preferred shares. FS, Individual A, and P
Corp all use the calendar year as their taxable
year. Individual A and P Corp are
shareholders of FS for all of Year 5. At the
beginning of Year 5, FS had earnings and
profits of $120x, which accumulated after the
issuance of the preferred stock. At the end of
Year 5, the accrued but unpaid dividends
with respect to the preferred stock are $36x.
For Year 5, FS has a $100x tested loss, and
no other items of income, gain, deduction or
loss. At the end of Year 5, FS has earnings
and profits of $20x.
(2) Analysis. FS is a tested loss CFC for
Year 5. Before taking into account the tested
loss in Year 5, FS had sufficient earnings and
profits to satisfy the accrued but unpaid
dividends of $36x. The amount of the
reduction in earnings below the amount
necessary to satisfy the accrued but unpaid
dividends attributable to the tested loss is
$16x ($36x¥($120x¥$100x)). Accordingly,
under paragraph (d)(4)(ii) of this section,
Individual A’s pro rata share of the Year 5
tested loss is $16x, and P Corp’s pro rata
share of the tested loss is $84x ($100x–$16x).
(B) Example 2—(1) Facts. FS, a controlled
foreign corporation, has outstanding 100
shares of common stock and 50 shares of 4%
nonparticipating, cumulative preferred stock
with a par value of $100x per share. P Corp,
a domestic corporation and a United States
shareholder of FS, owns all of the common
shares. Individual A, a United States citizen
and a United States shareholder, owns all of
the preferred shares. FS, Individual A, and P
Corp all use the calendar year as their
taxable year. Individual A and P Corp are
shareholders of FS for all of Year 1 and Year
2. At the beginning of Year 1, the common
stock had no liquidation value and the
preferred stock had a liquidation value of
$5,000x and no accrued but unpaid
dividends. In Year 1, FS has a tested loss of
$1,000x and no other items of income, gain,
deduction, or loss. In Year 2, FS has tested
income of $3,000x and no other items of
income, gain, deduction, or loss and paid no
dividends. FS has earnings and profits of
$3,000x for Year 2. At the end of Year 2, FS
has accrued but unpaid dividends of $400x
with respect to the preferred stock ($5000x ×
0.04 for Year 1 and $5000x × 0.04 for Year
2). (2) Analysis—(i) Year 1. FS is a tested loss
CFC in Year 1. The common stock of FS has
liquidation value of zero and the preferred
stock has a liquidation preference relative to
the common stock. The tested loss ($1,000x)
does not exceed the liquidation value of the
preferred stock ($5,000x). Accordingly, under
paragraph (d)(4)(iii) of this section, the tested
loss is distributed with respect to the
preferred stock in the hypothetical
distribution described in section 951(a)(2)(A)
and § 1.951–1(e). Individual A’s pro rata
share of the tested loss is $1,000x, and P
Corp’s pro rata share of the tested loss is $0.
(ii) Year 2. FS is a tested income CFC in
Year 2. Because $1,000x of tested loss was
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allocated to the preferred stock in Year 1
under paragraph (d)(4)(iii) of this section, the
first $1,000x of tested income in Year 2 is
allocated to the preferred stock under
paragraph (d)(2)(ii) of this section. P Corp’s
and Individual A’s pro rata shares of the
remaining $2,000x of tested income are
determined under the general rule of
paragraph (d)(2)(i) of this section, except that
for purposes of the hypothetical distribution
the amount of FS’s current earnings and
profits is reduced by the tested income
allocated under paragraph (d)(2)(ii) of this
section to $2,000x ($3,000x¥$1,000x).
Accordingly, under paragraph (d)(2)(i) of this
section, the amount of FS’s current earnings
and profits distributed in the hypothetical
distribution with respect to Individual A’s
preferred stock is $400x ($400x of accrued
but unpaid dividends) and with respect to P
Corp’s common stock is $1,600x
($2,000x¥$400x). Individual A’s pro rata
share of the tested income is $1,400x
($1,000x + $400x), and P Corp’s pro rata
share of the tested income is $1,600x.
(5) Tested interest expense. A United
States shareholder’s pro rata share of
tested interest expense of a controlled
foreign corporation for a U.S.
shareholder inclusion year is equal to
the amount by which the tested interest
expense reduces the shareholder’s pro
rata share of tested income of the
controlled foreign corporation for the
U.S. shareholder inclusion year,
increases the shareholder’s pro rata
share of tested loss of the controlled
foreign corporation for the U.S.
shareholder inclusion year, or both.
(6) Tested interest income. A United
States shareholder’s pro rata share of
tested interest income of a controlled
foreign corporation for a U.S.
shareholder inclusion year is equal to
the amount by which the tested interest
income increases the shareholder’s pro
rata share of tested income of the
controlled foreign corporation for the
U.S. shareholder inclusion year, reduces
the shareholder’s pro rata share of tested
loss of the controlled foreign
corporation for the U.S. shareholder
inclusion year, or both.
(e) Definitions. This paragraph (e)
provides additional definitions that
apply for purposes of the section 951A
regulations. Other definitions relevant
to the section 951A regulations are
included in §§ 1.951A–2 through
1.951A–6.
(1) CFC inclusion date. The term CFC
inclusion date means the last day of a
CFC inclusion year on which a foreign
corporation is a controlled foreign
corporation.
(2) CFC inclusion year. The term CFC
inclusion year means any taxable year of
a foreign corporation beginning after
December 31, 2017, at any time during
which the corporation is a controlled
foreign corporation.
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(3) Section 958(a) stock. The term
section 958(a) stock means stock of a
controlled foreign corporation owned
(directly or indirectly) by a United
States shareholder within the meaning
of section 958(a).
(4) U.S. shareholder inclusion year.
The term U.S. shareholder inclusion
year means a taxable year of a United
States shareholder that includes a CFC
inclusion date of a controlled foreign
corporation of the United States
shareholder.
■ Par. 5. Section 1.951A–2 is added to
read as follows:
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§ 1.951A–2
Tested income and tested loss.
(a) Scope. This section provides
general rules for determining the tested
income or tested loss of a controlled
foreign corporation for purposes of
determining a United States
shareholder’s net CFC tested income
under § 1.951A–1(c)(2). Paragraph (b) of
this section provides definitions related
to tested income and tested loss.
Paragraph (c) of this section provides
rules for determining the gross tested
income of a controlled foreign
corporation and the deductions that are
properly allocable to gross tested
income.
(b) Definitions related to tested
income and tested loss—(1) Tested
income and tested income CFC. The
term tested income means the excess (if
any) of a controlled foreign
corporation’s gross tested income for a
CFC inclusion year, over the allowable
deductions (including taxes) properly
allocable to the gross tested income for
the CFC inclusion year (a controlled
foreign corporation with tested income
for a CFC inclusion year, a tested
income CFC).
(2) Tested loss and tested loss CFC.
The term tested loss means the excess (if
any) of a controlled foreign
corporation’s allowable deductions
(including taxes) properly allocable to
gross tested income (or that would be
allocable to gross tested income if there
were gross tested income) for a CFC
inclusion year, over the gross tested
income of the controlled foreign
corporation for the CFC inclusion year
(a controlled foreign corporation
without tested income for a CFC
inclusion year, a tested loss CFC).
(c) Rules relating to the determination
of tested income and tested loss—(1)
Definition of gross tested income. The
term gross tested income means the
gross income of a controlled foreign
corporation for a CFC inclusion year
determined without regard to—
(i) Items of income described in
section 952(b),
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(ii) Gross income taken into account
in determining the subpart F income of
the corporation,
(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 solely by reason of an
election made under section 954(b)(4)
and § 1.954–1(d)(5),
(iv) Dividends received by the
corporation from related persons (as
defined in section 954(d)(3)), and
(v) Foreign oil and gas extraction
income (as defined in section 907(c)(1))
of the corporation.
(2) Determination of gross income and
allowable deductions. For purposes of
determining tested income and tested
loss, the gross income and allowable
deductions of a controlled foreign
corporation for a CFC inclusion year are
determined under the rules of § 1.952–
2 for determining the subpart F income
of a controlled foreign corporation.
(3) Allocation of deductions to gross
tested income. Any deductions of a
controlled foreign corporation allowable
under paragraph (c)(2) of this section are
allocated and apportioned to gross
tested income under the principles of
section 954(b)(5) and § 1.954–1(c), by
treating gross tested income that falls
within a single separate category (as
defined in § 1.904–5(a)(1)) as a single
item of gross income, in addition to the
items set forth in § 1.954–1(c)(1)(iii).
(4) Nonapplication of section 952(c)—
(i) In general. The gross tested income
and allowable deductions properly
allocable to gross tested income of a
controlled foreign corporation for a CFC
inclusion year are determined without
regard to the application of section
952(c).
(ii) Example. The following example
illustrates the application of this
paragraph (c)(4).
section, the gross tested income of FS is
determined without regard to section
952(c)(1). Therefore, in determining the gross
tested income of FS in Year 1, the $100x
foreign base company income of FS in Year
1 is excluded under paragraph (c)(1)(ii) of
this section, and FS has no gross tested
income in Year 1. In Year 2, under section
952(c)(2), FS’s earnings and profits ($100x) in
excess of its subpart F income ($0) are treated
as subpart F income. Therefore, FS has
subpart F income of $100x in Year 2, and A
Corp has an inclusion of $100x with respect
to FS under section 951(a)(1)(A). Under
paragraph (c)(4)(i) of this section, the gross
tested income of FS is determined without
regard to section 952(c)(2). Accordingly, FS’s
income in Year 2 is not subpart F income
described in paragraph (c)(1)(ii) of this
section, and FS has $100x of gross tested
income in Year 2.
gross tested income in paragraphs (c)(1)(i)
through (v) of this section. FS has no
allowable deductions properly allocable to
gross tested income for Year 2. (2) Analysis.
As a result of the earnings and profits
limitation of section 952(c)(1), FS has no
subpart F income in Year 1, and A Corp has
no inclusion with respect to FS under section
951(a)(1)(A). Under paragraph (c)(4)(i) of this
(iv) Example— (A) Facts. USP, a domestic
corporation, owns all of the stock of CFC1
and CFC2, each a controlled foreign
corporation. Both USP and CFC1 use the
calendar year as their taxable year. CFC2 uses
a taxable year ending November 30. On
November 1, 2018, before the start of its first
CFC inclusion year, CFC2 sells intangible
property to CFC1 that is amortizable under
(5) Disregard of basis in property
related to certain transfers during the
disqualified period—(i) In general. Any
deduction or loss attributable to
disqualified basis of any specified
property allocated and apportioned to
gross tested income under paragraph
(c)(3) of this section is disregarded for
purposes of determining tested income
or tested loss of a controlled foreign
corporation. For purposes of this
paragraph (c)(5), in the case that a
deduction or loss arises with respect to
specified property with disqualified
basis and adjusted basis other than
disqualified basis, the deduction or loss
is treated as attributable to the
disqualified basis in the same
proportion that the disqualified basis
bears to the total adjusted basis of the
property.
(ii) Definition of specified property.
The term specified property means
property that is of a type with respect
to which a deduction is allowable under
section 167 or 197.
(iii) Definition of disqualified basis.
Solely for purposes of paragraph (c)(5)(i)
of this section, the term disqualified
basis has the meaning set forth in
(A) Example—(1) Facts. A Corp, a domestic
§ 1.951A–3(h)(2)(ii) (including with
corporation, owns 100% of the single class of
respect to property owned by a
stock of FS, a controlled foreign corporation.
partnership by reason of § 1.951A–
Both A Corp and FS use the calendar year
3(g)(3)), except that, in applying the
as their taxable year. In Year 1, FS has
provisions of § 1.951A–3(h)(2) to
foreign base company income of $100x, a
loss in foreign oil and gas extraction income
determine the disqualified basis, the
of $100x, and earnings and profits of $0. FS
term ‘‘specified property’’ is substituted
has no other income. In Year 2, FS has gross
for ‘‘specified tangible property’’ and
income of $100x and earnings and profits of
the term ‘‘controlled foreign
$100x. Without regard to section 952(c)(2), in
corporation’’ is substituted for ‘‘tested
Year 2 FS has no income described in any
income CFC’’ each place they appear.
of the categories of income excluded from
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section 197 in exchange for $100x of cash.
The intangible property has a basis of $20x
in the hands of CFC2, and CFC2 recognizes
$80x of gain as a result of the sale
($100x¥$20x). CFC2’s gain is not subject to
U.S. tax or taken into account in determining
USP’s inclusion under section 951(a)(1)(A).
(B) Analysis. The sale by CFC1 is a
disqualified transfer (within the meaning of
§ 1.951A–3(h)(2)(ii)(C), as modified by
paragraph (c)(5)(iii) of this section) because it
is a transfer of specified property, CFC2 and
CFC1 are related persons, and the transfer
occurs during the disqualified period (within
the meaning of § 1.951A–3(h)(2)(ii)(D)). The
disqualified basis is $80x, the excess of
CFC1’s adjusted basis in the property
immediately after the disqualified transfer
($100x), over the sum of CFC2’s basis in the
property immediately before the transfer
($20x) and the qualified gain amount (as
defined in § 1.951A–3(h)(2)(ii)(B)) ($0).
Accordingly, under paragraph (c)(5)(i) of this
section, any deduction or loss attributable to
the disqualified basis is disregarded for
purposes of determining the tested income or
tested loss of any CFC for any CFC inclusion
year.
Par. 6. Section 1.951A–3 is added to
read as follows:
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§ 1.951A–3 Qualified business asset
investment.
(a) Scope. This section provides
general rules for determining the
qualified business asset investment of a
controlled foreign corporation for
purposes of determining a United States
shareholder’s deemed tangible income
return under § 1.951A–1(c)(3)(ii).
Paragraph (b) of this section defines
qualified business asset investment.
Paragraph (c) of this section defines
tangible property and specified tangible
property. Paragraph (d) of this section
provides rules and examples for
determining the portion of property that
is specified tangible property when the
property is used in the production of
both gross tested income and gross
income that is not gross tested income.
Paragraph (e) of this section provides
rules for determining the adjusted basis
of specified tangible property. Paragraph
(f) of this section provides rules for
determining qualified business asset
investment of a tested income CFC with
a short taxable year. Paragraph (g) of this
section provides rules and examples for
increasing the qualified business asset
investment of a tested income CFC by
reason of property owned through a
partnership. Paragraph (h) of this
section provides anti-abuse rules that
disregard the basis of specified tangible
property transferred in certain
transactions when determining the
qualified business asset investment of a
tested income CFC.
(b) Definition of qualified business
asset investment. The term qualified
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business asset investment means the
average of a tested income CFC’s
aggregate adjusted bases as of the close
of each quarter of a CFC inclusion year
in specified tangible property that is
used in a trade or business of the tested
income CFC and is of a type with
respect to which a deduction is
allowable under section 167. A tested
loss CFC has no qualified business asset
investment. See paragraph (f) of this
section for rules relating to the qualified
business asset investment of a tested
income CFC with a short taxable year.
(c) Specified tangible property—(1) In
general. The term specified tangible
property means, subject to paragraph (d)
of this section, tangible property used in
the production of gross tested income.
None of the tangible property of a tested
loss CFC is specified tangible property.
(2) Tangible property. The term
tangible property means property for
which the depreciation deduction
provided by section 167(a) is eligible to
be determined under section 168
without regard to section 168(f)(1), (2),
or (5) and the date placed in service.
(d) Dual use property—(1) In general.
In the case of tangible property of a
tested income CFC that is used in both
the production of gross tested income
and the production of gross income that
is not gross tested income in a CFC
inclusion year, the portion of the
adjusted basis in the property treated as
adjusted basis in specified tangible
property for the CFC inclusion year is
determined by multiplying the average
of the tested income CFC’s adjusted
basis in the property by the dual use
ratio with respect to the property for the
CFC inclusion year.
(2) Dual use ratio. The term dual use
ratio means, with respect to specified
tangible property:
(i) In the case of specified tangible
property that produces directly
identifiable income for a CFC inclusion
year, the ratio of the gross tested income
produced by the property for the CFC
inclusion year to the total amount of
gross income produced by the property
for the CFC inclusion year.
(ii) In the case of specified tangible
property that does not produce directly
identifiable income for a CFC inclusion
year, the ratio of the gross tested income
of the tested income CFC for the CFC
inclusion year to the total amount of
gross income of the tested income CFC
for the CFC inclusion year.
(3) Example. The following example
illustrates the application of this
paragraph (d).
(i) Example— (A) Facts. FS is a tested
income CFC. FS owns a machine that only
packages Product A. In Year 1, FS sells
Product A to related and unrelated resellers
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and earns $1,000x of gross income. For Year
1, sales of Product A produce gross tested
income of $750x and foreign base company
sales income (as defined in section 954(d)) of
$250x. The average adjusted basis of the
machine for Year 1 in the hands of FS is
$4,000x. FS also owns an office building for
its administrative functions with an average
adjusted basis for Year 1 of $10,000x. The
office building does not produce directly
identifiable income. FS has no other
specified tangible property. For year 1, FS
also earns $1,250x of gross tested income and
$2,750x of foreign base company sales
income from sales of Product B. Neither the
machine nor the office building is used in the
production of income related to Product B.
For Year 1, FS’s gross tested income is
$2,000x and its total gross income is $5,000x.
(B) Analysis. The machine and office
building are both property for which the
depreciation deduction provided by section
167(a) is eligible to be determined under
section 168. Therefore, under paragraph
(c)(2) of this section, the machine and office
building are tangible property. Under
paragraph (d)(1) of this section, the portion
of the basis in the machine treated as basis
in specified tangible property is equal to FS’s
average basis in the machine for the year
($4,000x), multiplied by the dual use ratio
under paragraph (d)(2)(i) of this section
(75%), which is the proportion that the gross
tested income produced by the property
($750x) bears to the total gross income
produced by the property ($1,000x).
Accordingly, $3,000x ($4,000x × 75%) of FS’s
adjusted basis in the machine is taken into
account in determining the average of FS’s
aggregate adjusted bases described in
paragraph (b) of this section. Under
paragraph (d)(1) of this section, the portion
of the basis in the office building treated as
basis in specified tangible property is equal
to FS’s average basis in the office building for
the year ($10,000x), multiplied by the dual
use ratio under paragraph (d)(2)(ii) of this
section (40%), which is the ratio of FS’s gross
tested income for Year 1 ($2,000x) to FS’s
total gross income for Year 1 ($5,000x).
Accordingly, $4,000x ($10,000x × 40%) of
FS’s adjusted basis in the office building is
taken into account in determining the
average of FS’s aggregate adjusted bases
described in paragraph (b) of this section.
(e) Determination of adjusted basis of
specified tangible property—(1) In
general. The adjusted basis in specified
tangible property is determined by using
the alternative depreciation system
under section 168(g), and by allocating
the depreciation deduction with respect
to such property for the CFC inclusion
year ratably to each day during the
period in the taxable year to which such
depreciation relates.
(2) Effect of change in law. The
determination of adjusted basis for
purposes of paragraph (b) of this section
is made without regard to any provision
of law enacted after December 22, 2017,
unless such later enacted law
specifically and directly amends the
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definition of qualified business asset
investment under section 951A.
(3) Specified tangible property placed
in service before enactment of section
951A. The adjusted basis in property
placed in service before December 22,
2017, is determined using the
alternative depreciation system under
section 168(g), as if this system had
applied from the date that the property
was placed in service.
(f) Special rules for short taxable
years—(1) In general. In the case of a
tested income CFC that has a CFC
inclusion year that is less than twelve
months (a short taxable year), the rules
for determining the qualified business
asset investment of the tested income
CFC under this section are modified as
provided in paragraphs (f)(2) and (3) of
this section with respect to the CFC
inclusion year.
(2) Determination of quarter closes.
For purposes of determining quarter
closes, in determining the qualified
business asset investment of a tested
income CFC for a short taxable year, the
quarters of the tested income CFC for
purposes of this section are the full
quarters beginning and ending within
the short taxable year (if any),
determining quarter length as if the
tested income CFC did not have a short
taxable year, plus one or more short
quarters (if any).
(3) Reduction of qualified business
asset investment. The qualified business
asset investment of a tested income CFC
for a short taxable year is the sum of—
(i) The sum of the tested income
CFC’s aggregate adjusted bases in
specified tangible property as of the
close of each full quarter (if any) in the
CFC inclusion year divided by four,
plus
(ii) The tested income CFC’s aggregate
adjusted bases in specified tangible
property as of the close of each short
quarter (if any) in the CFC inclusion
year multiplied by the sum of the
number of days in each short quarter
divided by 365.
(4) Example. The following example
illustrates the application of this
paragraph (f).
(i) Example— (A) Facts. USP1, a domestic
corporation, owns all of the stock of FS, a
controlled foreign corporation. USP1 owns
FS from the beginning of Year 1. On July 15,
Year 1, USP1 sells FS to USP2, an unrelated
person. USP2 makes a section 338(g) election
with respect to the purchase of FS, as a result
of which FS’s taxable year is treated as
ending on July 15. USP1, USP2, and FS all
use the calendar year as their taxable year.
FS’s aggregate adjusted bases in specified
tangible property are $250x as of March 31,
$300x as of June 30, $275x as of July 15,
$500x as of September 30, and $450x as of
December 31.
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(B) Analysis—(1) Determination of short
taxable years and quarters. FS has two short
taxable years in Year 1. The first short taxable
year is from January 1 to July 15, with two
full quarters (January 1–March 31 and April
1–June 30) and one short quarter (July 1–July
15). The second taxable year is from July 16
to December 31, with one short quarter (July
16–September 30) and one full quarter
(October 1–December 31).
(2) Calculation of qualified business asset
investment for the first short taxable year.
Under paragraph (f)(2) of this section, for the
first short taxable year in Year 1, FS has three
quarter closes (March 31, June 30, and July
15). Under paragraph (f)(3) of this section, the
qualified business asset investment of FS for
the first short taxable year is $148.80x, the
sum of $137.50x (($250x + $300x)/4)
attributable to the two full quarters and
$11.30x ($275x × 15/365) attributable to the
short quarter.
(3) Calculation of qualified business asset
investment for the second short taxable year.
Under paragraph (f)(2) of this section, for the
second short taxable year in Year 1, FS has
two quarter closes (September 30 and
December 31). Under paragraph (f)(3) of this
section, the qualified business asset
investment of FS for the second short taxable
year is $217.98x, the sum of $112.50x
($450x/4) attributable to the one full quarter
and $105.48x ($500x × 77/365) attributable to
the short quarter.
(g) Partnership property—(1) In
general. For purposes of paragraph (b) of
this section, if a tested income CFC
holds an interest in one or more
partnerships as of the close of the CFC
inclusion year, the qualified business
asset investment of the tested income
CFC for the CFC inclusion year is
increased by the sum of the tested
income CFC’s partnership QBAI with
respect to each partnership for the CFC
inclusion year. A tested loss CFC has no
partnership QBAI for a CFC inclusion
year.
(2) Definitions related to partnership
QBAI—(i) In general. The term
partnership QBAI means the sum of the
tested income CFC’s share of the
partnership’s adjusted basis in
partnership specified tangible property
as of the close of a partnership taxable
year that ends with or within a CFC
inclusion year. A tested income CFC’s
share of the partnership’s adjusted basis
in partnership specified tangible
property is determined separately with
respect to each partnership specified
tangible property of the partnership by
multiplying the partnership’s adjusted
basis in the property by the partnership
QBAI ratio with respect to the property.
If the partnership’s taxable year is less
than twelve months, the principles of
paragraph (f) of this section apply in
determining a tested income CFC’s
partnership QBAI with respect to the
partnership.
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(ii) Partnership QBAI ratio. The term
partnership QBAI ratio means, with
respect to partnership specified tangible
property:
(A) In the case of partnership
specified tangible property that
produces directly identifiable income
for a partnership taxable year, the ratio
of the tested income CFC’s distributive
share of the gross income produced by
the property for the partnership taxable
year that is included in the gross tested
income of the tested income CFC for the
CFC inclusion year to the total gross
income produced by the property for the
partnership taxable year.
(B) In the case of partnership
specified tangible property that does not
produce directly identifiable income for
a partnership taxable year, the ratio of
the tested income CFC’s distributive
share of the gross income of the
partnership for the partnership taxable
year that is included in the gross tested
income of the tested income CFC for the
CFC inclusion year to the total amount
of gross income of the partnership for
the partnership taxable year.
(iii) Partnership specified tangible
property. The term partnership specified
tangible property means tangible
property (as defined in paragraph (c)(2)
of this section) of a partnership that is—
(A) Used in the trade or business of
the partnership,
(B) Of a type with respect to which a
deduction is allowable under section
167, and
(C) Used in the production of tested
income.
(3) Determination of adjusted basis.
For purposes of this paragraph (g), a
partnership’s adjusted basis in
partnership specified tangible property
is determined based on the average of
the partnership’s adjusted basis in the
property as of the close of each quarter
in the partnership taxable year. The
principles of paragraphs (e) and (h) of
this section apply for purposes of
determining a partnership’s adjusted
basis in partnership specified tangible
property and the portion of such
adjusted basis taken into account in
determining a tested income CFC’s
partnership QBAI.
(4) Examples. The following examples
illustrate the rules of this paragraph (g).
(i) Example 1— (A) Facts. FC, a tested
income CFC, is a partner in PRS. Both FC and
PRS use the calendar year as their taxable
year. PRS owns two assets, Asset A and Asset
B, both of which are tangible property used
in PRS’s trade or business that it depreciates
under section 168. The average of PRS’s
adjusted basis as of the close of each quarter
of PRS’s taxable year in Asset A is $100x and
the average of PRS’s adjusted basis as of the
end of each quarter of PRS’s taxable year in
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Asset B is $50x. Asset A produces $10x of
directly identifiable gross income in Year 1,
and Asset B produces $50x of directly
identifiable gross income in Year 1. FC’s
distributive share of the gross income from
Asset A is $8x and its distributive share of
the gross income from Asset B is $10x. FC’s
entire distributive share of income from
Asset A and Asset B is included in FC’s gross
tested income for Year 1. PRS partners’
distributive shares satisfy the requirements of
section 704.
(B) Analysis. Each of Asset A and Asset B
is partnership specified tangible property
because each is tangible property, of a type
with respect to which a deduction is
allowable under section 167, used in PRS’s
trade or business, and used in the production
of tested income. FC’s partnership QBAI ratio
for Asset A is 80%, the ratio of FC’s
distributive share of the gross income from
Asset A for Year 1 that is included in FC’s
gross tested income ($8x) to the total gross
income produced by Asset A for Year 1
($10x). FC’s partnership QBAI ratio for Asset
B is 20%, the ratio of FC’s distributive share
of the gross income from Asset B for Year 1
that is included in FC’s gross tested income
($10x) to the total gross income produced by
Asset B for Year 1 ($50x). FC’s share of the
average of PRS’s adjusted basis of Asset A is
$80x, PRS’s adjusted basis in Asset A of
$100x multiplied by FC’s partnership QBAI
ratio for Asset A of 80%. FC’s share of the
average of PRS’s adjusted basis of Asset B is
$10x, PRS’s adjusted basis in Asset B of $50x
multiplied by FC’s partnership QBAI ratio for
Asset B of 20%. Therefore, FC’s partnership
QBAI with respect to PRS is $90x ($80x +
$10x). Accordingly, under paragraph (g)(1) of
this section, FC increases its qualified
business asset investment for Year 1 by $90x.
(ii) Example 2— (A) Facts. FC, a tested
income CFC, owns a 50% interest in PRS.
PRS owns Asset A, which is specified
tangible property. The average of PRS’s
adjusted basis as of the close of each quarter
of PRS’s taxable year in Asset A is $100x. FC
has the same taxable year as PRS. Asset A
produces $20x of directly identifiable gross
income in Year 1, and PRS has $22x of
expenses in Year 1 that are properly allocable
to such income. Therefore, FC’s allocation of
net income or loss from PRS is $1x loss,
which is comprised of FC’s distributive share
of the gross income from Asset A of $10x, all
of which is included in FC’s gross tested
income for Year 1, and FC’s distributive
share of the expenses related to Asset A of
$11x, all of which is taken into account in
determining its tested income under § 1.951–
2(c). PRS has no other income or loss in Year
1. FC also has $8x of gross tested income
from other sources in Year 1, and no
deductions properly allocable to such
income. PRS partners’ distributive shares
satisfy the requirements of section 704.
(B) Analysis. FC’s partnership QBAI ratio
for Asset A is 50%, the ratio of FC’s
distributive share of the gross income from
Asset A for Year 1 that is included in FC’s
gross tested income ($10x) to the total gross
income produced by Asset A for Year 1
($20x). FC’s share of the average of PRS’s
adjusted basis in Asset A is $50x, PRS’s
adjusted basis in Asset A of $100x multiplied
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by FC’s partnership QBAI ratio for Asset A
of 50%. FC increases its qualified business
asset investment by $50x, notwithstanding
that FC would not be a tested income CFC
but for its $8x of gross tested income from
other sources.
(h) Anti-abuse rules for certain
transfers of property—(1) Disregard of
basis in specified tangible property held
temporarily. If a tested income CFC
(acquiring CFC) acquires specified
tangible property (as defined in
paragraph (c)(1) of this section) with a
principal purpose of reducing the GILTI
inclusion amount of a United States
shareholder for any U.S. shareholder
inclusion year, and the tested income
CFC holds the property temporarily but
over at least the close of one quarter, the
specified tangible property is
disregarded in determining the
acquiring CFC’s average adjusted basis
in specified tangible property for
purposes of determining the acquiring
CFC’s qualified business asset
investment for any CFC inclusion year
during which the tested income CFC
held the property. For purposes of this
paragraph (h)(1), specified tangible
property held by the tested income CFC
for less than a twelve month period that
includes at least the close of one quarter
during the taxable year of a tested
income CFC is treated as temporarily
held and acquired with a principal
purpose of reducing the GILTI inclusion
amount of a United States shareholder
for a U.S. shareholder inclusion year if
such acquisition would, but for this
paragraph (h)(1), reduce the GILTI
inclusion amount of a United States
shareholder for a U.S. shareholder
inclusion year.
(2) Disregard of basis in specified
tangible property related to transfers
during the disqualified period—(i) In
general. For purposes of determining
the qualified business asset investment
of a tested income CFC for a CFC
inclusion year, in applying the
alternative depreciation system under
section 168(g) to determine the tested
income CFC’s adjusted basis in
specified tangible property, any
disqualified basis with respect to the
specified tangible property is not taken
into account.
(ii) Determination of disqualified
basis—(A) In general. The term
disqualified basis means, with respect to
specified tangible property, the excess
(if any) of the property’s adjusted basis
immediately after a disqualified
transfer, over the sum of the property’s
adjusted basis immediately before the
disqualified transfer and the qualified
gain amount with respect to the
disqualified transfer. Disqualified basis
may be reduced or eliminated through
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depreciation, amortization, sales or
exchanges, section 362(e), and other
methods. In such circumstances, in the
case of specified tangible property with
disqualified basis and adjusted basis
other than disqualified basis, the
disqualified basis is reduced or
eliminated in the same proportion that
the disqualified basis bears to the total
adjusted basis of the property.
(B) Definition of qualified gain
amount. The term qualified gain
amount means, with respect to a
disqualified transfer, the sum of the
following amounts:
(1) The amount of gain recognized by
a controlled foreign corporation
(transferor CFC) on the disqualified
transfer of the specified tangible
property that is subject to U.S. federal
income tax under section 882 (except to
the extent the gain is subject to a
reduced rate of tax, or is exempt from
tax, pursuant to an applicable treaty
obligation of the United States); and
(2) Any United States shareholder’s
pro rata share of the gain recognized by
the transferor CFC on the disqualified
transfer of the specified tangible
property (determined without regard to
properly allocable deductions) taken
into account in determining the United
States shareholder’s inclusion under
section 951(a)(1)(A), excluding any
amount that is described in paragraph
(h)(2)(ii)(B)(1) of this section.
(C) Definition of disqualified transfer.
The term disqualified transfer means a
transfer of specified tangible property
during a transferor CFC’s disqualified
period by the transferor CFC to a related
person in which gain was recognized, in
whole or in part, by the transferor CFC,
regardless of whether the property was
specified tangible property in the hands
of the transferor CFC. For purposes of
the preceding sentence, a transfer
includes any disposition, sale or
exchange, contribution, or distribution
of the specified tangible property, and
includes an indirect transfer (for
example, a transfer of an interest in a
partnership is treated as a transfer of the
assets of the partnership and transfer by
or to a partnership is treated as a
transfer by or to its partners).
(D) Definition of disqualified period.
The term disqualified period means,
with respect to a transferor CFC, the
period beginning on January 1, 2018,
and ending as of the close of the
transferor CFC’s last taxable year that is
not a CFC inclusion year. A transferor
CFC that has a CFC inclusion year
beginning January 1, 2018, has no
disqualified period.
(E) Related person. For purposes of
this paragraph (h)(2), a person is related
to a controlled foreign corporation if the
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person bears a relationship to the
controlled foreign corporation described
in section 267(b) or 707(b) immediately
before or immediately after the transfer.
(iii) Examples. The following
examples illustrate the application of
this paragraph (h)(2).
(A) Example 1— (1) Facts. USP, a domestic
corporation, owns all of the stock of CFC1
and CFC2, each a controlled foreign
corporation. Both USP and CFC1 use the
calendar year as their taxable year. CFC2 uses
a taxable year ending November 30. On
November 1, 2018, before the start of its first
CFC inclusion year, CFC2 sells specified
tangible property that has a basis of $10x in
the hands of CFC2 to CFC1 in exchange for
$100x of cash. CFC2 recognizes $90x of gain
as a result of the sale ($100x¥$10x), $30x of
which is foreign base company income
(within the meaning of section 954). USP
includes in gross income under section
951(a)(1)(A) its pro rata share of the subpart
F income of $30x. CFC2’s gain is not
otherwise subject to U.S. tax or taken into
account in determining USP’s inclusion
under section 951(a)(1)(A).
(2) Analysis. The transfer is a disqualified
transfer because it is a transfer of specified
tangible property; CFC1 and CFC2 are related
persons; and the transfer occurs during the
disqualified period, the period that begins on
January 1, 2018, and ends the last day before
the first CFC inclusion year of CFC2
(November 30, 2018). The disqualified basis
is $60x, the excess of CFC1’s adjusted basis
in the property immediately after the
disqualified transfer ($100x), over the sum of
CFC2’s basis in the property immediately
before the transfer ($10x) and USP’s pro rata
share of the gain recognized by CFC1 on the
transfer of the property taken into account by
USP under section 951(a)(1)(A) ($30x).
Accordingly, under paragraph (h)(2)(i) of this
section, for purposes of determining the
qualified business asset investment of any
tested income CFC for any CFC inclusion
year, in applying section 168(g) to determine
the CFC’s basis in the specified tangible
property, the $60x disqualified basis of the
property is not taken into account.
(B) Example 2— (1) Facts. The facts are the
same as in paragraph (1) of Example 1,
except that CFC2 uses the calendar year as
its taxable year.
(2) Analysis. Because CFC2 has a taxable
year beginning January 1, 2018, CFC2 has no
disqualified period. Accordingly, the
property was not transferred during a
disqualified period of CFC2, and there is no
disqualified basis with respect to the
property.
Par. 7 Section 1.951A–4 is added to
read as follows:
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■
§ 1.951A–4 Tested interest expense and
tested interest income.
(a) Scope. This section provides
general rules for determining the tested
interest expense and tested interest
income of a controlled foreign
corporation for purposes of determining
a United States shareholder’s specified
interest expense under § 1.951A–
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1(c)(3)(iii). Paragraph (b) of this section
provides the definitions related to tested
interest expense and tested interest
income. Paragraph (c) of this section
provides examples illustrating these
definitions and the application of
§ 1.951A–1(c)(3)(iii). The amount of
specified interest expense determined
under § 1.951A–1(c)(3)(iii) and this
section is the amount of interest
expense described in section
951A(b)(2)(B).
(b) Definitions related to specified
interest expense—(1) Tested interest
expense—(i) In general. The term tested
interest expense means interest expense
paid or accrued by a controlled foreign
corporation taken into account in
determining the tested income or tested
loss of the controlled foreign
corporation for the CFC inclusion year
under § 1.951A–2(c), reduced by the
qualified interest expense of the
controlled foreign corporation.
(ii) Interest expense. The term interest
expense means any expense or loss that
is treated as interest expense by reason
of the Internal Revenue Code or the
regulations thereunder, and any other
expense or loss incurred in a transaction
or series of integrated or related
transactions in which the use of funds
is secured for a period of time if such
expense or loss is predominately
incurred in consideration of the time
value of money.
(iii) Qualified interest expense. The
term qualified interest expense means,
with respect to a qualified CFC, the
interest expense paid or accrued by the
qualified CFC taken into account in
determining the tested income or tested
loss of the qualified CFC for the CFC
inclusion year, multiplied by the
fraction (not to exceed one) described in
paragraph (b)(1)(iii)(A) of this section,
and then reduced (but not to less than
zero) by the amount described in
paragraph (b)(1)(iii)(B) of this section.
(A) The numerator of the fraction
described in this paragraph (b)(1)(iii)(A)
is the average of the aggregate adjusted
bases as of the close of each quarter of
obligations or financial instruments
held by the qualified CFC that give rise
to income excluded from foreign
personal holding company income (as
defined in section 954(c)(1)) by reason
of section 954(h) or (i), and the
denominator is the average of the
aggregate adjusted bases as of the close
of each quarter of all assets held by the
qualified CFC. For purposes of this
paragraph (b)(1)(iii)(A), the basis of the
stock of another qualified CFC held by
a qualified CFC is treated as basis of an
obligation or financial instrument giving
rise to income excluded from foreign
personal holding company income by
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reason of section 954(h) or (i) in an
amount equal to the basis of the stock
multiplied by the fraction described in
this paragraph (b)(1)(iii)(A) determined
with respect to the assets of such other
qualified CFC.
(B) The amount described in this
paragraph (b)(1)(iii)(B) is the amount of
interest income of the qualified CFC for
the CFC inclusion year that is excluded
from foreign personal holding company
income (as defined in section 954(c)(1))
by reason of section 954(c)(3) or (6).
(iv) Qualified CFC. The term qualified
CFC means an eligible controlled
foreign corporation (within the meaning
of section 954(h)(2)) or a qualifying
insurance company (within the meaning
of section 953(e)(3)).
(2) Tested interest income—(i) In
general. The term tested interest income
means interest income included in the
gross tested income of a controlled
foreign corporation for the CFC
inclusion year, reduced by qualified
interest income of the controlled foreign
corporation.
(ii) Interest income. The term interest
income means any income or gain that
is treated as interest income by reason
of the Internal Revenue Code or the
regulations thereunder, and any other
income or gain recognized in a
transaction or series of integrated or
related transactions in which the
forbearance of funds is secured for a
period of time if such income or gain is
predominately derived from
consideration of the time value of
money.
(iii) Qualified interest income. The
term qualified interest income means,
with respect to a qualified CFC, interest
income of the qualified CFC included in
the gross tested income of the qualified
CFC for the CFC inclusion year that is
excluded from foreign personal holding
company income (as defined in section
954(c)(1)) by reason of section 954(h) or
(i).
(c) Examples. The following examples
illustrate the application of this section.
(1) Example 1: Wholly-owned CFCs— (i)
Facts. A Corp, a domestic corporation, owns
100% of the single class of stock of each of
FS1 and FS2, each a controlled foreign
corporation. A Corp, FS1, and FS2 all use the
calendar year as their taxable year. In Year
1, FS1 pays $100x of interest to FS2. Also,
in Year 1, FS2 pays $100x of interest to a
bank that is not related to A Corp, FS1, or
FS2. The interest paid by each of FS1 and
FS2 is taken into account in determining the
tested income and tested loss of FS1 and FS2
under § 1.951A–2(c), and the interest
received by FS2 is not foreign personal
holding company income (as defined in
section 954(c)(1)) by reason of section
954(c)(6) and thus is included in gross tested
income. For Year 1, taking into account
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interest income and expense, FS1 has $500x
of tested income and FS2 has $400x of tested
loss. Neither FS1 nor FS2 is a qualified CFC.
(ii) Analysis—(A) CFC-level determination;
tested interest expense and tested interest
income. FS1 has $100x of tested interest
expense for Year 1. FS2 has $100x of tested
interest expense and $100x of tested interest
income for Year 1.
(B) United States shareholder-level
determination; pro rata share and specified
interest expense. Under § 1.951A–1(d)(5) and
(6), A Corp’s pro rata share of FS1’s tested
interest expense is $100x, its pro rata share
of FS2’s tested interest expense is $100x, and
its pro rata share of FS2’s tested interest
income is $100x. For Year 1, A Corp’s
aggregate pro rata share of tested interest
expense is $200x and its aggregate pro rata
share of tested interest income is $100x.
Accordingly, under § 1.951A–1(c)(3)(iii), A
Corp’s specified interest expense is $100x
($200x¥$100x) for Year 1.
(2) Example 2: Less than wholly-owned
CFCs— (i) Facts. The facts are the same as
in paragraph (i) of Example 1, except that A
Corp owns 50% of the single class of stock
of FS1 and 80% of the single class of stock
of FS2.
(ii) Analysis. (A) CFC-level determination;
tested interest expense and tested interest
income. The analysis is the same as in
paragraph (ii)(A) of Example 1.
(B) United States shareholder-level
determination; pro rata share and specified
interest expense. Under § 1.951A–1(d)(5) and
(6), A Corp’s pro rata share of FS1’s tested
interest expense is $50x ($100x × 0.50), its
pro rata share of FS2’s tested interest expense
is $80x ($100x × 0.80), and its pro rata share
of FS2’s tested interest income is $80x ($100x
× 0.80). For Year 1, A Corp’s aggregate pro
rata share of the tested interest expense is
$130x and its aggregate pro rata share of the
tested interest income is $80x. Accordingly,
under § 1.951A–1(c)(3)(iii), A Corp’s
specified interest expense is $50x ($130x ¥
$80x) for Year 1.
(3) Example 3: Qualified CFC—(i) Facts. B
Corp, a domestic corporation, owns 100% of
the single class of stock of each of FS1 and
FS2, each a controlled foreign corporation. B
Corp, FS1, and FS2 all use the calendar year
as their taxable year. FS2 is an eligible
controlled foreign corporation within the
meaning of section 954(h)(2). In Year 1, FS1
pays $100x of interest to FS2, which interest
income is excluded from the foreign personal
holding company income (as defined in
section 954(c)(1)) of FS2 by reason of section
954(c)(6). Also, in Year 1, FS2 pays $250x of
interest to a bank, and receives an additional
$300x of interest from customers that are not
related to FS2, which interest income is
excluded from foreign personal holding
company income by reason of section 954(h).
The interest paid by each of FS1 and FS2 is
taken into account in determining the tested
income and tested loss of FS1 and FS2, and
the interest received by FS2 is included in
gross tested income. FS1 is not a qualified
CFC. FS2 does not own stock in any qualified
CFC. FS2’s average adjusted bases in
obligations or financial instruments that give
rise to income excluded from foreign
personal holding company income by reason
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of section 954(h) is $8,000x, and FS2’s
average adjusted bases in all its assets is
$10,000x.
(ii) Analysis—(A) CFC-level determination;
tested interest expense and tested interest
income. FS1 has $100x of tested interest
expense for Year 1. FS2 is a qualified CFC
because it is an eligible controlled foreign
corporation within the meaning of section
954(h)(2). As a result, in determining the
tested interest income and tested interest
expense of FS2, the qualified interest income
and qualified interest expense of FS2 are
excluded. FS2 has qualified interest income
of $300x, the amount of FS2’s interest
income that is excluded from foreign
personal holding company income by reason
of section 954(h). In addition, FS2 has
qualified interest expense of $100x, the
amount of FS2’s interest expense taken into
account in determining FS2’s tested income
or tested loss under § 1.951A–2(c) ($250x),
multiplied by a fraction, the numerator of
which is FS2’s average adjusted bases in
obligations or financial instruments that give
rise to income excluded from foreign
personal holding company income by reason
of section 954(h) ($8,000x), and the
denominator of which is F2’s average
adjusted bases in all its assets ($10,000x), and
then reduced by the amount of the interest
income received from FS1 excluded from
foreign personal holding company income by
reason of section 954(c)(6) ($100x).
Therefore, for Year 1, FS2 has tested interest
income of $100x ($400x ¥ $300x) and tested
interest expense of $150x ($250x ¥ $100x).
(B) United States shareholder-level
determination; pro rata share and specified
interest expense. Under § 1.951A–1(d)(5) and
(6), B Corp’s pro rata share of FS1’s tested
interest expense is $100x, its pro rata share
of FS2’s tested interest expense is $150x, and
its pro rata share of FS2’s tested interest
income is $100x. For Year 1, B Corp’s
aggregate pro rata share of tested interest
expense is $250x ($100x + $150x) and its
aggregate pro rata share of tested interest
income is $100x ($0 + $100x). Accordingly,
under § 1.951A–1(c)(3)(iii), B Corp’s
specified interest expense is $150x ($250x ¥
$100x) for Year 1.
Par. 8. Section 1.951A–5 is added to
read as follows:
■
§ 1.951A–5 Domestic partnerships and
their partners.
(a) Scope. This section provides rules
regarding the application of section
951A and the section 951A regulations
to domestic partnerships that own
(within the meaning of section 958(a))
stock in one or more controlled foreign
corporations and to partners of such
domestic partnerships, including United
States persons (within the meaning of
section 957(c)). Paragraph (b) of this
section provides rules for the
determination of the GILTI inclusion
amount of a domestic partnership and
the distributive share of such amount of
a partner that is not a United States
shareholder with respect to one or more
controlled foreign corporations owned
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51101
by the domestic partnership. Paragraph
(c) of this section provides rules for the
determination of the GILTI inclusion
amount of a partner that is a United
States shareholder with respect to one
or more controlled foreign corporations
owned by a domestic partnership.
Paragraph (d) of this section provides
rules for tiered domestic partnerships.
Paragraph (e) of this section provides
the definitions of CFC tested item,
partnership CFC, U.S. shareholder
partner, and U.S. shareholder
partnership. Paragraph (f) of this section
requires a domestic partnership to
provide certain information to each
partner necessary for the partner to
determine its GILTI inclusion amount or
its distributive share of the partnership’s
GILTI inclusion amount. Paragraph (g)
of this section provides examples
illustrating the rules of this section. For
rules regarding the treatment of certain
controlled domestic partnerships owned
through one or more foreign
corporations as foreign partnerships for
purposes of sections 951 through 964,
including section 951A and the section
951A regulations, see § 1.951–1(h).
(b) In general—(1) Determination of
GILTI inclusion amount of a U.S.
shareholder partnership. A U.S.
shareholder partnership determines its
GILTI inclusion amount for its U.S.
shareholder inclusion year under the
general rules applicable to United States
shareholders in section 951A and the
section 951A regulations.
(2) Determination of distributive share
of U.S. shareholder partnership’s GILTI
inclusion amount of a partner other
than a U.S. shareholder partner. Each
partner of a U.S. shareholder
partnership that is not a U.S.
shareholder partner takes into account
its distributive share of the U.S.
shareholder partnership’s GILTI
inclusion amount (if any) for the U.S.
shareholder inclusion year in
accordance with section 702 and
§ 1.702–1(a)(8)(ii).
(c) Determination of GILTI inclusion
amount of a U.S. shareholder partner.
For purposes of section 951A and the
section 951A regulations, section 958(a)
stock of a partnership CFC owned by a
U.S. shareholder partnership is treated
as section 958(a) stock owned
proportionately by each U.S.
shareholder partner that is a United
States shareholder of the partnership
CFC in the same manner as if the U.S.
shareholder partnership were a foreign
partnership under section 958(a)(2) and
§ 1.958–1(b). Accordingly, for purposes
of determining a U.S. shareholder
partner’s GILTI inclusion amount, the
U.S. shareholder partner determines its
pro rata share of any CFC tested item of
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a partnership CFC based on the section
958(a) stock owned by the U.S.
shareholder partner by reason of this
paragraph (c). In addition, a U.S.
shareholder partner’s distributive share
of the GILTI inclusion amount of a U.S.
shareholder partnership is determined
without regard to the partnership’s pro
rata share of any CFC tested item of a
partnership CFC with respect to which
the U.S. shareholder partner is a United
States shareholder.
(d) Tiered U.S. shareholder
partnerships. In the case of tiered U.S.
shareholder partnerships, section 958(a)
stock of a partnership CFC treated as
owned under paragraph (c) of this
section by a U.S. shareholder partner
that is also a U.S. shareholder
partnership is treated as section 958(a)
stock owned by the U.S. shareholder
partnership for purposes of applying
paragraph (c) of this section to a U.S.
shareholder partner of such U.S.
shareholder partnership.
(e) Definitions. The following
definitions apply for purposes of this
section:
(1) CFC tested item. The term CFC
tested item has the meaning set forth in
§ 1.951A–1(d)(1).
(2) Partnership CFC. The term
partnership CFC means, with respect to
a U.S. shareholder partnership, a
controlled foreign corporation stock of
which is owned (within the meaning of
section 958(a)) by the U.S. shareholder
partnership.
(3) U.S. shareholder partner. The term
U.S. shareholder partner means, with
respect to a U.S. shareholder
partnership and a partnership CFC of
the U.S. shareholder partnership, a
United States person that is a partner in
the U.S. shareholder partnership and
that is also a United States shareholder
(as defined in section 951(b)) of the
partnership CFC.
(4) U.S. shareholder partnership. The
term U.S. shareholder partnership
means a domestic partnership (within
the meaning of section 7701(a)(4)) that
is a United States shareholder of one or
more controlled foreign corporations.
(f) Reporting requirement. A U.S.
shareholder partnership must furnish to
each partner on or with such partner’s
Schedule K–1 (Form 1065 or successor
form) for each U.S. shareholder
inclusion year of the partnership the
partner’s distributive share of the
partnership’s GILTI inclusion amount (if
any) and, with respect to a U.S.
shareholder partner, the partner’s
proportionate share of the partnership’s
pro rata share (if any) of each CFC tested
item of each partnership CFC of the
partnership and any other information
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required in the form or instructions. See
section 6031(b).
(g) Examples. The following examples
illustrate the rules of this section. None
of the persons in the following examples
own an interest in any controlled
foreign corporation other than as
described.
(1) Example 1: Domestic partnership with
partners that are not United States
shareholders— (i) Facts. Eleven U.S. citizens
(‘‘individuals’’) each own a 9% interest of
PRS, a domestic partnership. The remaining
1% interest of PRS is owned by X Corp, a
domestic corporation. None of the
individuals or X Corp are related. PRS owns
100% of the single class of stock of FC, a
controlled foreign corporation. The
individuals, X Corp, PRS, and FC all use the
calendar year as their taxable year. In Year
1, FC has $130x of tested income and $50x
of qualified business asset investment.
(ii) Analysis—(A) Partnership-level
calculation. PRS is a U.S. shareholder
partnership with respect to FC. Under
paragraph (b)(1) of this section, PRS
determines its GILTI inclusion amount for
Year 1. PRS’s pro rata share of FC’s tested
income is $130x. PRS’s pro rata share of FC’s
qualified business asset investment is $50x.
PRS’s net CFC tested income is $130x. PRS’s
net deemed tangible income return is $5x
($50x × 0.10). PRS’s GILTI inclusion amount
for Year 1 is $125x ($130x ¥ $5x).
(B) Partner-level calculation. Neither X
Corp nor the individuals are U.S. shareholder
partners with respect to FC. Accordingly,
under paragraph (b)(2) of this section, each
of the individuals and X Corp includes its
distributive share of PRS’s GILTI inclusion
amount ($11.25x each for the individuals and
$1.25x for X Corp) in gross income for Year
1.
(2) Example 2: Domestic partnership with
partners that are United States shareholders;
multiple partnership CFCs—
(i) Facts. X Corp and Y Corp are domestic
corporations that own 40% and 60%,
respectively, of PRS, a domestic partnership.
PRS owns 100% of the single class of stock
of FC1 and of FC2, each a controlled foreign
corporation. X Corp, Y Corp, PRS, FC1, and
FC2 all use the calendar year as their taxable
year. In Year 1, FC1 has $130x of tested
income and $50x of qualified business asset
investment, and FC2 has $30x of tested loss.
(ii) Analysis—(A) Partnership-level
calculation. PRS is a U.S. shareholder
partnership with respect to each of FC1 and
FC2. Under paragraph (b)(1) of this section,
PRS determines its GILTI inclusion amount
for Year 1. PRS’s pro rata share of FC1’s
tested income is $130x and of FC2’s tested
loss is $30x. PRS’s pro rata share of FC1’s
qualified business asset investment is $50x.
PRS’s net CFC tested income is $100x ($130x
¥ $30x). PRS’s net deemed tangible income
return is $5x ($50x × 0.10). PRS’s GILTI
inclusion amount for Year 1 is $95x ($100x
¥ $5x).
(B) Partner-level calculation. X Corp and Y
Corp are U.S. shareholder partners with
respect to FC1 and FC2. Accordingly, under
paragraph (c) of this section, X Corp and Y
Corp are treated as owning section 958(a)
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stock of FC1 and FC2 proportionately as if
PRS were a foreign partnership. Thus, X
Corp’s pro rata share of FC1’s tested income
is $52x ($130x × 0.40), and its pro rata share
of FC2’s tested loss is $12x ($30x × 0.40). X
Corp’s pro rata share of FC1’s qualified
business asset investment is $20x ($50x ×
0.40). Accordingly, X Corp’s net CFC tested
income is $40x ($52x ¥ $12x), and its net
deemed tangible income return is $2x ($20x
× 0.10). X Corp’s GILTI inclusion amount for
Year 1 is $38x ($40x ¥ $2x). Y Corp’s pro
rata share of FC1’s tested income is $78x
($130x × 0.60), and its pro rata share of FC2’s
tested loss is $18x ($30x × 0.60). Y Corp’s pro
rata share of FC1’s qualified business asset
investment is $30x ($50x × 0.60).
Accordingly, Y Corp’s net CFC tested income
is $60x ($78x ¥ $18x), and its net deemed
tangible income return is $3x ($30x × 0.10).
Y Corp’s GILTI inclusion amount for Year 1
is $57x ($60x ¥ $3x). Because X Corp and
Y Corp are both U.S. shareholder partners
with respect to FC1 and FC2, the only
partnership CFCs of PRS, X Corp and Y Corp
each includes its proportionate share of
PRS’s share of each CFC tested item of FC1
and FC2 under paragraph (c) of this section
rather than including a distributive share of
the GILTI inclusion amount of PRS.
(3) Example 3: Domestic partnership with
partners that are United States shareholders
with respect to some, but not all, of the
controlled foreign corporations owned by the
domestic partnership— (i) Facts. X Corp and
Y Corp are domestic corporations that own
40% and 60%, respectively, of PRS, a
domestic partnership. PRS owns 20% of the
single class of stock of FC1 and 10% of the
single class of stock of FC2. In addition, Y
Corp owns 100% of the single class of stock
of FC3. FC1, FC2, and FC3 are controlled
foreign corporations. X Corp, Y Corp, PRS,
FC1, FC2, and FC3 all use the calendar year
as their taxable year. In Year 1, FC1 has
$100x of tested income, FC2 has $80x of
tested income, and FC3 has $10x of tested
loss.
(ii) Analysis. (A) Partnership-level
calculation. PRS is a U.S. shareholder
partnership with respect to each of FC1 and
FC2. Under paragraph (b)(1) of this section,
PRS determines its GILTI inclusion amount
for Year 1. PRS’s pro rata share of FC1’s
tested income is $20x ($100x × 0.20) and of
FC2’s tested income is $8x ($80x × 0.10).
PRS’s net CFC tested income is $28x ($20x
+ $8x). PRS has no net deemed tangible
income return. PRS’s GILTI inclusion amount
for Year 1 is $28x.
(B) Partner-level calculation—(1) X Corp. X
Corp is not a U.S. shareholder partner with
respect to either FC1 or FC2 because X Corp
owns (within the meaning of section 958)
less than 10% of each of FC1 (40% × 20%
= 8%) and FC2 (40% × 10% = 4%).
Accordingly, under paragraph (b)(2) of this
section, X Corp includes in income its
distributive share, or $11.20x ($28x × 0.40),
of PRS’s GILTI inclusion amount in Year 1.
(2) Y Corp. Y Corp is a United States
shareholder of FC3. Y Corp is also a U.S.
shareholder partner with respect to FC1,
because it owns (within the meaning of
section 958) at least 10% (60% × 20% = 12%)
of the stock of FC1, but not with respect to
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FC2, because Y Corp owns (within the
meaning of section 958) less than 10% of the
stock of FC2 (60% × 10% = 6%).
Accordingly, under paragraph (c) of this
section, Y Corp is treated as owning section
958(a) stock of FC1 proportionately as if PRS
were a foreign partnership. Thus, Y Corp’s
pro rata share of FC1’s tested income is $12x
($20x × 0.60). Y Corp’s pro rata share of FC3’s
tested loss is $10x ($10x × 1). Accordingly,
Y Corp’s net CFC tested income is $2x ($12x
¥ $10x) and Y Corp has no net deemed
tangible income return. Y Corp’s GILTI
inclusion amount for Year 1 is $2x. In
addition, under paragraph (c) of this section,
for purposes of determining Y Corp’s
distributive share of PRS’s GILTI inclusion
amount, Y Corp’s distributive share of PRS’s
GILTI inclusion amount is determined
without regard to PRS’s pro rata share of any
item of FC1. PRS’s GILTI inclusion amount
computed solely with respect to FC2 is $8x
($80x × 0.10). Y Corp’s distributive share of
PRS’s GILTI inclusion amount is $4.80x ($8x
× 0.60) in Year 1.
(4) Example 4: Tiered domestic
partnerships—(i) Facts. X Corp and Y Corp
are domestic corporations that own,
respectively, a 20% interest and an 80%
interest in PRS1, an upper-tier domestic
partnership. PRS1 owns a 40% interest in
PRS2, a lower-tier domestic partnership. The
remaining 60% of PRS2 is owned by Z Corp,
a controlled foreign corporation. PRS2 is not
a controlled domestic partnership within the
meaning of § 1.951–1(h)(2) (because no
United States shareholder of Z Corp (or
related persons) controls PRS2). PRS2 owns
80% of the single class of stock of FC, a
controlled foreign corporation. X Corp, Y
Corp, Z Corp, PRS1, PRS2, and FC all use the
calendar year as their taxable year. In Year
1, FC has $100x of tested income and $50x
of qualified business asset investment.
(ii) Analysis. (A) Lower-tier partnershiplevel calculation. PRS2 is a U.S. shareholder
partnership with respect to FC, because PRS2
directly owns 80% of the single class of stock
of FC. Under paragraph (b)(1) of this section,
PRS2 determines its GILTI inclusion amount
for its taxable year. PRS2’s pro rata share of
FC’s tested income is $80x ($100x × 0.80).
PRS2’s pro rata share of FC’s qualified
business asset investment is $40x ($50x ×
0.80). PRS2’s net CFC tested income is $80x,
and its net deemed tangible income return is
$4x ($40x × 0.10). PRS2’s GILTI inclusion
amount for Year 1 is $76x ($80x ¥ $4x).
(B) Non-U.S. shareholder partner
calculation. Z Corp is not a U.S. shareholder
partner of FC. Therefore, under paragraph
(b)(2) of this section, in Year 1, Z Corp
includes in income Z Corp’s distributive
share of PRS2’s GILTI inclusion amount, or
$45.60x ($76x × 0.60). Z Corp’s gross tested
income in Year 1 includes this amount.
(C) Upper-tier partnership-level
calculation. PRS1 is a U.S. shareholder
partner with respect to FC because it owns
(within the meaning of section 958) more
than 10% of the stock of FC (40% × 100%
(by reason of the application of section
958(b)(2)) = 40%). Accordingly, under
paragraph (c) of this section, PRS1 is treated
as owning section 958(a) stock of FC
proportionately as if PRS2 were a foreign
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partnership. Thus, PRS1’s pro rata share of
FC’s tested income is $32x ($100x × 0.80 ×
0.40), and its pro rata share of FC’s qualified
business asset investment is $16x ($50x ×
0.80 × 0.40). PRS1’s net CFC tested income
is $32x, and its net deemed tangible income
return is $1.60x ($16x × 0.10). PRS1’s GILTI
inclusion amount for Year 1 is $30.40x ($32x
¥ $1.60x).
(D) Upper-tier partnership partner-level
calculation—(1) Treatment of upper-tier
partnership. For purposes of applying
paragraph (c) of this section to determine X
Corp and Y Corp’s GILTI inclusion amount,
PRS1 is treated as owning section 958(a)
stock of FC.
(2) X Corp. X Corp is not a U.S.
shareholder partner with respect to FC
because it owns (within the meaning of
section 958) less than 10% (20% × 40% ×
100% (by reason of the application of section
958(b)(2)) = 8%) of the stock of FC.
Accordingly, under paragraph (b)(2) of this
section, X Corp includes its distributive share
of PRS1’s GILTI inclusion amount in Year 1,
which is $6.08x ($30.40x × 0.20).
(3) Y Corp. Y Corp is a U.S. shareholder
partner with respect to FC because it owns
(within the meaning of section 958) more
than 10% (80% × 40% × 100% (by reason of
the application of section 958(b)(2)) = 32%)
of the stock of FC. Accordingly, under
paragraphs (c) and (d) of this section, Y Corp
is treated as owning section 958(a) stock of
FC proportionately as if PRS1 and PRS2 were
foreign partnerships. Thus, Y Corp’s pro rata
share of FC’s tested income is $25.60x ($100x
× 0.80 × 0.40 × 0.80), and its pro rata share
of FC’s qualified business asset investment is
$12.80x ($50x × 0.80 × 0.40 × 0.80). Y Corp’s
net CFC tested income is $25.60x, its net
deemed tangible income return is $1.28x
($12.80x × 0.10), and its GILTI inclusion
amount is $24.32x ($25.60x ¥ $1.28x).
Because Y Corp is a U.S. shareholder partner
with respect to FC, the only partnership CFC
of PRS1, Y Corp has no distributive share of
the GILTI inclusion amount of PRS1 under
paragraph (c) of this section.
(5) Example 5: S corporation and its
shareholders— (i) Facts. Individual A, a U.S.
citizen, and Grantor Trust, a trust all of
which is treated under sections 671 through
679 as owned by Individual B, a U.S. citizen,
respectively own 5% and 95% of the single
class of stock of Corporation X, an S
corporation. Corporation X owns 100% of the
single class of stock of FC, a controlled
foreign corporation. Individual A, Grantor
Trust, Individual B, Corporation X, and FC
all use the calendar year as their taxable year.
In Year 1, FC has $200x of tested income and
$100x of qualified business asset investment.
(ii) Analysis—(A) S corporation-level
calculation. An S corporation is treated as a
partnership for purposes of sections 951
through 965 under section 1373. Corporation
X is a U.S. shareholder partnership with
respect to FC, a partnership CFC.
Accordingly, under paragraph (b)(1) of this
section, Corporation X determines its GILTI
inclusion amount for Year 1. Corporation X’s
pro rata share of FC’s tested income is $200x,
and its pro rata share of FC’s qualified
business asset investment is $100x.
Corporation X’s net CFC tested income is
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$200x, and its net deemed tangible income
return is $10x ($100x × 0.10). Corporation X’s
GILTI inclusion amount for Year 1 is $190x
($200x ¥ $10x).
(B) S corporation shareholder-level
calculation—(1) Individual A. Individual A is
not a U.S. shareholder partner with respect
to FC because it owns (within the meaning
of section 958) less than 10% (5% × 100%
= 5%) of the FC stock. Accordingly, under
paragraph (b)(2) of this section, Individual A
includes in gross income its proportionate
share of Corporation X’s GILTI inclusion
amount, which is $9.50x ($190x × 0.05).
(2) Grantor Trust. Because Individual B is
treated as owning all of Grantor Trust under
sections 671 through 679, Individual B is
treated as if it directly owns the shares of
stock in Corporation X owned by Grantor
Trust. As a result, Individual B is treated as
a U.S. shareholder partner with respect to FC
because it owns (within the meaning of
section 958) more than 10% (95% × 100% =
95%) of the FC stock. Accordingly, under
paragraph (c) of this section, Individual B is
treated as owning section 958(a) stock of FC
proportionately as if Corporation X were a
foreign partnership. Thus, Individual B’s pro
rata share of FC’s tested income is $190x
($200x × 0.95) and its pro rata share of FC’s
qualified business asset investment is $95x
($100x × 0.95). Individual B’s net CFC tested
income is $190x, and its net deemed tangible
income return is $9.50x ($95x × 0.10).
Individual B’s GILTI inclusion amount for
Year 1 is $180.5x ($190x ¥ $9.50x). Because
Individual B is a U.S. shareholder partner
with respect to FC, the only partnership CFC
of Corporation X, Individual B has no
distributive share of the GILTI inclusion
amount of Corporation X under paragraph (c)
of this section.
(6) Example 6: Domestic partnership with
no GILTI inclusion amount— (i) Facts. X
Corp is a domestic corporation that owns a
90% interest in PRS, a domestic partnership.
The remaining 10% of PRS is owned by Y,
a foreign individual. PRS owns 100% of the
single class of stock of FC1, a controlled
foreign corporation, and 100% of the single
class of stock of FC2, a controlled foreign
corporation. X Corp owns 100% of the single
class of stock of FC3, a controlled foreign
corporation. X Corp, PRS, FC1, FC2, and FC3
all use the calendar year as their taxable year.
In Year 1, FC1 has $100x of tested loss and
$80x of tested interest expense, FC2 has $50x
of tested income, and FC3 has $150x of tested
income and $500x of qualified business asset
investment in Year 1.
(ii) Analysis—(A) Partnership-level
calculation. PRS is a U.S. shareholder
partnership with respect to FC1 and FC2.
Under paragraph (b)(1) of this section, PRS
determines its GILTI inclusion amount for
Year 1. PRS’s pro rata share of FC1’s tested
loss is $100x, and PRS’s pro rata share of
FC2’s tested income is $50x. PRS’s net CFC
tested income is $0 ($50x ¥ 100x), and
therefore PRS has no GILTI inclusion amount
for Year 1.
(B) Partner-level calculation. X Corp is a
U.S. shareholder partner with respect to FC1
and FC2 because X Corp owns (within the
meaning of section 958) at least 10% of each
(90% × 100% = 90%). Accordingly, under
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paragraph (c) of this section, X Corp is
treated as owning section 958(a) stock of FC1
and FC2 proportionately as if PRS were a
foreign partnership. X Corp’s pro rata share
of FC1’s tested loss is $90x ($100x × 0.90),
and X Corp’s pro rata share of FC1’s tested
interest expense is $72x ($80 × 0.90). X
Corp’s pro rata share of FC2’s tested income
is $45x ($50x × 0.90). X Corp’s pro rata share
of FC3’s tested income is $150x, and its pro
rata share of FC3’s qualified business asset
investment is $500x. X Corp’s net CFC tested
income is $105x ($45x + $150x ¥ $90x). X
Corp’s deemed tangible income return is
$50x ($500x × 0.10), but its net deemed
tangible income return is $0 ($50x ¥ $72x).
X Corp has a GILTI inclusion amount of
$105x ($105x ¥ $0) for Year 1.
Par. 9. Section 1.951A–6 is added to
read as follows:
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§ 1.951A–6 Treatment of GILTI inclusion
amount and adjustments to earnings and
profits and basis related to tested loss
CFCs.
(a) Scope. This section provides rules
relating to the treatment of GILTI
inclusion amounts and adjustments to
earnings and profits and basis to
account for tested losses. Paragraph (b)
of this section provides that a GILTI
inclusion amount is treated in the same
manner as an amount included under
section 951(a)(1)(A) for purposes of
applying certain sections of the Code.
Paragraph (c) of this section provides
rules for the treatment of amounts taken
into account in determining the net CFC
tested income when applying sections
163(e)(3)(B)(i) and 267(a)(3)(B).
Paragraph (d) of this section provides
rules that increase the earnings and
profits of a tested loss CFC for purposes
of section 952(c)(1)(A). Paragraph (e) of
this section provides rules for certain
basis adjustments to the stock of a
controlled foreign corporation by reason
of tested losses used to reduce a
domestic corporation’s net CFC tested
income upon the disposition of the
stock of the controlled foreign
corporation.
(b) Treatment as subpart F income for
certain purposes—(1) In general. A
GILTI inclusion amount is treated in the
same manner as an amount included
under section 951(a)(1)(A) for purposes
of applying sections 168(h)(2)(B),
535(b)(10), 851(b), 904(h)(1), 959, 961,
962, 993(a)(1)(E), 996(f)(1), 1248(b)(1),
1248(d)(1), 1411, 6501(e)(1)(C),
6654(d)(2)(D), and 6655(e)(4), and with
respect to other sections of the Internal
Revenue Code as provided in other
guidance published in the Internal
Revenue Bulletin.
(2) Allocation of GILTI inclusion
amount to tested income CFCs—(i) In
general. For purposes of the sections
referred to in paragraph (b)(1) of this
section, the portion of the GILTI
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inclusion amount of a United States
shareholder treated as being with
respect to each controlled foreign
corporation of the United States
shareholder for the U.S. shareholder
inclusion year is—
(A) In the case of a tested loss CFC,
zero, and
(B) In the case of a tested income CFC,
the portion of the GILTI inclusion
amount of the United States shareholder
which bears the same ratio to such
inclusion amount as the United States
shareholder’s pro rata share of the tested
income of the tested income CFC for the
U.S. shareholder inclusion year bears to
the aggregate amount of the United
States shareholder’s pro rata share of the
tested income of each tested income
CFC for the U.S. shareholder inclusion
year.
(ii) Example— (A) Facts. USP, a domestic
corporation, owns all of the stock of three
controlled foreign corporations, CFC1, CFC2,
and CFC3. USP, CFC1, CFC2, and CFC3 all
use the calendar year as their taxable year. In
Year 1, CFC1 has tested income of $100x,
CFC2 has tested income of $300x, and CFC3
has tested loss of $50x. Neither CFC1 nor
CFC2 has qualified business asset
investment.
(B) Analysis. In Year 1, USP has a GILTI
inclusion amount of $350x ($100x +
$300x¥$50x). The aggregate amount of
USP’s pro rata share of tested income from
CFC1 and CFC2 is $400x ($100x + $300x).
The portion of USP’s GILTI inclusion amount
treated as being with respect to CFC1 is
$87.50x ($350x x $100x/$400x). The portion
of USP’s GILTI inclusion amount treated as
being with respect to CFC2 is $262.50x
($350x x $300x/$400x). The portion of USP’s
GILTI inclusion amount treated as being with
respect to CFC3 is $0 because CFC3 is a
tested loss CFC.
(iii) Translation of portion of GILTI
inclusion amount allocated to tested
income CFC. The portion of the GILTI
inclusion amount of a United States
shareholder allocated to a tested income
CFC under section 951A(f)(2) and
paragraph (b)(2)(i) of this section is
translated into the functional currency
of the tested income CFC using the
average exchange rate for the CFC
inclusion year of the tested income CFC.
(c) Treatment as an amount
includible in the gross income of a
United States person—(1) In general.
For purposes of sections 163(e)(3)(B)(i)
and 267(a)(3)(B), an item (including
original issue discount) is treated as
includible in the gross income of a
United States person to the extent that
such item increases a United States
shareholder’s pro rata share of tested
income of a controlled foreign
corporation for a U.S. shareholder
inclusion year, reduces the
shareholder’s pro rata share of tested
loss of a controlled foreign corporation
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for the U.S. shareholder inclusion year,
or both.
(2) Special rule for a United States
shareholder that is a domestic
partnership. In the case of a United
States shareholder that is a domestic
partnership (within the meaning of
section 7701(a)(4)), an item is described
in paragraph (c)(1) of this section only
to the extent one or more United States
persons (other than domestic
partnerships) that are direct or indirect
partners of the domestic partnership
include in gross income their
distributive share of the GILTI inclusion
amount (if any) of the domestic
partnership for the U.S. shareholder
inclusion year of the domestic
partnership in which such item accrues
or such item is taken into account under
paragraph (c)(1) of this section by a U.S.
shareholder partner (within the meaning
of § 1.951A–5(e)(3)) of the domestic
partnership by reason of § 1.951A–5(c).
(d) Increase of earnings and profits of
tested loss CFC for purposes of section
952(c)(1)(A). For purposes of section
952(c)(1)(A) with respect to a CFC
inclusion year, the earnings and profits
of a tested loss CFC are increased by an
amount equal to the tested loss of the
tested loss CFC for the CFC inclusion
year.
(e) Adjustments to basis related to net
used tested loss—(1) In general—(i)
Disposition of stock of a controlled
foreign corporation. In the case of a
disposition of section 958(a) stock of a
controlled foreign corporation owned
(directly or indirectly) by a domestic
corporation (specified stock), the
adjusted basis of the specified stock is
reduced immediately before the
disposition by the domestic
corporation’s net used tested loss
amount with respect to the controlled
foreign corporation (if any) attributable
to the specified stock. If the reduction
described in the preceding sentence
exceeds the adjusted basis in the
specified stock immediately before the
disposition, such excess is treated as
gain from the sale or exchange of the
stock for the taxable year in which the
disposition occurs.
(ii) Disposition of stock of an uppertier controlled foreign corporation. In
the case of a disposition of specified
stock of a controlled foreign corporation
(upper-tier CFC) by reason of which a
domestic corporation owns, or has
owned, section 958(a) stock of any other
controlled foreign corporation (lowertier CFC), for purposes of determining
the reduction under paragraph (e)(1)(i)
of this section, the domestic
corporation’s net used tested loss
amount (if any) with respect to the
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upper-tier CFC attributable to the
specified stock is—
(A) Increased by the sum of the
domestic corporation’s net used tested
loss amounts with respect to each
lower-tier CFC attributable to the
specified stock; and
(B) Reduced (but not below zero) by
the sum of the domestic corporation’s
net offset tested income amounts with
respect to the upper-tier CFC and each
lower-tier CFC attributable to the
specified stock.
(iii) Disposition of an interest in a
foreign entity other than a controlled
foreign corporation. In the case of a
disposition of an interest in a foreign
entity other than a controlled foreign
corporation through which entity a
domestic corporation owns section
958(a) stock of a controlled foreign
corporation, for purposes of paragraph
(e)(1)(i) and (ii) of this section, the
controlled foreign corporation is treated
as a lower-tier CFC, the interest in the
entity is treated as specified stock of a
controlled foreign corporation, and the
entity is treated as an upper-tier CFC
with respect to which the domestic
corporation has neither a net used tested
loss amount nor a net offset tested
income amount.
(iv) Order of application of basis
reductions. In the event of an indirect
disposition described in paragraph
(e)(6)(ii)(B) of this section, the basis
reduction described in paragraph
(e)(1)(i) of this section is deemed to
occur at the lowest-tier CFC first and,
thereafter, up the chain of ownership
until adjustments are made to the
specified stock directly owned by the
person making the disposition described
in paragraph (e)(6)(ii)(A) of this section.
(v) No duplicative adjustments. No
item is taken into account under this
paragraph (e)(1) to adjust the basis of
specified stock of a controlled foreign
corporation to the extent that such
amount has previously been taken into
account with respect to a prior basis
adjustment with respect to such stock
under this paragraph (e)(1). Moreover,
the basis of specified stock is not
reduced to the extent a taxpayer can
demonstrate to the satisfaction of the
Secretary that such adjustments would
duplicate prior reductions to the basis of
such stock under section 362(e)(2).
(2) Net used tested loss amount—(i) In
general. The term net used tested loss
amount means, with respect to a
domestic corporation and a controlled
foreign corporation, the excess (if any)
of—
(A) The aggregate of the domestic
corporation’s used tested loss amount
with respect to the controlled foreign
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corporation for each U.S. shareholder
inclusion year, over
(B) The aggregate of the domestic
corporation’s offset tested income
amount with respect to the controlled
foreign corporation for each U.S.
shareholder inclusion year.
(ii) Used tested loss amount. The term
used tested loss amount means, with
respect to a domestic corporation and a
tested loss CFC for a U.S. shareholder
inclusion year—
(A) In the case of a domestic
corporation that has net CFC tested
income for the U.S. shareholder
inclusion year, the domestic
corporation’s pro rata share of the tested
loss of the tested loss CFC for the U.S.
shareholder inclusion year, or
(B) In the case of a domestic
corporation without net CFC tested
income for the U.S. shareholder
inclusion year, the amount that bears
the same ratio to the domestic
corporation’s pro rata share of the tested
loss of the tested loss CFC for the U.S.
shareholder inclusion year as the
aggregate of the domestic corporation’s
pro rata share of the tested income of
each tested income CFC for the U.S.
shareholder inclusion year bears to the
aggregate of the domestic corporation’s
pro rata share of the tested loss of each
tested loss CFC for the U.S. shareholder
inclusion year.
(3) Net offset tested income amount—
(i) In general. The term net offset tested
income amount means, with respect to
a domestic corporation and a controlled
foreign corporation, the excess (if any)
of the amount described in paragraph
(e)(2)(i)(B) of this section over the
amount described in paragraph
(e)(2)(i)(A) of this section.
(ii) Offset tested income amount. The
term offset tested income amount
means, with respect to a domestic
corporation and a tested income CFC for
a U.S. shareholder inclusion year—
(A) In the case of a domestic
corporation that has net CFC tested
income for the U.S. shareholder
inclusion year, the amount that bears
the same ratio to the domestic
corporation’s pro rata share of the tested
income of the tested income CFC for the
U.S. shareholder inclusion year as the
aggregate of the domestic corporation’s
pro rata share of the tested loss of each
tested loss CFC for the U.S. shareholder
inclusion year bears to the aggregate of
the domestic corporation’s pro rata
share of the tested income of each tested
income CFC for the U.S. shareholder
inclusion year, or
(B) In the case of a domestic
corporation without net CFC tested
income for the U.S. shareholder
inclusion year, the domestic
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corporation’s pro rata share of the tested
income of the tested income CFC for the
U.S. shareholder inclusion year.
(4) Attribution to stock—(i) In general.
The portion of a domestic corporation’s
net used tested loss amount or net offset
tested income amount with respect to a
controlled foreign corporation
(including a lower-tier CFC) attributable
to specified stock for purposes of
paragraph (e)(1) of this section is
determined based on the domestic
corporation’s pro rata share of the tested
loss and tested income, as applicable, of
the controlled foreign corporation for
each U.S. shareholder inclusion year
with respect to such specified stock. See
§ 1.951A–1(d)(1), (2), and (4) for rules
regarding the determination of pro rata
share amounts of tested income and
tested loss.
(ii) Nonrecognition transactions. In
the case of specified stock acquired by
a domestic corporation in a
nonrecognition transaction (as defined
in section 7701(a)(45)), the principles of
§ 1.1248–8 apply to determine the
domestic corporation’s net used tested
loss amount or net offset tested income
amount with respect to a controlled
foreign corporation attributable to
specified stock. For purposes of
applying the principles of § 1.1248–8,
tested income is treated as earnings and
profits and tested loss is treated as a
deficit in earnings and profits.
(5) Section 381 transactions. If a
controlled foreign corporation with
respect to which a United States
shareholder has a net used tested loss
amount or net offset tested income
amount is a distributor or transferor
corporation in a transaction described in
section 381(a) (acquired CFC) in which
a controlled foreign corporation is the
acquiring corporation (acquiring CFC),
the domestic corporation’s net used
tested loss amount or net offset tested
income amount with respect to the
acquiring CFC is increased by the
amount of the net used tested loss
amount or net offset tested income
amount of the acquired CFC. This
paragraph (e)(5) does not apply to the
extent that the acquiring CFC is an
upper-tier CFC and such amounts
would be taken into account under
paragraph (e)(1)(ii) of this paragraph if
the stock of the acquiring CFC were
disposed of.
(6) Other definitions. The following
additional definitions apply for
purposes of this paragraph (e):
(i) Domestic corporation. The term
domestic corporation means a domestic
corporation other than a real estate
investment trust (as defined in section
856) or a regulated investment company
(as defined in section 851).
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(ii) Disposition. The term disposition
means—
(A) Any transfer of specified stock
that is taxable, in whole or in part,
including a sale or exchange,
contribution, or distribution of the
stock, including a deemed sale or
exchange by reason of the specified
stock becoming worthless within the
meaning of section 165(g), or
(B) Any indirect disposition of
specified stock of a lower-tier CFC as a
result of a disposition described in
paragraph (e)(6)(ii)(A) of this section of
specified stock of an upper-tier CFC.
(7) Special rule for disposition by
controlled foreign corporation less than
100 percent owned by a single domestic
corporation. In the case of a disposition
by a controlled foreign corporation that
is not 100 percent owned, within the
meaning of section 958(a), by a single
domestic corporation, if a reduction to
basis described in paragraph (e)(1) of
this section by reason of a domestic
corporation’s net used tested loss
amount results in an increase to the
controlled foreign corporation’s foreign
personal holding company income (as
defined in section 954(c)(1)), the
domestic corporation’s pro rata share of
the subpart F income of the controlled
foreign corporation, as otherwise
determined under section 951(a)(2) and
§ 1.951–1(b) and (e), is increased by the
amount of such increase, and no other
shareholder takes such subpart F
income into account under section
951(a)(1)(A).
(8) Special rules for members of a
consolidated group. For purposes of the
section 951A regulations, a member
determines its net used tested loss
amount and the adjustments made as a
result of the amount under the rules
provided in § 1.1502–51(c).
(9) Examples. The following examples
illustrate the application of the rules in
this paragraph (e).
(i) Example 1— (A) Facts. USP, a domestic
corporation, owns 100% of the single class of
stock of CFC1 and CFC2. USP1, CFC1, and
CFC2 all use the calendar year as their
taxable year. In Year 1, CFC2 has $90x of
tested loss and CFC1 has $100x of tested
income. At the beginning of Year 2, USP sells
all of the stock of CFC2 to an unrelated buyer
for cash. USP has no used tested loss amount
or offset tested income amount with respect
to CFC2 in any year prior to Year 1. USP has
not owned stock in any other CFC by reason
of owning stock of CFC1 and CFC2.
(B) Analysis. At the time of the disposition,
USP has a net used tested loss amount of
$90x with respect to CFC2 attributable to the
CFC2 stock, which is the specified stock.
Because USP does not own (and has not
owned), within the meaning of section
958(a)(2), stock in any lower-tier CFCs by
reason of the CFC2 stock, there is no
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adjustment to the net used tested loss amount
of $90x pursuant to paragraph (e)(1)(ii) of this
section. Accordingly, immediately before the
disposition of the CFC2 stock, the basis of the
CFC2 stock is reduced by $90x under
paragraph (e)(1)(i) of this section.
(ii) Example 2— (A) Facts. The facts are
the same as in paragraph (A) of Example 1,
except that USP sells only 90% of the shares
of CFC2.
(B) Analysis. The analysis is the same as
in paragraph (B) of Example 1, except that
USP’s net used tested loss amount
attributable to the CFC2 stock that was
disposed of is only $81x (90% x $90x) under
paragraph (e)(4)(i) of this section.
Accordingly, immediately before the
disposition of such stock, the basis in the
CFC2 stock disposed of is reduced by $81x
under paragraph (e)(1)(i) of this section.
(iii) Example 3— (A) Facts. The facts are
the same as in paragraph (A) of Example 1,
except that USP sells the CFC2 stock at the
beginning of Year 3 and during Year 2 CFC1
has $10x of tested loss that offsets Year 2
tested income of CFC2.
(B) Analysis. USP has a net used tested loss
amount of $80x with respect to CFC2
attributable to the CFC2 stock, the amount of
USP’s used tested loss amount with respect
to CFC2 attributable to the CFC2 stock in
Year 1 of $90x reduced by USP’s offset tested
income amount with respect to CFC2
attributable to the CFC2 stock in Year 2 of
$10x. Accordingly, immediately before the
disposition of the CFC2 stock, the basis of the
CFC2 stock is reduced by $80x under
paragraph (e)(1)(i) of this section.
(iv) Example 4— (A) Facts. USP, a
domestic corporation, owns 100% of the
single class of stock of CFC1, and CFC1 owns
100% of the single class of stock of CFC2.
USP1, CFC1, and CFC2 all use the calendar
year as their taxable year. In Year 1, CFC1 has
$100x of tested loss that offsets CFC2’s $100x
of tested income. USP sells the stock of CFC1
at the beginning of Year 2. USP has no used
tested loss amount or offset tested income
amount with respect to CFC1 or CFC2 in any
year prior to Year 1. USP has not owned
stock in any other CFC by reason of owning
stock of CFC1 and CFC2.
(B) Analysis—(1) Direct disposition. At the
time of the disposition, USP has a net used
tested loss amount of $100x with respect to
CFC1 attributable to the CFC1 stock.
However, because USP owns, within the
meaning of section 958(a)(2), CFC2 stock by
reason of the CFC1 stock, USP’s $100x net
used tested loss amount with respect to CFC1
attributable to the CFC1 stock is reduced by
USP’s $100x net offset tested income amount
with respect to CFC2 attributable to the CFC1
stock. Accordingly, there is no adjustment to
the basis of the CFC1 stock under paragraph
(e)(1)(i) of this section.
(2) Indirect disposition. Under paragraph
(e)(6)(ii)(B) of this section, USP’s disposition
of the CFC1 stock also constitutes an indirect
disposition of the CFC2 stock because CFC1
is an upper-tier CFC and CFC2 is a lower-tier
CFC within the meaning of paragraph
(e)(1)(ii) of this section. However, USP has no
net used tested loss amount with respect to
CFC2 attributable to the CFC2 stock.
Accordingly, there is no adjustment to the
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basis of the CFC2 stock under paragraph
(e)(1) of this section.
(v) Example 5— (A) Facts. The facts are the
same as in paragraph (A) of Example 4,
except that in Year 1 CFC2 has $100x of
tested loss that offsets CFC1’s $100x of tested
income. CFC1 sells the stock of CFC2 at the
beginning of Year 2.
(B) Analysis. USP, a domestic corporation,
owns within the meaning of section 958(a)
stock of CFC2. Accordingly, immediately
before the disposition, CFC1’s basis in the
CFC2 stock is reduced by USP’s net used
tested loss amount with respect to CFC2
attributable to the CFC2 stock of $100x under
paragraph (e)(1)(i) of this section.
(2) Indirect disposition.
(vi) Example 6— (A) Facts. The facts are
the same as in paragraph (A) of Example 5,
except that instead of CFC1 selling the stock
of CFC2, USP sells the stock of CFC1.
(B) Analysis—(1) Direct disposition. USP
has no net used tested loss amount with
respect to CFC1 attributable to the stock of
CFC1. However, because USP owns, within
the meaning of section 958(a)(2), stock of
CFC2 by reason of owning stock of CFC1,
under paragraph (e)(1)(ii) of this section,
USP’s net used tested loss amount
attributable to the stock of CFC1 ($0) is
increased by USP’s net used tested loss
amount with respect to CFC2 attributable to
the CFC1 stock ($100x), and reduced by
USP’s net offset tested income amount with
respect to CFC1 attributable to the CFC1
stock ($100x). Accordingly, there is no
adjustment to the basis of the CFC1 stock
under paragraph (e)(1) of this section.
(2) Indirect disposition. Under paragraph
(e)(6)(ii)(B) of this section, USP’s disposition
of CFC1 stock also constitutes an indirect
disposition of the CFC2 stock because CFC1
is an upper-tier CFC and CFC2 is a lower-tier
CFC within the meaning of paragraph
(e)(1)(ii) of this section. Accordingly,
immediately before the disposition, CFC1’s
basis in the CFC2 stock is reduced by USP’s
net used tested loss amount with respect to
CFC2 attributable to the CFC2 stock of $100x
under paragraph (e)(1)(i) of this section.
Under paragraph (e)(1)(iv) of this section, the
basis reduction to CFC2’s shares is deemed
to occur immediately before any reductions
occur with respect to the stock of CFC1, of
which there are none.
(vii) Example 7— (A) Facts. USP1, a
domestic corporation, owns 90% of the
single class of stock of CFC1, and CFC1 owns
100% of the single class of stock of CFC2.
USP1 also owns 100% of the single class of
stock of CFC3. The remaining 10% of the
stock of CFC1 is owned by USP2, a person
unrelated to USP1. USP2 owns no other
CFCs. USP1, USP2, CFC1, CFC2, and CFC3
all use the calendar year as their taxable year.
In Year 1, CFC1 has no tested income or
tested loss, CFC2 has tested loss of $100x,
and CFC3 has tested income of $100x. CFC1
has no other earnings or income in Year 1.
At the beginning of Year 2, CFC1 sells CFC2.
Without regard to this paragraph (e), CFC1
would recognize no gain or loss with respect
to the CFC2 stock. USP1 has not owned stock
in any other controlled foreign corporation
by reason of owning stock of CFC1, CFC2,
and CFC3.
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(B) Analysis. At the time of the disposition,
USP2 has no net used tested loss amount
with respect to CFC2. At the time of the
disposition, USP1 has a net used tested loss
amount of $90x with respect to CFC2
attributable to the CFC2 stock, which is the
specified stock. Because USP1 does not own
(and has not owned), within the meaning of
section 958(a)(2), stock in any lower-tier
CFCs by reason of the CFC2 stock, there is
no adjustment to the net used tested loss
amount of $90x pursuant to paragraph
(e)(1)(ii) of this section. Accordingly,
immediately before the disposition of the
CFC2 stock, the basis of the CFC2 stock is
reduced by $90x under paragraph (e)(1)(i) of
this section. As a result, CFC1 recognizes
gain of $90x on the disposition of the CFC2
stock, which results in $90x of foreign
personal holding company income and $90x
of earnings and profits. Under paragraph
(e)(7) of this section, USP1’s pro rata share
of the subpart F income of CFC1 is increased
by $90x, and USP2 does not take such
subpart F income into account under section
951(a)(1)(A).
(viii) Example 8—(A) Facts. USP, a
domestic corporation, owns 100% of the
single class of stock of CFC1 and CFC2, and
CFC1 owns 100% of the single class of stock
of CFC3 and CFC4. USP, CFC1, CFC2, CFC3,
and CFC4 all use the calendar year as their
taxable year. In Year 1, CFC1 has no tested
income or tested loss, CFC2 has $200x of
tested income, and CFC3 and CFC4 each
have tested loss of $100x. During Year 2,
CFC3 liquidates into CFC1 in a nontaxable
transaction described under section 332, and
CFC1 sells the stock of CFC4 to an unrelated
third party for cash. During Year 2, none of
CFC1, CFC2, CFC3, or CFC4 earn tested
income or tested loss. At the beginning of
Year 3, USP sells the stock of CFC1 to an
unrelated third party for cash. USP has not
owned stock in any other CFC by reason of
owning stock in CFC1, CFC2, CFC3, or CFC4.
(B) Analysis. (1) CFC3’s liquidation into
CFC1 is not a disposition within the meaning
of paragraph (e)(6)(ii)(A) of this section
because CFC1 does not recognize gain or loss
in whole or in part with respect to the stock
of CFC3 under section 332. Furthermore,
CFC1 does not inherit CFC3’s net used tested
loss amount under paragraph (e)(5) of this
section because CFC1 is an upper-tier CFC
with respect to CFC3 and would take such
amounts into account under paragraph
(e)(1)(ii) of this section at the time of a future
disposition. That is, the CFC3 stock is section
958(a) stock that USP has owned by reason
of its ownership of CFC1 within the meaning
of paragraph (e)(1)(ii) of this section.
(2) At the time of CFC1’s sale of the stock
of CFC4, USP has a $100x net used tested
loss amount with respect to CFC4 attributable
to the CFC4 stock, which is the specified
stock. Because USP has not owned, within
the meaning of section 958(a)(2), stock in any
lower-tier CFCs by reason of the CFC4 stock,
there is no adjustment to the net used tested
loss amount of $100x pursuant to paragraph
(e)(1)(ii) of this section. Accordingly,
immediately before the disposition of the
CFC4 stock, the basis of the CFC4 stock is
reduced by $100x under paragraph (e)(1)(i) of
this section.
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(3) At the time of USP’s sale of CFC1, USP
has no net used tested loss amount with
respect to CFC1 attributable to the CFC1
stock. However, USP has owned, within the
meaning of section 958(a)(2), stock of lowertier CFCs (CFC3 and CFC4) by reason of its
ownership of CFC1. Thus, USP’s net used
tested loss amount attributable to the stock of
CFC1 ($0) is increased by USP’s net used
tested loss amounts with respect to CFC3 and
CFC4 attributable to the CFC1 stock ($200x).
Accordingly, immediately before the
disposition of the CFC1 stock, the basis of the
CFC1 stock is reduced by $200x under
paragraph (e)(1)(i) of this section. The rule
prohibiting duplicative adjustments under
paragraph (e)(1)(v) of this section does not
prevent this basis reduction because the net
used tested loss amounts with respect to the
CFC3 and CFC4 stock were not previously
taken into account to reduce the basis of
CFC1 stock.
Par. 10. Section 1.951A–7 is added to
read as follows:
■
§ 1.951A–7
Applicability dates.
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.
■ Par. 11. Section 1.1502–12 is
amended by adding paragraph (s) to
read as follows:
§ 1.1502–12
Separate taxable income.
*
*
*
*
*
(s) See § 1.1502–51 for rules relating
to the computation of a member’s GILTI
inclusion amount under section 951A
and related basis adjustments.
■ Par. 12. Section 1.1502–13 is
amended by adding paragraph (c) to
Example 4 in paragraph (f)(7).
The addition reads as follows:
§ 1.1502–13
*
*
*
(f) * * *
(7) * * *
Intercompany transactions.
*
*
Example 4. * * *
(c) Application of § 1.1502–51(c)(5) to all
cash intercompany reorganization under
section 368(a)(1)(D). The facts are the same
as in paragraph (a) of this Example 4, except
that S’s sole asset is stock of a controlled
foreign corporation, within the meaning of
section 957, with respect to which S has a
net used tested loss amount (within the
meaning of § 1.1502–51(e)(15)) of $15. As in
paragraph (b) of this Example 4, S is treated
as receiving additional B stock with a fair
market value of $100 (in lieu of the $100)
and, under section 358, a basis of $25 which
S distributes to M in liquidation.
Immediately after the sale, pursuant to
§ 1.1502–51(c)(5), the basis in the B stock
received by M is reduced by $15 (the amount
of the net used tested loss amount with
respect to the controlled foreign corporation)
to $10. Following the basis reduction
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51107
pursuant to § 1.1502–51(c)(5), the B stock
(with the exception of the nominal share
which is still held by M) received by M is
treated as redeemed for $100, and the
redemption is treated under section 302(d) as
a distribution to which section 301 applies.
M’s basis of $10 in the B stock is reduced
under § 1.1502–32(b)(3)(v), resulting in an
excess loss account of $90 in the nominal
share. (See § 1.302–2(c).) M’s deemed
distribution of the nominal share of B stock
to P under § 1.368–2(l) will result in M
generating an intercompany gain under
section 311(b) of $90, to be subsequently
taken into account under the matching and
acceleration rules.
*
*
*
*
*
Par. 13. Section 1.1502–32 is
amended by:
■ 1. Adding paragraphs (b)(3)(ii)(E),
(b)(3)(ii)(F), and (b)(3)(iii)(C).
■ 2. Revising paragraph (j).
The revision and additions read as
follows:
■
§ 1.1502–32
*
Investment adjustments.
*
*
*
*
(b) * * *
(3) * * *
(ii) * * *
(E) Adjustment for the offset tested
income amount of a controlled foreign
corporation in relation to section 951A.
S’s tax-exempt income for a taxable year
includes the aggregate of S’s offset
tested income amounts (within the
meaning of § 1.1502–51(c)(3)) with
respect to a controlled foreign
corporation (within the meaning of
section 957) for all of its U.S.
shareholder inclusion years (within the
meaning of § 1.951A–1(e)(4)), to the
extent such aggregate does not exceed
the excess (if any) of—
(1) The aggregate of S’s used tested
loss amounts (within the meaning of
§ 1.1502–51(c)(2)) with respect to the
controlled foreign corporation for all of
its U.S. shareholder inclusion years,
over
(2) The aggregate of S’s offset tested
income amounts with respect to the
controlled foreign corporation for all of
its U.S. shareholder inclusion years
previously treated as tax-exempt income
pursuant to this paragraph.
(F) Adjustment for the net offset tested
income amount of a controlled foreign
corporation in relation to section 951A.
S will be treated as having tax-exempt
income immediately prior to a
transaction (recognition event) in which
another member of the group recognizes
income, gain, deduction, or loss with
respect to a share of S’s stock to the
extent provided in this paragraph
(b)(3)(ii)(F). S’s tax-exempt income is
equal to the portion of the allocable
amount that would have been
characterized as a dividend to which
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section 245A, but not section 1059,
would have applied if the allocable
amount had been distributed by a
controlled foreign corporation to the
owner of the transferred shares
immediately before the recognition
event. For purposes of this paragraph—
(1) The term transferred shares means
the shares of a controlled foreign
corporation that S owns within the
meaning of section 958(a) or is
considered to own by applying the rules
of ownership of section 958(b) and that
are indirectly transferred as part of the
recognition event; and
(2) The term allocable amount means
the net offset tested income amount
(within the meaning of § 1.1502–
51(e)(14)) allocable to the transferred
shares.
(iii) * * *
(C) Adjustment for the used tested
loss amount of a controlled foreign
corporation in relation to section 951A.
S’s noncapital, nondeductible expense
includes its amount of used tested loss
amount (within the meaning of
§ 1.1502–51(c)(2)) with respect to a
controlled foreign corporation (within
the meaning of section 957) for a U.S.
shareholder inclusion year (within the
meaning of § 1.951A–1(e)(4)).
*
*
*
*
*
(j) Applicability date—(1) In general.
Paragraph (b)(4)(iv) of this section
applies to any original consolidated
Federal income tax return due (without
extensions) after June 14, 2007. For
original consolidated Federal income
tax returns due (without extensions)
after May 30, 2006, and on or before
June 14, 2007, see § 1.1502–32T as
contained in 26 CFR part 1 in effect on
April 1, 2007. For original consolidated
Federal income tax returns due (without
extensions) on or before May 30, 2006,
see § 1.1502–32 as contained in 26 CFR
part 1 in effect on April 1, 2006.
(2) Adjustment for the offset tested
income amount, net offset tested income
amount, and used tested loss amount of
a controlled foreign corporation.
Paragraphs (b)(3)(ii)(E), (b)(3)(ii)(F), and
(b)(3)(iii)(C) of this section apply to any
consolidated Federal income tax return
for a taxable year in which or with
which the taxable year of a controlled
foreign corporation beginning after
December 31, 2017, ends.
*
*
*
*
*
■ Par. 14. Section 1.1502–51 is added to
read as follows:
§ 1.1502–51
Consolidated section 951A.
(a) In general. This section provides
rules for applying section 951A and
§§ 1.951A–1 through 1.951A–7 (the
section 951A regulations) to each
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member of a consolidated group (each,
a member) that is a United States
shareholder of any controlled foreign
corporation. Paragraph (b) describes the
inclusion of the GILTI inclusion amount
by a member of a consolidated group.
Paragraph (c) modifies the rules
provided in § 1.951A–6(e) for
adjustments to basis related to used
tested loss amount. Paragraph (d)
provides rules governing basis
adjustments to member stock resulting
from the application of § 1.951A–6(e)
and paragraph (c) of this section.
Paragraph (e) provides definitions for
purposes of this section. Paragraph (f)
provides examples illustrating the rules
of this section. Paragraph (g) provides
an applicability date.
(b) Calculation of the GILTI inclusion
amount for a member of a consolidated
group. Each member who is a United
States shareholder of any controlled
foreign corporation includes in gross
income in the U.S. shareholder
inclusion year the member’s GILTI
inclusion amount, if any, for the U.S.
shareholder inclusion year. See section
951A(a) and § 1.951A–1(b). The GILTI
inclusion amount of a member for a U.S.
shareholder inclusion year is the excess
(if any) of the member’s net CFC tested
income for the U.S. shareholder
inclusion year, over the member’s net
deemed tangible income return for the
U.S. shareholder inclusion year,
determined using the definitions
provided in paragraph (e) of this
section.
(c) Adjustments to basis related to
used tested loss amount—(1) In general.
The adjusted basis of the section 958(a)
stock of a controlled foreign corporation
that is owned (directly or indirectly) by
a member (specified stock) or an interest
in a foreign entity other than a
controlled foreign corporation by reason
of which a domestic corporation owns
(within the meaning of section
958(a)(2)) stock of a controlled foreign
corporation is adjusted immediately
before its disposition pursuant to
§ 1.951A–6(e). The amount of the
adjustment is determined using the
rules provided in paragraphs (c)(2), (3),
and (4) of this section.
(2) Determination of used tested loss
amount. For purposes of the section
951A regulations and this section, the
term used tested loss amount means,
with respect to a member and a tested
loss CFC for a U.S. shareholder
inclusion year—
(i) In the case of the consolidated
group tested income equaling or
exceeding the consolidated group tested
loss for a U.S. shareholder inclusion
year, the member’s pro rata share
(determined under § 1.951A–1(d)(4)) of
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the tested loss of the tested loss CFC for
the U.S. shareholder inclusion year.
(ii) In the case of the consolidated
group tested income being less than the
consolidated group tested loss for a U.S.
shareholder inclusion year, the amount
that bears the same ratio to the
member’s pro rata share (determined
under § 1.951A–1(d)(4)) of the tested
loss of the tested loss CFC for the U.S.
shareholder inclusion year as the
consolidated group tested income for
the U.S. shareholder inclusion year
bears to the consolidated group tested
loss for the U.S. shareholder inclusion
year.
(3) Determination of offset tested
income amount. For purposes of the
section 951A regulations and this
section, the term offset tested income
amount means, with respect to a
member and a tested income CFC for a
U.S. shareholder inclusion year—
(i) In the case of the consolidated
group tested income exceeding the
consolidated group tested loss for a U.S.
shareholder inclusion year, the amount
that bears the same ratio to the
member’s pro rata share (determined
under § 1.951A–1(d)(2)) of the tested
income of the tested income CFC for the
U.S. shareholder inclusion year as the
consolidated group tested loss for the
U.S. shareholder inclusion year bears to
the consolidated group tested income
for the U.S. shareholder inclusion year.
(ii) In the case of the consolidated
group tested income equaling or being
less than the consolidated group tested
loss for a U.S. shareholder inclusion
year, the member’s pro rata share
(determined under § 1.951A–1(d)(2)) of
the tested income of the tested income
CFC for the U.S. shareholder inclusion
year.
(4) Special rule for disposition by a
controlled foreign corporation less than
100 percent owned by a single domestic
corporation. For purposes of
determining the application of
§ 1.951A–6(e)(7), the amount of stock in
the controlled foreign corporation a
member owns, within the meaning of
section 958(a), includes any stock that
the member is considered as owning by
applying the rules of ownership of
section 958(b).
(5) Special rule for intercompany
nonrecognition transactions. If a
member engages in a nonrecognition
transaction (within the meaning of
section 7701(a)(45)), with another
member in which stock of a controlled
foreign corporation that has a net used
tested loss amount is directly
transferred, the adjusted basis of the
nonrecognition property (within the
meaning of section 358) received in the
nonrecognition transaction is
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immediately reduced by the amount of
the net used tested loss amount. In cases
of intercompany transactions that are
governed by § 1.368–2(l), the reduction
in basis pursuant to this paragraph (c)(5)
is made prior to the application of
§ 1.1502–13(f)(3). See § 1.1502–13(f)(7),
Example 4(c).
(d) Adjustments to the basis of a
member. For adjustments to the basis of
a member related to paragraph (c) of this
section, see § 1.1502–32(b)(3)(ii)(E),
(b)(3)(ii)(F), and (b)(3)(iii)(C).
(e) Definitions. The following
definitions apply for purposes of the
section—
(1) Aggregate tested income. With
respect to a member, the term aggregate
tested income means the aggregate of the
member’s pro rata share (determined
under § 1.951A–1(d)(2)) of the tested
income of each tested income CFC for
a U.S. shareholder inclusion year.
(2) Aggregate tested loss. With respect
to a member, the term aggregate tested
loss means the aggregate of the
member’s pro rata share (determined
under § 1.951A–1(d)(4)) of the tested
loss of each tested loss CFC for a U.S.
shareholder inclusion year.
(3) Allocable share. The term
allocable share means, with respect to a
member that is a United States
shareholder and a U.S. shareholder
inclusion year—
(i) With respect to consolidated group
QBAI, the product of the consolidated
group QBAI of the member’s
consolidated group and the member’s
GILTI allocation ratio.
(ii) With respect to consolidated
group specified interest expense, the
product of the consolidated group
specified interest expense of the
member’s consolidated group and the
member’s GILTI allocation ratio.
(iii) With respect to consolidated
group tested loss, the product of the
consolidated group tested loss of the
member’s consolidated group and the
member’s GILTI allocation ratio.
(4) Consolidated group QBAI. With
respect to a consolidated group, the
term consolidated group QBAI means
the sum of each member’s pro rata share
(determined under § 1.951A–1(d)(3)) of
the qualified business asset investment
of each tested income CFC for a U.S.
shareholder inclusion year.
(5) Consolidated group specified
interest expense. With respect to a
consolidated group, the term
consolidated group specified interest
expense means the excess (if any) of—
(i) The sum of each member’s pro rata
share (determined under § 1.951A–
1(d)(5)) of the tested interest expense of
each controlled foreign corporation for
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the U.S. shareholder inclusion year,
over
(ii) The sum of each member’s pro
rata share (determined under § 1.951A–
1(d)(6)) of the tested interest income of
each controlled foreign corporation for
the U.S. shareholder inclusion year.
(6) Consolidated group tested income.
With respect to a consolidated group,
the term consolidated group tested
income means the sum of each
member’s aggregate tested income for a
U.S. shareholder inclusion year.
(7) Consolidated group tested loss.
With respect to a consolidated group,
the term consolidated group tested loss
means the sum of each member’s
aggregate tested loss for a U.S.
shareholder inclusion year.
(8) Controlled foreign corporation.
The term controlled foreign corporation
means a controlled foreign corporation
as defined in section 957.
(9) Deemed tangible income return.
With respect to a member, the term
deemed tangible income return means
10 percent of the member’s allocable
share of the consolidated group QBAI.
(10) GILTI allocation ratio. With
respect to a member, the term GILTI
allocation ratio means the ratio of—
(i) The aggregate tested income of the
member for a U.S. shareholder inclusion
year, to
(ii) The consolidated group tested
income of the consolidated group of
which the member is a member for the
U.S. shareholder inclusion year.
(11) GILTI inclusion amount. With
respect to a member, the term GILTI
inclusion amount has the meaning
provided in paragraph (b) of this
section.
(12) Net CFC tested income. With
respect to a member, the term net CFC
tested income means the excess (if any)
of—
(i) The member’s aggregate tested
income, over
(ii) The member’s allocable share of
the consolidated group tested loss.
(13) Net deemed tangible income
return. With respect to a member, the
term net deemed tangible income return
means the excess (if any) of the
member’s deemed tangible income
return over the member’s allocable share
of the consolidated group specified
interest expense.
(14) Net offset tested income amount.
The term net offset tested income
amount means, with respect to a
member and a controlled foreign
corporation, the excess (if any) of the
amount described in paragraph
(e)(15)(ii) of this section over the
amount described in paragraph (e)(15)(i)
of this section.
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51109
(15) Net used tested loss amount. The
term net used tested loss amount means,
with respect to a member and a
controlled foreign corporation, the
excess (if any) of —
(i) The aggregate of the member’s pro
rata share of each used tested loss
amount of the controlled foreign
corporation for each U.S. shareholder
inclusion year over
(ii) The aggregate of the member’s pro
rata share of each offset tested income
amount of the controlled foreign
corporation for each U.S. shareholder
inclusion year.
(16) Offset tested income amount. The
term offset tested income amount has
the meaning provided in paragraph
(c)(3) of this section.
(17) Qualified business asset
investment. The term qualified business
asset investment has the meaning
provided in § 1.951A–3(b).
(18) Tested income. The term tested
income has the meaning provided in
§ 1.951A–2(b)(1).
(19) Tested income CFC. The term
tested income CFC has the meaning
provided in § 1.951A–2(b)(1).
(20) Tested interest expense. The term
tested interest expense has the meaning
provided in § 1.951A–4(b)(1).
(21) Tested interest income. The term
tested interest income has the meaning
provided in § 1.951A–4(b)(2).
(22) Tested loss. The term tested loss
has the meaning provided in § 1.951A–
2(b)(2).
(23) Tested loss CFC. The term tested
loss CFC has the meaning provided in
§ 1.951A–2(b)(2).
(24) United States shareholder. The
term United States shareholder has the
meaning provided in § 1.951–1(g)(1).
(25) U.S. shareholder inclusion year.
The term U.S. shareholder inclusion
year has the meaning provided in
§ 1.951A–1(e)(4).
(26) Used tested loss amount. The
term used tested loss amount has the
meaning provided in paragraph (c)(2) of
this section.
(f) Examples. The following examples
illustrate the rules of this section. For
purposes of the examples in this
section, unless otherwise stated: P is the
common parent of the P consolidated
group; P owns all of the single class of
stock of subsidiaries USS1, USS2, and
USS3, all of whom are members of the
P consolidated group; CFC1, CFC2,
CFC3, and CFC4 are all controlled
foreign corporations (within the
meaning of paragraph (e)(8) of this
section); and the taxable year of all
persons is the calendar year.
(1) Example 1: Calculation of net CFC
tested income within a consolidated group
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when all CFCs are wholly owned by a
member— (i) Facts. USS1 owns all of the
single class of stock of CFC1. USS2 owns all
of the single class of stock of each of CFC2
and CFC3. USS3 owns all of the single class
of stock of CFC4. In Year 1, CFC1 has tested
loss of $100, CFC2 has tested income of
$200x, CFC3 has tested loss of $200x, and
CFC4 has tested income of $600x. Neither
CFC2 nor CFC4 has qualified business asset
investment in Year 1.
(ii) Analysis—(A) Consolidated group
tested income and GILTI allocation ratio.
USS1 has no aggregate tested income; USS2’s
aggregate tested income is $200x, its pro rata
share (within the meaning of § 1.951A–
1(d)(2)) of CFC2’s tested income; and USS3’s
aggregate tested income is $600x, its pro rata
share (within the meaning of § 1.951A–
1(d)(2)) of CFC4’s tested income. Therefore,
under paragraph (e)(6) of this section, the P
consolidated group’s consolidated group
tested income is $800x ($200x + $600x). As
a result, the GILTI allocation ratios of USS1,
USS2, and USS3 are 0 ($0/$800x), 0.25
($200x/$800x), and 0.75 ($600x/$800x),
respectively.
(B) Consolidated group tested loss. Under
paragraph (e)(7) of this section, the P
consolidated group’s consolidated group
tested loss is $300x ($100x + $200x), the
aggregate of USS1’s aggregate tested loss,
which is equal to its pro rata share (within
the meaning of § 1.951A–1(d)(4)) of CFC1’s
tested loss ($100x), and USS2’s aggregate
tested loss, which is equal to its pro rata
share (within the meaning of § 1.951A–
1(d)(4)) of CFC3’s tested loss ($200x). Under
paragraph (e)(3)(iii) of this section, a
member’s allocable share of the consolidated
group tested loss is the product of the
consolidated group tested loss of the
member’s consolidated group and the
member’s GILTI allocation ratio. Therefore,
the allocable shares of the consolidated group
tested loss of USS1, USS2, and USS3 are $0
(0 × $300x), $75x (0.25 × $300x), and $225x
(0.75 × $300x), respectively.
(C) Calculation of net CFC tested income.
Under paragraph (e)(12) of this section, a
member’s net CFC tested income is the
excess (if any) of the member’s aggregate
tested income over the member’s allocable
share of the consolidated group tested loss.
As a result, USS1’s, USS2’s, and USS3’s net
CFC tested income amounts are $0 ($0¥$0),
$125x ($200x¥$75x), and $375x
($600x¥$225x), respectively.
(2) Example 2: Calculation of net CFC
tested income within a consolidated group
when ownership of a tested loss CFC is split
between members— (i) Facts. The facts are
the same as in paragraph (i) of Example 1,
except that USS2 and USS3 each own 50%
of the single class of stock of CFC3.
(ii) Analysis. As in paragraph (ii) of
Example 1, USS1 has no aggregate tested
income and a GILTI allocation ratio of 0,
USS2 has $200x of aggregate tested income
and a GILTI allocation ratio of 0.25, and
USS3 has $600x of aggregate tested income
and a GILTI allocation ratio of 0.75.
Additionally, the P consolidated group’s
consolidated group tested loss is $300x (the
aggregate of USS1’s aggregate tested loss,
which is equal to its pro rata share (within
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the meaning of § 1.951A–1(d)(4)) of CFC1’s
tested loss ($100x); USS2’s aggregate tested
loss, which is equal to its pro rata share
(within the meaning of § 1.951A–1(d)(4)) of
CFC3’s tested loss ($100x); and USS3’s
aggregate tested loss, which is equal to its pro
rata share (within the meaning of § 1.951A–
1(d)(4)) of CFC3’s tested loss ($100x)). As a
result, under paragraph (e)(12) of this section,
as in paragraph (ii)(C) of Example 1, USS1’s,
USS2’s, and USS3’s net CFC tested income
amounts are $0 ($0—$0), $125x ($200x—
$75x), and $375x ($600x—$225x),
respectively.
(3) Example 3: Calculation of GILTI
inclusion amount— (i) Facts. The facts are
the same as in paragraph (i) of Example 1,
except that CFC2 and CFC4 have qualified
business asset investment of $500x and
$2000x, respectively, for Year 1. In Year 1,
CFC1 and CFC4 each have tested interest
expense (within the meaning of § 1.951A–
4(b)(1)) of $25x, and CFC1, CFC2, CFC3, and
CFC4 have $0 of tested interest income
(within the meaning of § 1.951A–4(b)(2)).
CFC1’s tested loss of $100x and CFC4’s tested
income of $600x take into account the
interest paid.
(ii) Analysis—(A) GILTI allocation ratio. As
in paragraph (ii) of Example 1, the GILTI
allocation ratios of USS1, USS2, and USS3
are 0 ($0/$800x), 0.25 ($200x/$800x), and
0.75 ($600x/$800x), respectively.
(B) Consolidated group QBAI. Under
paragraph (e)(4) of this section, the P
consolidated group’s consolidated group
QBAI is $2,500x ($500x + $2,000x), the
aggregate of USS2’s pro rata share
(determined under § 1.951A–1(d)(3)) of the
qualified business asset investment of CFC2
and USS3’s pro rata share (determined under
§ 1.951A–1(d)(3)) of the qualified business
asset investment of CFC4. Under paragraph
(e)(3)(i) of this section, a member’s allocable
share of consolidated group QBAI is the
product of the consolidated group QBAI of
the member’s consolidated group and the
member’s GILTI allocation ratio. Therefore,
the allocable shares of the consolidated group
QBAI of each of USS1, USS2, and USS3 are
$0 (0 × $2,500x), $625x (0.25 × $2,500x), and
$1,875x (0.75 × $2,500x), respectively.
(C) Consolidated group specified interest
expense—(1) Pro rata share of tested interest
expense. USS1’s pro rata share of the tested
interest expense of CFC1 is $25x, the amount
by which the tested interest expense
increases USS1’s pro rata share of CFC1’s
tested loss (from $75x to $100x) for Year 1.
USS3’s pro rata share of the tested interest
expense of CFC4 is also $25x, the amount by
which the tested interest expense decreases
USS1’s pro rata share of CFC4’s tested
income (from $625x to $600x). See § 1.951A–
1(d)(5).
(2) Consolidated group specified interest
expense. Under paragraph (e)(5) of this
section, the P consolidated group’s
consolidated group specified interest expense
is $50x, the excess of the sum of each
member’s pro rata share of the tested interest
expense of each controlled foreign
corporation ($50x, $25x from USS1 + $25x
from USS3), over the sum of each member’s
pro rata share of tested interest income ($0).
Under paragraph (e)(3)(ii) of this section, a
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member’s allocable share of consolidated
group specified interest expense is the
product of the consolidated group specified
interest expense of the member’s
consolidated group and the member’s GILTI
allocation ratio. Therefore, the allocable
shares of consolidated group specified
interest expense of USS1, USS2, and USS3
are $0 (0 × $50x), $12.50x (0.25 × $50x), and
$37.50x (0.75 × $50x), respectively.
(D) Calculation of deemed tangible income
return. Under paragraph (e)(9) of this section,
a member’s deemed tangible income return
means 10 percent of the member’s allocable
share of the consolidated group QBAI. As a
result, USS1’s, USS2’s, and USS3’s deemed
tangible income returns are $0 (0¥$0),
$62.50x (0.1 ¥ $625x), and $187.50x (0.1 ¥
$1,875x), respectively.
(E) Calculation of net deemed tangible
income return. Under paragraph (e)(13) of
this section, a member’s net deemed tangible
income return means the excess (if any) of a
member’s deemed tangible income return
over the member’s allocable share of the
consolidated group specified interest. As a
result, USS1’s, USS2’s, and USS3’s net
deemed tangible income returns are $0
($0¥$0), $50x ($62.50x¥$12.50x), and
$150x ($187.50x¥$37.50x), respectively.
(F) Calculation of GILTI inclusion amount.
Under paragraph (b) of this section, a
member’s GILTI inclusion amount for a U.S.
shareholder inclusion year is the excess (if
any) of the member’s net CFC tested income
for the U.S. shareholder inclusion year, over
the shareholder’s net deemed tangible
income return for the U.S. shareholder
inclusion year. As described in paragraph
(ii)(C) of Example 1, the amounts of USS1’s,
USS2’s, and USS3’s net CFC tested income
are $0, $125x, and $375x, respectively. As
described in paragraph (ii)(E) of this Example
3, the amounts of USS1’s, USS2’s, and
USS3’s net deemed tangible income return
are $0, $50x, and $150x, respectively. As a
result, under paragraph (b) of this section,
USS1’s, USS2’s, and USS3’s GILTI inclusion
amounts are $0 ($0¥$0), $75x
($125x¥$50x), and $225x ($375x¥$150x),
respectively.
(G) Calculation of used tested loss amount
and offset tested income amount. As
described in paragraph (ii)(A) of Example 1,
P consolidated group’s consolidated group
tested income is $800x. As described in
paragraph (ii)(B) of Example 1, P
consolidated group’s consolidated group
tested loss is $300x. Therefore, the P
consolidated group’s consolidated group
tested income exceeds its consolidated group
tested loss. As a result, USS1 has a $100x
used tested loss amount with respect to CFC1
and USS2 has a $200x used tested loss
amount with respect to CFC3. Additionally,
USS2 has a $75x offset tested income amount
with respect to CFC2 ($200x x $300x/$800x)
and USS3 has a $225x offset tested income
amount with respect to CFC3 ($600x x
$300x/$800x). See paragraph (c) of this
section. P will adjust its basis in USS1 and
USS2 pursuant to the rule in § 1.1502–
32(b)(3)(iii)(C).
(g) Applicability date. This section
applies to taxable years of foreign
corporations beginning after December
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31, 2017, and to taxable years of United
States shareholders in which or with
which such taxable years of foreign
corporations end.
■ Par. 15. Section 1.6038–2 is amended
by:
■ 1. Revising the section heading.
■ 2. Revising the first sentence in
paragraph (a).
■ 3. Revising paragraph (m).
The revisions read as follows:
§ 1.6038–2 Information returns required of
United States persons with respect to
annual accounting periods of certain
foreign corporations.
(a) Requirement of return. Every U.S.
person shall make a separate annual
information return with respect to each
annual accounting period (described in
paragraph (e) of this section) of each
foreign corporation which that person
controls (as defined in paragraph (b) of
this section) at any time during such
annual accounting period. * * *
*
*
*
*
*
(m) Applicability dates. This section
applies to taxable years of foreign
corporations beginning on or after
October 3, 2018. See 26 CFR 1.6038–2
(revised as of April 1, 2018) for rules
applicable to taxable years of foreign
corporations beginning before such date.
■ Par. 16. Section 1.6038–5 is added to
read as follows:
§ 1.6038–5 Information returns required of
certain United States persons to report
amounts determined with respect to certain
foreign corporations for global intangible
low-taxed income (GILTI) purposes.
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(a) Requirement of return. Except as
provided in paragraph (d) of this
section, each United States person who
is a United States shareholder (as
defined in section 951(b)) of any
controlled foreign corporation must
make an annual return on Form 8992,
‘‘U.S. Shareholder Calculation of Global
Intangible Low-Taxed Income (GILTI),’’
(or successor form) for each U.S.
shareholder inclusion year (as defined
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in § 1.951A–1(e)(4)) setting forth the
information with respect to each such
controlled foreign corporation, in such
form and manner, as Form 8992 (or
successor form) prescribes.
(b) Time and manner for filing.
Returns on Form 8992 (or successor
form) required under paragraph (a) of
this section for a taxable year must be
filed with the United States person’s
income tax return on or before the due
date (taking into account extensions) for
filing that person’s income tax return.
(c) Failure to furnish information—(1)
Penalties. If any person required to file
Form 8992 (or successor form) under
section 6038 and this section fails to
furnish the information prescribed on
Form 8992 within the time prescribed
by paragraph (b) of this section, the
penalties imposed by section 6038(b)
and (c) may apply.
(2) Increase in penalty. If a failure
described in paragraph (c)(1) of this
section continues for more than 90 days
after the date on which the Director of
Field Operations, Area Director, or
Director of Compliance Campus
Operations mails notice of such failure
to the person required to file Form 8992,
such person shall pay a penalty of
$10,000, in addition to the penalty
imposed by section 6038(b)(1), for each
30-day period (or a fraction of) during
which such failure continues after such
90-day period has expired. The
additional penalty imposed by section
6038(b)(2) and this paragraph (c)(2)
shall be limited to a maximum of
$50,000 for each failure.
(3) Reasonable cause—(i) For
purposes of section 6038(b) and (c) and
this section, the time prescribed for
furnishing information under paragraph
(b) of this section, and the beginning of
the 90-day period after mailing of notice
by the director under paragraph (c)(2) of
this section, shall be treated as being not
earlier than the last day on which
reasonable cause existed for failure to
furnish the information.
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51111
(ii) To show that reasonable cause
existed for failure to furnish information
as required by section 6038 and this
section, the person required to report
such information must make an
affirmative showing of all facts alleged
as reasonable cause for such failure in
a written statement containing a
declaration that it is made under the
penalties of perjury. The statement must
be filed with the director where the
return is required to be filed. The
director shall determine whether the
failure to furnish information was due
to reasonable cause, and if so, the period
of time for which such reasonable cause
existed. In the case of a return that has
been filed as required by this section
except for an omission of, or error with
respect to, some of the information
required, if the person who filed the
return establishes to the satisfaction of
the director that the person has
substantially complied with this
section, then the omission or error shall
not constitute a failure under this
section.
(d) Exception from filing requirement.
Any United States person that does not
own, within the meaning of section
958(a), stock of a controlled foreign
corporation in which the United States
person is a United States shareholder for
a taxable year is not required to file
Form 8992. For this purpose, a U.S.
shareholder partner (as defined in
§ 1.951A–5(e)(3)) with respect to a
partnership CFC (as defined in
§ 1.951A–5(e)(2)) is treated as owning,
within the meaning of section 958(a),
stock of the partnership CFC.
(e) Applicability date. This section
applies to taxable years of controlled
foreign corporations beginning on or
after October 3, 2018.
Kirsten Wielobob,
Deputy Commissioner for Services and
Enforcement.
[FR Doc. 2018–20304 Filed 10–3–18; 4:15 pm]
BILLING CODE 4830–01–P
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Agencies
[Federal Register Volume 83, Number 196 (Wednesday, October 10, 2018)]
[Proposed Rules]
[Pages 51072-51111]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-20304]
[[Page 51071]]
Vol. 83
Wednesday,
No. 196
October 10, 2018
Part II
Department of the Treasury
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Internal Revenue Service
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26 CFR Part 1
Guidance Related to Section 951A (Global Intangible Low-Taxed Income);
Proposed Rule
Federal Register / Vol. 83 , No. 196 / Wednesday, October 10, 2018 /
Proposed Rules
[[Page 51072]]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-104390-18]
RIN 1545-BO54
Guidance Related to Section 951A (Global Intangible Low-Taxed
Income)
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking.
-----------------------------------------------------------------------
SUMMARY: This document contains proposed regulations implementing
section 951A of the Internal Revenue Code. Section 951A was added to
the Internal Revenue Code by the Tax Cuts and Jobs Act, which was
enacted on December 22, 2017. This document also contains proposed
regulations under sections 951, 1502, and 6038. These proposed
regulations would affect United States shareholders of controlled
foreign corporations.
DATES: Written or electronic comments and requests for a public hearing
must be received by November 26, 2018.
ADDRESSES: Send submissions to: Internal Revenue Service, CC:PA:LPD:PR
(REG-104390-18), 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 (indicate
REG-104390-18), Courier's Desk, Internal Revenue Service, 1111
Constitution Avenue NW, Washington, DC 20224, or sent electronically,
via the Federal eRulemaking Portal at www.regulations.gov (IRS REG-
104390-18).
FOR FURTHER INFORMATION CONTACT: Concerning proposed regulations
Sec. Sec. 1.951-1, 1.951A-0 through 1.951A-7, 1.6038-2, and 1.6038-5,
Melinda E. Harvey or Michael Kaercher at (202) 317-6934; concerning
proposed regulations Sec. Sec. 1.1502-12, 1.1502-13, 1.1502-32, and
1.1502-51, Austin Diamond-Jones at (202) 317-6847 or Kevin M. Jacobs at
(202) 317-5332; concerning submissions of comments or requests for a
public hearing, Regina L. Johnson at (202) 317-6901 (not toll free
numbers).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed amendments to 26 CFR part 1 under
sections 951, 951A, 1502, and 6038 (the ``proposed regulations'').
Added to the Internal Revenue Code (``Code'') by section 14201(a) of
the Tax Cuts and Jobs Act, Public Law 115-97 (2017) (``the Act''),
section 951A requires a United States shareholder (``U.S.
shareholder'') of any controlled foreign corporation (``CFC'') for any
taxable year to include in gross income the shareholder's global
intangible low-taxed income (``GILTI'') for such taxable year. Section
14201(d) of the Act provides that section 951A 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. The proposed regulations under
section 951A provide guidance for U.S. shareholders to determine the
amount of GILTI to include in gross income (``GILTI inclusion
amount'').
Section 14201(b) of the Act added two new foreign tax credit
provisions relating to GILTI--section 960(d) provides a foreign tax
credit for taxes properly attributable to tested income taken into
account by a domestic corporation under section 951A, and section
904(d)(1)(A) provides that any amount included in gross income under
section 951A (other than passive category income) is treated as a
separate category of income for purposes of section 904. In addition,
section 14202(a) of the Act added section 250 to the Code providing
domestic corporations a deduction equal to a percentage of their GILTI
inclusion amount and foreign-derived intangible income, subject to a
taxable income limitation. The proposed regulations do not include any
rules relating to foreign tax credits or the deduction under section
250. Rules relating to foreign tax credits and the deduction under
section 250 will be included in separate notices of proposed
rulemaking. It is anticipated that the proposed regulations relating to
foreign tax credits will provide rules for assigning the section 78
gross-up attributable to foreign taxes deemed paid under section 960(d)
to the separate category described in section 904(d)(1)(A).
Before the Act, section 951(b) defined a U.S. shareholder of a
foreign corporation as a United States person (``U.S. person'') that
holds at least 10 percent of the total combined voting power of all
classes of stock entitled to vote in a foreign corporation. Section
14214(a) of the Act amended this definition to include a U.S. person
that holds at least 10 percent of the total value of shares of all
classes of stock of the foreign corporation. Section 14215(a) of the
Act amended section 951(a)(1) to eliminate the requirement that a
foreign corporation must be a CFC for an uninterrupted period of 30
days or more in order to give rise to an inclusion under section
951(a)(1) (the ``30-day requirement''). These amendments apply to
taxable years of foreign corporations beginning after December 31,
2017, and to taxable years of U.S. shareholders with or within which
such taxable years of foreign corporations end. See sections 14214(b)
and 14215(b) of the Act. The proposed regulations under section 951
incorporate these amendments into the regulations and provide other
guidance necessary for U.S. shareholders to coordinate subpart F and
GILTI.
Explanation of Provisions
I. Section 951A
A. Overview
The Act established a participation exemption 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 that, without
any base protection measures, the 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 CFCs operating in low- or zero-tax
jurisdictions. See Senate Committee on the Budget, 115th Cong.,
Reconciliation Recommendations Pursuant to H. Con. Res. 71, at 365
(Comm. Print 2017) (``Senate Explanation''). 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, GILTI of a corporate U.S. shareholder is 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. Also, due to the administrative difficulty
in identifying income attributable to intangible assets, in contrast to
income from tangible assets, intangible income (and thus GILTI) is
determined for purposes of section 951A based on a formulaic approach,
under which a 10-percent return is attributed to certain tangible
assets (``qualified business asset investment'' or ``QBAI'') and then
each dollar of certain income above such ``normal return'' is
effectively treated as intangible income. Id. at 366.
[[Page 51073]]
Section 951A(a) provides that a U.S. shareholder of any CFC for a
taxable year must include in gross income its GILTI for that year. A
GILTI inclusion is treated in a manner similar to a section
951(a)(1)(A) inclusion of a CFC's subpart F income for many purposes of
the Code. See section 951A(f)(1). However, a GILTI inclusion is
determined in a manner that is fundamentally different from that of an
inclusion under section 951(a)(1)(A). Subpart F income is determined at
the level of a CFC, and then a U.S. shareholder that owns stock
directly or indirectly in the CFC generally includes in gross income
its pro rata share of the CFC's subpart F income. The amount of the
shareholder's section 951(a)(1)(A) inclusion with respect to one CFC is
not taken into account in determining the shareholder's section
951(a)(1)(A) inclusion with respect to another CFC. A U.S.
shareholder's pro rata share of a CFC's subpart F income is generally
the final step in determining its section 951(a)(1)(A) inclusion.
Similar to an inclusion under section 951(a)(1)(A), the
determination of a U.S. shareholder's GILTI inclusion amount begins
with the calculation of certain items of each CFC owned by the
shareholder, such as tested income, tested loss, or QBAI. A U.S.
shareholder then determines its pro rata share of each of these CFC-
level items in a manner similar to a shareholder's pro rata share of
subpart F income under section 951(a)(2). See section 951A(e)(1).
However, in contrast to an inclusion under section 951(a)(1)(A), the
U.S. shareholder's pro rata shares of these items are not amounts
included in gross income, but rather amounts taken into account by the
shareholder in determining the GILTI included in the shareholder's
gross income. The U.S. shareholder aggregates (and then nets or
multiplies) its pro rata share of each of these items into a single
shareholder-level amount--for example, aggregate tested income reduced
by aggregate tested loss becomes net CFC tested income and aggregate
QBAI multiplied by 10 percent becomes deemed tangible income return. A
shareholder's GILTI inclusion amount for a taxable year is then
calculated by subtracting one aggregate shareholder-level amount from
another--the shareholder's net deemed tangible income return (``net
DTIR'') is the excess of deemed tangible income return over certain
interest expense, and, finally, its GILTI inclusion amount is the
excess of its net CFC tested income over its net DTIR.
As explained above, a U.S. shareholder does not compute a separate
GILTI inclusion amount with respect to each CFC for a taxable year, but
rather computes a single GILTI inclusion amount by reference to all its
CFCs. Cf. section 951A(f)(2) (allocating the U.S. shareholder's GILTI
inclusion amount to each tested income CFC for purposes of various
sections of the Code). Because a U.S. shareholder's GILTI inclusion
amount is determined based on the relevant items of all the CFCs of
which it is a U.S. shareholder, the effect of the provision is
generally to ensure that a U.S. shareholder is taxed on its GILTI
wherever (and through whichever CFC) derived. See, for example, Senate
Explanation at 366 (``The Committee believes that calculating GILTI on
an aggregate basis, instead of on a CFC-by-CFC basis, reflects the
interconnected nature of a U.S. corporation's global operations and is
a more accurate way of determining a U.S. corporation's global
intangible income.'').
The proposed regulations under section 951A follow an outline
similar to the description in this overview. Proposed Sec. Sec.
1.951A-2 through 1.951A-4 provide detailed guidance on items determined
at the CFC level--that is, tested income and tested loss, QBAI, and the
items necessary to determine the amount of certain interest expense
that reduces net DTIR. Proposed Sec. 1.951A-1(d) provides rules for
determining the U.S. shareholder's pro rata share of these CFC-level
items. Finally, proposed Sec. 1.951A-1(c) provides rules describing
the aggregation of the U.S. shareholder's pro rata share amounts to
determine the shareholder's GILTI inclusion amount.
B. General Rules and Definitions
1. Inclusion of GILTI in Gross Income
Proposed Sec. 1.951A-1 provides general rules to determine a U.S.
shareholder's GILTI inclusion amount and associated definitions. Some
of the definitions distinguish between a CFC's taxable year and a U.S.
shareholder's taxable year. For example, a ``U.S. shareholder inclusion
year'' refers to the relevant taxable year of the U.S. shareholder and
is defined as a taxable year of the U.S. shareholder that includes a
CFC inclusion date (as that term is defined in the proposed
regulations) of the CFC. See proposed Sec. 1.951A-1(e)(4). A ``CFC
inclusion year'' refers to the relevant taxable year of the CFC
beginning after December 31, 2017 (the effective date of section 951A
for a foreign corporation that is a CFC). See proposed Sec. 1.951A-
1(e)(2).
2. Determination of Net DTIR
Proposed Sec. 1.951A-1(c)(3) defines net DTIR, which is computed
at the U.S. shareholder level based on QBAI (as defined in proposed
Sec. 1.951A-3(b)) held by the shareholder's CFCs and offsets the
shareholder's net CFC tested income for purposes of determining the
shareholder's GILTI inclusion amount. A CFC's QBAI is equal to its
aggregate average adjusted bases in specified tangible property, which
is defined as tangible property used in the production of tested
income. See section 951A(d)(2)(A) and proposed Sec. 1.951A-3(c)(1).
Consistent with the statute and the conference report accompanying the
Act (``Conference Report''), the proposed regulations clarify that a
tested loss CFC does not have specified tangible property. See H.R.
Rep. No. 115-466, at 642, fn. 1536 (2017) (Conf. Rep.) and proposed
Sec. 1.951A-3(b), (c)(1), and (g)(1). Accordingly, for purposes of
calculating its GILTI inclusion amount, a U.S. shareholder does not
take into account the tangible property of a tested loss CFC in
calculating its aggregate pro rata share of QBAI, its deemed tangible
income return, or its net DTIR.
3. Determination of Pro Rata Share
Section 951A(e)(1) provides that, for purposes of determining a
U.S. shareholder's GILTI inclusion amount, the shareholder's pro rata
share of a CFC's tested income, tested loss, and QBAI ``shall be
determined under the rules of section 951(a)(2) in the same manner as
such section applies to subpart F income.'' Accordingly, the proposed
regulations incorporate the pro rata share rules of section 951(a)(2)
and Sec. 1.951-1(b) and (e), with appropriate modifications to account
for the differences between subpart F income, on the one hand, and
tested income, tested loss, and QBAI, on the other. Similar to the
determination of a U.S. shareholder's pro rata share of subpart F
income, proposed Sec. 1.951A-1(d)(1) provides that a U.S.
shareholder's pro rata share of any CFC item necessary for calculating
its GILTI inclusion amount is determined by reference to the stock such
shareholder owns (within the meaning of section 958(a)) in the CFC
(``section 958(a) stock'') as of the close of the CFC's taxable year,
including section 958(a) stock treated as owned by the U.S. shareholder
through a domestic partnership under proposed Sec. 1.951A-5(c). See
section I.F of this Explanation of Provisions for an explanation of
proposed rules for domestic partnerships and their partners.
[[Page 51074]]
In several places, the provisions of proposed Sec. 1.951A-1(d)
reference section 951(a)(2) and proposed Sec. 1.951-1(e), which amends
existing Sec. 1.951-1(e). See section II.A of this Explanation of
Provisions for an explanation of the proposed modifications to Sec.
1.951-1(e). Comments requested guidance on how to determine a preferred
shareholder's pro rata share of CFC items for purposes of GILTI. Rules
relating to the allocation of tested income to preferred stock are
included in proposed Sec. 1.951A-1(d)(2) by cross-reference to
proposed Sec. 1.951-1(e). In addition, the proposed regulations
provide rules relating to a preferred shareholder's pro rata share of
tested loss and QBAI.
A U.S. shareholder's pro rata share of tested income generally is
determined in the same manner as its pro rata share of subpart F income
under section 951(a)(2) and Sec. 1.951-1(b) and (e) (that is, based on
the relative amount that would be received by the shareholder in a
year-end hypothetical distribution of all the CFC's current year
earnings). See proposed Sec. 1.951A-1(d)(2)(i). For purposes of
determining a U.S. shareholder's pro rata share of a CFC's QBAI, the
amount of QBAI distributed in the hypothetical distribution of section
951(a)(2)(A) and Sec. 1.951-1(e) is generally proportionate to the
amount of the CFC's tested income distributed in the hypothetical
distribution. See proposed Sec. 1.951A-1(d)(3)(i). However, a special
rule in the proposed regulations provides that if a CFC's QBAI exceeds
10 times its tested income, so that the amount of QBAI allocated to
preferred stock would exceed 10 times the tested income allocated to
the preferred stock under the general proportionate allocation rule,
the excess amount of QBAI is allocated solely to the CFC's common
stock. See proposed Sec. 1.951A-1(d)(3)(ii). The proposed cap on QBAI
allocated to a preferred shareholder (10 times tested income) is
derived from the statutory cap on the amount of QBAI that may be used
to compute GILTI (10 percent of aggregate QBAI). These rules in the
proposed regulations ensure that the notional ``normal return''
associated with the CFC's QBAI generally flows to the shareholders in a
manner consistent with their economic rights in the earnings of the
CFC. For illustration, see proposed Sec. 1.951A-1(d)(3)(iii), Examples
1 and 2.
For purposes of determining a U.S. shareholder's pro rata share of
a CFC's tested loss, the amount distributed in the hypothetical
distribution is the amount of the tested loss, rather than the CFC's
current earnings and profits, and the tested loss is distributed solely
with respect to the CFC's common stock, except in certain cases
involving dividend arrearages with respect to preferred stock and
common stock with no liquidation value. See proposed Sec. 1.951A-
1(d)(4)(i) through (iii). In the latter case, the proposed regulations
provide that any amount of tested loss that would otherwise be
distributed in the hypothetical distribution to a class of common stock
that has no liquidation value is instead distributed to the most junior
class of equity with a positive liquidation value to the extent of the
liquidation value. See proposed Sec. 1.951A-1(d)(4)(iii). In
subsequent years, tested income is allocated to any class of stock to
the extent that tested loss was allocated to such class in prior years
under this special rule. See proposed Sec. 1.951A-1(d)(2)(ii). In
addition, the proposed regulations provide that section 951(a)(2)(B) is
applied to reduce tested losses, but modified to treat the amount of a
dividend received by another person as equal to the amount of the
tested loss, without regard to whether an actual dividend is made by
the tested loss CFC. See proposed Sec. 1.951A-1(d)(4)(i)(D). The
effect of this rule is to reduce a shareholder's pro rata share of
tested loss in proportion to the number of days the shareholder did not
own the stock of the tested loss CFC within the meaning of section
958(a). Each of these modifications is intended to ensure that the
tested loss of a CFC is allocated to each U.S. shareholder in an amount
commensurate with the economic loss borne by the shareholder by reason
of the tested loss.
Proposed Sec. 1.951A-1(d)(5) and (6) provide rules for determining
a shareholder's pro rata share of ``tested interest expense'' and
``tested interest income.'' Tested interest expense and tested interest
income are defined in proposed Sec. 1.951A-4, which is discussed in
section I.E of this Explanation of Provisions. A U.S. shareholder's pro
rata share of a CFC's tested interest expense for a taxable year equals
the amount by which the CFC's tested interest expense reduces the
shareholder's pro rata share of tested income, increases the
shareholder's pro rata share of tested loss, or both. Conversely, a
U.S. shareholder's pro rata share of tested interest income for a
taxable year equals the amount by which the CFC's tested interest
income increases the shareholder's pro rata share of tested income,
reduces the shareholder's pro rata share of tested loss, or both. For
example, tested interest income could both increase a U.S.
shareholder's pro rata share of tested income and decrease its pro rata
share of tested loss if a CFC with tested income for a taxable year
would have, without regard to the tested interest income, a tested loss
for the taxable year.
The Department of the Treasury (``Treasury Department'') and the
IRS request comments on the proposed approaches for determining a U.S.
shareholder's pro rata share of a CFC's QBAI and tested loss, including
how (or whether) to allocate tested loss of a CFC when no class of CFC
stock has positive liquidation value.
4. Foreign Currency Translation
Because GILTI is computed at the U.S. shareholder level, the tested
income, tested loss, tested interest expense, tested interest income,
and QBAI of a CFC that uses a functional currency other than the U.S.
dollar must be translated into U.S. dollars. The appropriate exchange
rate under section 989(b)(3) for income inclusions under section
951(a)(1)(A) is the average exchange rate for the taxable year of the
foreign corporation. GILTI inclusion amounts are similar to section
951(a)(1)(A) inclusions in that both inclusions are determined based on
certain income (and, in the case of GILTI, certain losses) of the CFC
for the taxable year of the CFC that ends with or within the taxable
year of the U.S. shareholder. Therefore, the proposed regulations
prescribe the same translation rule that is used for subpart F income
for translating a pro rata share of tested income, tested loss, tested
interest expense, tested interest income, and QBAI. See proposed Sec.
1.951A-1(d)(1). Similarly, a U.S. shareholder's GILTI inclusion amount
that is allocated to a tested income CFC under section 951A(f)(2) is
translated from U.S. dollars into the CFC's functional currency using
the average exchange rate for the taxable year of the tested income
CFC. See proposed Sec. 1.951A-6(b)(2)(iii).
C. Tested Income and Tested Loss
1. Determination of Gross Income and Allowable Deductions
Under section 951A(c)(2), tested income and tested loss are
determined by beginning with a CFC's gross income, excluding certain
items (gross income after exclusions, ``gross tested income''), and
then subtracting properly allocable deductions determined using rules
similar to the rules of section 954(b)(5). While section 951A does not
specifically address which expenses of a CFC are allowable as a
deduction, existing rules under Sec. 1.952-2 apply to determine the
gross income and
[[Page 51075]]
deductions of a CFC taken into account in determining its subpart F
income. The Treasury Department and the IRS have determined that due to
the similarities between gross tested income and subpart F income (for
example, gross tested income and subpart F income are both determined
at the CFC level and taxed to a U.S. shareholder on a current basis),
and the overlap between CFCs impacted by GILTI and subpart F (since a
CFC can have both tested income and subpart F income), the
determinations of gross income and allowable deductions for GILTI
should be made in a manner similar to the determination of subpart F
income. Accordingly, the proposed regulations require that the gross
income and allowable deduction determinations are made under the rules
of Sec. 1.952-2. See proposed Sec. 1.951A-2(c)(2). Under Sec. 1.952-
2(a)(1) and proposed Sec. 1.951A-2(c)(2), subject to the special rules
in Sec. 1.952-2(c), tested income or tested loss of a CFC is
determined by treating the CFC as a domestic corporation taxable under
section 11 and by applying the principles of section 61 and the
regulations thereunder. Therefore, only items of deduction that would
be allowable in determining the taxable income of a domestic
corporation may be taken into account for purposes of determining a
CFC's tested income or tested loss. If an item of a CFC would be
disallowed as a deduction in determining the CFC's taxable income if
the CFC were a domestic corporation, the item cannot be taken into
account for purposes of determining the tested income or tested loss of
the CFC even if the item reduces the CFC's earnings and profits.
The Treasury Department and the IRS request comments on the
application of the rules under Sec. 1.952-2 for purposes of
determining subpart F income, tested income, and tested loss. In
particular, comments are requested as to whether these rules should
allow a CFC a deduction, or require a CFC to take into account income,
that is expressly limited to domestic corporations under the Code. For
example, questions have arisen as to whether a CFC could be entitled to
a dividends received deduction under section 245A, even though section
245A by its terms applies only to dividends received by a domestic
corporation. See Conf. Rep. at 599, fn. 1486. The Treasury Department
and the IRS also welcome comments on other approaches to determining
tested income or tested loss, including whether additional
modifications should be made to Sec. 1.952-2 for purposes of
calculating GILTI.
Comments have also requested guidance on the interactions of
section 163(j) and section 267A with section 951A. Issues related to
sections 163(j), 245A, and 267A will be addressed in future guidance.
2. Income Excluded From Foreign Base Company Income and Insurance
Income by Reason of Section 954(b)(4)
As noted in section I.C.1 of this Explanation of Provisions,
section 951A(c)(2) requires that the gross income of the CFC for the
taxable year be determined without regard to certain items. One of
these items is gross income excluded from foreign base company income
(as defined in section 954) or insurance income (as defined in section
953) of the CFC by reason of electing the exception under section
954(b)(4) (``high-tax exception''). In response to comments, the
proposed regulations clarify that this exclusion applies only to income
that is excluded from foreign base company income and insurance income
solely by reason of an election made to exclude the income under the
high-tax exception of section 954(b)(4). Accordingly, the exclusion
does not apply to income that would not otherwise be subpart F income
or to categories of income that do not constitute subpart F income due
to exceptions other than the high-tax exception (for example, as a
result of an exception to foreign personal holding company income under
section 954(c)(6) or section 954(h)).
3. Gross Income Taken Into Account in Determining Subpart F Income
Another item excluded from gross tested income is gross income
taken into account in determining a corporation's subpart F income.
Comments have requested guidance on the interaction between the
earnings and profits limitation to subpart F income under section
952(c), including the recapture rule in section 952(c)(2), and the
determination of gross tested income for purposes of section 951A. The
Treasury Department and the IRS have determined that any income
described in section 952(a) is ``taken into account in determining
subpart F income'' regardless of whether the section 952(c) limitation
applies, and therefore should not be included in gross tested income.
Conversely, the recapture of subpart F income under section 952(c)(2),
even if by reason of earnings and profits attributable to gross tested
income, does not result in excluding any amount from gross tested
income. Therefore, the proposed regulations provide that tested income
and tested loss are determined without regard to the application of
section 952(c). See proposed Sec. 1.951A-2(c)(4).
4. Determination of Allowable Deductions Properly Allocable to Gross
Tested Income
Section 951A(c)(2)(A)(ii) provides that tested income and tested
loss are determined by subtracting from a CFC's gross tested income
``the deductions (including taxes) properly allocable to such gross
income under rules similar to the rules of section 954(b)(5) (or to
which such deductions would be allocable if there were such gross
income).'' Regulations under section 954(b)(5) require taxpayers to
determine net subpart F income by properly allocating and apportioning
deductions to the various categories of subpart F income. For this
purpose, Sec. 1.954-1(c) provides that taxpayers must first determine
the gross amount of each item of income in a category of income (as
described in Sec. 1.954-1(c)(1)(iii)) and then allocate and apportion
expenses to these categories under the principles of sections 861, 864,
and 904(d). Accordingly, in order to apply the principles of section
954(b)(5) to section 951A (as required under section
951A(c)(2)(A)(ii)), the proposed regulations provide that allowable
deductions determined under the principles of Sec. 1.952-2 are
allocated and apportioned to gross tested income under the principles
of section 954(b)(5) and Sec. 1.954-1(c), treating gross tested income
that falls within a single separate category (as defined in Sec.
1.904-5(a)(1)) as an additional category of income for this purpose.
See proposed Sec. 1.951A-2(c)(3).
Section I.D.5 of this Explanation of Provisions describes a rule
that disregards basis in specified tangible property created in certain
taxable transfers occurring before the effective date of section 951A
for purposes of calculating QBAI. See Sec. 1.951A-3(h)(2). These rules
are cross-referenced in proposed Sec. 1.951A-2(c)(5) to disallow any
loss or deduction related to such stepped up-basis in any depreciable
or amortizable property (including, for example, intangible property)
for purposes of calculating tested income or tested loss.
D. QBAI
1. QBAI and Specified Tangible Property
Proposed Sec. 1.951A-3(b) provides that a tested income CFC's QBAI
for any taxable year is the average of the CFC's aggregate adjusted
bases as of the close of each quarter in specified tangible property
that is used in a trade or
[[Page 51076]]
business of the corporation and of a type with respect to which a
deduction is allowable under section 167. In general, specified
tangible property is tangible property used in the production of tested
income. See proposed Sec. 1.951A-3(c)(1). Tangible property is defined
as property for which the depreciation deduction provided by section
167(a) is eligible to be determined under section 168 (even if the CFC
has elected not to apply section 168). See proposed Sec. 1.951A-
3(c)(2). The proposed regulations define tangible property by reference
to whether the property can be depreciated under section 168 because,
unlike section 167, section 168 applies only to tangible property, and
there is a substantial amount of guidance delineating property subject
to section 168.
Property that is used in the production of both gross tested income
and gross income that is not gross tested income (``dual use
property'') is proportionately treated as specified tangible property.
See proposed Sec. 1.951A-3(d)(1). Generally, the proportion is
determined based on the relative amount of gross tested income to
income other than gross tested income that the property generates for
the taxable year. See proposed Sec. 1.951A-3(d)(2)(i). A special rule
is provided for determining the proportion of the property treated as
specified tangible property if the property generates no directly
identifiable income (for example, because the property is used in
general and administrative functions that contribute to the generation
of all the income of the CFC). See proposed Sec. 1.951A-3(d)(2)(ii).
Under Sec. 1.167(a)-2, the depreciation allowance for tangible
property applies only to that part of the property which is subject to
wear and tear, to decay or decline from natural causes, to exhaustion,
and to obsolescence. Accordingly, for purposes of section 951A,
property that may be in part depreciable qualifies as specified
tangible property to the extent it is depreciable. For example,
precious metal used in a manufacturing process may be considered
specified tangible property in part because it is depreciable in part.
See Rev. Rul. 2015-11, 2015-21 I.R.B. 975.
2. Determination of Adjusted Basis of Specified Tangible Property
Proposed Sec. 1.951A-3(e) provides rules to determine the adjusted
basis of specified tangible property for purposes of determining QBAI.
The general rule in proposed Sec. 1.951A-3(e)(1), like section
951A(d)(3), provides that the adjusted basis in any property is
determined by using the alternative depreciation system under section
168(g) (``ADS'') and allocating the depreciation deduction with respect
to the property ratably to each day during the period in the taxable
year to which the depreciation relates. ADS applies for purposes of
determining QBAI irrespective of whether the basis of the property is
determined using another depreciation method for other purposes of the
Code.
The Treasury Department and the IRS recognize that taxpayers may
hold specified tangible property that was acquired before December 22,
2017, that was not depreciated using ADS. Section 951A(d) does not
distinguish between property acquired before December 22, 2017, and
property acquired on or after December 22, 2017. The Treasury
Department and the IRS have concluded that, regardless of the date
acquired, the adjusted basis in specified tangible property should be
determined under ADS in order for the U.S. shareholder's pro rata share
of QBAI to be properly determined and not distorted. Therefore, the
proposed regulations provide that when determining QBAI, the adjusted
basis in property placed in service before December 22, 2017, is
determined using ADS as if this system had applied from the date that
the property was placed in service. See proposed Sec. 1.951A-3(e)(3).
3. Short Taxable Year
Net DTIR is intended to reduce a U.S. shareholder's GILTI inclusion
amount by an annual return on specified tangible property. To ensure
that the net DTIR of a CFC with a taxable year of less than 12 months
(a ``short taxable year'') reflects an annual return, the proposed
regulations provide a methodology to reduce the QBAI of a CFC with a
short taxable year to an amount that, if annualized, would produce an
amount equal to the QBAI for a 12-month taxable year. See proposed
Sec. 1.951A-3(f).
4. Specified Tangible Property Held Through a Partnership
Section 951A(d)(3) \1\ (the ``partnership QBAI paragraph'') states
that if a CFC holds an interest in a partnership at the close of the
CFC's taxable year, the CFC takes into account under section 951A(d)(1)
its ``distributive share of the aggregate of the partnership's adjusted
bases (determined as of such date in the hands of the partnership)'' in
specified tangible property in computing its QBAI. The partnership QBAI
paragraph further provides that a CFC's ``distributive share of the
adjusted basis of any property shall be the controlled foreign
corporation's distributive share of income with respect to such
property.''
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\1\ As enacted, section 951A(d) contains two paragraphs
designated as paragraph (3).
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The statutory language ``distributive share of the aggregate of the
partnership's adjusted basis'' is ambiguous because the term
``distributive share'' is used in subchapter K of the Code with respect
to income, gain, loss, and credits of a partnership, but not the bases
of assets. A partner of a partnership has a basis in its partnership
interest (``outside basis''), while the partnership has a separate
basis in the assets of the partnership (``inside basis''). The proposed
regulations therefore use the term ``share'' (rather than
``distributive share'') when referring to the amount of the inside
basis of a partnership asset that a partner that is a CFC may include
in its QBAI.
The partnership QBAI paragraph provides that a CFC ``shall take
into account'' under section 951A(d)(1) the CFC's distributive share of
the basis in partnership specified tangible property. Because section
951A(d)(1) requires an averaging of basis over the close of each
quarter of the taxable year of the CFC, and the term ``distributive
share'' as it pertains to basis is ambiguous, it is unclear based on
the statute how a CFC determines its distributive share of the basis of
partnership specified tangible property for purposes of determining its
QBAI. One interpretation of the partnership QBAI paragraph is that a
CFC partner's QBAI is increased by an amount equal to the CFC partner's
share of the basis that the partnership has in its specified tangible
property as of the close of the CFC partner's taxable year. However,
that interpretation would be contrary to the requirement in section
951A(d)(1) that the CFC's bases in specified tangible property be
averaged over four quarters. Furthermore, giving the term
``distributive share'' effect, the amount determined at the end of the
CFC partner's taxable year should be reduced for any period during the
taxable year when the partnership did not own the property, whereas a
CFC partner of a partnership that disposed of property before the close
of the CFC's taxable year would receive no QBAI benefit if there were a
single measurement date. In addition, a requirement that a
partnership's basis in specified tangible property be measured on the
last day of a CFC partner's taxable year could be burdensome for
partnerships that have one or more CFC partners with taxable years that
do not coincide with the partnership's taxable
[[Page 51077]]
year and, in those cases, would have the effect of decoupling the CFC
partner's share of the basis of partnership property used to compute
the CFC partner's QBAI from the CFC partner's distributive share of the
partnership's income from the property that is taken into account in
computing the CFC partner's tested income. Moreover, because
depreciation is treated as reducing the adjusted basis of property on
each day during the taxable year, calculating a partnership's basis on
the final day of the CFC partner's taxable year will generally result
in an artificially low basis relative to calculating average adjusted
basis over the course of the partnership's taxable year. For the
foregoing reasons, the proposed regulations determine a CFC partner's
share of the partnership's adjusted basis in specified tangible
property by reference to the partnership's average adjusted basis in
the property as of the close of each quarter of the partnership's
taxable year that ends with or within the CFC's taxable year. See
proposed Sec. 1.951A-3(g)(3).
A partner that is a CFC takes into account its share of the
adjusted basis of specified tangible property held by a partnership in
computing QBAI if, among other things, the property ``is used in the
production of tested income (determined with respect to such controlled
foreign corporation's distributive share of income with respect to such
property).'' Section 951A(d)(3)(C). Consistent with the general rule
for QBAI, only a tested income CFC can increase its QBAI by reason of
specified tangible property owned by a partnership. See proposed Sec.
1.951A-3(g)(1). Further, consistent with the parenthetical in the
partnership QBAI paragraph, the proposed regulations provide that a CFC
partner determines its share of the partnership's average adjusted
basis in specified tangible property based on the amount of its
distributive share of the gross income produced by the property that is
included in the CFC partner's gross tested income relative to the total
amount of gross income produced by the property. See proposed Sec.
1.951A-3(g)(2). The proposed regulations incorporate the dual use
property rule of section 951A(d)(2)(B) in the context of specified
tangible property owned indirectly through a partnership and include
similar rules for addressing specified tangible property that does not
produce any directly identifiable income. The calculation is performed
separately for each item of specified tangible property held by the
partnership, taking into account the CFC partner's distributive share
of income with respect to such property.
The Treasury Department and the IRS request comments on the
proposed approach to specified tangible property held through a
partnership, including the rules addressing specified tangible property
that does not produce directly identifiable income.
5. Anti-Abuse Provisions
Section 951A(d)(4) provides that ``[t]he Secretary shall issue such
regulations or other guidance as the Secretary determines appropriate
to prevent the avoidance of the purposes of this subsection, including
regulations or other guidance which provide for the treatment of
property if--(A) such property is transferred, or held, temporarily, or
(B) the avoidance of the purposes of this paragraph is a factor in the
transfer or holding of such property.'' The Conference Report describes
the scope of section 951A(d)(4), stating that ``[t]he conferees intend
that non-economic transactions intended to affect tax attributes of
CFCs and their U.S. shareholders (including amounts of tested income
and tested loss, tested foreign income taxes, net deemed tangible
income return, and QBAI) to minimize tax under this provision be
disregarded.'' Conf. Rep. at 645. One specific example illustrated in
the Conference Report is a transaction that occurs after the
measurement date of post-1986 earnings and profits under section 965
but before the first taxable year for which section 951A is effective
in order to increase a CFC's QBAI. Id.
Consistent with section 951A(d)(4) and the Conference Report, as
well as the Secretary's broad authority under section 7805(a) to
``prescribe all needful rules and regulations for the enforcement of''
the Code, the proposed regulations provide that specified tangible
property of a tested income CFC is disregarded for purposes of
determining the tested income CFC's average aggregate basis in
specified tangible property if the tested income CFC acquires the
property with a principal purpose of reducing the GILTI inclusion
amount of a U.S. shareholder and holds the property temporarily but
over at least one quarter end. See proposed Sec. 1.951A-3(h)(1). For
this purpose, property held for less than a twelve month period that
includes at least one quarter end during the taxable year of a tested
income CFC is treated as temporarily held and acquired with a principal
purpose of reducing the GILTI inclusion amount of a U.S. shareholder.
Id.
The Treasury Department and the IRS are aware that taxpayers are
engaging in transactions like the ones described in the Conference
Report involving taxable transfers of property from one CFC to another
CFC before the first taxable year of the transferor CFC to which
section 951A applies in order to provide the transferee CFC with a
stepped-up basis in the transferred property that, for example, may
increase a U.S. shareholder's amount of QBAI with respect to the CFC
for periods when it is subject to section 951A. See Conf. Rep. at 645.
The stepped-up basis may also reduce the transferee CFC's tested income
or increase its tested loss (for example, due to increased depreciation
or amortization deductions) during periods when it is subject to
section 951A. The Treasury Department and the IRS have determined that
it would be inappropriate for a taxpayer to reduce its GILTI inclusion
amount for any taxable year by reason of a stepped-up basis in CFC
assets attributable to transactions between related CFCs during the
period after December 31, 2017, but before the effective date of
section 951A. Accordingly, the proposed regulations disallow the
benefit of a stepped-up basis in specified tangible property
transferred between related CFCs during the period before the
transferor CFC's first inclusion year for purposes of calculating the
transferee CFC's QBAI. See proposed Sec. 1.951A-3(h)(2). As discussed
in section I.C.4 of this Explanation of Provisions, these rules are
also cross-referenced in proposed Sec. 1.951A-2(c)(5) to disregard a
stepped-up basis in any property that is depreciable or amortizable for
purposes of calculating tested income and tested loss.
The U.S. tax results claimed with respect to transactions that fall
outside the scope of the anti-abuse rules in the proposed regulations
may, nonetheless, be challenged under other statutory provisions or
judicial doctrines.
E. Specified Interest Expense
To calculate a U.S. shareholder's net DTIR, section 951A(b)(2)(B)
provides that 10 percent of the aggregate of the shareholder's pro rata
share of the QBAI of each CFC (defined as ``deemed tangible income
return'' in proposed Sec. 1.951A-1(c)(3)(ii)) is reduced by ``the
amount of interest expense taken into account under subsection
(c)(2)(A)(ii) in determining such shareholder's net CFC tested income
for the taxable year to the extent the interest income attributable to
such expense is not taken into account in determining such
shareholder's net CFC tested income.'' Deductions taken
[[Page 51078]]
into account under section 951A(c)(2)(A)(ii) are deductions (including
taxes) that are properly allocable to gross tested income for purposes
of calculating tested income and tested loss. Thus, only a U.S.
shareholder's pro rata share of interest expense that is currently
deductible and properly allocable to gross tested income is taken into
account for purposes of determining the interest expense described in
section 951A(b)(2)(B). For purposes of the proposed regulations,
interest expense described in section 951A(b)(2)(B) is referred to as
``specified interest expense.'' See proposed Sec. 1.951A-1(c)(3)(iii).
Specified interest expense is a U.S. shareholder-level
determination which is net of ``attributable'' interest income taken
into account by the U.S. shareholder. Specifically, specified interest
expense of a U.S. shareholder is its pro rata share of interest expense
properly allocable to gross tested income reduced by its pro rata share
of interest income included in gross tested income to the extent
attributable to such interest expense. The effect of this formulation
is to count against net DTIR only a U.S. shareholder's pro rata share
of interest expense allocable to gross tested income to the extent that
the related interest income is not also reflected in the U.S.
shareholder's pro rata share of the tested income of another CFC, such
as in the case of third-party interest expense or interest expense paid
to related U.S. persons.
The amount of interest income ``attributable'' to interest expense
is not defined in section 951A(b)(2)(B). Accordingly, it is necessary
to define this concept in the proposed regulations. A definition that
incorporates a strict tracing approach would require a U.S. shareholder
to determine each item of interest expense with respect to each debt
instrument of each of its CFCs to determine whether, and to what
extent, the interest income with respect to that debt instrument is
taken into account by the U.S. shareholder in determining the
shareholder's net CFC tested income. However, the Treasury Department
and the IRS have determined that a tracing approach for specified
interest expense would be administratively burdensome and difficult to
reconcile with the framework of section 951A, which generally requires
a determination of CFC-level items followed by a second determination
of U.S. shareholder-level aggregate pro rata shares of such items. A
tracing approach for specified interest expense would necessitate a
hybrid determination, in which the relevant item--``attributable''
interest income--could not be determined at the level of the CFC, but
rather would require a matching at the U.S. shareholder level of the
shareholder's pro rata share of each item of interest expense with its
pro rata share of each item of interest income attributable to such
interest expense. A tracing approach would create particular complexity
with respect to interest paid between CFCs that are owned by different
U.S. shareholders in different proportions or with respect to interest
for which the accrual of the expense and inclusion of the income occur
in separate taxable years.
The Treasury Department and the IRS have instead determined that a
netting approach to specified interest expense accomplishes the purpose
of the specified interest expense rule in a more administrable manner
and is consistent with the requirement that ``attributable'' interest
income be netted against interest expense. Therefore, the proposed
regulations provide that a U.S. shareholder's specified interest
expense is the excess of its aggregate pro rata share of the tested
interest expense of each CFC over its aggregate pro rata share of the
tested interest income of each CFC. See proposed Sec. 1.951A-
1(c)(3)(iii). Tested interest expense and tested interest income are
generally defined by reference to all interest expense and interest
income that is taken into account in determining a CFC's tested income
or tested loss. See proposed Sec. 1.951A-4(b)(1) and (2).
Comments have questioned whether interest expense of a captive
finance CFC must be taken into account for purposes of determining a
U.S. shareholder's specified interest expense, or whether the related
interest income from unrelated customers may be available to offset
such interest expense. Under a netting approach to the computation of
specified interest expense, without modifications, whether a CFC's
active banking business increases or reduces the specified interest
expense of a U.S. shareholder relative to other taxpayers depends on
whether the third-party expense related to such business is greater
than or less than interest income related to such business. The
Treasury Department and the IRS have determined that a U.S.
shareholder's specified interest expense, and therefore its net DTIR
and its GILTI inclusion amount, should not depend on whether the U.S.
shareholder has one or more CFCs engaged in the active conduct of a
financing or insurance business, as long as the interest expense of the
CFC is incurred exclusively to fund such business with unrelated
persons and thus not incurred, for instance, to fund the acquisition of
specified tangible property. Therefore, the proposed regulations
exclude from the definition of tested interest expense any interest
expense of a CFC that is an eligible controlled foreign corporation
(within the meaning of section 954(h)(2)) or a qualifying insurance
company (within the meaning of section 953(e)(3)) (``qualified CFC''),
except to the extent of the qualified CFC's assets unrelated to its
financing or insurance business and any interest income received by the
qualified CFC from loans to certain related persons (interest expense
described in this sentence, ``qualified interest expense''). See
proposed Sec. 1.951A-4(b)(1)(iii). Further, the proposed regulations
exclude from the definition of tested interest income any interest
income of a qualified CFC included in the gross tested income of the
qualified CFC for the CFC inclusion year that is excluded from subpart
F income due to the active financing exception of section 954(h) or the
active insurance exception of section 954(i) (``qualified interest
income''). See proposed Sec. 1.951A-4(b)(2)(iii).
For purposes of determining specified interest expense, interest
income and interest expense are defined broadly to encompass any amount
treated as interest under the Code or regulations, and any other amount
incurred or recognized in a transaction or series of integrated or
related transactions in which the use or forbearance of funds is
secured for a period of time if the expense or loss is predominately
incurred in consideration of the time value of money. See proposed
Sec. 1.951A-4(b)(1)(ii) and (2)(ii).
Comments requested clarification of whether the interest expense of
a tested loss CFC is used in the determination of specified interest
expense. Regardless of whether interest expense increases tested loss
or reduces tested income, the expense is ``taken into account. . .in
determining the shareholder's net CFC tested income'' within the
meaning of section 951A(b)(2)(B). In addition, if a tested loss CFC's
interest expense were not taken into account for purposes of
determining specified interest expense, a taxpayer could easily avoid
specified interest expense by incurring offshore debt through a tested
loss CFC. Therefore, the proposed regulations confirm that any interest
expense taken into account for purposes of determining the tested
income or tested loss of a CFC is also taken into account in
determining a U.S. shareholder's specified interest expense.
[[Page 51079]]
F. Domestic Partnerships and Their Partners
Comments requested guidance on the treatment of domestic
partnerships that own stock of CFCs. Section 951A itself does not
contain any specific rules on domestic partnerships and their partners
that directly or indirectly own stock of CFCs. Accordingly, proposed
Sec. 1.951A-5 provides this guidance to domestic partnerships and
their partners on how to compute their GILTI inclusion amounts. This
guidance also applies to S corporations and their shareholders, which
are treated as partnerships and partners for purposes of sections 951
through 965. See section 1373.
A domestic partnership is a U.S. person by definition under section
7701(a)(4) and (30) and can therefore be a U.S. shareholder of a CFC
under section 951(b). Under current law, a domestic partnership that is
a U.S. shareholder includes in gross income its section 951(a)(1)(A)
inclusion with respect to a CFC, and its partners include in gross
income their distributive share of such inclusion. However, as noted in
section I.A of this Explanation of Provisions, there is no analog in
section 951(a)(1)(A) to the U.S. shareholder-level determinations
required by section 951A, and thus the level at which the section
951(a)(1)(A) determination is made--whether at the level of the
partnership or its partners--does not generally affect the amount of
the inclusion, if the partnership and its partners are all U.S.
shareholders. On the other hand, the GILTI inclusion amount is an
aggregation of the U.S. shareholder's pro rata shares of tested income,
tested loss, QBAI, tested interest expense, and tested interest income
of each of its CFCs. Thus, the level at which the GILTI calculation is
made dictates the CFC items to be taken into account by the
shareholder, and each of these items can impact the shareholder's GILTI
inclusion amount.
The Treasury Department and the IRS considered a number of
approaches to applying section 951A with respect to domestic
partnerships and their partners. A pure aggregate approach to the
treatment of domestic partnerships and their partners would treat the
partnership as an aggregate of its partners, so that each partner would
calculate its own GILTI inclusion amount taking into account its pro
rata share of CFC items through the partnership. However, a pure
aggregate approach might also be interpreted by taxpayers to exempt
small partners of a domestic partnership from the GILTI regime
entirely, a result that is not clearly contemplated in section 951A or
its legislative history and is inconsistent with section 951.
The Treasury Department and the IRS also considered a pure entity
approach. Under a pure entity approach, the domestic partnership would
determine its own GILTI inclusion amount, and each partner would take
into gross income its distributive share of such amount. In the case of
a partner that is a U.S. shareholder of CFCs owned by the partnership
and other CFCs outside the partnership, a pure entity approach would
effectively fragment the shareholder's GILTI inclusion amount into
multiple GILTI inclusion amounts by separating the items of the CFCs
owned by the shareholder through the partnership from the items of the
CFCs owned by the shareholder outside the partnership, including
through other domestic partnerships. An approach that dramatically
alters a U.S. shareholder's inclusion under section 951A for a taxable
year depending on the legal structure by which the shareholder owns
each CFC presents both an inappropriate planning opportunity as well as
a trap for the unwary. Such an approach is also inconsistent with the
structure of section 951A, which requires an aggregation of all
relevant items of a shareholder's CFCs in order to compute a single
GILTI inclusion amount for a U.S. shareholder. As discussed in section
III.A of this Explanation of Provisions, the Treasury Department and
the IRS relied on similar considerations in concluding that the
relevant items of each CFC owned directly or indirectly by members of a
consolidated group should be taken into account in determining the
GILTI inclusion amount of each member of that group.
In addition, the Treasury Department and the IRS have concluded
that other provisions that are related to, and interdependent with,
section 951A should apply at the level of a domestic corporate partner.
Section 960(d) provides a domestic corporation that is a U.S.
shareholder a credit for foreign taxes paid by a CFC that are properly
attributable to tested income ``taken into account'' by the domestic
corporation, and determines the amount of that credit by reference to
the corporation's aggregate pro rata share of tested income. See
section 960(d)(2)(B) and (3). A domestic partnership is not eligible to
claim deemed paid credits under section 960(d). Furthermore, under a
pure entity approach, a domestic corporate partner of a domestic
partnership may not be eligible for a deemed paid credit by reason of
its distributive share of the partnership's GILTI inclusion because a
partner would not have a pro rata share of the tested income of any CFC
owned by the partnership, and thus it would not take into account the
tested income of any such CFC. Similarly, only a domestic corporation
is eligible for a section 250 deduction. Nonetheless, the Conference
Report indicates that the domestic corporate partners of a domestic
partnership should get the benefit of a section 250 deduction, which is
consistent with an aggregate approach. See Conf. Rep. at 623, fn. 1517.
Based on the foregoing, the Treasury Department and the IRS have
determined that the approach that best harmonizes the treatment of
domestic partnerships and their partners across all provisions of the
GILTI regime (sections 250, 951A, and 960(d)) is neither a pure
aggregate nor a pure entity approach. Rather, the most harmonious
approach treats a domestic partnership as an entity with respect to
partners that are not U.S. shareholders of any CFC owned by the
partnership, but treats the partnership as an aggregate for purposes of
partners that are themselves U.S. shareholders with respect to one or
more CFCs owned by the partnership. This approach ensures that each
non-U.S. shareholder partner takes into income its distributive share
of the domestic partnership's GILTI inclusion amount (similar to
subpart F), while permitting a partner that is itself a U.S.
shareholder to determine a single GILTI inclusion amount by reference
to all its CFCs, whether owned directly or through a partnership, as
well as allowing a corporate U.S. shareholder to calculate a foreign
tax credit under section 960(d) with respect to each such CFC and to
compute a section 250 deduction with respect to its GILTI inclusion
amount determined by reference to each such CFC.
Therefore, the proposed regulations provide that, in general, a
domestic partnership that is a U.S. shareholder of one or more CFCs
(``U.S. shareholder partnership'') computes its own GILTI inclusion
amount in the same manner as any other U.S. shareholder, and each
partner takes into account its distributive share of the domestic
partnership's GILTI inclusion amount under section 702 and Sec. 1.702-
1(a)(8)(ii). See proposed Sec. 1.951A-5(b). However, for purposes of
section 951A and the proposed regulations, a partner that is itself a
U.S. shareholder (within the meaning of section 951(b)) (``U.S.
shareholder partner'') of one or more CFCs owned directly or indirectly
by a domestic partnership (``partnership CFC'') is treated as owning
[[Page 51080]]
proportionately section 958(a) stock in each such partnership CFC as if
the partnership were a foreign partnership. See proposed Sec. 1.951A-
5(c). As a result, a partner that is itself a U.S. shareholder of a CFC
owned by a domestic partnership computes its GILTI inclusion amount for
a taxable year by taking into account its proportionate share of the
partnership's pro rata share of each of the relevant items--tested
income, tested loss, QBAI, tested interest income, and tested interest
expense--of such CFC. This rule applies regardless of whether the
domestic partnership itself has a GILTI inclusion amount for the
taxable year. See proposed Sec. 1.951A-5(g), Example 6. In the case
that a partner is treated as owning the section 958(a) stock of one or
more partnership CFCs, the partner's distributive share of the
partnership's GILTI inclusion amount is determined solely by reference
to partnership CFCs in which the partner is not a U.S. shareholder. See
proposed Sec. 1.951A-5(c) and (g), Example 3. A U.S. shareholder
partnership is therefore required to provide to its partners their
distributive share of the partnership's GILTI inclusion amount, as well
as provide to each U.S. shareholder partner the partner's proportionate
share of the partnership's pro rata share (if any) of each CFC tested
item of each partnership CFC of the partnership, and forms and
instructions will be updated accordingly. See proposed Sec. 1.951A-
5(f).
To illustrate the differences between the approach taken in the
proposed regulations and the pure entity approach, consider a domestic
partnership (PRS) with two domestic corporate partners, US1 and US2,
owning 5 percent and 95 percent of PRS, respectively. PRS owns 100
percent of the single class of stock of FS1, a CFC with tested income
of $100x, and 100 percent of the single class of stock of FS2, a CFC
with tested loss of $50x. US2 also owns 100 percent of the single class
of stock of FS3, a CFC with tested loss of $20x. Under a pure entity
approach, US2's distributive share of PRS's GILTI inclusion amount
would be $47.50x (95% x ($100x-$50x)), and US2's pro rata share of
FS3's tested loss of $20x would be unused. Under the proposed
regulations, US2, because it is a U.S. shareholder partner with respect
to FS1 and FS2, aggregates its proportionate share of the tested income
and tested loss of FS1 and FS2 with its pro rata share of the tested
loss of FS3 in determining its GILTI inclusion amount of $27.50x ((95%
x ($100x-$50x))-$20x). Accordingly, under a pure entity approach, US2
would be incentivized to reorganize its ownership structure (for
example, by liquidating PRS or contributing the stock of FS3 to PRS) in
order to obtain the full benefit of the tested loss of FS3. Under the
proposed regulations, however, US2 has the same GILTI inclusion amount
whether it owns its CFCs directly or through one or more partnerships.
The Treasury Department and the IRS request comments as to whether
any other approach to the treatment of domestic partnerships and their
partners for purposes of section 951A, including a pure entity approach
or a pure aggregate approach, would more appropriately harmonize the
provisions of the GILTI regime than the approach of the proposed
regulations, particularly in light of the administrative and compliance
burdens associated with any other approach and the approach of the
proposed regulations. In addition, the Treasury Department and the IRS
request comments on adjustments required by reason of computing a GILTI
inclusion amount, in whole or in part, at the level of the partner of a
domestic partnership, including adjustments to the partner's basis in
its partnership interest, the partner's section 704(b) capital account,
the partnership's basis in CFC stock under section 961, and a CFC's
previously taxed earnings and profits with respect to the partner or
partnership under section 959.
G. Treatment of GILTI Inclusion Amount and Adjustments to Earnings and
Profits and Basis
1. Treatment of GILTI as Subpart F Income for Certain Purposes
A U.S. shareholder's GILTI inclusion amount is not an inclusion
under section 951(a)(1)(A). Nevertheless, for purposes of some
provisions, GILTI inclusion amounts are treated similarly to section
951(a)(1)(A) inclusions. Section 951A(f)(1)(A) provides that any GILTI
included in gross income is treated in the same manner as an amount
included under section 951(a)(1)(A) for purposes of applying sections
168(h)(2)(B), 535(b)(10), 851(b), 904(h)(1), 959, 961, 962,
993(a)(1)(E), 996(f)(1), 1248(b)(1), 1248(d)(1), 6501(e)(1)(C),
6654(d)(2)(D), and 6655(e)(4).
Section 951A(f)(1)(B) grants the Secretary authority to provide
rules applying section 951A(f)(1)(A) to other provisions of the Code. A
comment requested clarification as to whether GILTI inclusion amounts
are net investment income under section 1411. Pursuant to the authority
in section 951A(f)(1)(B), the proposed regulations provide that a GILTI
inclusion amount is treated in the same manner as an amount included
under section 951(a)(1)(A) for purposes of applying section 1411. See
proposed Sec. 1.951A-6(b)(1). Thus, for example, a U.S. shareholder
that has made an election pursuant to Sec. 1.1411-10(g) with respect
to a CFC to treat amounts included in gross income under section
951(a)(1)(A) as net investment income and to apply the basis adjustment
rules of sections 961(a) and (b) with respect to such amounts for
section 1411 purposes should also treat the portion of the U.S.
shareholder's GILTI inclusion amount treated as being with respect to
the CFC under section 951A(f)(2) and proposed Sec. 1.951A-6(b)(2) as
net investment income.
Comments have requested that regulations clarify that an inclusion
under section 951A is determined before an inclusion under section
951(a)(1)(B). The Treasury Department and the IRS have determined that
clarification is unnecessary. Because a GILTI inclusion amount is
treated as a section 951(a)(1)(A) inclusion for purposes of section
959, the determination of the amount included under section
951(a)(1)(B) is made after the determination of the amount of a section
951(a)(1)(A) inclusion and the GILTI inclusion amount. See section
959(a)(2) and (f)(1). The Treasury Department and the IRS intend to
issue a separate notice of proposed rulemaking to update the
regulations under sections 959 and 961 to account for the Act's
modifications to the U.S. international tax system, including the
enactment of section 245A.
The characterization of GILTI inclusions for purposes of
determining the unrelated business taxable income of tax-exempt
entities will be addressed in separate guidance. The Treasury
Department and the IRS request comments on other areas in which the
characterization of a GILTI inclusion amount is relevant, and whether
it is appropriate in those areas to treat a GILTI inclusion amount in
the same manner as a section 951(a)(1)(A) inclusion or in some other
manner (for example, as a dividend).
2. Interaction With Sections 163(e)(3)(B)(i) and 267(a)(3)(B)
Section 267(a)(3)(B) generally provides that a deduction for an
item payable to a related CFC is not allowed until paid, except to the
extent that an amount attributable to that item is includible
(determined without regard to properly allocable deductions and
qualified deficits) in the gross income of
[[Page 51081]]
a U.S. shareholder. Section 163(e)(3)(B)(i) provides a similar rule for
original issue discount on a debt instrument held by a related CFC.
The Treasury Department and the IRS have determined that deductions
should not be deferred under sections 163(e)(3)(B)(i) and 267(a)(3)(B)
to the extent an item is taken into account in determining a U.S.
shareholder's GILTI inclusion amount. Accordingly, the proposed
regulations provide that a deduction is allowed under sections
163(e)(3)(B)(i) and 267(a)(3)(B) for an item taken into account in
determining the net CFC tested income of a U.S. shareholder, including
a U.S. shareholder treated under the proposed regulations as owning
section 958(a) stock of a CFC owned by a domestic partnership. See
proposed Sec. 1.951A-6(c)(1). In the case of a U.S. shareholder that
is a domestic partnership, this rule applies only to the extent that
one or more U.S. persons (other than domestic partnerships) that are
direct or indirect partners of the domestic partnership include in
gross income their distributive share of the partnership's GILTI
inclusion amount or the item is taken into account by a U.S.
shareholder partner of the domestic partnership by reason of Sec.
1.951A-5(c). See proposed Sec. 1.951A-6(c)(2).
3. Basis Adjustments for the Use of Tested Losses
In determining a U.S. shareholder's net CFC tested income, the U.S.
shareholder's pro rata share of a tested loss of one CFC may offset the
shareholder's pro rata share of tested income of another CFC. Under the
statute, such a use of a tested loss does not reduce the U.S.
shareholder's basis in the stock of the tested loss CFC, increase the
stock basis of the tested income CFC, or affect the earnings and
profits of either the tested loss CFC or the tested income CFC.
The Treasury Department and the IRS have determined that in certain
cases the lack of adjustments to stock basis of a tested loss CFC can
lead to inappropriate results. For example, if the U.S. shareholder's
basis in the stock of the tested loss CFC is not reduced to reflect the
use of the tested loss to offset tested income taken into account by
the U.S. shareholder, the U.S. shareholder would recognize a second and
duplicative benefit of the loss--either through the recognition of a
loss or the reduction of gain--if the stock of the tested loss CFC is
disposed of. See Charles Ilfeld Co. v. Hernandez, 292 U.S. 62 (1934)
(denying the loss on stock of subsidiaries upon liquidation when
operating losses were previously claimed from the subsidiaries'
operations because ``[i]f allowed, this would be the practical
equivalent of double deduction''); U.S. v. Skelly Oil. Co., 394 U.S.
678 (1969) (``the Code should not be interpreted to allow respondent
`the practical equivalent of a double deduction''' (citing Charles
Ilfeld Co.)); Sec. 1.161-1. On the other hand, in the case of a
corporate U.S. shareholder, but not in the case of an individual, gain
recognized on the disposition of a CFC attributable to offset tested
income would, in most cases, be eliminated as a result of the
application of section 964(e) or section 1248(a) and (j), to the extent
the gain is recharacterized as a dividend that is eligible for the
dividends received deduction under section 245A. Accordingly, proposed
Sec. 1.951A-6(e) generally provides that in the case of a corporate
U.S. shareholder (excluding regulated investment companies and real
estate investment trusts), for purposes of determining the gain, loss,
or income on the direct or indirect disposition of stock of a CFC, the
basis of the stock is reduced by the amount of tested loss that has
been used to offset tested income in calculating net CFC tested income
of the U.S. shareholder. The basis reduction is only made at the time
of the disposition and therefore does not affect the stock basis prior
to a disposition. Requiring the basis reduction only at the time of the
disposition prevents the use of tested losses alone from causing the
recognition of gain if the reduction exceeds the amount of stock basis.
The basis adjustments apply only to the extent a ``net'' tested
loss of the controlled foreign corporation has been used. This
limitation is intended to ensure that the reduction applies only to the
extent necessary to eliminate the duplicative loss in the stock. For
example, if a $100x tested loss of a CFC (CFC1) offsets $100x of tested
income of another CFC (CFC2) in one year in determining a U.S.
shareholder's net CFC tested income, and in the next year CFC1 has $20x
of tested income that is offset by a $20x tested loss of CFC2, then the
$100x used tested loss attributable to the CFC1 stock from the first
year is reduced by the $20x of its tested income from the second year
that was offset by the tested loss of CFC2, resulting in a ``net'' used
tested loss of $80x. See proposed Sec. 1.951A-6(e)(2).
Similar adjustments apply when the tested loss CFC is treated as
owned by the U.S. shareholder through certain intervening foreign
entities by reason of section 958(a)(2) to prevent the indirect use of
the duplicative loss through the disposition of interests in those
intervening entities. The regulations provide an exception to those
rules in certain cases when the tested loss CFC and the CFC that
generated the tested income that is offset by the tested loss are in
the same section 958(a)(2) ownership chain; adjustments are not
appropriate in these cases because there is no duplicative loss to the
extent the shares of both CFCs are directly or indirectly disposed of.
See proposed Sec. 1.951A-6(e)(1)(ii).
A direct disposition of the stock of a CFC can result in the
indirect disposition of the stock of one or more lower-tier CFCs. See
proposed Sec. 1.951A-6(e)(6)(ii)(B). In such a case, basis adjustments
may be made to both the stock of the upper-tier CFC and the stock of
the lower-tier CFCs. Accordingly, the proposed regulations provide
ordering rules for making these adjustments that, in general, are
intended to prevent gain resulting from a basis adjustment attributable
to the use of a single tested loss from being taken into account more
than once. See proposed Sec. 1.951A-6(e)(1)(iv).
The proposed regulations also include rules that take into account
certain nonrecognition transactions involving CFCs, such as the
acquisition of CFC stock by a domestic corporation and transactions
described in section 381. See proposed Sec. 1.951A-6(e)(4)(ii) and
(e)(5). These rules are intended to prevent the elimination or
avoidance of the basis adjustments through these types of transactions.
Finally, the proposed regulations provide a special rule to address
dispositions of CFC stock by another CFC that is not wholly owned by a
single domestic corporation. See proposed Sec. 1.951A-6(e)(7). This
rule, which is consistent with proposed Sec. 1.961-3(b) and Revenue
Ruling 82-16, 1982-1 C.B. 106, is intended to ensure that the
appropriate amount of subpart F income is taken into account by U.S.
shareholders of the CFC as a result of the disposition.
The Treasury Department and the IRS request comments on these
rules, including whether additional adjustments to stock basis or
earnings and profits should be made to account for a used tested loss
or offset tested income (for example, whether adjustments should be
provided that are consistent with those set forth in proposed Sec.
1.965-2(d) and (f) (REG-104226-18, 83 FR 39514, August 9, 2018)).
Comments are also requested on whether similar rules should apply to
non-corporate U.S. shareholders, taking into account the fact that non-
corporate U.S. shareholders are not entitled to a dividends received
deduction under section 245A. Additionally, comments
[[Page 51082]]
are requested as to whether the definition of ``disposition'' should be
modified. For example, the Treasury Department and the IRS are
considering broadening the term to include transactions that do not
involve an actual transfer of stock but might result in taxable gain
but for the presence of tax basis in CFC stock. Examples of such
transactions include distributions subject to section 301(c)(2) or
1059.
II. Section 951
A. Pro Rata Share Rules
Section 1.951-1(e) was revised in 2005 and 2006 to address certain
avoidance structures, such as structures that resulted in non-economic
allocations of subpart F income to shareholders of CFCs that are not
U.S. shareholders. The Treasury Department and the IRS have become
aware of additional avoidance structures. For example, the existing
regulations require an allocation of earnings and profits between
classes of stock with discretionary distribution rights based on the
fair market value of the stock. While this rule appropriately allocates
subpart F income in some cases (for example, involving multiple classes
of common stock), some taxpayers have attempted to improperly allocate
subpart F income by applying these rules to certain structures
involving shares with preferred liquidation and distribution rights.
Similar avoidance structures involve cumulative preferred stock with
dividends that compound less frequently than annually.
This notice of proposed rulemaking proposes to amend Sec. 1.951-
1(e) to address these avoidance structures, which implicate section
951A as well as section 951. The proposed regulations clarify that, for
purposes of determining a U.S. shareholder's pro rata share of subpart
F income, earnings and profits for the taxable year are first
hypothetically distributed among the classes of stock and then
hypothetically distributed to each share in the class on the
hypothetical distribution date, which is the last day of the CFC's
taxable year on which it is a CFC. In lieu of prescribing a
determination based on fair market value, the proposed regulations
provide that the amount of earnings and profits that would be
distributed with respect to classes of stock is based on all relevant
facts and circumstances. See proposed Sec. 1.951-1(e)(3). In addition,
the proposed regulations disregard any transaction or arrangement that
is part of a plan a principal purpose of which is to reduce a U.S.
shareholder's pro rata share of the subpart F income of a CFC. See
proposed Sec. 1.951-1(e)(6). This rule also applies for purposes of
determining a U.S. shareholder's pro rata share of amounts for purposes
of calculating the shareholder's GILTI inclusion amount. Id. As a
result of adding this broader rule, the proposed regulations do not
include the specific anti-avoidance rule involving section 304
transactions in existing Sec. 1.951-1(e)(3)(v).
The proposed regulations also modify Sec. 1.951-1(e) in specific
ways to take into account section 951A. For example, the proposed
regulations provide that a U.S. shareholder's pro rata share of a CFC's
subpart F income is determined by reference to the shareholder's
proportionate share of the total current earnings and profits that
would be distributed in the hypothetical distribution. In addition to
determining a U.S. shareholder's pro rata share of a CFC's subpart F
income, Sec. 1.951-1(e) also applies for purposes of determining the
shareholder's pro rata share of the CFC's tested income. See also
proposed Sec. 1.951A-1(d)(2). However, because tested income is not
limited to the earnings and profits of a CFC, and because a CFC's
tested loss increases its earnings and profits for purposes of
determining the subpart F income limitation in section 952(c)(1), the
earnings and profits allocated in the hypothetical distribution may
exceed the earnings and profits of the CFC computed under section 964.
Accordingly, the hypothetical distribution in the proposed regulations
is based on the greater of the section 964 earnings and profits or the
sum of the subpart F income (increased by reason of any tested loss
add-back under section 951A(c)(2)(B)(ii) and proposed Sec. 1.951A-
6(d)) and tested income of the CFC.
B. Partnership Blocker Structures
Notice 2010-41, 2010-22 I.R.B. 715, stated that forthcoming
regulations would treat a domestic partnership as a foreign partnership
for purposes of identifying the U.S. shareholder of a CFC required to
include in gross income its pro rata share of the CFC's subpart F
income in the circumstances described in the notice. The Treasury
Department and the IRS have determined that the same rules should also
apply to identify the U.S. shareholder of a CFC for purposes of section
951A. Accordingly, the proposed regulations treat certain controlled
domestic partnerships as foreign partnerships for purposes of
identifying a U.S. shareholder for purposes of sections 951 through
964. See also proposed Sec. 1.965-1(e) (REG-104226-18, 83 FR 39514,
August 9, 2018) (adopting a similar partnership blocker rule for
purposes of the section 965 regulations).
C. Other Modifications
The proposed regulations also update Sec. 1.951-1 consistent with
the modification in the Act of the definition of a U.S. shareholder and
the elimination in the Act of the 30-day requirement. See proposed
Sec. 1.951-1(a) and (g)(1).
III. Section 1502
A. In General
Section 1502 provides the Secretary authority to
prescribe such regulations as he may deem necessary in order that
the tax liability of any affiliated group of corporations making a
consolidated return and of each corporation in the group, both
during and after the period of affiliation, may be returned,
determined, computed, assessed, collected, and adjusted, in such
manner as clearly to reflect the income-tax liability and the
various factors necessary for the determination of such liability,
and in order to prevent avoidance of such tax liability.
A consolidated group member's inclusion of subpart F income under
section 951(a)(1)(A) is determined at the member level. However, as
discussed in section I.A of this Explanation of Provisions, a section
951(a)(1)(A) inclusion with respect to a CFC is determined solely by
reference to the subpart F income of the CFC, and therefore determining
a member's section 951(a)(1)(A) inclusion solely by reference to a CFC
the stock of which is owned (within the meaning of section 958(a)) by
the member is not distortive of the consolidated group's income tax
liability. As a result, the location of the CFC within the group
generally has no effect on the consolidated group's income tax
liability by reason of section 951(a)(1)(A). In contrast, section 951A
requires an aggregate, U.S. shareholder-level calculation, under which
a member's pro rata share of the relevant items of one CFC can increase
or decrease a member's GILTI inclusion amount otherwise resulting from
its ownership of another CFC. Accordingly, a determination of a
member's GILTI inclusion amount solely based on its pro rata share of
the items of a CFC the stock of which is owned (within the meaning of
section 958(a)) by that member may not result in a clear reflection of
the consolidated group's income tax liability. For example, a
consolidated group could segregate one CFC with tested interest expense
under one member and another CFC with QBAI under another member,
thereby increasing the net DTIR of the second
[[Page 51083]]
member relative to the consolidated group's net DTIR if determined at a
group level. Alternatively, a strict, separate-entity application of
section 951A could inappropriately increase a consolidated group's
income tax liability, because one member's excess pro rata share of
tested losses or QBAI over tested income would be unavailable to reduce
another member's GILTI inclusion amount.
B. Section 1.1502-51
In response to comments, the Treasury Department and the IRS have
determined that a member's GILTI inclusion amount should be determined
by reference to the relevant items of each CFC owned by members of the
same consolidated group. As discussed in section I.A of this
Explanation of Provisions, a U.S. shareholder includes in gross income
its GILTI inclusion amount for any taxable year. GILTI inclusion amount
is defined under proposed Sec. 1.951A-1(c)(1) as, with respect to a
U.S. shareholder for a taxable year of the shareholder, the excess (if
any) of the shareholder's net CFC tested income over the shareholder's
net DTIR for the taxable year. Under proposed Sec. 1.1502-51, this
definition applies equally to a U.S. shareholder that is a member of a
consolidated group. However, consistent with the authority in section
1502, the proposed regulations provide special definitions of net CFC
tested income and net DTIR in order to clearly reflect the income tax
liability of the consolidated group. Specifically, the proposed
regulations provide that, to determine a member's GILTI inclusion
amount, the pro rata shares of tested loss, QBAI, tested interest
expense, and tested interest income of each member are aggregated, and
then a portion of each aggregate amount is allocated to each member of
the group that is a U.S. shareholder of a tested income CFC based on
the proportion of such member's aggregate pro rata share of tested
income to the total tested income of the consolidated group. See
proposed Sec. 1.1502-51(e).
As discussed in section I.G.3 of this Explanation of Provisions,
proposed Sec. 1.951A-6(e) provides that the adjusted basis of the
stock of a CFC is adjusted immediately before its disposition. Proposed
Sec. 1.1502-51(c) provides special rules for making these adjustments
to the adjusted basis of the stock of a CFC owned by a member in a
manner that reflects the special definitions applicable to members.
C. Section 1.1502-32
Section 1.1502-32 provides rules for adjusting the basis of the
stock of a subsidiary owned by another member to reflect, among other
items, the subsidiary's items of income. Accordingly, no new rules are
necessary to adjust the basis of the stock of a member because of a
GILTI inclusion. However, as previously discussed, proposed Sec. Sec.
1.951A-6(e) and 1.1502-51(c) provide rules for adjusting the basis of
the stock of a CFC immediately before its disposition. As a result,
proposed Sec. 1.1502-32(b)(3)(ii)(E) and (iii)(C) provide for
adjustments to the basis of the stock of a member to reflect those
rules. Specifically, the proposed rules treat a portion of a member's
offset tested income amount as tax-exempt income and all of a member's
used tested loss amount as a noncapital, nondeductible expense.
As previously discussed, the Treasury Department and the IRS have
determined that in the case of a corporate U.S. shareholder, gain
recognized on the disposition of stock of a CFC attributable to offset
tested income would, in most cases, be eliminated as a result of the
application of section 964(e)(4) or section 1248(a) and (j), to the
extent the gain or income is eligible for the dividends received
deduction under section 245A. In order to not incentivize a sale of the
stock of a CFC over a sale of stock of a member, proposed Sec. 1.1502-
32(b)(3)(ii)(F) provides that a member is also treated as receiving
tax-exempt income immediately before another member recognizes income,
gain, deduction, or loss with respect to a share of the first member's
stock. The amount of this additional tax-exempt income is the net
offset tested income amount allocable to the shares of any CFC owned by
the first member to the extent that a distribution of such amount would
have been characterized as a dividend eligible for a section 245A
deduction and not subject to section 1059.
The Treasury Department and the IRS request comments regarding the
coordination of the rules of proposed Sec. Sec. 1.951A-6(e) and
1.1502-51(c) with the investment adjustment regime of Sec. 1.1502-32.
Comments are specifically requested on: (1) Whether the amount of the
adjustments to the basis of member stock should be limited to the
amount of the adjustments to the basis of the stock of a CFC under the
rules of proposed Sec. 1.951A-6(e); (2) whether the adjustments to the
basis of member stock should all be made on a current basis, made to
the extent of the basis adjustments provided in proposed Sec. 1.951A-
6(e) on a current basis with any remaining adjustments being made at
the time of a disposition of stock of a CFC or of a member, or made
only at the time of a disposition of the stock of a CFC or of a member;
and (3) whether rules should provide that a deduction under section
245A should not be treated as tax-exempt income to the extent that the
underlying dividend is attributable to offset tested income for which
basis adjustments have already been made. Additionally, comments are
specifically requested as to whether there are any circumstances in
which there should be a deemed disposition of the stock of a CFC owned
by a member, such that the rules of proposed Sec. 1.951A-6(e) would
apply, including, but not limited to, a deconsolidation or taxable
disposition of the stock of a member that owns (directly or indirectly)
the stock of a CFC to either a person outside of the consolidated group
or to another member, and a transfer of the stock of a member in an
intercompany transaction that is a nonrecognition transaction.
Similarly, comments are specifically requested as to whether there are
other transactions that should be described in the definition of
transferred shares in proposed Sec. 1.1502-32(b)(3)(ii)(F)(1), such as
a deemed disposition pursuant to Sec. 1.1502-19(c)(1)(iii)(B). Lastly,
comments are specifically requested as to whether any other adjustments
are necessary to prevent the duplication of gain or loss resulting from
a member's ownership of a CFC, including situations where a member
owning a CFC joins another consolidated group.
In response to comments received, no new rules are being proposed
under Sec. 1.1502-33, which provides rules for adjusting the earnings
and profits of a subsidiary and any member owning stock of the
subsidiary. The Treasury Department and the IRS request comments on
whether additional rules under Sec. 1.1502-33 or any other regulations
issued under section 1502 are necessary.
IV. Sections 1.6038-2(a) and 1.6038-5
Under section 6038(a)(1), U.S. persons that control foreign
corporations must file certain information returns with respect to
those corporations. Before the Act, a U.S. shareholder would not have
had an income inclusion under section 951(a)(1) with respect to a
foreign corporation unless the corporation had been a CFC for an
uninterrupted period of at least 30 days during the taxable year. While
section 6038 does not limit the reporting requirements to foreign
corporations that a U.S. person controls for an uninterrupted period of
at least
[[Page 51084]]
30 days, Sec. 1.6038-2(a) does provide for such a limit. To coordinate
with the amendment to section 951(a)(1) that removed the 30-day
requirement, this notice of proposed rulemaking proposes to revise
Sec. 1.6038-2(a) to provide that certain information reporting is
required for U.S. persons that control a foreign corporation at any
time during an annual accounting period.
Section 6038(a)(4) allows the Secretary to require any U.S.
shareholder of a CFC to provide information required under section
6038(a)(1), which includes information that is similar to the listed
information in section 6038(a)(1)(A) through (a)(1)(E), as well as
information that ``the Secretary determines to be appropriate to carry
out the provisions of this title.'' In order to effectively administer
and enforce section 951A, the Treasury Department and the IRS have
determined that, in general, U.S. shareholders must file a new Schedule
I-1, Information for Global Intangible Low-Taxed Income, to Form 5471,
Information Return of U.S. Persons With Respect To Certain Foreign
Corporations, as well as new Form 8992, U.S Shareholder Calculation of
Global Intangible Low-Taxed Income (GILTI), to provide the information
that a U.S. shareholder needs with respect to each of its CFCs to
determine the U.S. shareholder's GILTI inclusion amount for a taxable
year. Proposed Sec. 1.6038-5 provides the filing requirements for new
Form 8992.
V. Applicability Dates
Consistent with the applicability date of section 951A, proposed
Sec. Sec. 1.951-1(e)(1)(ii)(B), 1.951A-1 through 1.951A-6, 1.1502-
32(b)(3)(ii)(E), (b)(3)(ii)(F), and (b)(3)(iii)(C), and 1.1502-51 are
proposed to 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. See
section 7805(b)(2). Proposed Sec. 1.951-1(e) (pro rata share of
subpart F income) (other than Sec. 1.951-1(e)(1)(ii)(B)) is proposed
to apply to taxable years of U.S. shareholders ending on or after
October 3, 2018. See section 7805(b)(1)(B). Consistent with the
applicability date of the modification to section 951 in the Act,
proposed Sec. 1.951-1(a) (controlled foreign corporations) and Sec.
1.951-1(g) (definition of U.S. shareholder) are proposed to apply to
taxable years of foreign corporations beginning after December 31,
2017, and to taxable years of U.S. shareholders with or within which
such taxable years of foreign corporations end. See section 7805(b)(2).
Proposed Sec. 1.951-1(h) (special rule for partnership blocker
structure) is proposed to apply to taxable years of domestic
partnerships ending on or after May 14, 2010. See Notice 2010-41 and
section 7805(b)(1)(C). Although proposed Sec. 1.951-1(h) applies for
purposes of both section 951 and section 951A, the only practical
effect of applying this rule to taxable years of domestic partnerships
ending on or after May 14, 2010, and before January 1, 2018, concerns
the application of section 951. The proposed rule does not have
relevance to the application of section 951A until the first taxable
year of a CFC owned by a domestic partnership beginning after December
31, 2017 (the effective date of section 951A). Proposed Sec. 1.6038-
2(a) (information returns required of U.S. persons with respect to
annual accounting periods of certain foreign corporations) and proposed
Sec. 1.6038-5 (information returns required of certain U.S. persons to
report amounts determined with respect to certain foreign corporations
for GILTI purposes) are proposed to apply to taxable years of foreign
corporations beginning on or after October 3, 2018. See sections
6038(a)(3) and 7805(b)(1)(B).
Special Analyses
Regulatory Planning and Review--Economic Analysis
Executive Orders 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, of
reducing costs, of harmonizing rules, and of promoting flexibility. The
Executive Order 13771 designation for any final rule resulting from
these proposed regulations will be informed by comments received.
The proposed regulations have 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 (April
11, 2018) between the Treasury Department and the Office of Management
and Budget regarding review of tax regulations. OIRA has determined
that the proposed rulemaking is significant. Accordingly, the proposed
regulations have been reviewed by OIRA. For more detail on the economic
analysis, please refer to the following analysis.
A. Overview
The proposed regulations provide taxpayers with computational,
definitional, and anti-avoidance guidance regarding the application of
section 951A. They provide guidance for U.S. shareholders to determine
the amount of GILTI to include in gross income and how to compute the
components of GILTI. Among other benefits, this clarity helps ensure
that taxpayers all calculate GILTI in a similar manner, which promotes
efficiency and equity contingent on the provisions of the overall Code.
The proposed regulations under sections 951A, 1502, and 6038
(proposed Sec. Sec. 1.951A-1 through 1.951A-7, 1.1502-12, 1.1502-13,
1.1502-32, and 1.1502-51, and 1.6038-5) provide details for taxpayers
(including members of a consolidated group) regarding the computation
of certain components of GILTI (for example, tested income and tested
loss, QBAI, net deemed tangible income return, and specified interest
expense), describe the consequences of a GILTI inclusion for purposes
of other sections of the Code, and detail the reporting requirements
associated with GILTI. These proposed regulations further establish
anti-abuse rules to prevent taxpayers from taking measures to
inappropriately reduce their GILTI through certain transfers of
property. They also disallow certain losses that reduce GILTI from
being used a second time.
The proposed regulations under sections 951 and 6038 (proposed
Sec. Sec. 1.951-1 and 1.6038-2) prevent taxpayers from avoiding an
inclusion of subpart F income under section 951(a) or the inclusion of
GILTI under section 951A through certain artificial arrangements
involving the ownership of CFC stock, coordinate the calculation of a
U.S. shareholder's subpart F with its GILTI, and conform the
regulations to other amendments in the Act, including a modification to
the definition of U.S. shareholder for purposes of sections 951(a) and
951A and the elimination of the 30-day CFC status requirement. This
economic analysis describes the economic benefits and costs of the
proposed regulations.
B. Economic Analysis of the Proposed Regulations
1. Background
Because section 951A is a new Code section, many of the details
behind the relevant terms and necessary calculations required for the
[[Page 51085]]
computation of a U.S. shareholder's GILTI inclusion amount would
benefit from greater specificity. Thus, as is expected after the
passage of major tax reform legislation, the regulations answer open
questions and provide detail and specificity for the definitions and
concepts described in section 951A, so that U.S. shareholders can
readily and accurately determine their GILTI inclusion amounts. For
example, the regulations provide definitions of crucial terms, such as
tested income, tested loss, specified tangible property, and specified
interest expense.
As discussed in section I.A. of the Explanation of Provisions,
although a GILTI inclusion is treated similarly to an inclusion of
subpart F income for some purposes, it is determined in a manner
fundamentally different from that of a subpart F inclusion. Therefore,
in some cases it is appropriate for the regulations to rely on subpart
F principles, but in other cases different rules are necessary. For
example, the regulations apply subpart F rules for purposes of (1)
determining a U.S. shareholder's pro rata share of certain items of a
CFC, (2) translating foreign currency to U.S. dollars, (3) determining
gross income and allowable deductions, and (4) allocating and
apportioning allowable deductions to gross tested income. However, it
would be inappropriate to rely on subpart F rules for the GILTI
computations that are performed at the U.S. shareholder level because
subpart F income is determined solely at the level of a CFC. For
example, the regulations provide detail on how a U.S. shareholder
determines its specified interest expense at the shareholder level
based on the interest expense and interest income of each CFC owned by
the shareholder.
Additionally, the proposed regulations provide rules regarding the
interaction of certain aspects of section 951A with other provisions.
For example, they clarify that, regarding the interaction of the
earnings and profits limitation (including recapture) for subpart F
income and the determination of gross tested income, tested income and
tested loss are computed without regard to the earnings and profits
limitation in section 952(c). In addition, the proposed regulations
provide that GILTI inclusion amounts are considered net investment
income under section 1411. Finally, the proposed regulations provide
that certain deductions between related parties are not deferred under
sections 163(e)(3)(B)(i) and 267(a)(3)(B) to the extent the income is
taken into account in determining a U.S. shareholder's GILTI inclusion
amount.
Section 951A provides the Secretary of the Treasury the authority
to issue regulations and other guidance to prevent the avoidance of the
purposes of section 951A(d). As such, regulations under Sec. Sec.
1.951A-2 and 1.951A-3 provide that certain transactions that reduce a
U.S. shareholder's GILTI inclusion amount, for example, by increasing a
CFC's qualified business asset investment (QBAI) or decreasing a CFC's
tested income, will be disregarded for purposes of the GILTI
computation.
Further, the Treasury Department and the IRS have determined that,
in the absence of any adjustment, inappropriate results may arise in
cases that a U.S. shareholder's pro rata share of the tested loss of
one CFC offsets the shareholder's pro rata share of the tested income
of another CFC in determining the shareholder's GILTI inclusion amount.
In particular, a U.S. shareholder disposing of the stock of a tested
loss CFC could recognize second, duplicative benefits from a single
economic loss. Therefore, the proposed regulations provide that, when
determining gain or loss on the disposition of the stock of a tested
loss CFC, the U.S. shareholder's basis in the stock of the tested loss
CFC is reduced by the cumulative amount of tested losses that were used
to offset tested income in determining the shareholder's net CFC tested
income.
The statute is silent on the computation of GILTI for members of a
consolidated group and for domestic partnerships and their partners.
Absent these regulations, there would be uncertainty among taxpayers as
to whether to calculate a GILTI inclusion amount at the level of a
member or its consolidated group, or at the level of a domestic
partnership or its partners. Without guidance, different taxpayers
would likely take different positions on these matters. The proposed
regulations provide clarity by (1) determining the GILTI inclusion
amount of each member of a consolidated group by taking into account
the relevant items of each CFC owned by members of such group, and (2)
providing guidance on the computation of the GILTI inclusion amount of
domestic partnerships and their partners.
Finally, these proposed regulations provide reporting requirements
necessary to properly administer and enforce section 951A. In
particular, the Treasury Department and the IRS have determined that
U.S. shareholders must file a new Schedule I-1, Information for Global
Intangible Low-Taxed Income, associated with Form 5471, Information
Return of U.S. Persons With Respect To Certain Foreign Corporations, as
well as new Form 8992, U.S Shareholder Calculation of Global Intangible
Low-Taxed Income (GILTI), in order to provide the information that a
U.S. shareholder is using with respect to each of its CFCs to determine
the U.S. shareholder's GILTI inclusion amount for a taxable year. The
proposed regulations also provide that a U.S. shareholder partnership
must include on its Schedule K-1, associated with Form 1065, U.S.
Return of Partnership Income, certain information necessary for its
partners to determine their distributive share of the partnership's
GILTI inclusion amount or, in the case of U.S. shareholder partners, to
determine their own GILTI inclusion amounts. Finally, to coordinate
with the amendment to section 951(a)(1) that removed the 30-day CFC
status requirement for subpart F inclusions, the proposed regulations
provide that certain information reporting is required for U.S. persons
that control a foreign corporation at any time during an annual
accounting period.
2. Anticipated Benefits and Costs of the Proposed Regulations
a. Baseline
The Treasury Department and the IRS have assessed the benefits and
costs of the proposed regulations against a baseline--the way the world
would look in the absence of the proposed regulations.
b. Anticipated Benefits
The Treasury Department and the IRS expect that the certainty and
clarity provided by these proposed regulations, relative to the
baseline, will enhance U.S. economic performance under the statute.
Because a tax has not previously been imposed on GILTI and the statute
is silent on certain aspects of definitions and calculations, taxpayers
can particularly benefit from enhanced specificity regarding the
relevant terms and necessary calculations they are required to apply
under the statute. In the absence of this enhanced specificity,
similarly situated taxpayers might interpret the statutory rules of
section 951A differently, potentially resulting in inequitable
outcomes. For example, different taxpayers might pursue income-
generating activities based on different assumptions about whether that
income will be counted as GILTI, and some taxpayers may forego specific
investments that other taxpayers deem worthwhile based on different
interpretations of the tax consequences alone. The guidance provided in
these regulations helps to ensure that
[[Page 51086]]
taxpayers face more uniform incentives when making economic decisions,
a tenet of economic efficiency. Consistent reporting across taxpayers
also increases the IRS's ability to consistently enforce the tax rules,
thus increasing equity and decreasing opportunities for tax evasion.
For example, the proposed regulations provide a definition of
specified interest expense that adopts a netting approach. Alternatives
would be to adopt a tracing approach or to remain silent. The Treasury
Department and the IRS rejected a tracing approach because it would be
more burdensome for taxpayers due to the complexity of matching, at the
U.S. shareholder-level, of the shareholder's pro rata share of each
item of interest expense with its pro rata share of each item of
interest income. The Treasury Department and the IRS also rejected the
option of remaining silent because if taxpayers relied on statutory
language alone, taxpayers would adopt different approaches because the
statute does not define what ``attributable'' means, leaving it open to
differing interpretations.
As discussed above, there are similarities between GILTI and
subpart F. Where appropriate, these proposed regulations rely on rules
already developed under subpart F. Since taxpayers to whom GILTI
applies are already subject to the subpart F regime, it is less costly
to them to apply rules they are already familiar with, and they will
benefit in reduced time and cost spent learning new rules. For example,
the proposed regulations apply existing subpart F rules for determining
allowable deductions for GILTI purposes. By relying on existing
infrastructure, the proposed regulations allow taxpayers to use the
same analysis that they already conduct for subpart F purposes. For
additional discussion of the rules for determining allowable
deductions, see section I.C.1 of the Explanation of Provisions section.
The Treasury Department and the IRS next considered the benefits
and costs of providing these specific proposed terms, calculations, and
other details regarding GILTI. In developing these proposed
regulations, the Treasury Department and the IRS have generally aimed
to apply the principle that an economically efficient tax system would
treat income derived from similar economic decisions similarly, to the
extent consistent with the statute and considerations of
administrability of the tax system. Similar economic decisions, in the
context of GILTI, are those that involve property of a similar degree
of immobility and that demonstrate active business operations and
presence in any particular jurisdiction. See, for example, Senate
Explanation, at 366.
An economically efficient tax system would also generally keep the
choice among businesses' ownership and organizational structures
neutral contingent on the provisions of the corporate income tax and
other tax provisions that may affect organizational structure. The
Treasury Department and the IRS expect that the proposed regulations,
in providing that GILTI be generally calculated on a consolidated group
basis and at the partner level in the case of partners that are U.S.
shareholders of one or more partnership CFCs, will ensure that
shareholders face uniform tax treatment on their GILTI-relevant
investments regardless of ownership or organizational structure, thus
encouraging market-driven as opposed to tax-driven structuring
decisions. If, as an alternative policy approach, GILTI were determined
solely at the level of a member (in the case of consolidated groups) or
solely at the level of a partnership (in the case of domestic
partnerships and their partners), many taxpayers would be compelled to
reorganize their ownership structures just to obtain the full
aggregation of CFC attributes as envisioned by Congress. Yet other
taxpayers would be incentivized to reorganize in an attempt to avoid
full aggregation so as to reduce their inclusion below an amount that
accurately reflects their GILTI. For an illustration, see section I.F
of the Explanation of Provisions. Therefore, the Treasury Department
and the IRS propose that GILTI be calculated on a consolidated group
basis and at the partner level in the case of partners that are U.S.
shareholders of one or more partnership CFCs. The preamble discusses
further why those approaches were taken, as well as describing
alternative approaches considered. The Treasury Department and the IRS
request comments on this proposed approach.
c. Anticipated Impacts on Administrative and Compliance Costs
Because the statute requires payment of tax regardless of the
issuance of regulations or instructions, the new forms, revisions to
existing forms, and proposed regulations can lower the burden on
taxpayers of determining their tax liability. The Treasury Department
and the IRS expect that the proposed regulations will reduce the costs
for taxpayers to comply with the Act, relative to the baseline of no
promulgated regulations. The proposed regulations require that each
U.S. shareholder partnership provide to each partner its distributive
share of the partnership's GILTI inclusion amount and, if the partner
is a U.S. shareholder of one or more partnership CFCs, the partner's
proportionate share of the partnership's pro rata share of each
relevant item of the partnership CFC. Under the baseline, the burden
would potentially have fallen on each partner, who would be required to
determine its own distributive share of the partnership's GILTI
inclusion amount or, if a U.S. shareholder of a partnership CFC,
determine its own GILTI inclusion amount by reference to the
partnership's pro rata share of items of the partnership CFC. While
this latter burden is difficult to assess, because it is unclear how
partners would calculate these amounts in the absence of a
determination by the partnership and it is similarly unclear what
efforts might be made by the partnership to help the partners fulfill
this obligation, the Treasury Department and the IRS expect that it
would be significantly greater than the burden incurred under the
proposed regulations.
Proposed Sec. 1.6038-2(a) increases record-keeping requirements
for taxpayers because it requires all taxpayers to file Form 5471 if
they held stock in a CFC during the taxable year regardless of the
duration of the holding period, rather than only if they held the stock
for a 30-day period under the current regulation. The changes in the
proposed regulation derive directly from statutory changes to the
holding period requirement in the Act.
C. Paperwork Reduction Act
The collections of information in these proposed regulations with
respect to section 951A are in proposed Sec. Sec. 1.951A-5(f) and
1.6038-5. A separate collection of information applicable to
controlling U.S. shareholders of a foreign corporation is in proposed
Sec. 1.6038-2(a).
The collection of information in proposed Sec. 1.6038-5 is
mandatory for each U.S. shareholder (including a U.S. shareholder
partner) that owns (within the meaning of section 958(a)) stock of a
CFC. The collection of information in proposed Sec. 1.6038-5 is
satisfied by submitting a new reporting form, Form 8992, U.S.
Shareholder Calculation of Global Intangible Low-Taxed Income (GILTI),
with an income tax return. In addition, for those U.S. shareholders
that are required to file Form 5471, Information Return of U.S. Persons
with Respect to Certain Foreign Corporations, a new Schedule I-1,
Information for Global Intangible Low-Taxed Income, has been added. For
purposes of the Paperwork Reduction Act of 1995 (44
[[Page 51087]]
U.S.C. 3507(d)) (``PRA''), the reporting burden associated with
proposed Sec. 1.6038-5 will be reflected in the IRS Form 14029,
Paperwork Reduction Act Submission, associated with Form 5471 (OMB
control number 1545-0704) and the new Form 8992 (OMB control number
1545-0123).
The collection of information in proposed Sec. 1.951A-5(f)
requires each U.S. shareholder partnership to provide to its partners
their distributive share of the partnership's GILTI inclusion amount,
as well as provide to each U.S. shareholder partner their proportionate
share of the partnership's pro rata share (if any) of each CFC tested
item of each partnership CFC of the partnership. The Treasury
Department and the IRS anticipate revising Schedule K-1 (Form 1065),
Partner's Share of Income, Deductions, Credits, etc., or its
instructions to require the provision of this information. For purposes
of the PRA, the reporting burden associated with proposed Sec. 1.951A-
5(f) will be reflected in the IRS Form 14029, Paperwork Reduction Act
Submission, associated with Schedule K-1 (Form 1065, OMB control number
1545-0123).
The collection of information currently required from a U.S. person
that controls a foreign corporation is revised by proposed Sec.
1.6038-2(a). Section 1.6038-2(a) presently requires only those U.S.
persons with uninterrupted control of a foreign corporation for 30 days
or more during the shareholder's annual accounting period to file Form
5471 for that period. Consistent with statutory changes in the Act, the
revised collection of information in proposed Sec. 1.6038-2(a)
eliminates the 30-day holding period as a precondition to reporting and
requires every U.S. person that controls a foreign corporation at any
time during an annual accounting period to file Form 5471 for that
period. For purposes of the PRA, the reporting burden associated with
proposed Sec. 1.6038-2(a) will be reflected in the IRS Form 14029,
Paperwork Reduction Act Submission, associated with Form 5471.
When available, drafts of IRS forms are posted for comment at
https://apps.irs.gov/app/picklist/list/draftTaxForms.html.
Related New or Revised Tax Forms
----------------------------------------------------------------------------------------------------------------
Revision of Number of respondents
New existing form (estimated)
----------------------------------------------------------------------------------------------------------------
Schedule I-1 (Form 5471)............................. [check] ............... 25,000-35,000
Form 8992............................................ [check] ............... 25,000-35,000
Form 1065/1120S, Schedule K.......................... ............... [check] 8,000-12,000
Form 5471 (30 days).................................. ............... [check] <1,000
----------------------------------------------------------------------------------------------------------------
D. Regulatory Flexibility Act
It is hereby certified that this notice of proposed rulemaking 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).
The domestic small business entities that are subject to section
951A and this notice of proposed rulemaking are those domestic small
business entities that are U.S. shareholders of a CFC.\2\ Generally, a
U.S. shareholder is any U.S. person that owns 10 percent or more of a
foreign corporation's stock, measured either by value or voting power.
A CFC is a foreign corporation in which more than 50 percent of its
stock is owned by U.S. shareholders, again measured either by value or
voting power. Data about the number of domestic small business entities
potentially affected by these regulations are not readily available.
---------------------------------------------------------------------------
\2\ The Treasury Department and the IRS estimate that there are
25,000-35,000 respondents of all sizes that are likely to file
Schedule I-1, Form 5471. Only a small proportion of these are likely
to be small businesses. The Treasury Department and the IRS request
comments on the number of small businesses that are likely to file
Schedule I-1.
---------------------------------------------------------------------------
The domestic small business entities that are subject to the
requirements of proposed Sec. 1.951A-5(f) or 1.6038-5 of this notice
of proposed rulemaking are U.S. shareholders of one or more CFCs. The
Treasury Department and the IRS do not have data to assess the number
of small entities potentially affected by Sec. 1.951A-5(f) or 1.6038-
5. 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. Therefore, the Treasury Department and the
IRS do not believe that a substantial number of domestic small business
entities will be subject to proposed Sec. 1.951A-5(f) or 1.6038-5.
Consequently, the Treasury Department and the IRS do not believe that
proposed Sec. 1.951A-5(f) or 1.6038-5 will have a significant economic
impact on a substantial number of domestic small business entities.
Therefore, a Regulatory Flexibility Analysis under the Regulatory
Flexibility Act is not required with respect to the collection of
information requirements of proposed Sec. 1.951A-5(f) or 1.6038-5.
Existing Sec. 1.6038-2(a) requires only those U.S. persons with
uninterrupted control of a foreign corporation for 30 days or more
during the shareholder's annual accounting period to file Form 5471 for
that period. Proposed Sec. 1.6038-2(a) eliminates the 30-day holding
period as a precondition to reporting and requires every U.S. person
that controls a foreign corporation at any time during an annual
accounting period to file Form 5471 for that period. As a result, those
U.S. shareholders that control a foreign corporation for less than 30
days will now be required to file Form 5471 pursuant to proposed Sec.
1.6038-2(a). The domestic small business entities subject to the
requirements of proposed Sec. 1.6038-2(a) are those domestic small
business entities that control a foreign corporation at any time during
a taxable year. For these purposes, a domestic small business entity
controls a foreign corporation by owning more than 50 percent of that
foreign corporation's stock, measured either by voting power or value.
The Treasury Department and the IRS do not believe that a substantial
number of domestic small business entities that are controlling
shareholders of a foreign corporation will become Form 5471 filers due
to the information collection in proposed Sec. 1.6038-2(a) for the
following reasons. First, significant resources and investment are
required for a U.S. person to own and operate a business in a foreign
country as a corporation. Second, the Treasury Department and the IRS
believe that satisfying the stock ownership requirement for control for
purposes of proposed Sec. 1.6038-2(a) requires a potential outlay of
significant resources and investment, including active involvement in
managing the foreign corporation due to controlling ownership of the
corporation, such that
[[Page 51088]]
few domestic small business entities are likely to control foreign
corporations for purposes of proposed Sec. 1.6038-2(a). For these
reasons, the Treasury Department and the IRS do not believe it likely
that a domestic small business entity would have controlling ownership
of a foreign corporation for less than a 30-day period in a taxable
year. As a result, the Treasury Department and the IRS do not believe
that a substantial number of domestic small business entities will be
affected by the proposed Sec. 1.6038-2(a) eliminating the 30-day
holding period as a precondition to filing Form 5471. Consequently, the
Treasury Department and the IRS do not believe that proposed Sec.
1.6038-2(a) will have a significant economic impact on a substantial
number of domestic small business entities. Therefore, a Regulatory
Flexibility Analysis under the Regulatory Flexibility Act is not
required with respect to the requirements of proposed Sec. 1.6038-
2(a).
Notwithstanding this certification, the Treasury Department and the
IRS invite comments from the public about the impact of this proposed
rule on small entities.
Pursuant to section 7805(f), 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. The IRS
invites the public to comment on this certification.
E. 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 2018, that threshold is approximately $150 million. This
rule does 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.
F. 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. This proposed rule does not have
federalism implications and does 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 specifically on the issues identified in
sections I.B.3, I.C.1, I.D.4, I.F, I.G.1, I.G.3, and III.C of the
Explanations of Provisions. 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.
Drafting Information
The principal authors of the proposed regulations are Melinda E.
Harvey and Michael Kaercher of the Office of Associate Chief Counsel
(International) and Austin Diamond-Jones and Kevin M. Jacobs of the
Office of Associate Chief Counsel (Corporate). However, other personnel
from the IRS and the Treasury Department participated in the
development of the proposed regulations.
Statement of Availability of IRS Documents
IRS Revenue Procedures, Revenue Rulings, notices, and other
guidance cited in this document are published in the Internal Revenue
Bulletin (or Cumulative Bulletin) and are available from the
Superintendent of Documents, U.S. Government Printing Office,
Washington, DC 20402, or by visiting the IRS website at https://www.irs.gov.
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 is amended by adding
entries in numerical order to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.951-1 also issued under 26 U.S.C. 7701(a). * * *
Sections 1.951A-2 and 1.951A-3 also issued under 26 U.S.C.
951A(d). * * *
Section 1.951A-5 also issued under 26 U.S.C. 6031.
Section 1.951A-6 also issued under 26 U.S.C. 951A(f)(1)(B). * *
*
Section 1.1502-51 also issued under 26 U.S.C. 1502. * * *
Section 1.6038-2 also issued under 26 U.S.C. 6038. * * *
Section 1.6038-5 also issued under 26 U.S.C. 6038. * * *
0
Par. 2. Section 1.951-1 is amended by:
0
1. Revising the introductory language in paragraph (a).
0
2. Revising paragraphs (e) and (g)(1).
0
3. Adding paragraphs (h) and (i).
The revisions and additions read as follows:
Sec. 1.951-1 Amounts included in gross income of United States
shareholders.
(a) In general. If a foreign corporation is a controlled foreign
corporation (within the meaning of section 957) at any time during any
taxable year of such corporation, every person--
* * * * *
(e) Pro rata share of subpart F income defined--(1) In general--(i)
Hypothetical distribution. For purposes of paragraph (b) of this
section, a United States shareholder's pro rata share of a controlled
foreign corporation's subpart F income for a taxable year is the amount
that bears the same ratio to the corporation's subpart F income for the
taxable year as the amount of the corporation's current earnings and
profits that would be distributed with respect to the stock of the
corporation which the United States shareholder owns (within the
meaning of section 958(a)) for the taxable year bears to the total
amount of the corporation's current earnings and profits that would be
distributed with respect to the stock owned by all the shareholders of
the corporation if all the current earnings and profits of the
corporation for the taxable year (not reduced by actual distributions
during the year) were distributed (hypothetical distribution) on the
last day of the corporation's taxable year on which such corporation is
a controlled foreign corporation (hypothetical distribution date).
(ii) Determination of current earnings and profits. For purposes of
this paragraph (e), the amount of current earnings and profits of a
controlled foreign corporation for a taxable year is treated as the
greater of the following two amounts:
[[Page 51089]]
(A) The earnings and profits of the corporation for the taxable
year determined under section 964; or
(B) The sum of the subpart F income (as determined under section
952 and increased as provided under section 951A(c)(2)(B)(ii) and Sec.
1.951A-6(d)) of the corporation for the taxable year and the tested
income (as defined in section 951A(c)(2)(A) and Sec. 1.951A-2(b)(1))
of the corporation for the taxable year.
(2) One class of stock. If a controlled foreign corporation for a
taxable year has only one class of stock outstanding, the amount of the
corporation's current earnings and profits distributed in the
hypothetical distribution with respect to each share in the class of
stock is determined as if the hypothetical distribution were made pro
rata with respect to each share in the class of stock.
(3) More than one class of stock. If a controlled foreign
corporation for a taxable year has more than one class of stock
outstanding, the amount of the corporation's current earnings and
profits distributed in the hypothetical distribution with respect to
each class of stock is determined under this paragraph (e)(3) based on
the distribution rights of each class of stock on the hypothetical
distribution date, and then further distributed pro rata with respect
to each share in the class of stock. Subject to paragraphs (e)(4)
through (6) of this section, the distribution rights of a class of
stock are determined taking into account all facts and circumstances
related to the economic rights and interest in the current earnings and
profits of the corporation of each class, including the terms of the
class of stock, any agreement among the shareholders and, where
appropriate, the relative fair market value of shares of stock.
(4) Special rules--(i) Redemptions, liquidations, and returns of
capital. Notwithstanding the terms of any class of stock of the
controlled foreign corporation or any agreement or arrangement with
respect thereto, no amount of current earnings and profits is
distributed in the hypothetical distribution with respect to a
particular class of stock to the extent that a distribution of such
amount would constitute a distribution in redemption of stock (even if
such redemption would be treated as a distribution of property to which
section 301 applies pursuant to section 302(d)), a distribution in
liquidation, or a return of capital.
(ii) Certain cumulative preferred stock. If a controlled foreign
corporation has outstanding a class of redeemable preferred stock with
cumulative dividend rights and dividend arrearages that do not compound
at least annually at a rate that equals or exceeds the applicable
Federal rate (as defined in section 1274(d)(1)) (AFR), the amount of
the corporation's current earnings and profits distributed in the
hypothetical distribution with respect to the class of stock may not
exceed the amount of dividends actually paid during the taxable year
with respect to the class of stock plus the present value of the unpaid
current dividends with respect to the class determined using the AFR
that applies on the date the stock is issued for the term from such
issue date to the mandatory redemption date and assuming the dividends
will be paid at the mandatory redemption date. For purposes of this
paragraph (e)(4)(ii), if the class of preferred stock does not have a
mandatory redemption date, the mandatory redemption date is the date
that the class of preferred stock is expected to be redeemed based on
all facts and circumstances.
(iii) Dividend arrearages. If there is an arrearage in dividends
for prior taxable years with respect to a class of preferred stock of a
controlled foreign corporation, an amount of the corporation's current
earnings and profits is distributed in the hypothetical distribution to
the class of preferred stock by reason of the arrearage only to the
extent the arrearage exceeds the accumulated earnings and profits of
the controlled foreign corporation remaining from prior taxable years
beginning after December 31, 1962, as of the beginning of the taxable
year, or the date on which such stock was issued, whichever is later.
If there is an arrearage in dividends for prior taxable years with
respect to more than one class of preferred stock, the previous
sentence is applied to each class in order of priority, except that the
accumulated earnings and profits remaining after the applicable date
are reduced by the earnings and profits necessary to satisfy arrearages
with respect to classes of stock with a higher priority. For purposes
of this paragraph (e)(4)(iii), the amount of any arrearage is
determined by taking into account the time value of money principles in
paragraph (e)(4)(ii) of this section.
(5) Restrictions or other limitations on distributions--(i) In
general. A restriction or other limitation on distributions of an
amount of earnings and profits by a controlled foreign corporation is
not taken into account in determining the amount of the corporation's
current earnings and profits distributed in a hypothetical distribution
to a class of stock of the controlled foreign corporation.
(ii) Definition. For purposes of paragraph (e)(5)(i) of this
section, a restriction or other limitation on distributions includes
any limitation that has the effect of limiting the distribution of an
amount of earnings and profits by a controlled foreign corporation with
respect to a class of stock of the corporation, other than currency or
other restrictions or limitations imposed under the laws of any foreign
country as provided in section 964(b).
(iii) Exception for certain preferred distributions. For purposes
of paragraph (e)(5)(i) of this section, the right to receive
periodically a fixed amount (whether determined by a percentage of par
value, a reference to a floating coupon rate, a stated return expressed
in terms of a certain amount of U.S. dollars or foreign currency, or
otherwise) with respect to a class of stock the distribution of which
is a condition precedent to a further distribution of earnings and
profits that year with respect to any class of stock (not including a
distribution in partial or complete liquidation) is not a restriction
or other limitation on the distribution of earnings and profits by a
controlled foreign corporation.
(iv) Illustrative list of restrictions and limitations. Except as
provided in paragraph (e)(5)(iii) of this section, restrictions or
other limitations on distributions include, but are not limited to--
(A) An arrangement that restricts the ability of a controlled
foreign corporation to pay dividends on a class of stock of the
corporation until a condition or conditions are satisfied (for example,
until another class of stock is redeemed);
(B) A loan agreement entered into by a controlled foreign
corporation that restricts or otherwise affects the ability to make
distributions on its stock until certain requirements are satisfied; or
(C) An arrangement that conditions the ability of a controlled
foreign corporation to pay dividends to its shareholders on the
financial condition of the corporation.
(6) Transactions and arrangements with a principal purpose of
reducing pro rata shares. For purposes of this paragraph (e), any
transaction or arrangement that is part of a plan a principal purpose
of which is the avoidance of Federal income taxation, including, but
not limited to, a transaction or arrangement to reduce a United States
shareholder's pro rata share of the subpart F income of a controlled
foreign corporation, which transaction or arrangement would avoid
Federal income taxation without regard
[[Page 51090]]
to this paragraph (e)(6), is disregarded in determining such United
States shareholder's pro rata share of the subpart F income of the
corporation. This paragraph (e)(6) also applies for purposes of the pro
rata share rules described in Sec. 1.951A-1(d) that reference this
paragraph (e), including the rules in Sec. 1.951A-1(d)(3) that
determine the pro rata share of qualified business asset investment
based on the pro rata share of tested income.
(7) Examples. The application of this section is illustrated by the
examples in this paragraph (e)(7).
(i) Common facts for examples in paragraph (e)(7). Except as
otherwise stated, the following facts are assumed for purposes of the
examples.
(A) FC1 is a controlled foreign corporation.
(B) USP1, USP2, and USP3 are domestic corporations and United
States shareholders of FC1.
(C) Individual A is a foreign individual, and FC2 is a foreign
corporation.
(D) All persons use the calendar year as their taxable year.
(E) Any ownership of FC1 by any shareholder is for all of Year 1.
(F) The common shareholders of FC1 are entitled to dividends when
declared by FC1's board of directors.
(G) There are no accrued but unpaid dividends with respect to
preferred shares, and common shares have positive liquidation value.
(H) FC1 makes no distributions during Year 1.
(I) There are no other facts and circumstances related to the
economic rights and interest of any class of stock in the current
earnings and profits of a foreign corporation, and no transaction or
arrangement was entered into as part of a plan a principal purpose of
which is the avoidance of Federal income taxation.
(J) FC1 does not have tested income within the meaning of section
951A(c)(2)(A) and Sec. 1.951A-2(b)(1) or tested loss within the
meaning of section 951A(c)(2)(B) and Sec. 1.951A-2(b)(2).
(ii) Example 1: Single class of stock-- (A) Facts. FC1 has
outstanding 100 shares of one class of stock. USP1 owns 60 shares of
FC1. USP2 owns 40 shares of FC1. For Year 1, FC1 has $1,000x of
earnings and profits and $100x of subpart F income within the
meaning of section 952.
(B) Facts. Analysis. FC1 has one class of stock. Therefore,
under paragraph (e)(2) of this section, FC1's current earnings and
profits of $1,000x are distributed in the hypothetical distribution
pro rata to each share of stock. Accordingly, under paragraph (e)(1)
of this section, for Year 1, USP1's pro rata share of FC1's subpart
F income is $60x ($100x x $600x/$1,000x) and USP2's pro rata share
of FC1's subpart F income is $40x ($100x x $400x/$1,000x).
(iii) Example 2: Common and preferred stock-- (A) Facts. FC1 has
outstanding 70 shares of common stock and 30 shares of 4%
nonparticipating, voting preferred stock with a par value of $10x
per share. USP1 owns all of the common shares. Individual A owns all
of the preferred shares. For Year 1, FC1 has $100x of earnings and
profits and $50x of subpart F income within the meaning of section
952. In Year 1, FC1 distributes as a dividend $12x to Individual A
with respect to Individual A's preferred shares.
(B) Analysis. The distribution rights of the preferred shares
are not a restriction or other limitation within the meaning of
paragraph (e)(5) of this section. Under paragraph (e)(3) of this
section, the amount of FC1's current earnings and profits
distributed in the hypothetical distribution with respect to
Individual A's preferred shares is $12x and with respect to USP1's
common shares is $88x. Accordingly, under paragraph (e)(1) of this
section, USP1's pro rata share of FC1's subpart F income is $44x
($50x x $88x/$100x) for Year 1.
(iv) Example 3: Restriction based on cumulative income-- (A)
Facts. FC1 has outstanding 10 shares of common stock and 400 shares
of 2% nonparticipating, voting preferred stock with a par value of
$1x per share. USP1 owns all of the common shares. FC2 owns all of
the preferred shares. USP1 and FC2 cause the governing documents of
FC1 to provide that no dividends may be paid to the common
shareholders until FC1 cumulatively earns $100,000x of income. For
Year 1, FC1 has $50x of earnings and profits and $50x of subpart F
income within the meaning of section 952. In Year 1, FC1 distributes
as a dividend $8x to FC2 with respect to FC2's preferred shares.
(B) Analysis. The agreement restricting FC1's ability to pay
dividends to common shareholders until FC1 cumulatively earns
$100,000x of income is a restriction or other limitation within the
meaning of paragraph (e)(5) of this section. Therefore, the
restriction is disregarded for purposes of determining the amount of
FC1's current earnings and profits distributed in the hypothetical
distribution to a class of stock. The distribution rights of the
preferred shares are not a restriction or other limitation within
the meaning of paragraph (e)(5) of this section. Under paragraph
(e)(3) of this section, the amount of FC1's current earnings and
profits distributed in the hypothetical distribution with respect to
FC2's preferred shares is $8x and with respect to USP1's common
shares is $42x. Accordingly, under paragraph (e)(1) of this section,
USP1's pro rata share of FC1's subpart F income is $42x for Year 1.
(v) Example 4: Redemption rights-- (A) Facts. FC1 has
outstanding 40 shares of common stock and 10 shares of 4%
nonparticipating, voting preferred stock with a par value of $50x
per share. Pursuant to the terms of the preferred stock, FC1 has the
right to redeem at any time, in whole or in part, the preferred
stock. FC2 owns all of the preferred shares. USP1, wholly owned by
FC2, owns all of the common shares. For Year 1, FC1 has $100x of
earnings and profits and $100x of subpart F income within the
meaning of section 952. In Year 1, FC1 distributes as a dividend
$20x to FC2 with respect to FC2's preferred shares.
(B) Analysis. If FC1 were treated as having redeemed any
preferred shares, the redemption would be treated as a distribution
to which section 301 applies under section 302(d) due to FC2's
constructive ownership of the common shares. However, under
paragraph (e)(4)(i) of this section, no amount of earnings and
profits is distributed in the hypothetical distribution to the
preferred shareholders on the hypothetical distribution date as a
result of FC1's right to redeem, in whole or in part, the preferred
shares. FC1's redemption rights with respect to the preferred shares
cannot affect the distribution of current earnings and profits in
the hypothetical distribution to FC1's shareholders. As a result,
the amount of FC1's current earnings and profits distributed in the
hypothetical distribution with respect to FC2's preferred shares is
$20x and with respect to USP1's common shares is $80x. Accordingly,
under paragraph (e)(1) of this section, USP1's pro rata share of
FC1's subpart F income is $80x for Year 1.
(vi) Example 5: Shareholder owns common and preferred stock--
(A) Facts. FC1 has outstanding 40 shares of common stock and 60
shares of 6% nonparticipating, nonvoting preferred stock with a par
value of $100x per share. USP1 owns 30 shares of the common stock
and 15 shares of the preferred stock during Year 1. The remaining 10
shares of common stock and 45 shares of preferred stock of FC1 are
owned by Individual A. For Year 1, FC1 has $1,000x of earnings and
profits and $500x of subpart F income within the meaning of section
952.
(B) Analysis. Under paragraph (e)(5)(iii) of this section, the
right of the holder of the preferred stock to receive 6% of par
value is not a restriction or other limitation within the meaning of
paragraph (e)(5) of this section. The amount of FC1's current
earnings and profits distributed in the hypothetical distribution
with respect to FC1's preferred shares is $360x (0.06 x $100x x 60)
and with respect to its common shares is $640x ($1,000x-$360x). As a
result, the amount of FC1's current earnings and profits distributed
in the hypothetical distribution to USP1 is $570x, the sum of $90x
($360x x 15/60) with respect to its preferred shares and $480x
($640x x 30/40) with respect to its common shares. Accordingly,
under paragraph (e)(1) of this section, USP1's pro rata share of the
subpart F income of FC1 is $285x ($500x x $570x/$1,000x).
(vii) Example 6: Subpart F income and tested income-- (A) Facts.
FC1 has outstanding 700 shares of common stock and 300 shares of 4%
nonparticipating, voting preferred stock with a par value of $100x
per share. USP1 owns all of the common shares. USP2 owns all of the
preferred shares. For Year 1, FC1 has $10,000x of earnings and
profits, $2,000x of subpart F income within the meaning of section
952, and $9,000x of tested income within the meaning of section
951A(c)(2)(A) and Sec. 1.951A-2(b)(1).
(B) Analysis--(1) Pro rata share of subpart F income. The
current earnings and profits of
[[Page 51091]]
FC1 determined under paragraph (e)(1)(ii) of this section are
$11,000x, the greater of FC1's earnings and profits as determined
under section 964 ($10,000x) or the sum of FC1's subpart F income
and tested income ($2,000x + $9,000x). The amount of FC1's current
earnings and profits distributed in the hypothetical distribution
with respect to USP2's preferred shares is $1,200x (.04 x $100x x
300) and with respect to USP1's common shares is $9,800x ($11,000x-
$1,200x). Accordingly, under paragraph (e)(1) of this section,
USP1's pro rata share of FC1's subpart F income is $1,782x ($2,000x
x $9,800x/$11,000x), and USP2's pro rata share of FC1's subpart F
income is $218x ($2,000x x $1,200x/$11,000x).
(2) Pro rata share of tested income. The same analysis applies
for the hypothetical distribution with respect to the tested income
as under paragraph (ii)(A) of this Example 6 with respect to the
subpart F income. Accordingly, under Sec. 1.951A-1(d)(2), USP1's
pro rata share of FC1's tested income is $8,018x ($9,000x x $9,800x/
$11,000x), and USP2's pro rata share of FC1's tested income is $982x
($9,000x x $1,200x/$11,000x) for Year 1.
(viii) Example 7: Subpart F income and tested loss-- (A) Facts.
The facts are the same as in paragraph (A) of Example 6, except that
for Year 1, FC1 has $8,000x of earnings and profits, $10,000x of
subpart F income within the meaning of section 952 (but without
regard to the limitation in section 952(c)), and $2,000x of tested
loss within the meaning of section 951A(c)(2)(B) and Sec. 1.951A-
2(b)(2). Under section 951A(c)(2)(B)(ii) and Sec. 1.951A-6(d), the
earnings and profits of FC1 are increased for purposes of section
952 by the amount of FC1's tested loss. Accordingly, taking into
account section 951A(c)(2)(B)(ii) and Sec. 1.951A-6(d), the subpart
F income of FC1 is $10,000x.
(B) Analysis--(1) Pro rata share of subpart F income. The
current earnings and profits determined under paragraph (e)(1)(ii)
of this section are $10,000x, the greater of the earnings and
profits of FC1 determined under section 964 ($8,000x) or the sum of
FC1's subpart F income and tested income ($10,000x + $0). The amount
of FC1's current earnings and profits distributed in the
hypothetical distribution with respect to USP2's preferred shares is
$1,200x (.04 x $100x x 300) and with respect to Corp A's common
shares is $8,800x ($10,000x-$1,200x). Accordingly, under paragraph
(e)(1) of this section, for Year 1, USP1's pro rata share of FC1's
subpart F income is $8,800x and USP2's pro rata share of FC1's
subpart F income is $1,200x.
(2) Pro rata share of tested loss. The current earnings and
profits determined under Sec. 1.951A-1(d)(4)(i)(B) are $2,000x, the
amount of FC1's tested loss. Under Sec. 1.951A-1(d)(4)(i)(C), the
entire $2,000x tested loss is distributed in the hypothetical
distribution with respect to USP1's common shares. Accordingly,
USP1's pro rata share of the tested loss is $2,000x.
* * * * *
(g) * * *
(1) In general. For purposes of sections 951 through 964, the term
``United States shareholder'' means, with respect to a foreign
corporation, a United States person (as defined in section 957(c)) who
owns within the meaning of section 958(a), or is considered as owning
by applying the rules of ownership of section 958(b), 10 percent or
more of the total combined voting power of all classes of stock
entitled to vote of such foreign corporation, or 10 percent or more of
the total value of shares of all classes of stock of such foreign
corporation.
* * * * *
(h) Special rule for partnership blocker structures--(1) In
general. For purposes of sections 951 through 964, a controlled
domestic partnership is treated as a foreign partnership in determining
the stock of a controlled foreign corporation owned (within the meaning
of section 958(a)) by a United States person if the following
conditions are satisfied--
(i) Without regard to this paragraph (h), the controlled domestic
partnership owns (within the meaning of section 958(a)) stock of a
controlled foreign corporation; and
(ii) If the controlled domestic partnership (and all other
controlled domestic partnerships in the chain of ownership of the
controlled foreign corporation) were treated as foreign--
(A) The controlled foreign corporation would continue to be a
controlled foreign corporation; and
(B) At least one United States shareholder of the controlled
foreign corporation would be treated as owning (within the meaning of
section 958(a)) stock of the controlled foreign corporation through
another foreign corporation that is a direct or indirect partner in the
controlled domestic partnership.
(2) Definition of a controlled domestic partnership. For purposes
of paragraph (h)(1) of this section, the term controlled domestic
partnership means, with respect to a United States shareholder
described in paragraph (h)(1)(ii)(B) of this section, a domestic
partnership that is controlled by the United States shareholder and
persons related to the United States shareholder. For purposes of this
paragraph (h)(2), control generally is determined based on all the
facts and circumstances, except that a partnership will be deemed to be
controlled by a United States shareholder and related persons in any
case in which those persons, in the aggregate, own (directly or
indirectly through one or more partnerships) more than 50 percent of
the interests in the partnership capital or profits. For purposes of
this paragraph (h)(2), a related person is, with respect to a United
States shareholder, a person that is related to the United States
shareholder within the meaning of section 267(b) or 707(b)(1).
(3) Example-- (i) Facts. USP, a domestic corporation, owns all
of the stock of CFC1 and CFC2. CFC1 and CFC2 own 60% and 40%,
respectively, of the interests in the capital and profits of DPS, a
domestic partnership. DPS owns all of the stock of CFC3. Each of
CFC1, CFC2, and CFC3 is a controlled foreign corporation. USP, DPS,
CFC1, CFC2, and CFC3 all use the calendar year as their taxable
year. For Year 1, CFC3 has $100x of subpart F income (as defined
under section 952) and $100x of earnings and profits.
(ii) Analysis. DPS is a controlled domestic partnership with
respect to USP within the meaning of paragraph (h)(2) of this
section because more than 50% of the interests in its capital or
profits are owned by persons related to USP within the meaning of
section 267(b) (that is, CFC1 and CFC2), and thus DPS is controlled
by USP and related persons. Without regard to paragraph (h) of this
section, DPS is a United States shareholder that owns (within the
meaning of section 958(a)) stock of CFC3, a controlled foreign
corporation. If DPS were treated as foreign, CFC3 would continue to
be a controlled foreign corporation, and USP would be treated as
owning (within the meaning of section 958(a)) stock in CFC3 through
CFC1 and CFC2, which are both partners in DPS. Thus, under paragraph
(h)(1) of this section, DPS is treated as a foreign partnership for
purposes of determining the stock of CFC3 owned (within the meaning
of section 958(a)) by USP. Accordingly, USP's pro rata share of
CFC3's subpart F income for Year 1 is $100x, and USP includes in its
gross income $100x under section 951(a)(1)(A). DPS is not a United
States shareholder of CFC3 for purposes of sections 951 through 964.
(i) Applicability dates. Paragraphs (a), (e)(1)(ii)(B), and (g)(1)
of this section apply to taxable years of foreign corporations
beginning after December 31, 2017, and to taxable years of United
States shareholders with or within which such taxable years of foreign
corporations end. Except for paragraph (e)(1)(ii)(B), paragraph (e) of
this section applies to taxable years of United States shareholders
ending on or after October 3, 2018. Paragraph (h) of this section
applies to taxable years of domestic partnerships ending on or after
May 14, 2010.
* * * * *
0
Par. 3. Section 1.951A-0 is added to read as follows:
Sec. 1.951A-0 Outline of section 951A regulations.
This section lists the headings for Sec. Sec. 1.951A-1 through
1.951A-7.
[[Page 51092]]
Sec. 1.951A-1 General provisions.
(a) Overview.
(1) In general.
(2) Scope.
(b) Inclusion of global intangible low-taxed income.
(c) Determination of GILTI inclusion amount.
(1) In general.
(2) Definition of net CFC tested income.
(3) Definition of net deemed tangible income return.
(i) In general.
(ii) Definition of deemed tangible income return.
(iii) Definition of specified interest expense.
(4) Determination of GILTI inclusion amount for consolidated
groups.
(d) Determination of pro rata share.
(1) In general.
(2) Tested income.
(i) In general.
(ii) Special rule for prior allocation of tested loss.
(3) Qualified business asset investment.
(i) In general.
(ii) Special rule for preferred stock in case of excess QBAI.
(iii) Examples.
(4) Tested loss.
(i) In general.
(ii) Special rule in case of accrued but unpaid dividends.
(iii) Special rule for stock with no liquidation value.
(iv) Examples.
(5) Tested interest expense.
(6) Tested interest income.
(e) Definitions.
(1) CFC inclusion date.
(2) CFC inclusion year.
(3) Section 958(a) stock.
(4) U.S. shareholder inclusion year.
Sec. 1.951A-2 Tested income and tested loss.
(a) Scope.
(b) Definitions related to tested income and tested loss.
(1) Tested income and tested income CFC.
(2) Tested loss and tested loss CFC.
(c) Rules relating to the determination of tested income and tested
loss.
(1) Definition of gross tested income.
(2) Determination of gross tested income and allowable deductions.
(3) Allocation of deductions to gross tested income.
(4) Nonapplication of section 952(c).
(i) In general.
(ii) Example.
(5) Disregard of basis in property related to certain transfers
during the disqualified period.
(i) In general.
(ii) Definition of specified property.
(iii) Definition of disqualified basis.
(iv) Example.
Sec. 1.951A-3 Qualified business asset investment.
(a) Scope.
(b) Definition of qualified business asset investment.
(c) Specified tangible property.
(1) In general.
(2) Tangible property.
(d) Dual use property.
(1) In general.
(2) Dual use ratio.
(3) Example.
(e) Determination of adjusted basis of specified tangible property.
(1) In general.
(2) Effect of change in law.
(3) Specified tangible property placed in service before enactment
of section 951A.
(f) Special rules for short taxable years.
(1) In general.
(2) Determination of quarter closes.
(3) Reduction of qualified business asset investment.
(4) Example.
(g) Partnership property.
(1) In general.
(2) Definitions related to partnership QBAI.
(i) In general.
(ii) Partnership QBAI ratio.
(iii) Partnership specified tangible property.
(3) Determination of adjusted basis.
(4) Examples.
(h) Anti-abuse rules for certain transfers of property.
(1) Disregard of basis in specified tangible property held
temporarily.
(2) Disregard of basis in specified tangible property related to
transfers during the disqualified period.
(i) In general.
(ii) Determination of disqualified basis.
(A) In general.
(B) Definition of qualified gain amount.
(C) Definition of disqualified transfer.
(D) Definition of disqualified period.
(E) Related person.
(iii) Examples.
Sec. 1.951A-4 Tested interest expense and tested interest income.
(a) Scope.
(b) Definitions related to specified interest expense.
(1) Tested interest expense.
(i) In general.
(ii) Interest expense.
(iii) Qualified interest expense.
(iv) Qualified CFC.
(2) Tested interest income.
(i) In general.
(ii) Interest income.
(iii) Qualified interest income.
(c) Examples.
Sec. 1.951A-5 Domestic partnerships and their partners.
(a) Scope.
(b) In general.
(1) Determination of GILTI inclusion amount of a U.S. shareholder
partnership.
(2) Determination of distributive share of U.S. shareholder
partnership's GILTI inclusion amount of partner other than a U.S.
shareholder partner.
(c) Determination of GILTI inclusion amount of a U.S. shareholder
partner.
(d) Tiered U.S. shareholder partnerships.
(e) Definitions.
(1) CFC tested item.
(2) Partnership CFC.
(3) U.S. shareholder partner.
(4) U.S. shareholder partnership.
(f) Reporting requirement.
(g) Examples.
Sec. 1.951A-6 Treatment of GILTI inclusion amount and adjustments to
earnings and profits and basis related to tested loss CFCs.
(a) Scope.
(b) Treatment as subpart F income for certain purposes.
(1) In general.
(2) Allocation of GILTI inclusion amount to tested income CFCs.
(i) In general.
(ii) Example.
(iii) Translation of portion of GILTI inclusion amount allocated to
tested income CFC.
(c) Treatment as an amount includible in the gross income of a
United States person.
(1) In general.
(2) Special rule for a United States shareholder that is a domestic
partnership.
(d) Increase of earnings and profits of tested loss CFC for
purposes of section 952(c)(1)(A).
(e) Adjustments to basis related to net used tested loss.
(1) In general.
(i) Disposition of stock of a controlled foreign corporation.
(ii) Disposition of stock of an upper-tier controlled foreign
corporation.
(iii) Disposition of an interest in a foreign entity other than a
controlled foreign corporation.
(iv) Order of application of basis reductions.
(v) No duplicative adjustments.
(2) Net used tested loss amount.
(i) In general.
(ii) Used tested loss amount.
(3) Net offset tested income amount.
[[Page 51093]]
(i) In general.
(ii) Offset tested income amount.
(4) Attribution to stock.
(i) In general.
(ii) Nonrecognition transactions.
(5) Section 381 transactions.
(6) Other definitions.
(i) Domestic corporation.
(ii) Disposition.
(7) Special rule for disposition by controlled foreign corporation
less than 100 percent owned by a single domestic corporation.
(8) Special rules for members of a consolidated group.
(9) Examples.
Sec. 1.951A-7 Applicability dates.
0
Par. 4. Section 1.951A-1 is added to read as follows:
Sec. 1.951A-1 General provisions.
(a) Overview--(1) In general. This section and Sec. Sec. 1.951A-2
through 1.951A-7 (collectively, the section 951A regulations) provide
rules to determine a United States shareholder's income inclusion under
section 951A and certain definitions for purposes of section 951A and
the section 951A regulations. This section provides general rules for
determining a United States shareholder's inclusion of global
intangible low-taxed income. Section 1.951A-2 provides rules for
determining a controlled foreign corporation's tested income or tested
loss. Section 1.951A-3 provides rules for determining a controlled
foreign corporation's qualified business asset investment. Section
1.951A-4 provides rules for determining a controlled foreign
corporation's tested interest expense and tested interest income.
Section 1.951A-5 provides rules relating to the application of section
951A and the section 951A regulations to domestic partnerships and
their partners. Section 1.951A-6 provides rules relating to the
treatment of the inclusion of global intangible low-taxed income for
certain purposes and adjustments to earnings and profits and basis of a
controlled foreign corporation related to a tested loss. Section
1.951A-7 provides dates of applicability.
(2) Scope. Paragraph (b) of this section provides the general rule
requiring a United States shareholder to include in gross income its
global intangible low-taxed income for a U.S. shareholder inclusion
year. Paragraph (c) of this section provides rules for determining the
amount of a United States shareholder's global intangible low-taxed
income for the U.S. shareholder inclusion year, including a rule for
the application of section 951A and the section 951A regulations to
consolidated groups. Paragraph (d) of this section provides rules for
determining a United States shareholder's pro rata share of certain
items for purposes of determining the United States shareholder's
global intangible low-taxed income. Paragraph (e) of this section
provides additional general definitions for purposes of this section
and the section 951A regulations.
(b) Inclusion of global intangible low-taxed income. Each person
who is a United States shareholder (as defined in section 951(b)) of
any controlled foreign corporation (as defined in section 957) and owns
section 958(a) stock (as defined in paragraph (e)(3) of this section)
in any such controlled foreign corporation includes in gross income in
the U.S. shareholder inclusion year (as defined in paragraph (e)(4) of
this section) the shareholder's GILTI inclusion amount (as defined in
paragraph (c) of this section), if any, for the U.S. shareholder
inclusion year.
(c) Determination of GILTI inclusion amount--(1) In general. Except
as provided in paragraph (c)(4) of this section, the term GILTI
inclusion amount means, with respect to a United States shareholder and
a U.S. shareholder inclusion year, the excess (if any) of--
(i) The shareholder's net CFC tested income (as defined in
paragraph (c)(2) of this section) for the year, over
(ii) The shareholder's net deemed tangible income return (as
defined in paragraph (c)(3) of this section) for the year.
(2) Definition of net CFC tested income. The term net CFC tested
income means, with respect to a United States shareholder and a U.S.
shareholder inclusion year, the excess (if any) of--
(i) The aggregate of the shareholder's pro rata share of the tested
income of each tested income CFC (as defined in Sec. 1.951A-2(b)(1))
for the year, over
(ii) The aggregate of the shareholder's pro rata share of the
tested loss of each tested loss CFC (as defined in Sec. 1.951A-
2(b)(2)) for the year.
(3) Definition of net deemed tangible income return--(i) In
general. The term net deemed tangible income return means, with respect
to a United States shareholder and a U.S. shareholder inclusion year,
the excess (if any) of--
(A) The shareholder's deemed tangible income return (as defined in
paragraph (c)(3)(ii) of this section) for the year, over
(B) The shareholder's specified interest expense (as defined in
paragraph (c)(3)(iii) of this section) for the year.
(ii) Definition of deemed tangible income return. The term deemed
tangible income return means, with respect to a United States
shareholder and a U.S. shareholder inclusion year, 10 percent of the
aggregate of the shareholder's pro rata share of the qualified business
asset investment (as defined in Sec. 1.951A-3(b)) of each tested
income CFC for the year.
(iii) Definition of specified interest expense. The term specified
interest expense means, with respect to a United States shareholder and
a U.S. shareholder inclusion year, the excess (if any) of--
(A) The aggregate of the shareholder's pro rata share of the tested
interest expense (as defined in Sec. 1.951A-4(b)(1)) of each
controlled foreign corporation for the year, over
(B) The aggregate of the shareholder's pro rata share of the tested
interest income (as defined in Sec. 1.951A-4(b)(2)) of each controlled
foreign corporation for the year.
(4) Determination of GILTI inclusion amount for consolidated
groups. For purposes of section 951A and the section 951A regulations,
a member of a consolidated group (as defined in Sec. 1.1502-1(h))
determines its GILTI inclusion amount under the rules provided in Sec.
1.1502-51.
(d) Determination of pro rata share--(1) In general. For purposes
of paragraph (c) of this section, each United States shareholder that
owns section 958(a) stock in a controlled foreign corporation as of a
CFC inclusion date (as defined in paragraph (e)(1) of this section)
determines for a U.S. shareholder inclusion year that includes such CFC
inclusion date its pro rata share (if any) of the controlled foreign
corporation's tested income, tested loss, qualified business asset
investment, tested interest expense, and tested interest income (each a
CFC tested item), as applicable, for the CFC inclusion year (as defined
in paragraph (e)(2) of this section). Except as otherwise provided in
this paragraph (d), a United States shareholder's pro rata share of
each CFC tested item is determined independently of its pro rata share
of any other CFC tested item. Except as modified in this paragraph (d),
a United States shareholder's pro rata share of any CFC tested item is
determined under the rules of section 951(a)(2) and Sec. 1.951-1(b)
and (e) in the same manner as those provisions apply to subpart F
income. Under section 951(a)(2) and Sec. 1.951-1(b) and (e), as
modified by this paragraph (d), a United States shareholder's pro rata
share of any CFC tested item for a U.S. shareholder inclusion year is
[[Page 51094]]
determined with respect to the section 958(a) stock of the controlled
foreign corporation owned by the United States shareholder on the CFC
inclusion date. A United States shareholder's pro rata share of any CFC
tested item is translated into United States dollars using the average
exchange rate for the CFC inclusion year of the controlled foreign
corporation. Paragraphs (d)(2) through (5) of this section provide
rules for determining a United States shareholder's pro rata share of
each CFC tested item of a controlled foreign corporation.
(2) Tested income--(i) In general. Except as provided in paragraph
(d)(2)(ii) of this section, a United States shareholder's pro rata
share of the tested income of each tested income CFC for a U.S.
shareholder inclusion year is determined under section 951(a)(2) and
Sec. 1.951-1(b) and (e), substituting ``tested income'' for ``subpart
F income'' each place it appears, other than in Sec. 1.951-
1(e)(1)(ii)(B).
(ii) Special rule for prior allocation of tested loss. In any case
in which tested loss has been allocated to any class of stock in a
prior CFC inclusion year under paragraph (d)(4)(iii) of this section,
tested income is first allocated to each such class of stock in the
order of its liquidation priority to the extent of the excess (if any)
of the sum of the tested loss allocated to each such class of stock for
each prior CFC inclusion year under paragraph (d)(4)(iii) of this
section, over the sum of the tested income allocated to each such class
of stock for each prior CFC inclusion year under this paragraph
(d)(2)(ii). Paragraph (d)(2)(i) of this section applies for purposes of
determining a United States shareholder's pro rata share of the
remainder of the tested income, except that, for purposes of the
hypothetical distribution of section 951(a)(2)(A) and Sec. 1.951-1(b)
and (e), the amount of current earnings and profits of the tested
income CFC is reduced by the amount of tested income allocated under
the first sentence of this paragraph (d)(2)(ii). For an example of the
application of this paragraph (d)(2), see Example 2 of paragraph
(d)(4)(iv) of this section.
(3) Qualified business asset investment--(i) In general. Except as
provided in paragraph (d)(3)(ii) of this section, a United States
shareholder's pro rata share of the qualified business asset investment
of a tested income CFC for a U.S. shareholder inclusion year bears the
same ratio to the total qualified business asset investment of the
tested income CFC for the CFC inclusion year as the United States
shareholder's pro rata share of the tested income of the tested income
CFC for the U.S. shareholder inclusion year bears to the total tested
income of the tested income CFC for the CFC inclusion year.
(ii) Special rule for preferred stock in case of excess QBAI. If a
tested income CFC's qualified business asset investment for a CFC
inclusion year exceeds 10 times its tested income for the CFC inclusion
year (such excess, excess QBAI), a United States shareholder's pro rata
share of the tested income CFC's qualified business asset investment is
the sum of its pro rata share determined under paragraph (d)(3)(i) of
this section without regard to the excess QBAI, plus its pro rata share
determined under paragraph (d)(3)(i) of this section solely with
respect to the excess QBAI and without regard to tested income
allocated to any share of preferred stock of the tested income CFC
under paragraph (d)(2) of this section.
(iii) Examples. The following examples illustrate the application
of paragraphs (d)(2) and (3) of this section. See also Sec. 1.951-
1(e)(7), Example 6 (illustrating a United States shareholder's pro rata
share of tested income).
(A) Example 1-- (1) Facts. FS, a controlled foreign corporation,
has outstanding 70 shares of common stock and 30 shares of 4%
nonparticipating, cumulative preferred stock with a par value of
$10x per share. P Corp, a domestic corporation and a United States
shareholder of FS, owns all of the common shares. Individual A, a
United States shareholder, owns all of the preferred shares. Both FS
and P Corp use the calendar year as their taxable year. Individual A
and P Corp are shareholders of FS for all of Year 4. At the
beginning of Year 4, FS had no dividend arrearages with respect to
its preferred stock. For Year 4, FS has $100x of earnings and
profits, $120x of tested income, and no subpart F income within the
meaning of section 952. FS also has $750x of qualified business
asset investment for Year 4.
(2) Analysis--(i) Determination of pro rata share of tested
income. For purposes of determining P Corp's pro rata share of FS's
tested income under paragraph (d)(2) of this section, the amount of
FS's current earnings and profits for purposes of the hypothetical
distribution described in Sec. 1.951-1(e)(1)(i) is $120x, the
greater of its earnings and profits as determined under section 964
($100x) or the sum of its subpart F income and tested income ($0 +
$120x). Under paragraph (d)(2) of this section and Sec. 1.951-
1(e)(3), the amount of FS's current earnings and profits distributed
in the hypothetical distribution is $12x (.04 x $10x x 30) with
respect to Individual A's preferred shares and $108x ($120x-$12x)
with respect to P Corp's common shares. Accordingly, under paragraph
(d)(2) of this section and Sec. 1.951-1(e)(1), Individual A's pro
rata share of FS's tested income is $12x, and P Corp's pro rata
share of FS's tested income is $108x for Year 4.
(ii) Determination of pro rata share of qualified business asset
investment. The special rule of paragraph (d)(3)(ii) of this section
does not apply because FS's qualified business asset investment of
$750x does not exceed $1,200x, which is 10 times FS's tested income
of $120x. Accordingly, under the general rule of paragraph (d)(3)(i)
of this section, Individual A's and P Corp's pro rata share of FS's
qualified business asset investment bears the same ratio to FS's
total qualified business asset investment as Individual A's and P
Corp's pro rata share, respectively, of FS's tested income bears to
FS's total tested income. Thus, Individual A's pro rata share of
FS's qualified business asset investment is $75x ($750x x $12x/
$120x), and P Corp's pro rata share of FS's qualified business asset
investment is $675x ($750x x $108x/$120x).
(B) Example 2-- (1) Facts. The facts are the same as in
paragraph (1) of Example 1, except that FS has $1,500x of qualified
business asset investment for Year 4.
(2) Analysis. (i) Determination of pro rata share of tested
income. The analysis and the result are the same as in paragraph
(2)(i) of Example 1.
(ii) Determination of pro rata share of qualified business asset
investment. The special rule of paragraph (d)(3)(ii) of this section
applies because FS's qualified business asset investment of $1,500x
exceeds $1,200x, which is 10 times FS's tested income of $120x.
Under paragraph (d)(3)(ii) of this section, Individual A's and P
Corp's pro rata share of FS's qualified business asset investment is
the sum of their pro rata share determined under paragraph (d)(3)(i)
of this section without regard to the excess QBAI plus their pro
rata share with respect to the excess QBAI but without regard to
tested income allocated to preferred stock under paragraph (d)(2) of
this section. Without regard to the excess QBAI of $300x, Individual
A's pro rata share of FS's qualified business asset investment is
$120x ($1,200x x $12x/$120x), and P Corp's pro rata share of FS's
qualified business asset investment is $1,080x ($1,200x x $108x/
$120x). Solely with respect to the excess QBAI and without regard to
tested income allocated to the preferred stock under paragraph
(d)(2) of this section, Individual A's pro rata share of FS's
qualified business asset investment is $0 ($300x x $0/$108x), and P
Corp's pro rata share of FS's qualified business asset investment is
$300x ($300x x $108x/$108x). Thus, Individual A's pro rata share of
FS's qualified business asset investment is $120x ($120x + $0), and
P Corp's pro rata share of FS's qualified business asset investment
is $1,380x ($1,080x + $300x).
(4) Tested loss--(i) In general. A United States shareholder's pro
rata share of the tested loss of each tested loss CFC for a U.S.
shareholder inclusion year is determined under section 951(a)(2) and
Sec. 1.951-1(b) and (e) with the following modifications--
(A) ``Tested loss'' is substituted for ``subpart F income'' each
place it appears;
(B) For purposes of the hypothetical distribution described in
section
[[Page 51095]]
951(a)(2)(A) and Sec. 1.951-1(e)(1)(i), the amount of current earnings
and profits of a controlled foreign corporation for a CFC inclusion
year is treated as being equal to the tested loss of the tested loss
CFC for the CFC inclusion year;
(C) Except as provided in paragraphs (d)(4)(ii) and (iii) of this
section, the hypothetical distribution described in section
951(a)(2)(A) and Sec. 1.951-1(e)(1)(i) is treated as made solely with
respect to the common stock of the tested loss CFC; and
(D) The amount of the dividend received by any other person for
purposes of section 951(a)(2)(B) and Sec. 1.951-1(b)(1)(ii) is treated
as being equal to the amount of the tested loss of the tested loss CFC
for the CFC inclusion year (regardless of whether, or the extent to
which, the other person actually receives a dividend).
(ii) Special rule in case of accrued but unpaid dividends. If a
tested loss CFC's earnings and profits that have accumulated since the
issuance of preferred shares are reduced below the amount necessary to
satisfy any accrued but unpaid dividends with respect to such preferred
shares, then the amount by which the tested loss reduces the earnings
below the amount necessary to satisfy the accrued but unpaid dividends
is distributed in the hypothetical distribution described in section
951(a)(2)(A) and Sec. 1.951-1(e)(1)(i) with respect to the preferred
stock of the tested loss CFC and the remainder of the tested loss is
distributed with respect to the common stock of the tested loss CFC.
(iii) Special rule for stock with no liquidation value. If a tested
loss CFC's common stock has a liquidation value of zero and there is at
least one other class of equity with a liquidation preference relative
to the common stock, then the tested loss is distributed in the
hypothetical distribution described in section 951(a)(2)(A) and Sec.
1.951-1(e)(1)(i) with respect to the most junior class of equity with a
positive liquidation value to the extent of such liquidation value.
Thereafter, tested loss is distributed with respect to the next most
junior class of equity to the extent of its liquidation value and so
on. All determinations of liquidation value are to be made as of the
beginning of the CFC inclusion year of the tested loss CFC.
(iv) Examples.The following examples illustrate the application of
this paragraph (d)(4). See also Sec. 1.951-1(e)(7), Example 7
(illustrating a United States shareholder's pro rata share of subpart F
income and tested loss).
(A) Example-- (1) Facts. FS, a controlled foreign corporation,
has outstanding 70 shares of common stock and 30 shares of 4%
nonparticipating, cumulative preferred stock with a par value of
$10x per share. P Corp, a domestic corporation and a United States
shareholder of FS, owns all of the common shares. Individual A, a
United States citizen and a United States shareholder, owns all of
the preferred shares. FS, Individual A, and P Corp all use the
calendar year as their taxable year. Individual A and P Corp are
shareholders of FS for all of Year 5. At the beginning of Year 5, FS
had earnings and profits of $120x, which accumulated after the
issuance of the preferred stock. At the end of Year 5, the accrued
but unpaid dividends with respect to the preferred stock are $36x.
For Year 5, FS has a $100x tested loss, and no other items of
income, gain, deduction or loss. At the end of Year 5, FS has
earnings and profits of $20x.
(2) Analysis. FS is a tested loss CFC for Year 5. Before taking
into account the tested loss in Year 5, FS had sufficient earnings
and profits to satisfy the accrued but unpaid dividends of $36x. The
amount of the reduction in earnings below the amount necessary to
satisfy the accrued but unpaid dividends attributable to the tested
loss is $16x ($36x-($120x-$100x)). Accordingly, under paragraph
(d)(4)(ii) of this section, Individual A's pro rata share of the
Year 5 tested loss is $16x, and P Corp's pro rata share of the
tested loss is $84x ($100x-$16x).
(B) Example 2--(1) Facts. FS, a controlled foreign corporation,
has outstanding 100 shares of common stock and 50 shares of 4%
nonparticipating, cumulative preferred stock with a par value of
$100x per share. P Corp, a domestic corporation and a United States
shareholder of FS, owns all of the common shares. Individual A, a
United States citizen and a United States shareholder, owns all of
the preferred shares. FS, Individual A, and P Corp all use the
calendar year as their taxable year. Individual A and P Corp are
shareholders of FS for all of Year 1 and Year 2. At the beginning of
Year 1, the common stock had no liquidation value and the preferred
stock had a liquidation value of $5,000x and no accrued but unpaid
dividends. In Year 1, FS has a tested loss of $1,000x and no other
items of income, gain, deduction, or loss. In Year 2, FS has tested
income of $3,000x and no other items of income, gain, deduction, or
loss and paid no dividends. FS has earnings and profits of $3,000x
for Year 2. At the end of Year 2, FS has accrued but unpaid
dividends of $400x with respect to the preferred stock ($5000x x
0.04 for Year 1 and $5000x x 0.04 for Year 2). (2) Analysis--(i)
Year 1. FS is a tested loss CFC in Year 1. The common stock of FS
has liquidation value of zero and the preferred stock has a
liquidation preference relative to the common stock. The tested loss
($1,000x) does not exceed the liquidation value of the preferred
stock ($5,000x). Accordingly, under paragraph (d)(4)(iii) of this
section, the tested loss is distributed with respect to the
preferred stock in the hypothetical distribution described in
section 951(a)(2)(A) and Sec. 1.951-1(e). Individual A's pro rata
share of the tested loss is $1,000x, and P Corp's pro rata share of
the tested loss is $0.
(ii) Year 2. FS is a tested income CFC in Year 2. Because
$1,000x of tested loss was allocated to the preferred stock in Year
1 under paragraph (d)(4)(iii) of this section, the first $1,000x of
tested income in Year 2 is allocated to the preferred stock under
paragraph (d)(2)(ii) of this section. P Corp's and Individual A's
pro rata shares of the remaining $2,000x of tested income are
determined under the general rule of paragraph (d)(2)(i) of this
section, except that for purposes of the hypothetical distribution
the amount of FS's current earnings and profits is reduced by the
tested income allocated under paragraph (d)(2)(ii) of this section
to $2,000x ($3,000x-$1,000x). Accordingly, under paragraph (d)(2)(i)
of this section, the amount of FS's current earnings and profits
distributed in the hypothetical distribution with respect to
Individual A's preferred stock is $400x ($400x of accrued but unpaid
dividends) and with respect to P Corp's common stock is $1,600x
($2,000x-$400x). Individual A's pro rata share of the tested income
is $1,400x ($1,000x + $400x), and P Corp's pro rata share of the
tested income is $1,600x.
(5) Tested interest expense. A United States shareholder's pro rata
share of tested interest expense of a controlled foreign corporation
for a U.S. shareholder inclusion year is equal to the amount by which
the tested interest expense reduces the shareholder's pro rata share of
tested income of the controlled foreign corporation for the U.S.
shareholder inclusion year, increases the shareholder's pro rata share
of tested loss of the controlled foreign corporation for the U.S.
shareholder inclusion year, or both.
(6) Tested interest income. A United States shareholder's pro rata
share of tested interest income of a controlled foreign corporation for
a U.S. shareholder inclusion year is equal to the amount by which the
tested interest income increases the shareholder's pro rata share of
tested income of the controlled foreign corporation for the U.S.
shareholder inclusion year, reduces the shareholder's pro rata share of
tested loss of the controlled foreign corporation for the U.S.
shareholder inclusion year, or both.
(e) Definitions. This paragraph (e) provides additional definitions
that apply for purposes of the section 951A regulations. Other
definitions relevant to the section 951A regulations are included in
Sec. Sec. 1.951A-2 through 1.951A-6.
(1) CFC inclusion date. The term CFC inclusion date means the last
day of a CFC inclusion year on which a foreign corporation is a
controlled foreign corporation.
(2) CFC inclusion year. The term CFC inclusion year means any
taxable year of a foreign corporation beginning after December 31,
2017, at any time during which the corporation is a controlled foreign
corporation.
[[Page 51096]]
(3) Section 958(a) stock. The term section 958(a) stock means stock
of a controlled foreign corporation owned (directly or indirectly) by a
United States shareholder within the meaning of section 958(a).
(4) U.S. shareholder inclusion year. The term U.S. shareholder
inclusion year means a taxable year of a United States shareholder that
includes a CFC inclusion date of a controlled foreign corporation of
the United States shareholder.
0
Par. 5. Section 1.951A-2 is added to read as follows:
Sec. 1.951A-2 Tested income and tested loss.
(a) Scope. This section provides general rules for determining the
tested income or tested loss of a controlled foreign corporation for
purposes of determining a United States shareholder's net CFC tested
income under Sec. 1.951A-1(c)(2). Paragraph (b) of this section
provides definitions related to tested income and tested loss.
Paragraph (c) of this section provides rules for determining the gross
tested income of a controlled foreign corporation and the deductions
that are properly allocable to gross tested income.
(b) Definitions related to tested income and tested loss--(1)
Tested income and tested income CFC. The term tested income means the
excess (if any) of a controlled foreign corporation's gross tested
income for a CFC inclusion year, over the allowable deductions
(including taxes) properly allocable to the gross tested income for the
CFC inclusion year (a controlled foreign corporation with tested income
for a CFC inclusion year, a tested income CFC).
(2) Tested loss and tested loss CFC. The term tested loss means the
excess (if any) of a controlled foreign corporation's allowable
deductions (including taxes) properly allocable to gross tested income
(or that would be allocable to gross tested income if there were gross
tested income) for a CFC inclusion year, over the gross tested income
of the controlled foreign corporation for the CFC inclusion year (a
controlled foreign corporation without tested income for a CFC
inclusion year, a tested loss CFC).
(c) Rules relating to the determination of tested income and tested
loss--(1) Definition of gross tested income. The term gross tested
income means the gross income of a controlled foreign corporation for a
CFC inclusion year determined without regard to--
(i) Items of income described in section 952(b),
(ii) Gross income taken into account in determining the subpart F
income of the corporation,
(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 solely by reason of an election made
under section 954(b)(4) and Sec. 1.954-1(d)(5),
(iv) Dividends received by the corporation from related persons (as
defined in section 954(d)(3)), and
(v) Foreign oil and gas extraction income (as defined in section
907(c)(1)) of the corporation.
(2) Determination of gross income and allowable deductions. For
purposes of determining tested income and tested loss, the gross income
and allowable deductions of a controlled foreign corporation for a CFC
inclusion year are determined under the rules of Sec. 1.952-2 for
determining the subpart F income of a controlled foreign corporation.
(3) Allocation of deductions to gross tested income. Any deductions
of a controlled foreign corporation allowable under paragraph (c)(2) of
this section are allocated and apportioned to gross tested income under
the principles of section 954(b)(5) and Sec. 1.954-1(c), by treating
gross tested income that falls within a single separate category (as
defined in Sec. 1.904-5(a)(1)) as a single item of gross income, in
addition to the items set forth in Sec. 1.954-1(c)(1)(iii).
(4) Nonapplication of section 952(c)--(i) In general. The gross
tested income and allowable deductions properly allocable to gross
tested income of a controlled foreign corporation for a CFC inclusion
year are determined without regard to the application of section
952(c).
(ii) Example. The following example illustrates the application of
this paragraph (c)(4).
(A) Example--(1) Facts. A Corp, a domestic corporation, owns
100% of the single class of stock of FS, a controlled foreign
corporation. Both A Corp and FS use the calendar year as their
taxable year. In Year 1, FS has foreign base company income of
$100x, a loss in foreign oil and gas extraction income of $100x, and
earnings and profits of $0. FS has no other income. In Year 2, FS
has gross income of $100x and earnings and profits of $100x. Without
regard to section 952(c)(2), in Year 2 FS has no income described in
any of the categories of income excluded from gross tested income in
paragraphs (c)(1)(i) through (v) of this section. FS has no
allowable deductions properly allocable to gross tested income for
Year 2. (2) Analysis. As a result of the earnings and profits
limitation of section 952(c)(1), FS has no subpart F income in Year
1, and A Corp has no inclusion with respect to FS under section
951(a)(1)(A). Under paragraph (c)(4)(i) of this section, the gross
tested income of FS is determined without regard to section
952(c)(1). Therefore, in determining the gross tested income of FS
in Year 1, the $100x foreign base company income of FS in Year 1 is
excluded under paragraph (c)(1)(ii) of this section, and FS has no
gross tested income in Year 1. In Year 2, under section 952(c)(2),
FS's earnings and profits ($100x) in excess of its subpart F income
($0) are treated as subpart F income. Therefore, FS has subpart F
income of $100x in Year 2, and A Corp has an inclusion of $100x with
respect to FS under section 951(a)(1)(A). Under paragraph (c)(4)(i)
of this section, the gross tested income of FS is determined without
regard to section 952(c)(2). Accordingly, FS's income in Year 2 is
not subpart F income described in paragraph (c)(1)(ii) of this
section, and FS has $100x of gross tested income in Year 2.
(5) Disregard of basis in property related to certain transfers
during the disqualified period--(i) In general. Any deduction or loss
attributable to disqualified basis of any specified property allocated
and apportioned to gross tested income under paragraph (c)(3) of this
section is disregarded for purposes of determining tested income or
tested loss of a controlled foreign corporation. For purposes of this
paragraph (c)(5), in the case that a deduction or loss arises with
respect to specified property with disqualified basis and adjusted
basis other than disqualified basis, the deduction or loss is treated
as attributable to the disqualified basis in the same proportion that
the disqualified basis bears to the total adjusted basis of the
property.
(ii) Definition of specified property. The term specified property
means property that is of a type with respect to which a deduction is
allowable under section 167 or 197.
(iii) Definition of disqualified basis. Solely for purposes of
paragraph (c)(5)(i) of this section, the term disqualified basis has
the meaning set forth in Sec. 1.951A-3(h)(2)(ii) (including with
respect to property owned by a partnership by reason of Sec. 1.951A-
3(g)(3)), except that, in applying the provisions of Sec. 1.951A-
3(h)(2) to determine the disqualified basis, the term ``specified
property'' is substituted for ``specified tangible property'' and the
term ``controlled foreign corporation'' is substituted for ``tested
income CFC'' each place they appear.
(iv) Example-- (A) Facts. USP, a domestic corporation, owns all
of the stock of CFC1 and CFC2, each a controlled foreign
corporation. Both USP and CFC1 use the calendar year as their
taxable year. CFC2 uses a taxable year ending November 30. On
November 1, 2018, before the start of its first CFC inclusion year,
CFC2 sells intangible property to CFC1 that is amortizable under
[[Page 51097]]
section 197 in exchange for $100x of cash. The intangible property
has a basis of $20x in the hands of CFC2, and CFC2 recognizes $80x
of gain as a result of the sale ($100x-$20x). CFC2's gain is not
subject to U.S. tax or taken into account in determining USP's
inclusion under section 951(a)(1)(A).
(B) Analysis. The sale by CFC1 is a disqualified transfer
(within the meaning of Sec. 1.951A-3(h)(2)(ii)(C), as modified by
paragraph (c)(5)(iii) of this section) because it is a transfer of
specified property, CFC2 and CFC1 are related persons, and the
transfer occurs during the disqualified period (within the meaning
of Sec. 1.951A-3(h)(2)(ii)(D)). The disqualified basis is $80x, the
excess of CFC1's adjusted basis in the property immediately after
the disqualified transfer ($100x), over the sum of CFC2's basis in
the property immediately before the transfer ($20x) and the
qualified gain amount (as defined in Sec. 1.951A-3(h)(2)(ii)(B))
($0). Accordingly, under paragraph (c)(5)(i) of this section, any
deduction or loss attributable to the disqualified basis is
disregarded for purposes of determining the tested income or tested
loss of any CFC for any CFC inclusion year.
0
Par. 6. Section 1.951A-3 is added to read as follows:
Sec. 1.951A-3 Qualified business asset investment.
(a) Scope. This section provides general rules for determining the
qualified business asset investment of a controlled foreign corporation
for purposes of determining a United States shareholder's deemed
tangible income return under Sec. 1.951A-1(c)(3)(ii). Paragraph (b) of
this section defines qualified business asset investment. Paragraph (c)
of this section defines tangible property and specified tangible
property. Paragraph (d) of this section provides rules and examples for
determining the portion of property that is specified tangible property
when the property is used in the production of both gross tested income
and gross income that is not gross tested income. Paragraph (e) of this
section provides rules for determining the adjusted basis of specified
tangible property. Paragraph (f) of this section provides rules for
determining qualified business asset investment of a tested income CFC
with a short taxable year. Paragraph (g) of this section provides rules
and examples for increasing the qualified business asset investment of
a tested income CFC by reason of property owned through a partnership.
Paragraph (h) of this section provides anti-abuse rules that disregard
the basis of specified tangible property transferred in certain
transactions when determining the qualified business asset investment
of a tested income CFC.
(b) Definition of qualified business asset investment. The term
qualified business asset investment means the average of a tested
income CFC's aggregate adjusted bases as of the close of each quarter
of a CFC inclusion year in specified tangible property that is used in
a trade or business of the tested income CFC and is of a type with
respect to which a deduction is allowable under section 167. A tested
loss CFC has no qualified business asset investment. See paragraph (f)
of this section for rules relating to the qualified business asset
investment of a tested income CFC with a short taxable year.
(c) Specified tangible property--(1) In general. The term specified
tangible property means, subject to paragraph (d) of this section,
tangible property used in the production of gross tested income. None
of the tangible property of a tested loss CFC is specified tangible
property.
(2) Tangible property. The term tangible property means property
for which the depreciation deduction provided by section 167(a) is
eligible to be determined under section 168 without regard to section
168(f)(1), (2), or (5) and the date placed in service.
(d) Dual use property--(1) In general. In the case of tangible
property of a tested income CFC that is used in both the production of
gross tested income and the production of gross income that is not
gross tested income in a CFC inclusion year, the portion of the
adjusted basis in the property treated as adjusted basis in specified
tangible property for the CFC inclusion year is determined by
multiplying the average of the tested income CFC's adjusted basis in
the property by the dual use ratio with respect to the property for the
CFC inclusion year.
(2) Dual use ratio. The term dual use ratio means, with respect to
specified tangible property:
(i) In the case of specified tangible property that produces
directly identifiable income for a CFC inclusion year, the ratio of the
gross tested income produced by the property for the CFC inclusion year
to the total amount of gross income produced by the property for the
CFC inclusion year.
(ii) In the case of specified tangible property that does not
produce directly identifiable income for a CFC inclusion year, the
ratio of the gross tested income of the tested income CFC for the CFC
inclusion year to the total amount of gross income of the tested income
CFC for the CFC inclusion year.
(3) Example. The following example illustrates the application of
this paragraph (d).
(i) Example-- (A) Facts. FS is a tested income CFC. FS owns a
machine that only packages Product A. In Year 1, FS sells Product A
to related and unrelated resellers and earns $1,000x of gross
income. For Year 1, sales of Product A produce gross tested income
of $750x and foreign base company sales income (as defined in
section 954(d)) of $250x. The average adjusted basis of the machine
for Year 1 in the hands of FS is $4,000x. FS also owns an office
building for its administrative functions with an average adjusted
basis for Year 1 of $10,000x. The office building does not produce
directly identifiable income. FS has no other specified tangible
property. For year 1, FS also earns $1,250x of gross tested income
and $2,750x of foreign base company sales income from sales of
Product B. Neither the machine nor the office building is used in
the production of income related to Product B. For Year 1, FS's
gross tested income is $2,000x and its total gross income is
$5,000x.
(B) Analysis. The machine and office building are both property
for which the depreciation deduction provided by section 167(a) is
eligible to be determined under section 168. Therefore, under
paragraph (c)(2) of this section, the machine and office building
are tangible property. Under paragraph (d)(1) of this section, the
portion of the basis in the machine treated as basis in specified
tangible property is equal to FS's average basis in the machine for
the year ($4,000x), multiplied by the dual use ratio under paragraph
(d)(2)(i) of this section (75%), which is the proportion that the
gross tested income produced by the property ($750x) bears to the
total gross income produced by the property ($1,000x). Accordingly,
$3,000x ($4,000x x 75%) of FS's adjusted basis in the machine is
taken into account in determining the average of FS's aggregate
adjusted bases described in paragraph (b) of this section. Under
paragraph (d)(1) of this section, the portion of the basis in the
office building treated as basis in specified tangible property is
equal to FS's average basis in the office building for the year
($10,000x), multiplied by the dual use ratio under paragraph
(d)(2)(ii) of this section (40%), which is the ratio of FS's gross
tested income for Year 1 ($2,000x) to FS's total gross income for
Year 1 ($5,000x). Accordingly, $4,000x ($10,000x x 40%) of FS's
adjusted basis in the office building is taken into account in
determining the average of FS's aggregate adjusted bases described
in paragraph (b) of this section.
(e) Determination of adjusted basis of specified tangible
property--(1) In general. The adjusted basis in specified tangible
property is determined by using the alternative depreciation system
under section 168(g), and by allocating the depreciation deduction with
respect to such property for the CFC inclusion year ratably to each day
during the period in the taxable year to which such depreciation
relates.
(2) Effect of change in law. The determination of adjusted basis
for purposes of paragraph (b) of this section is made without regard to
any provision of law enacted after December 22, 2017, unless such later
enacted law specifically and directly amends the
[[Page 51098]]
definition of qualified business asset investment under section 951A.
(3) Specified tangible property placed in service before enactment
of section 951A. The adjusted basis in property placed in service
before December 22, 2017, is determined using the alternative
depreciation system under section 168(g), as if this system had applied
from the date that the property was placed in service.
(f) Special rules for short taxable years--(1) In general. In the
case of a tested income CFC that has a CFC inclusion year that is less
than twelve months (a short taxable year), the rules for determining
the qualified business asset investment of the tested income CFC under
this section are modified as provided in paragraphs (f)(2) and (3) of
this section with respect to the CFC inclusion year.
(2) Determination of quarter closes. For purposes of determining
quarter closes, in determining the qualified business asset investment
of a tested income CFC for a short taxable year, the quarters of the
tested income CFC for purposes of this section are the full quarters
beginning and ending within the short taxable year (if any),
determining quarter length as if the tested income CFC did not have a
short taxable year, plus one or more short quarters (if any).
(3) Reduction of qualified business asset investment. The qualified
business asset investment of a tested income CFC for a short taxable
year is the sum of--
(i) The sum of the tested income CFC's aggregate adjusted bases in
specified tangible property as of the close of each full quarter (if
any) in the CFC inclusion year divided by four, plus
(ii) The tested income CFC's aggregate adjusted bases in specified
tangible property as of the close of each short quarter (if any) in the
CFC inclusion year multiplied by the sum of the number of days in each
short quarter divided by 365.
(4) Example. The following example illustrates the application of
this paragraph (f).
(i) Example-- (A) Facts. USP1, a domestic corporation, owns all
of the stock of FS, a controlled foreign corporation. USP1 owns FS
from the beginning of Year 1. On July 15, Year 1, USP1 sells FS to
USP2, an unrelated person. USP2 makes a section 338(g) election with
respect to the purchase of FS, as a result of which FS's taxable
year is treated as ending on July 15. USP1, USP2, and FS all use the
calendar year as their taxable year. FS's aggregate adjusted bases
in specified tangible property are $250x as of March 31, $300x as of
June 30, $275x as of July 15, $500x as of September 30, and $450x as
of December 31.
(B) Analysis--(1) Determination of short taxable years and
quarters. FS has two short taxable years in Year 1. The first short
taxable year is from January 1 to July 15, with two full quarters
(January 1-March 31 and April 1-June 30) and one short quarter (July
1-July 15). The second taxable year is from July 16 to December 31,
with one short quarter (July 16-September 30) and one full quarter
(October 1-December 31).
(2) Calculation of qualified business asset investment for the
first short taxable year. Under paragraph (f)(2) of this section,
for the first short taxable year in Year 1, FS has three quarter
closes (March 31, June 30, and July 15). Under paragraph (f)(3) of
this section, the qualified business asset investment of FS for the
first short taxable year is $148.80x, the sum of $137.50x (($250x +
$300x)/4) attributable to the two full quarters and $11.30x ($275x x
15/365) attributable to the short quarter.
(3) Calculation of qualified business asset investment for the
second short taxable year. Under paragraph (f)(2) of this section,
for the second short taxable year in Year 1, FS has two quarter
closes (September 30 and December 31). Under paragraph (f)(3) of
this section, the qualified business asset investment of FS for the
second short taxable year is $217.98x, the sum of $112.50x ($450x/4)
attributable to the one full quarter and $105.48x ($500x x 77/365)
attributable to the short quarter.
(g) Partnership property--(1) In general. For purposes of paragraph
(b) of this section, if a tested income CFC holds an interest in one or
more partnerships as of the close of the CFC inclusion year, the
qualified business asset investment of the tested income CFC for the
CFC inclusion year is increased by the sum of the tested income CFC's
partnership QBAI with respect to each partnership for the CFC inclusion
year. A tested loss CFC has no partnership QBAI for a CFC inclusion
year.
(2) Definitions related to partnership QBAI--(i) In general. The
term partnership QBAI means the sum of the tested income CFC's share of
the partnership's adjusted basis in partnership specified tangible
property as of the close of a partnership taxable year that ends with
or within a CFC inclusion year. A tested income CFC's share of the
partnership's adjusted basis in partnership specified tangible property
is determined separately with respect to each partnership specified
tangible property of the partnership by multiplying the partnership's
adjusted basis in the property by the partnership QBAI ratio with
respect to the property. If the partnership's taxable year is less than
twelve months, the principles of paragraph (f) of this section apply in
determining a tested income CFC's partnership QBAI with respect to the
partnership.
(ii) Partnership QBAI ratio. The term partnership QBAI ratio means,
with respect to partnership specified tangible property:
(A) In the case of partnership specified tangible property that
produces directly identifiable income for a partnership taxable year,
the ratio of the tested income CFC's distributive share of the gross
income produced by the property for the partnership taxable year that
is included in the gross tested income of the tested income CFC for the
CFC inclusion year to the total gross income produced by the property
for the partnership taxable year.
(B) In the case of partnership specified tangible property that
does not produce directly identifiable income for a partnership taxable
year, the ratio of the tested income CFC's distributive share of the
gross income of the partnership for the partnership taxable year that
is included in the gross tested income of the tested income CFC for the
CFC inclusion year to the total amount of gross income of the
partnership for the partnership taxable year.
(iii) Partnership specified tangible property. The term partnership
specified tangible property means tangible property (as defined in
paragraph (c)(2) of this section) of a partnership that is--
(A) Used in the trade or business of the partnership,
(B) Of a type with respect to which a deduction is allowable under
section 167, and
(C) Used in the production of tested income.
(3) Determination of adjusted basis. For purposes of this paragraph
(g), a partnership's adjusted basis in partnership specified tangible
property is determined based on the average of the partnership's
adjusted basis in the property as of the close of each quarter in the
partnership taxable year. The principles of paragraphs (e) and (h) of
this section apply for purposes of determining a partnership's adjusted
basis in partnership specified tangible property and the portion of
such adjusted basis taken into account in determining a tested income
CFC's partnership QBAI.
(4) Examples. The following examples illustrate the rules of this
paragraph (g).
(i) Example 1-- (A) Facts. FC, a tested income CFC, is a partner
in PRS. Both FC and PRS use the calendar year as their taxable year.
PRS owns two assets, Asset A and Asset B, both of which are tangible
property used in PRS's trade or business that it depreciates under
section 168. The average of PRS's adjusted basis as of the close of
each quarter of PRS's taxable year in Asset A is $100x and the
average of PRS's adjusted basis as of the end of each quarter of
PRS's taxable year in
[[Page 51099]]
Asset B is $50x. Asset A produces $10x of directly identifiable
gross income in Year 1, and Asset B produces $50x of directly
identifiable gross income in Year 1. FC's distributive share of the
gross income from Asset A is $8x and its distributive share of the
gross income from Asset B is $10x. FC's entire distributive share of
income from Asset A and Asset B is included in FC's gross tested
income for Year 1. PRS partners' distributive shares satisfy the
requirements of section 704.
(B) Analysis. Each of Asset A and Asset B is partnership
specified tangible property because each is tangible property, of a
type with respect to which a deduction is allowable under section
167, used in PRS's trade or business, and used in the production of
tested income. FC's partnership QBAI ratio for Asset A is 80%, the
ratio of FC's distributive share of the gross income from Asset A
for Year 1 that is included in FC's gross tested income ($8x) to the
total gross income produced by Asset A for Year 1 ($10x). FC's
partnership QBAI ratio for Asset B is 20%, the ratio of FC's
distributive share of the gross income from Asset B for Year 1 that
is included in FC's gross tested income ($10x) to the total gross
income produced by Asset B for Year 1 ($50x). FC's share of the
average of PRS's adjusted basis of Asset A is $80x, PRS's adjusted
basis in Asset A of $100x multiplied by FC's partnership QBAI ratio
for Asset A of 80%. FC's share of the average of PRS's adjusted
basis of Asset B is $10x, PRS's adjusted basis in Asset B of $50x
multiplied by FC's partnership QBAI ratio for Asset B of 20%.
Therefore, FC's partnership QBAI with respect to PRS is $90x ($80x +
$10x). Accordingly, under paragraph (g)(1) of this section, FC
increases its qualified business asset investment for Year 1 by
$90x.
(ii) Example 2-- (A) Facts. FC, a tested income CFC, owns a 50%
interest in PRS. PRS owns Asset A, which is specified tangible
property. The average of PRS's adjusted basis as of the close of
each quarter of PRS's taxable year in Asset A is $100x. FC has the
same taxable year as PRS. Asset A produces $20x of directly
identifiable gross income in Year 1, and PRS has $22x of expenses in
Year 1 that are properly allocable to such income. Therefore, FC's
allocation of net income or loss from PRS is $1x loss, which is
comprised of FC's distributive share of the gross income from Asset
A of $10x, all of which is included in FC's gross tested income for
Year 1, and FC's distributive share of the expenses related to Asset
A of $11x, all of which is taken into account in determining its
tested income under Sec. 1.951-2(c). PRS has no other income or
loss in Year 1. FC also has $8x of gross tested income from other
sources in Year 1, and no deductions properly allocable to such
income. PRS partners' distributive shares satisfy the requirements
of section 704.
(B) Analysis. FC's partnership QBAI ratio for Asset A is 50%,
the ratio of FC's distributive share of the gross income from Asset
A for Year 1 that is included in FC's gross tested income ($10x) to
the total gross income produced by Asset A for Year 1 ($20x). FC's
share of the average of PRS's adjusted basis in Asset A is $50x,
PRS's adjusted basis in Asset A of $100x multiplied by FC's
partnership QBAI ratio for Asset A of 50%. FC increases its
qualified business asset investment by $50x, notwithstanding that FC
would not be a tested income CFC but for its $8x of gross tested
income from other sources.
(h) Anti-abuse rules for certain transfers of property--(1)
Disregard of basis in specified tangible property held temporarily. If
a tested income CFC (acquiring CFC) acquires specified tangible
property (as defined in paragraph (c)(1) of this section) with a
principal purpose of reducing the GILTI inclusion amount of a United
States shareholder for any U.S. shareholder inclusion year, and the
tested income CFC holds the property temporarily but over at least the
close of one quarter, the specified tangible property is disregarded in
determining the acquiring CFC's average adjusted basis in specified
tangible property for purposes of determining the acquiring CFC's
qualified business asset investment for any CFC inclusion year during
which the tested income CFC held the property. For purposes of this
paragraph (h)(1), specified tangible property held by the tested income
CFC for less than a twelve month period that includes at least the
close of one quarter during the taxable year of a tested income CFC is
treated as temporarily held and acquired with a principal purpose of
reducing the GILTI inclusion amount of a United States shareholder for
a U.S. shareholder inclusion year if such acquisition would, but for
this paragraph (h)(1), reduce the GILTI inclusion amount of a United
States shareholder for a U.S. shareholder inclusion year.
(2) Disregard of basis in specified tangible property related to
transfers during the disqualified period--(i) In general. For purposes
of determining the qualified business asset investment of a tested
income CFC for a CFC inclusion year, in applying the alternative
depreciation system under section 168(g) to determine the tested income
CFC's adjusted basis in specified tangible property, any disqualified
basis with respect to the specified tangible property is not taken into
account.
(ii) Determination of disqualified basis--(A) In general. The term
disqualified basis means, with respect to specified tangible property,
the excess (if any) of the property's adjusted basis immediately after
a disqualified transfer, over the sum of the property's adjusted basis
immediately before the disqualified transfer and the qualified gain
amount with respect to the disqualified transfer. Disqualified basis
may be reduced or eliminated through depreciation, amortization, sales
or exchanges, section 362(e), and other methods. In such circumstances,
in the case of specified tangible property with disqualified basis and
adjusted basis other than disqualified basis, the disqualified basis is
reduced or eliminated in the same proportion that the disqualified
basis bears to the total adjusted basis of the property.
(B) Definition of qualified gain amount. The term qualified gain
amount means, with respect to a disqualified transfer, the sum of the
following amounts:
(1) The amount of gain recognized by a controlled foreign
corporation (transferor CFC) on the disqualified transfer of the
specified tangible property that is subject to U.S. federal income tax
under section 882 (except to the extent the gain is subject to a
reduced rate of tax, or is exempt from tax, pursuant to an applicable
treaty obligation of the United States); and
(2) Any United States shareholder's pro rata share of the gain
recognized by the transferor CFC on the disqualified transfer of the
specified tangible property (determined without regard to properly
allocable deductions) taken into account in determining the United
States shareholder's inclusion under section 951(a)(1)(A), excluding
any amount that is described in paragraph (h)(2)(ii)(B)(1) of this
section.
(C) Definition of disqualified transfer. The term disqualified
transfer means a transfer of specified tangible property during a
transferor CFC's disqualified period by the transferor CFC to a related
person in which gain was recognized, in whole or in part, by the
transferor CFC, regardless of whether the property was specified
tangible property in the hands of the transferor CFC. For purposes of
the preceding sentence, a transfer includes any disposition, sale or
exchange, contribution, or distribution of the specified tangible
property, and includes an indirect transfer (for example, a transfer of
an interest in a partnership is treated as a transfer of the assets of
the partnership and transfer by or to a partnership is treated as a
transfer by or to its partners).
(D) Definition of disqualified period. The term disqualified period
means, with respect to a transferor CFC, the period beginning on
January 1, 2018, and ending as of the close of the transferor CFC's
last taxable year that is not a CFC inclusion year. A transferor CFC
that has a CFC inclusion year beginning January 1, 2018, has no
disqualified period.
(E) Related person. For purposes of this paragraph (h)(2), a person
is related to a controlled foreign corporation if the
[[Page 51100]]
person bears a relationship to the controlled foreign corporation
described in section 267(b) or 707(b) immediately before or immediately
after the transfer.
(iii) Examples. The following examples illustrate the application
of this paragraph (h)(2).
(A) Example 1-- (1) Facts. USP, a domestic corporation, owns all
of the stock of CFC1 and CFC2, each a controlled foreign
corporation. Both USP and CFC1 use the calendar year as their
taxable year. CFC2 uses a taxable year ending November 30. On
November 1, 2018, before the start of its first CFC inclusion year,
CFC2 sells specified tangible property that has a basis of $10x in
the hands of CFC2 to CFC1 in exchange for $100x of cash. CFC2
recognizes $90x of gain as a result of the sale ($100x-$10x), $30x
of which is foreign base company income (within the meaning of
section 954). USP includes in gross income under section
951(a)(1)(A) its pro rata share of the subpart F income of $30x.
CFC2's gain is not otherwise subject to U.S. tax or taken into
account in determining USP's inclusion under section 951(a)(1)(A).
(2) Analysis. The transfer is a disqualified transfer because it
is a transfer of specified tangible property; CFC1 and CFC2 are
related persons; and the transfer occurs during the disqualified
period, the period that begins on January 1, 2018, and ends the last
day before the first CFC inclusion year of CFC2 (November 30, 2018).
The disqualified basis is $60x, the excess of CFC1's adjusted basis
in the property immediately after the disqualified transfer ($100x),
over the sum of CFC2's basis in the property immediately before the
transfer ($10x) and USP's pro rata share of the gain recognized by
CFC1 on the transfer of the property taken into account by USP under
section 951(a)(1)(A) ($30x). Accordingly, under paragraph (h)(2)(i)
of this section, for purposes of determining the qualified business
asset investment of any tested income CFC for any CFC inclusion
year, in applying section 168(g) to determine the CFC's basis in the
specified tangible property, the $60x disqualified basis of the
property is not taken into account.
(B) Example 2-- (1) Facts. The facts are the same as in
paragraph (1) of Example 1, except that CFC2 uses the calendar year
as its taxable year.
(2) Analysis. Because CFC2 has a taxable year beginning January
1, 2018, CFC2 has no disqualified period. Accordingly, the property
was not transferred during a disqualified period of CFC2, and there
is no disqualified basis with respect to the property.
0
Par. 7 Section 1.951A-4 is added to read as follows:
Sec. 1.951A-4 Tested interest expense and tested interest income.
(a) Scope. This section provides general rules for determining the
tested interest expense and tested interest income of a controlled
foreign corporation for purposes of determining a United States
shareholder's specified interest expense under Sec. 1.951A-
1(c)(3)(iii). Paragraph (b) of this section provides the definitions
related to tested interest expense and tested interest income.
Paragraph (c) of this section provides examples illustrating these
definitions and the application of Sec. 1.951A-1(c)(3)(iii). The
amount of specified interest expense determined under Sec. 1.951A-
1(c)(3)(iii) and this section is the amount of interest expense
described in section 951A(b)(2)(B).
(b) Definitions related to specified interest expense--(1) Tested
interest expense--(i) In general. The term tested interest expense
means interest expense paid or accrued by a controlled foreign
corporation taken into account in determining the tested income or
tested loss of the controlled foreign corporation for the CFC inclusion
year under Sec. 1.951A-2(c), reduced by the qualified interest expense
of the controlled foreign corporation.
(ii) Interest expense. The term interest expense means any expense
or loss that is treated as interest expense by reason of the Internal
Revenue Code or the regulations thereunder, and any other expense or
loss incurred in a transaction or series of integrated or related
transactions in which the use of funds is secured for a period of time
if such expense or loss is predominately incurred in consideration of
the time value of money.
(iii) Qualified interest expense. The term qualified interest
expense means, with respect to a qualified CFC, the interest expense
paid or accrued by the qualified CFC taken into account in determining
the tested income or tested loss of the qualified CFC for the CFC
inclusion year, multiplied by the fraction (not to exceed one)
described in paragraph (b)(1)(iii)(A) of this section, and then reduced
(but not to less than zero) by the amount described in paragraph
(b)(1)(iii)(B) of this section.
(A) The numerator of the fraction described in this paragraph
(b)(1)(iii)(A) is the average of the aggregate adjusted bases as of the
close of each quarter of obligations or financial instruments held by
the qualified CFC that give rise to income excluded from foreign
personal holding company income (as defined in section 954(c)(1)) by
reason of section 954(h) or (i), and the denominator is the average of
the aggregate adjusted bases as of the close of each quarter of all
assets held by the qualified CFC. For purposes of this paragraph
(b)(1)(iii)(A), the basis of the stock of another qualified CFC held by
a qualified CFC is treated as basis of an obligation or financial
instrument giving rise to income excluded from foreign personal holding
company income by reason of section 954(h) or (i) in an amount equal to
the basis of the stock multiplied by the fraction described in this
paragraph (b)(1)(iii)(A) determined with respect to the assets of such
other qualified CFC.
(B) The amount described in this paragraph (b)(1)(iii)(B) is the
amount of interest income of the qualified CFC for the CFC inclusion
year that is excluded from foreign personal holding company income (as
defined in section 954(c)(1)) by reason of section 954(c)(3) or (6).
(iv) Qualified CFC. The term qualified CFC means an eligible
controlled foreign corporation (within the meaning of section
954(h)(2)) or a qualifying insurance company (within the meaning of
section 953(e)(3)).
(2) Tested interest income--(i) In general. The term tested
interest income means interest income included in the gross tested
income of a controlled foreign corporation for the CFC inclusion year,
reduced by qualified interest income of the controlled foreign
corporation.
(ii) Interest income. The term interest income means any income or
gain that is treated as interest income by reason of the Internal
Revenue Code or the regulations thereunder, and any other income or
gain recognized in a transaction or series of integrated or related
transactions in which the forbearance of funds is secured for a period
of time if such income or gain is predominately derived from
consideration of the time value of money.
(iii) Qualified interest income. The term qualified interest income
means, with respect to a qualified CFC, interest income of the
qualified CFC included in the gross tested income of the qualified CFC
for the CFC inclusion year that is excluded from foreign personal
holding company income (as defined in section 954(c)(1)) by reason of
section 954(h) or (i).
(c) Examples. The following examples illustrate the application of
this section.
(1) Example 1: Wholly-owned CFCs-- (i) Facts. A Corp, a domestic
corporation, owns 100% of the single class of stock of each of FS1
and FS2, each a controlled foreign corporation. A Corp, FS1, and FS2
all use the calendar year as their taxable year. In Year 1, FS1 pays
$100x of interest to FS2. Also, in Year 1, FS2 pays $100x of
interest to a bank that is not related to A Corp, FS1, or FS2. The
interest paid by each of FS1 and FS2 is taken into account in
determining the tested income and tested loss of FS1 and FS2 under
Sec. 1.951A-2(c), and the interest received by FS2 is not foreign
personal holding company income (as defined in section 954(c)(1)) by
reason of section 954(c)(6) and thus is included in gross tested
income. For Year 1, taking into account
[[Page 51101]]
interest income and expense, FS1 has $500x of tested income and FS2
has $400x of tested loss. Neither FS1 nor FS2 is a qualified CFC.
(ii) Analysis--(A) CFC-level determination; tested interest
expense and tested interest income. FS1 has $100x of tested interest
expense for Year 1. FS2 has $100x of tested interest expense and
$100x of tested interest income for Year 1.
(B) United States shareholder-level determination; pro rata
share and specified interest expense. Under Sec. 1.951A-1(d)(5) and
(6), A Corp's pro rata share of FS1's tested interest expense is
$100x, its pro rata share of FS2's tested interest expense is $100x,
and its pro rata share of FS2's tested interest income is $100x. For
Year 1, A Corp's aggregate pro rata share of tested interest expense
is $200x and its aggregate pro rata share of tested interest income
is $100x. Accordingly, under Sec. 1.951A-1(c)(3)(iii), A Corp's
specified interest expense is $100x ($200x-$100x) for Year 1.
(2) Example 2: Less than wholly-owned CFCs-- (i) Facts. The
facts are the same as in paragraph (i) of Example 1, except that A
Corp owns 50% of the single class of stock of FS1 and 80% of the
single class of stock of FS2.
(ii) Analysis. (A) CFC-level determination; tested interest
expense and tested interest income. The analysis is the same as in
paragraph (ii)(A) of Example 1.
(B) United States shareholder-level determination; pro rata
share and specified interest expense. Under Sec. 1.951A-1(d)(5) and
(6), A Corp's pro rata share of FS1's tested interest expense is
$50x ($100x x 0.50), its pro rata share of FS2's tested interest
expense is $80x ($100x x 0.80), and its pro rata share of FS2's
tested interest income is $80x ($100x x 0.80). For Year 1, A Corp's
aggregate pro rata share of the tested interest expense is $130x and
its aggregate pro rata share of the tested interest income is $80x.
Accordingly, under Sec. 1.951A-1(c)(3)(iii), A Corp's specified
interest expense is $50x ($130x - $80x) for Year 1.
(3) Example 3: Qualified CFC--(i) Facts. B Corp, a domestic
corporation, owns 100% of the single class of stock of each of FS1
and FS2, each a controlled foreign corporation. B Corp, FS1, and FS2
all use the calendar year as their taxable year. FS2 is an eligible
controlled foreign corporation within the meaning of section
954(h)(2). In Year 1, FS1 pays $100x of interest to FS2, which
interest income is excluded from the foreign personal holding
company income (as defined in section 954(c)(1)) of FS2 by reason of
section 954(c)(6). Also, in Year 1, FS2 pays $250x of interest to a
bank, and receives an additional $300x of interest from customers
that are not related to FS2, which interest income is excluded from
foreign personal holding company income by reason of section 954(h).
The interest paid by each of FS1 and FS2 is taken into account in
determining the tested income and tested loss of FS1 and FS2, and
the interest received by FS2 is included in gross tested income. FS1
is not a qualified CFC. FS2 does not own stock in any qualified CFC.
FS2's average adjusted bases in obligations or financial instruments
that give rise to income excluded from foreign personal holding
company income by reason of section 954(h) is $8,000x, and FS2's
average adjusted bases in all its assets is $10,000x.
(ii) Analysis--(A) CFC-level determination; tested interest
expense and tested interest income. FS1 has $100x of tested interest
expense for Year 1. FS2 is a qualified CFC because it is an eligible
controlled foreign corporation within the meaning of section
954(h)(2). As a result, in determining the tested interest income
and tested interest expense of FS2, the qualified interest income
and qualified interest expense of FS2 are excluded. FS2 has
qualified interest income of $300x, the amount of FS2's interest
income that is excluded from foreign personal holding company income
by reason of section 954(h). In addition, FS2 has qualified interest
expense of $100x, the amount of FS2's interest expense taken into
account in determining FS2's tested income or tested loss under
Sec. 1.951A-2(c) ($250x), multiplied by a fraction, the numerator
of which is FS2's average adjusted bases in obligations or financial
instruments that give rise to income excluded from foreign personal
holding company income by reason of section 954(h) ($8,000x), and
the denominator of which is F2's average adjusted bases in all its
assets ($10,000x), and then reduced by the amount of the interest
income received from FS1 excluded from foreign personal holding
company income by reason of section 954(c)(6) ($100x). Therefore,
for Year 1, FS2 has tested interest income of $100x ($400x - $300x)
and tested interest expense of $150x ($250x - $100x).
(B) United States shareholder-level determination; pro rata
share and specified interest expense. Under Sec. 1.951A-1(d)(5) and
(6), B Corp's pro rata share of FS1's tested interest expense is
$100x, its pro rata share of FS2's tested interest expense is $150x,
and its pro rata share of FS2's tested interest income is $100x. For
Year 1, B Corp's aggregate pro rata share of tested interest expense
is $250x ($100x + $150x) and its aggregate pro rata share of tested
interest income is $100x ($0 + $100x). Accordingly, under Sec.
1.951A-1(c)(3)(iii), B Corp's specified interest expense is $150x
($250x - $100x) for Year 1.
0
Par. 8. Section 1.951A-5 is added to read as follows:
Sec. 1.951A-5 Domestic partnerships and their partners.
(a) Scope. This section provides rules regarding the application of
section 951A and the section 951A regulations to domestic partnerships
that own (within the meaning of section 958(a)) stock in one or more
controlled foreign corporations and to partners of such domestic
partnerships, including United States persons (within the meaning of
section 957(c)). Paragraph (b) of this section provides rules for the
determination of the GILTI inclusion amount of a domestic partnership
and the distributive share of such amount of a partner that is not a
United States shareholder with respect to one or more controlled
foreign corporations owned by the domestic partnership. Paragraph (c)
of this section provides rules for the determination of the GILTI
inclusion amount of a partner that is a United States shareholder with
respect to one or more controlled foreign corporations owned by a
domestic partnership. Paragraph (d) of this section provides rules for
tiered domestic partnerships. Paragraph (e) of this section provides
the definitions of CFC tested item, partnership CFC, U.S. shareholder
partner, and U.S. shareholder partnership. Paragraph (f) of this
section requires a domestic partnership to provide certain information
to each partner necessary for the partner to determine its GILTI
inclusion amount or its distributive share of the partnership's GILTI
inclusion amount. Paragraph (g) of this section provides examples
illustrating the rules of this section. For rules regarding the
treatment of certain controlled domestic partnerships owned through one
or more foreign corporations as foreign partnerships for purposes of
sections 951 through 964, including section 951A and the section 951A
regulations, see Sec. 1.951-1(h).
(b) In general--(1) Determination of GILTI inclusion amount of a
U.S. shareholder partnership. A U.S. shareholder partnership determines
its GILTI inclusion amount for its U.S. shareholder inclusion year
under the general rules applicable to United States shareholders in
section 951A and the section 951A regulations.
(2) Determination of distributive share of U.S. shareholder
partnership's GILTI inclusion amount of a partner other than a U.S.
shareholder partner. Each partner of a U.S. shareholder partnership
that is not a U.S. shareholder partner takes into account its
distributive share of the U.S. shareholder partnership's GILTI
inclusion amount (if any) for the U.S. shareholder inclusion year in
accordance with section 702 and Sec. 1.702-1(a)(8)(ii).
(c) Determination of GILTI inclusion amount of a U.S. shareholder
partner. For purposes of section 951A and the section 951A regulations,
section 958(a) stock of a partnership CFC owned by a U.S. shareholder
partnership is treated as section 958(a) stock owned proportionately by
each U.S. shareholder partner that is a United States shareholder of
the partnership CFC in the same manner as if the U.S. shareholder
partnership were a foreign partnership under section 958(a)(2) and
Sec. 1.958-1(b). Accordingly, for purposes of determining a U.S.
shareholder partner's GILTI inclusion amount, the U.S. shareholder
partner determines its pro rata share of any CFC tested item of
[[Page 51102]]
a partnership CFC based on the section 958(a) stock owned by the U.S.
shareholder partner by reason of this paragraph (c). In addition, a
U.S. shareholder partner's distributive share of the GILTI inclusion
amount of a U.S. shareholder partnership is determined without regard
to the partnership's pro rata share of any CFC tested item of a
partnership CFC with respect to which the U.S. shareholder partner is a
United States shareholder.
(d) Tiered U.S. shareholder partnerships. In the case of tiered
U.S. shareholder partnerships, section 958(a) stock of a partnership
CFC treated as owned under paragraph (c) of this section by a U.S.
shareholder partner that is also a U.S. shareholder partnership is
treated as section 958(a) stock owned by the U.S. shareholder
partnership for purposes of applying paragraph (c) of this section to a
U.S. shareholder partner of such U.S. shareholder partnership.
(e) Definitions. The following definitions apply for purposes of
this section:
(1) CFC tested item. The term CFC tested item has the meaning set
forth in Sec. 1.951A-1(d)(1).
(2) Partnership CFC. The term partnership CFC means, with respect
to a U.S. shareholder partnership, a controlled foreign corporation
stock of which is owned (within the meaning of section 958(a)) by the
U.S. shareholder partnership.
(3) U.S. shareholder partner. The term U.S. shareholder partner
means, with respect to a U.S. shareholder partnership and a partnership
CFC of the U.S. shareholder partnership, a United States person that is
a partner in the U.S. shareholder partnership and that is also a United
States shareholder (as defined in section 951(b)) of the partnership
CFC.
(4) U.S. shareholder partnership. The term U.S. shareholder
partnership means a domestic partnership (within the meaning of section
7701(a)(4)) that is a United States shareholder of one or more
controlled foreign corporations.
(f) Reporting requirement. A U.S. shareholder partnership must
furnish to each partner on or with such partner's Schedule K-1 (Form
1065 or successor form) for each U.S. shareholder inclusion year of the
partnership the partner's distributive share of the partnership's GILTI
inclusion amount (if any) and, with respect to a U.S. shareholder
partner, the partner's proportionate share of the partnership's pro
rata share (if any) of each CFC tested item of each partnership CFC of
the partnership and any other information required in the form or
instructions. See section 6031(b).
(g) Examples. The following examples illustrate the rules of this
section. None of the persons in the following examples own an interest
in any controlled foreign corporation other than as described.
(1) Example 1: Domestic partnership with partners that are not
United States shareholders-- (i) Facts. Eleven U.S. citizens
(``individuals'') each own a 9% interest of PRS, a domestic
partnership. The remaining 1% interest of PRS is owned by X Corp, a
domestic corporation. None of the individuals or X Corp are related.
PRS owns 100% of the single class of stock of FC, a controlled
foreign corporation. The individuals, X Corp, PRS, and FC all use
the calendar year as their taxable year. In Year 1, FC has $130x of
tested income and $50x of qualified business asset investment.
(ii) Analysis--(A) Partnership-level calculation. PRS is a U.S.
shareholder partnership with respect to FC. Under paragraph (b)(1)
of this section, PRS determines its GILTI inclusion amount for Year
1. PRS's pro rata share of FC's tested income is $130x. PRS's pro
rata share of FC's qualified business asset investment is $50x.
PRS's net CFC tested income is $130x. PRS's net deemed tangible
income return is $5x ($50x x 0.10). PRS's GILTI inclusion amount for
Year 1 is $125x ($130x - $5x).
(B) Partner-level calculation. Neither X Corp nor the
individuals are U.S. shareholder partners with respect to FC.
Accordingly, under paragraph (b)(2) of this section, each of the
individuals and X Corp includes its distributive share of PRS's
GILTI inclusion amount ($11.25x each for the individuals and $1.25x
for X Corp) in gross income for Year 1.
(2) Example 2: Domestic partnership with partners that are
United States shareholders; multiple partnership CFCs--
(i) Facts. X Corp and Y Corp are domestic corporations that own
40% and 60%, respectively, of PRS, a domestic partnership. PRS owns
100% of the single class of stock of FC1 and of FC2, each a
controlled foreign corporation. X Corp, Y Corp, PRS, FC1, and FC2
all use the calendar year as their taxable year. In Year 1, FC1 has
$130x of tested income and $50x of qualified business asset
investment, and FC2 has $30x of tested loss.
(ii) Analysis--(A) Partnership-level calculation. PRS is a U.S.
shareholder partnership with respect to each of FC1 and FC2. Under
paragraph (b)(1) of this section, PRS determines its GILTI inclusion
amount for Year 1. PRS's pro rata share of FC1's tested income is
$130x and of FC2's tested loss is $30x. PRS's pro rata share of
FC1's qualified business asset investment is $50x. PRS's net CFC
tested income is $100x ($130x - $30x). PRS's net deemed tangible
income return is $5x ($50x x 0.10). PRS's GILTI inclusion amount for
Year 1 is $95x ($100x - $5x).
(B) Partner-level calculation. X Corp and Y Corp are U.S.
shareholder partners with respect to FC1 and FC2. Accordingly, under
paragraph (c) of this section, X Corp and Y Corp are treated as
owning section 958(a) stock of FC1 and FC2 proportionately as if PRS
were a foreign partnership. Thus, X Corp's pro rata share of FC1's
tested income is $52x ($130x x 0.40), and its pro rata share of
FC2's tested loss is $12x ($30x x 0.40). X Corp's pro rata share of
FC1's qualified business asset investment is $20x ($50x x 0.40).
Accordingly, X Corp's net CFC tested income is $40x ($52x - $12x),
and its net deemed tangible income return is $2x ($20x x 0.10). X
Corp's GILTI inclusion amount for Year 1 is $38x ($40x - $2x). Y
Corp's pro rata share of FC1's tested income is $78x ($130x x 0.60),
and its pro rata share of FC2's tested loss is $18x ($30x x 0.60). Y
Corp's pro rata share of FC1's qualified business asset investment
is $30x ($50x x 0.60). Accordingly, Y Corp's net CFC tested income
is $60x ($78x - $18x), and its net deemed tangible income return is
$3x ($30x x 0.10). Y Corp's GILTI inclusion amount for Year 1 is
$57x ($60x - $3x). Because X Corp and Y Corp are both U.S.
shareholder partners with respect to FC1 and FC2, the only
partnership CFCs of PRS, X Corp and Y Corp each includes its
proportionate share of PRS's share of each CFC tested item of FC1
and FC2 under paragraph (c) of this section rather than including a
distributive share of the GILTI inclusion amount of PRS.
(3) Example 3: Domestic partnership with partners that are
United States shareholders with respect to some, but not all, of the
controlled foreign corporations owned by the domestic partnership--
(i) Facts. X Corp and Y Corp are domestic corporations that own 40%
and 60%, respectively, of PRS, a domestic partnership. PRS owns 20%
of the single class of stock of FC1 and 10% of the single class of
stock of FC2. In addition, Y Corp owns 100% of the single class of
stock of FC3. FC1, FC2, and FC3 are controlled foreign corporations.
X Corp, Y Corp, PRS, FC1, FC2, and FC3 all use the calendar year as
their taxable year. In Year 1, FC1 has $100x of tested income, FC2
has $80x of tested income, and FC3 has $10x of tested loss.
(ii) Analysis. (A) Partnership-level calculation. PRS is a U.S.
shareholder partnership with respect to each of FC1 and FC2. Under
paragraph (b)(1) of this section, PRS determines its GILTI inclusion
amount for Year 1. PRS's pro rata share of FC1's tested income is
$20x ($100x x 0.20) and of FC2's tested income is $8x ($80x x 0.10).
PRS's net CFC tested income is $28x ($20x + $8x). PRS has no net
deemed tangible income return. PRS's GILTI inclusion amount for Year
1 is $28x.
(B) Partner-level calculation--(1) X Corp. X Corp is not a U.S.
shareholder partner with respect to either FC1 or FC2 because X Corp
owns (within the meaning of section 958) less than 10% of each of
FC1 (40% x 20% = 8%) and FC2 (40% x 10% = 4%). Accordingly, under
paragraph (b)(2) of this section, X Corp includes in income its
distributive share, or $11.20x ($28x x 0.40), of PRS's GILTI
inclusion amount in Year 1.
(2) Y Corp. Y Corp is a United States shareholder of FC3. Y Corp
is also a U.S. shareholder partner with respect to FC1, because it
owns (within the meaning of section 958) at least 10% (60% x 20% =
12%) of the stock of FC1, but not with respect to
[[Page 51103]]
FC2, because Y Corp owns (within the meaning of section 958) less
than 10% of the stock of FC2 (60% x 10% = 6%). Accordingly, under
paragraph (c) of this section, Y Corp is treated as owning section
958(a) stock of FC1 proportionately as if PRS were a foreign
partnership. Thus, Y Corp's pro rata share of FC1's tested income is
$12x ($20x x 0.60). Y Corp's pro rata share of FC3's tested loss is
$10x ($10x x 1). Accordingly, Y Corp's net CFC tested income is $2x
($12x - $10x) and Y Corp has no net deemed tangible income return. Y
Corp's GILTI inclusion amount for Year 1 is $2x. In addition, under
paragraph (c) of this section, for purposes of determining Y Corp's
distributive share of PRS's GILTI inclusion amount, Y Corp's
distributive share of PRS's GILTI inclusion amount is determined
without regard to PRS's pro rata share of any item of FC1. PRS's
GILTI inclusion amount computed solely with respect to FC2 is $8x
($80x x 0.10). Y Corp's distributive share of PRS's GILTI inclusion
amount is $4.80x ($8x x 0.60) in Year 1.
(4) Example 4: Tiered domestic partnerships--(i) Facts. X Corp
and Y Corp are domestic corporations that own, respectively, a 20%
interest and an 80% interest in PRS1, an upper-tier domestic
partnership. PRS1 owns a 40% interest in PRS2, a lower-tier domestic
partnership. The remaining 60% of PRS2 is owned by Z Corp, a
controlled foreign corporation. PRS2 is not a controlled domestic
partnership within the meaning of Sec. 1.951-1(h)(2) (because no
United States shareholder of Z Corp (or related persons) controls
PRS2). PRS2 owns 80% of the single class of stock of FC, a
controlled foreign corporation. X Corp, Y Corp, Z Corp, PRS1, PRS2,
and FC all use the calendar year as their taxable year. In Year 1,
FC has $100x of tested income and $50x of qualified business asset
investment.
(ii) Analysis. (A) Lower-tier partnership-level calculation.
PRS2 is a U.S. shareholder partnership with respect to FC, because
PRS2 directly owns 80% of the single class of stock of FC. Under
paragraph (b)(1) of this section, PRS2 determines its GILTI
inclusion amount for its taxable year. PRS2's pro rata share of FC's
tested income is $80x ($100x x 0.80). PRS2's pro rata share of FC's
qualified business asset investment is $40x ($50x x 0.80). PRS2's
net CFC tested income is $80x, and its net deemed tangible income
return is $4x ($40x x 0.10). PRS2's GILTI inclusion amount for Year
1 is $76x ($80x - $4x).
(B) Non-U.S. shareholder partner calculation. Z Corp is not a
U.S. shareholder partner of FC. Therefore, under paragraph (b)(2) of
this section, in Year 1, Z Corp includes in income Z Corp's
distributive share of PRS2's GILTI inclusion amount, or $45.60x
($76x x 0.60). Z Corp's gross tested income in Year 1 includes this
amount.
(C) Upper-tier partnership-level calculation. PRS1 is a U.S.
shareholder partner with respect to FC because it owns (within the
meaning of section 958) more than 10% of the stock of FC (40% x 100%
(by reason of the application of section 958(b)(2)) = 40%).
Accordingly, under paragraph (c) of this section, PRS1 is treated as
owning section 958(a) stock of FC proportionately as if PRS2 were a
foreign partnership. Thus, PRS1's pro rata share of FC's tested
income is $32x ($100x x 0.80 x 0.40), and its pro rata share of FC's
qualified business asset investment is $16x ($50x x 0.80 x 0.40).
PRS1's net CFC tested income is $32x, and its net deemed tangible
income return is $1.60x ($16x x 0.10). PRS1's GILTI inclusion amount
for Year 1 is $30.40x ($32x - $1.60x).
(D) Upper-tier partnership partner-level calculation--(1)
Treatment of upper-tier partnership. For purposes of applying
paragraph (c) of this section to determine X Corp and Y Corp's GILTI
inclusion amount, PRS1 is treated as owning section 958(a) stock of
FC.
(2) X Corp. X Corp is not a U.S. shareholder partner with
respect to FC because it owns (within the meaning of section 958)
less than 10% (20% x 40% x 100% (by reason of the application of
section 958(b)(2)) = 8%) of the stock of FC. Accordingly, under
paragraph (b)(2) of this section, X Corp includes its distributive
share of PRS1's GILTI inclusion amount in Year 1, which is $6.08x
($30.40x x 0.20).
(3) Y Corp. Y Corp is a U.S. shareholder partner with respect to
FC because it owns (within the meaning of section 958) more than 10%
(80% x 40% x 100% (by reason of the application of section
958(b)(2)) = 32%) of the stock of FC. Accordingly, under paragraphs
(c) and (d) of this section, Y Corp is treated as owning section
958(a) stock of FC proportionately as if PRS1 and PRS2 were foreign
partnerships. Thus, Y Corp's pro rata share of FC's tested income is
$25.60x ($100x x 0.80 x 0.40 x 0.80), and its pro rata share of FC's
qualified business asset investment is $12.80x ($50x x 0.80 x 0.40 x
0.80). Y Corp's net CFC tested income is $25.60x, its net deemed
tangible income return is $1.28x ($12.80x x 0.10), and its GILTI
inclusion amount is $24.32x ($25.60x - $1.28x). Because Y Corp is a
U.S. shareholder partner with respect to FC, the only partnership
CFC of PRS1, Y Corp has no distributive share of the GILTI inclusion
amount of PRS1 under paragraph (c) of this section.
(5) Example 5: S corporation and its shareholders-- (i) Facts.
Individual A, a U.S. citizen, and Grantor Trust, a trust all of
which is treated under sections 671 through 679 as owned by
Individual B, a U.S. citizen, respectively own 5% and 95% of the
single class of stock of Corporation X, an S corporation.
Corporation X owns 100% of the single class of stock of FC, a
controlled foreign corporation. Individual A, Grantor Trust,
Individual B, Corporation X, and FC all use the calendar year as
their taxable year. In Year 1, FC has $200x of tested income and
$100x of qualified business asset investment.
(ii) Analysis--(A) S corporation-level calculation. An S
corporation is treated as a partnership for purposes of sections 951
through 965 under section 1373. Corporation X is a U.S. shareholder
partnership with respect to FC, a partnership CFC. Accordingly,
under paragraph (b)(1) of this section, Corporation X determines its
GILTI inclusion amount for Year 1. Corporation X's pro rata share of
FC's tested income is $200x, and its pro rata share of FC's
qualified business asset investment is $100x. Corporation X's net
CFC tested income is $200x, and its net deemed tangible income
return is $10x ($100x x 0.10). Corporation X's GILTI inclusion
amount for Year 1 is $190x ($200x - $10x).
(B) S corporation shareholder-level calculation--(1) Individual
A. Individual A is not a U.S. shareholder partner with respect to FC
because it owns (within the meaning of section 958) less than 10%
(5% x 100% = 5%) of the FC stock. Accordingly, under paragraph
(b)(2) of this section, Individual A includes in gross income its
proportionate share of Corporation X's GILTI inclusion amount, which
is $9.50x ($190x x 0.05).
(2) Grantor Trust. Because Individual B is treated as owning all
of Grantor Trust under sections 671 through 679, Individual B is
treated as if it directly owns the shares of stock in Corporation X
owned by Grantor Trust. As a result, Individual B is treated as a
U.S. shareholder partner with respect to FC because it owns (within
the meaning of section 958) more than 10% (95% x 100% = 95%) of the
FC stock. Accordingly, under paragraph (c) of this section,
Individual B is treated as owning section 958(a) stock of FC
proportionately as if Corporation X were a foreign partnership.
Thus, Individual B's pro rata share of FC's tested income is $190x
($200x x 0.95) and its pro rata share of FC's qualified business
asset investment is $95x ($100x x 0.95). Individual B's net CFC
tested income is $190x, and its net deemed tangible income return is
$9.50x ($95x x 0.10). Individual B's GILTI inclusion amount for Year
1 is $180.5x ($190x - $9.50x). Because Individual B is a U.S.
shareholder partner with respect to FC, the only partnership CFC of
Corporation X, Individual B has no distributive share of the GILTI
inclusion amount of Corporation X under paragraph (c) of this
section.
(6) Example 6: Domestic partnership with no GILTI inclusion
amount-- (i) Facts. X Corp is a domestic corporation that owns a 90%
interest in PRS, a domestic partnership. The remaining 10% of PRS is
owned by Y, a foreign individual. PRS owns 100% of the single class
of stock of FC1, a controlled foreign corporation, and 100% of the
single class of stock of FC2, a controlled foreign corporation. X
Corp owns 100% of the single class of stock of FC3, a controlled
foreign corporation. X Corp, PRS, FC1, FC2, and FC3 all use the
calendar year as their taxable year. In Year 1, FC1 has $100x of
tested loss and $80x of tested interest expense, FC2 has $50x of
tested income, and FC3 has $150x of tested income and $500x of
qualified business asset investment in Year 1.
(ii) Analysis--(A) Partnership-level calculation. PRS is a U.S.
shareholder partnership with respect to FC1 and FC2. Under paragraph
(b)(1) of this section, PRS determines its GILTI inclusion amount
for Year 1. PRS's pro rata share of FC1's tested loss is $100x, and
PRS's pro rata share of FC2's tested income is $50x. PRS's net CFC
tested income is $0 ($50x - 100x), and therefore PRS has no GILTI
inclusion amount for Year 1.
(B) Partner-level calculation. X Corp is a U.S. shareholder
partner with respect to FC1 and FC2 because X Corp owns (within the
meaning of section 958) at least 10% of each (90% x 100% = 90%).
Accordingly, under
[[Page 51104]]
paragraph (c) of this section, X Corp is treated as owning section
958(a) stock of FC1 and FC2 proportionately as if PRS were a foreign
partnership. X Corp's pro rata share of FC1's tested loss is $90x
($100x x 0.90), and X Corp's pro rata share of FC1's tested interest
expense is $72x ($80 x 0.90). X Corp's pro rata share of FC2's
tested income is $45x ($50x x 0.90). X Corp's pro rata share of
FC3's tested income is $150x, and its pro rata share of FC3's
qualified business asset investment is $500x. X Corp's net CFC
tested income is $105x ($45x + $150x - $90x). X Corp's deemed
tangible income return is $50x ($500x x 0.10), but its net deemed
tangible income return is $0 ($50x - $72x). X Corp has a GILTI
inclusion amount of $105x ($105x - $0) for Year 1.
0
Par. 9. Section 1.951A-6 is added to read as follows:
Sec. 1.951A-6 Treatment of GILTI inclusion amount and adjustments to
earnings and profits and basis related to tested loss CFCs.
(a) Scope. This section provides rules relating to the treatment of
GILTI inclusion amounts and adjustments to earnings and profits and
basis to account for tested losses. Paragraph (b) of this section
provides that a GILTI inclusion amount is treated in the same manner as
an amount included under section 951(a)(1)(A) for purposes of applying
certain sections of the Code. Paragraph (c) of this section provides
rules for the treatment of amounts taken into account in determining
the net CFC tested income when applying sections 163(e)(3)(B)(i) and
267(a)(3)(B). Paragraph (d) of this section provides rules that
increase the earnings and profits of a tested loss CFC for purposes of
section 952(c)(1)(A). Paragraph (e) of this section provides rules for
certain basis adjustments to the stock of a controlled foreign
corporation by reason of tested losses used to reduce a domestic
corporation's net CFC tested income upon the disposition of the stock
of the controlled foreign corporation.
(b) Treatment as subpart F income for certain purposes--(1) In
general. A GILTI inclusion amount is treated in the same manner as an
amount included under section 951(a)(1)(A) for purposes of applying
sections 168(h)(2)(B), 535(b)(10), 851(b), 904(h)(1), 959, 961, 962,
993(a)(1)(E), 996(f)(1), 1248(b)(1), 1248(d)(1), 1411, 6501(e)(1)(C),
6654(d)(2)(D), and 6655(e)(4), and with respect to other sections of
the Internal Revenue Code as provided in other guidance published in
the Internal Revenue Bulletin.
(2) Allocation of GILTI inclusion amount to tested income CFCs--(i)
In general. For purposes of the sections referred to in paragraph
(b)(1) of this section, the portion of the GILTI inclusion amount of a
United States shareholder treated as being with respect to each
controlled foreign corporation of the United States shareholder for the
U.S. shareholder inclusion year is--
(A) In the case of a tested loss CFC, zero, and
(B) In the case of a tested income CFC, the portion of the GILTI
inclusion amount of the United States shareholder which bears the same
ratio to such inclusion amount as the United States shareholder's pro
rata share of the tested income of the tested income CFC for the U.S.
shareholder inclusion year bears to the aggregate amount of the United
States shareholder's pro rata share of the tested income of each tested
income CFC for the U.S. shareholder inclusion year.
(ii) Example-- (A) Facts. USP, a domestic corporation, owns all
of the stock of three controlled foreign corporations, CFC1, CFC2,
and CFC3. USP, CFC1, CFC2, and CFC3 all use the calendar year as
their taxable year. In Year 1, CFC1 has tested income of $100x, CFC2
has tested income of $300x, and CFC3 has tested loss of $50x.
Neither CFC1 nor CFC2 has qualified business asset investment.
(B) Analysis. In Year 1, USP has a GILTI inclusion amount of
$350x ($100x + $300x-$50x). The aggregate amount of USP's pro rata
share of tested income from CFC1 and CFC2 is $400x ($100x + $300x).
The portion of USP's GILTI inclusion amount treated as being with
respect to CFC1 is $87.50x ($350x x $100x/$400x). The portion of
USP's GILTI inclusion amount treated as being with respect to CFC2
is $262.50x ($350x x $300x/$400x). The portion of USP's GILTI
inclusion amount treated as being with respect to CFC3 is $0 because
CFC3 is a tested loss CFC.
(iii) Translation of portion of GILTI inclusion amount allocated to
tested income CFC. The portion of the GILTI inclusion amount of a
United States shareholder allocated to a tested income CFC under
section 951A(f)(2) and paragraph (b)(2)(i) of this section is
translated into the functional currency of the tested income CFC using
the average exchange rate for the CFC inclusion year of the tested
income CFC.
(c) Treatment as an amount includible in the gross income of a
United States person--(1) In general. For purposes of sections
163(e)(3)(B)(i) and 267(a)(3)(B), an item (including original issue
discount) is treated as includible in the gross income of a United
States person to the extent that such item increases a United States
shareholder's pro rata share of tested income of a controlled foreign
corporation for a U.S. shareholder inclusion year, reduces the
shareholder's pro rata share of tested loss of a controlled foreign
corporation for the U.S. shareholder inclusion year, or both.
(2) Special rule for a United States shareholder that is a domestic
partnership. In the case of a United States shareholder that is a
domestic partnership (within the meaning of section 7701(a)(4)), an
item is described in paragraph (c)(1) of this section only to the
extent one or more United States persons (other than domestic
partnerships) that are direct or indirect partners of the domestic
partnership include in gross income their distributive share of the
GILTI inclusion amount (if any) of the domestic partnership for the
U.S. shareholder inclusion year of the domestic partnership in which
such item accrues or such item is taken into account under paragraph
(c)(1) of this section by a U.S. shareholder partner (within the
meaning of Sec. 1.951A-5(e)(3)) of the domestic partnership by reason
of Sec. 1.951A-5(c).
(d) Increase of earnings and profits of tested loss CFC for
purposes of section 952(c)(1)(A). For purposes of section 952(c)(1)(A)
with respect to a CFC inclusion year, the earnings and profits of a
tested loss CFC are increased by an amount equal to the tested loss of
the tested loss CFC for the CFC inclusion year.
(e) Adjustments to basis related to net used tested loss--(1) In
general--(i) Disposition of stock of a controlled foreign corporation.
In the case of a disposition of section 958(a) stock of a controlled
foreign corporation owned (directly or indirectly) by a domestic
corporation (specified stock), the adjusted basis of the specified
stock is reduced immediately before the disposition by the domestic
corporation's net used tested loss amount with respect to the
controlled foreign corporation (if any) attributable to the specified
stock. If the reduction described in the preceding sentence exceeds the
adjusted basis in the specified stock immediately before the
disposition, such excess is treated as gain from the sale or exchange
of the stock for the taxable year in which the disposition occurs.
(ii) Disposition of stock of an upper-tier controlled foreign
corporation. In the case of a disposition of specified stock of a
controlled foreign corporation (upper-tier CFC) by reason of which a
domestic corporation owns, or has owned, section 958(a) stock of any
other controlled foreign corporation (lower-tier CFC), for purposes of
determining the reduction under paragraph (e)(1)(i) of this section,
the domestic corporation's net used tested loss amount (if any) with
respect to the
[[Page 51105]]
upper-tier CFC attributable to the specified stock is--
(A) Increased by the sum of the domestic corporation's net used
tested loss amounts with respect to each lower-tier CFC attributable to
the specified stock; and
(B) Reduced (but not below zero) by the sum of the domestic
corporation's net offset tested income amounts with respect to the
upper-tier CFC and each lower-tier CFC attributable to the specified
stock.
(iii) Disposition of an interest in a foreign entity other than a
controlled foreign corporation. In the case of a disposition of an
interest in a foreign entity other than a controlled foreign
corporation through which entity a domestic corporation owns section
958(a) stock of a controlled foreign corporation, for purposes of
paragraph (e)(1)(i) and (ii) of this section, the controlled foreign
corporation is treated as a lower-tier CFC, the interest in the entity
is treated as specified stock of a controlled foreign corporation, and
the entity is treated as an upper-tier CFC with respect to which the
domestic corporation has neither a net used tested loss amount nor a
net offset tested income amount.
(iv) Order of application of basis reductions. In the event of an
indirect disposition described in paragraph (e)(6)(ii)(B) of this
section, the basis reduction described in paragraph (e)(1)(i) of this
section is deemed to occur at the lowest-tier CFC first and,
thereafter, up the chain of ownership until adjustments are made to the
specified stock directly owned by the person making the disposition
described in paragraph (e)(6)(ii)(A) of this section.
(v) No duplicative adjustments. No item is taken into account under
this paragraph (e)(1) to adjust the basis of specified stock of a
controlled foreign corporation to the extent that such amount has
previously been taken into account with respect to a prior basis
adjustment with respect to such stock under this paragraph (e)(1).
Moreover, the basis of specified stock is not reduced to the extent a
taxpayer can demonstrate to the satisfaction of the Secretary that such
adjustments would duplicate prior reductions to the basis of such stock
under section 362(e)(2).
(2) Net used tested loss amount--(i) In general. The term net used
tested loss amount means, with respect to a domestic corporation and a
controlled foreign corporation, the excess (if any) of--
(A) The aggregate of the domestic corporation's used tested loss
amount with respect to the controlled foreign corporation for each U.S.
shareholder inclusion year, over
(B) The aggregate of the domestic corporation's offset tested
income amount with respect to the controlled foreign corporation for
each U.S. shareholder inclusion year.
(ii) Used tested loss amount. The term used tested loss amount
means, with respect to a domestic corporation and a tested loss CFC for
a U.S. shareholder inclusion year--
(A) In the case of a domestic corporation that has net CFC tested
income for the U.S. shareholder inclusion year, the domestic
corporation's pro rata share of the tested loss of the tested loss CFC
for the U.S. shareholder inclusion year, or
(B) In the case of a domestic corporation without net CFC tested
income for the U.S. shareholder inclusion year, the amount that bears
the same ratio to the domestic corporation's pro rata share of the
tested loss of the tested loss CFC for the U.S. shareholder inclusion
year as the aggregate of the domestic corporation's pro rata share of
the tested income of each tested income CFC for the U.S. shareholder
inclusion year bears to the aggregate of the domestic corporation's pro
rata share of the tested loss of each tested loss CFC for the U.S.
shareholder inclusion year.
(3) Net offset tested income amount--(i) In general. The term net
offset tested income amount means, with respect to a domestic
corporation and a controlled foreign corporation, the excess (if any)
of the amount described in paragraph (e)(2)(i)(B) of this section over
the amount described in paragraph (e)(2)(i)(A) of this section.
(ii) Offset tested income amount. The term offset tested income
amount means, with respect to a domestic corporation and a tested
income CFC for a U.S. shareholder inclusion year--
(A) In the case of a domestic corporation that has net CFC tested
income for the U.S. shareholder inclusion year, the amount that bears
the same ratio to the domestic corporation's pro rata share of the
tested income of the tested income CFC for the U.S. shareholder
inclusion year as the aggregate of the domestic corporation's pro rata
share of the tested loss of each tested loss CFC for the U.S.
shareholder inclusion year bears to the aggregate of the domestic
corporation's pro rata share of the tested income of each tested income
CFC for the U.S. shareholder inclusion year, or
(B) In the case of a domestic corporation without net CFC tested
income for the U.S. shareholder inclusion year, the domestic
corporation's pro rata share of the tested income of the tested income
CFC for the U.S. shareholder inclusion year.
(4) Attribution to stock--(i) In general. The portion of a domestic
corporation's net used tested loss amount or net offset tested income
amount with respect to a controlled foreign corporation (including a
lower-tier CFC) attributable to specified stock for purposes of
paragraph (e)(1) of this section is determined based on the domestic
corporation's pro rata share of the tested loss and tested income, as
applicable, of the controlled foreign corporation for each U.S.
shareholder inclusion year with respect to such specified stock. See
Sec. 1.951A-1(d)(1), (2), and (4) for rules regarding the
determination of pro rata share amounts of tested income and tested
loss.
(ii) Nonrecognition transactions. In the case of specified stock
acquired by a domestic corporation in a nonrecognition transaction (as
defined in section 7701(a)(45)), the principles of Sec. 1.1248-8 apply
to determine the domestic corporation's net used tested loss amount or
net offset tested income amount with respect to a controlled foreign
corporation attributable to specified stock. For purposes of applying
the principles of Sec. 1.1248-8, tested income is treated as earnings
and profits and tested loss is treated as a deficit in earnings and
profits.
(5) Section 381 transactions. If a controlled foreign corporation
with respect to which a United States shareholder has a net used tested
loss amount or net offset tested income amount is a distributor or
transferor corporation in a transaction described in section 381(a)
(acquired CFC) in which a controlled foreign corporation is the
acquiring corporation (acquiring CFC), the domestic corporation's net
used tested loss amount or net offset tested income amount with respect
to the acquiring CFC is increased by the amount of the net used tested
loss amount or net offset tested income amount of the acquired CFC.
This paragraph (e)(5) does not apply to the extent that the acquiring
CFC is an upper-tier CFC and such amounts would be taken into account
under paragraph (e)(1)(ii) of this paragraph if the stock of the
acquiring CFC were disposed of.
(6) Other definitions. The following additional definitions apply
for purposes of this paragraph (e):
(i) Domestic corporation. The term domestic corporation means a
domestic corporation other than a real estate investment trust (as
defined in section 856) or a regulated investment company (as defined
in section 851).
[[Page 51106]]
(ii) Disposition. The term disposition means--
(A) Any transfer of specified stock that is taxable, in whole or in
part, including a sale or exchange, contribution, or distribution of
the stock, including a deemed sale or exchange by reason of the
specified stock becoming worthless within the meaning of section
165(g), or
(B) Any indirect disposition of specified stock of a lower-tier CFC
as a result of a disposition described in paragraph (e)(6)(ii)(A) of
this section of specified stock of an upper-tier CFC.
(7) Special rule for disposition by controlled foreign corporation
less than 100 percent owned by a single domestic corporation. In the
case of a disposition by a controlled foreign corporation that is not
100 percent owned, within the meaning of section 958(a), by a single
domestic corporation, if a reduction to basis described in paragraph
(e)(1) of this section by reason of a domestic corporation's net used
tested loss amount results in an increase to the controlled foreign
corporation's foreign personal holding company income (as defined in
section 954(c)(1)), the domestic corporation's pro rata share of the
subpart F income of the controlled foreign corporation, as otherwise
determined under section 951(a)(2) and Sec. 1.951-1(b) and (e), is
increased by the amount of such increase, and no other shareholder
takes such subpart F income into account under section 951(a)(1)(A).
(8) Special rules for members of a consolidated group. For purposes
of the section 951A regulations, a member determines its net used
tested loss amount and the adjustments made as a result of the amount
under the rules provided in Sec. 1.1502-51(c).
(9) Examples. The following examples illustrate the application of
the rules in this paragraph (e).
(i) Example 1-- (A) Facts. USP, a domestic corporation, owns
100% of the single class of stock of CFC1 and CFC2. USP1, CFC1, and
CFC2 all use the calendar year as their taxable year. In Year 1,
CFC2 has $90x of tested loss and CFC1 has $100x of tested income. At
the beginning of Year 2, USP sells all of the stock of CFC2 to an
unrelated buyer for cash. USP has no used tested loss amount or
offset tested income amount with respect to CFC2 in any year prior
to Year 1. USP has not owned stock in any other CFC by reason of
owning stock of CFC1 and CFC2.
(B) Analysis. At the time of the disposition, USP has a net used
tested loss amount of $90x with respect to CFC2 attributable to the
CFC2 stock, which is the specified stock. Because USP does not own
(and has not owned), within the meaning of section 958(a)(2), stock
in any lower-tier CFCs by reason of the CFC2 stock, there is no
adjustment to the net used tested loss amount of $90x pursuant to
paragraph (e)(1)(ii) of this section. Accordingly, immediately
before the disposition of the CFC2 stock, the basis of the CFC2
stock is reduced by $90x under paragraph (e)(1)(i) of this section.
(ii) Example 2-- (A) Facts. The facts are the same as in
paragraph (A) of Example 1, except that USP sells only 90% of the
shares of CFC2.
(B) Analysis. The analysis is the same as in paragraph (B) of
Example 1, except that USP's net used tested loss amount
attributable to the CFC2 stock that was disposed of is only $81x
(90% x $90x) under paragraph (e)(4)(i) of this section. Accordingly,
immediately before the disposition of such stock, the basis in the
CFC2 stock disposed of is reduced by $81x under paragraph (e)(1)(i)
of this section.
(iii) Example 3-- (A) Facts. The facts are the same as in
paragraph (A) of Example 1, except that USP sells the CFC2 stock at
the beginning of Year 3 and during Year 2 CFC1 has $10x of tested
loss that offsets Year 2 tested income of CFC2.
(B) Analysis. USP has a net used tested loss amount of $80x with
respect to CFC2 attributable to the CFC2 stock, the amount of USP's
used tested loss amount with respect to CFC2 attributable to the
CFC2 stock in Year 1 of $90x reduced by USP's offset tested income
amount with respect to CFC2 attributable to the CFC2 stock in Year 2
of $10x. Accordingly, immediately before the disposition of the CFC2
stock, the basis of the CFC2 stock is reduced by $80x under
paragraph (e)(1)(i) of this section.
(iv) Example 4-- (A) Facts. USP, a domestic corporation, owns
100% of the single class of stock of CFC1, and CFC1 owns 100% of the
single class of stock of CFC2. USP1, CFC1, and CFC2 all use the
calendar year as their taxable year. In Year 1, CFC1 has $100x of
tested loss that offsets CFC2's $100x of tested income. USP sells
the stock of CFC1 at the beginning of Year 2. USP has no used tested
loss amount or offset tested income amount with respect to CFC1 or
CFC2 in any year prior to Year 1. USP has not owned stock in any
other CFC by reason of owning stock of CFC1 and CFC2.
(B) Analysis--(1) Direct disposition. At the time of the
disposition, USP has a net used tested loss amount of $100x with
respect to CFC1 attributable to the CFC1 stock. However, because USP
owns, within the meaning of section 958(a)(2), CFC2 stock by reason
of the CFC1 stock, USP's $100x net used tested loss amount with
respect to CFC1 attributable to the CFC1 stock is reduced by USP's
$100x net offset tested income amount with respect to CFC2
attributable to the CFC1 stock. Accordingly, there is no adjustment
to the basis of the CFC1 stock under paragraph (e)(1)(i) of this
section.
(2) Indirect disposition. Under paragraph (e)(6)(ii)(B) of this
section, USP's disposition of the CFC1 stock also constitutes an
indirect disposition of the CFC2 stock because CFC1 is an upper-tier
CFC and CFC2 is a lower-tier CFC within the meaning of paragraph
(e)(1)(ii) of this section. However, USP has no net used tested loss
amount with respect to CFC2 attributable to the CFC2 stock.
Accordingly, there is no adjustment to the basis of the CFC2 stock
under paragraph (e)(1) of this section.
(v) Example 5-- (A) Facts. The facts are the same as in
paragraph (A) of Example 4, except that in Year 1 CFC2 has $100x of
tested loss that offsets CFC1's $100x of tested income. CFC1 sells
the stock of CFC2 at the beginning of Year 2.
(B) Analysis. USP, a domestic corporation, owns within the
meaning of section 958(a) stock of CFC2. Accordingly, immediately
before the disposition, CFC1's basis in the CFC2 stock is reduced by
USP's net used tested loss amount with respect to CFC2 attributable
to the CFC2 stock of $100x under paragraph (e)(1)(i) of this
section.
(2) Indirect disposition.
(vi) Example 6-- (A) Facts. The facts are the same as in
paragraph (A) of Example 5, except that instead of CFC1 selling the
stock of CFC2, USP sells the stock of CFC1.
(B) Analysis--(1) Direct disposition. USP has no net used tested
loss amount with respect to CFC1 attributable to the stock of CFC1.
However, because USP owns, within the meaning of section 958(a)(2),
stock of CFC2 by reason of owning stock of CFC1, under paragraph
(e)(1)(ii) of this section, USP's net used tested loss amount
attributable to the stock of CFC1 ($0) is increased by USP's net
used tested loss amount with respect to CFC2 attributable to the
CFC1 stock ($100x), and reduced by USP's net offset tested income
amount with respect to CFC1 attributable to the CFC1 stock ($100x).
Accordingly, there is no adjustment to the basis of the CFC1 stock
under paragraph (e)(1) of this section.
(2) Indirect disposition. Under paragraph (e)(6)(ii)(B) of this
section, USP's disposition of CFC1 stock also constitutes an
indirect disposition of the CFC2 stock because CFC1 is an upper-tier
CFC and CFC2 is a lower-tier CFC within the meaning of paragraph
(e)(1)(ii) of this section. Accordingly, immediately before the
disposition, CFC1's basis in the CFC2 stock is reduced by USP's net
used tested loss amount with respect to CFC2 attributable to the
CFC2 stock of $100x under paragraph (e)(1)(i) of this section. Under
paragraph (e)(1)(iv) of this section, the basis reduction to CFC2's
shares is deemed to occur immediately before any reductions occur
with respect to the stock of CFC1, of which there are none.
(vii) Example 7-- (A) Facts. USP1, a domestic corporation, owns
90% of the single class of stock of CFC1, and CFC1 owns 100% of the
single class of stock of CFC2. USP1 also owns 100% of the single
class of stock of CFC3. The remaining 10% of the stock of CFC1 is
owned by USP2, a person unrelated to USP1. USP2 owns no other CFCs.
USP1, USP2, CFC1, CFC2, and CFC3 all use the calendar year as their
taxable year. In Year 1, CFC1 has no tested income or tested loss,
CFC2 has tested loss of $100x, and CFC3 has tested income of $100x.
CFC1 has no other earnings or income in Year 1. At the beginning of
Year 2, CFC1 sells CFC2. Without regard to this paragraph (e), CFC1
would recognize no gain or loss with respect to the CFC2 stock. USP1
has not owned stock in any other controlled foreign corporation by
reason of owning stock of CFC1, CFC2, and CFC3.
[[Page 51107]]
(B) Analysis. At the time of the disposition, USP2 has no net
used tested loss amount with respect to CFC2. At the time of the
disposition, USP1 has a net used tested loss amount of $90x with
respect to CFC2 attributable to the CFC2 stock, which is the
specified stock. Because USP1 does not own (and has not owned),
within the meaning of section 958(a)(2), stock in any lower-tier
CFCs by reason of the CFC2 stock, there is no adjustment to the net
used tested loss amount of $90x pursuant to paragraph (e)(1)(ii) of
this section. Accordingly, immediately before the disposition of the
CFC2 stock, the basis of the CFC2 stock is reduced by $90x under
paragraph (e)(1)(i) of this section. As a result, CFC1 recognizes
gain of $90x on the disposition of the CFC2 stock, which results in
$90x of foreign personal holding company income and $90x of earnings
and profits. Under paragraph (e)(7) of this section, USP1's pro rata
share of the subpart F income of CFC1 is increased by $90x, and USP2
does not take such subpart F income into account under section
951(a)(1)(A).
(viii) Example 8--(A) Facts. USP, a domestic corporation, owns
100% of the single class of stock of CFC1 and CFC2, and CFC1 owns
100% of the single class of stock of CFC3 and CFC4. USP, CFC1, CFC2,
CFC3, and CFC4 all use the calendar year as their taxable year. In
Year 1, CFC1 has no tested income or tested loss, CFC2 has $200x of
tested income, and CFC3 and CFC4 each have tested loss of $100x.
During Year 2, CFC3 liquidates into CFC1 in a nontaxable transaction
described under section 332, and CFC1 sells the stock of CFC4 to an
unrelated third party for cash. During Year 2, none of CFC1, CFC2,
CFC3, or CFC4 earn tested income or tested loss. At the beginning of
Year 3, USP sells the stock of CFC1 to an unrelated third party for
cash. USP has not owned stock in any other CFC by reason of owning
stock in CFC1, CFC2, CFC3, or CFC4.
(B) Analysis. (1) CFC3's liquidation into CFC1 is not a
disposition within the meaning of paragraph (e)(6)(ii)(A) of this
section because CFC1 does not recognize gain or loss in whole or in
part with respect to the stock of CFC3 under section 332.
Furthermore, CFC1 does not inherit CFC3's net used tested loss
amount under paragraph (e)(5) of this section because CFC1 is an
upper-tier CFC with respect to CFC3 and would take such amounts into
account under paragraph (e)(1)(ii) of this section at the time of a
future disposition. That is, the CFC3 stock is section 958(a) stock
that USP has owned by reason of its ownership of CFC1 within the
meaning of paragraph (e)(1)(ii) of this section.
(2) At the time of CFC1's sale of the stock of CFC4, USP has a
$100x net used tested loss amount with respect to CFC4 attributable
to the CFC4 stock, which is the specified stock. Because USP has not
owned, within the meaning of section 958(a)(2), stock in any lower-
tier CFCs by reason of the CFC4 stock, there is no adjustment to the
net used tested loss amount of $100x pursuant to paragraph
(e)(1)(ii) of this section. Accordingly, immediately before the
disposition of the CFC4 stock, the basis of the CFC4 stock is
reduced by $100x under paragraph (e)(1)(i) of this section.
(3) At the time of USP's sale of CFC1, USP has no net used
tested loss amount with respect to CFC1 attributable to the CFC1
stock. However, USP has owned, within the meaning of section
958(a)(2), stock of lower-tier CFCs (CFC3 and CFC4) by reason of its
ownership of CFC1. Thus, USP's net used tested loss amount
attributable to the stock of CFC1 ($0) is increased by USP's net
used tested loss amounts with respect to CFC3 and CFC4 attributable
to the CFC1 stock ($200x). Accordingly, immediately before the
disposition of the CFC1 stock, the basis of the CFC1 stock is
reduced by $200x under paragraph (e)(1)(i) of this section. The rule
prohibiting duplicative adjustments under paragraph (e)(1)(v) of
this section does not prevent this basis reduction because the net
used tested loss amounts with respect to the CFC3 and CFC4 stock
were not previously taken into account to reduce the basis of CFC1
stock.
0
Par. 10. Section 1.951A-7 is added to read as follows:
Sec. 1.951A-7 Applicability dates.
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.
0
Par. 11. Section 1.1502-12 is amended by adding paragraph (s) to read
as follows:
Sec. 1.1502-12 Separate taxable income.
* * * * *
(s) See Sec. 1.1502-51 for rules relating to the computation of a
member's GILTI inclusion amount under section 951A and related basis
adjustments.
0
Par. 12. Section 1.1502-13 is amended by adding paragraph (c) to
Example 4 in paragraph (f)(7).
The addition reads as follows:
Sec. 1.1502-13 Intercompany transactions.
* * * * *
(f) * * *
(7) * * *
Example 4. * * *
(c) Application of Sec. 1.1502-51(c)(5) to all cash
intercompany reorganization under section 368(a)(1)(D). The facts
are the same as in paragraph (a) of this Example 4, except that S's
sole asset is stock of a controlled foreign corporation, within the
meaning of section 957, with respect to which S has a net used
tested loss amount (within the meaning of Sec. 1.1502-51(e)(15)) of
$15. As in paragraph (b) of this Example 4, S is treated as
receiving additional B stock with a fair market value of $100 (in
lieu of the $100) and, under section 358, a basis of $25 which S
distributes to M in liquidation. Immediately after the sale,
pursuant to Sec. 1.1502-51(c)(5), the basis in the B stock received
by M is reduced by $15 (the amount of the net used tested loss
amount with respect to the controlled foreign corporation) to $10.
Following the basis reduction pursuant to Sec. 1.1502-51(c)(5), the
B stock (with the exception of the nominal share which is still held
by M) received by M is treated as redeemed for $100, and the
redemption is treated under section 302(d) as a distribution to
which section 301 applies. M's basis of $10 in the B stock is
reduced under Sec. 1.1502-32(b)(3)(v), resulting in an excess loss
account of $90 in the nominal share. (See Sec. 1.302-2(c).) M's
deemed distribution of the nominal share of B stock to P under Sec.
1.368-2(l) will result in M generating an intercompany gain under
section 311(b) of $90, to be subsequently taken into account under
the matching and acceleration rules.
* * * * *
0
Par. 13. Section 1.1502-32 is amended by:
0
1. Adding paragraphs (b)(3)(ii)(E), (b)(3)(ii)(F), and (b)(3)(iii)(C).
0
2. Revising paragraph (j).
The revision and additions read as follows:
Sec. 1.1502-32 Investment adjustments.
* * * * *
(b) * * *
(3) * * *
(ii) * * *
(E) Adjustment for the offset tested income amount of a controlled
foreign corporation in relation to section 951A. S's tax-exempt income
for a taxable year includes the aggregate of S's offset tested income
amounts (within the meaning of Sec. 1.1502-51(c)(3)) with respect to a
controlled foreign corporation (within the meaning of section 957) for
all of its U.S. shareholder inclusion years (within the meaning of
Sec. 1.951A-1(e)(4)), to the extent such aggregate does not exceed the
excess (if any) of--
(1) The aggregate of S's used tested loss amounts (within the
meaning of Sec. 1.1502-51(c)(2)) with respect to the controlled
foreign corporation for all of its U.S. shareholder inclusion years,
over
(2) The aggregate of S's offset tested income amounts with respect
to the controlled foreign corporation for all of its U.S. shareholder
inclusion years previously treated as tax-exempt income pursuant to
this paragraph.
(F) Adjustment for the net offset tested income amount of a
controlled foreign corporation in relation to section 951A. S will be
treated as having tax-exempt income immediately prior to a transaction
(recognition event) in which another member of the group recognizes
income, gain, deduction, or loss with respect to a share of S's stock
to the extent provided in this paragraph (b)(3)(ii)(F). S's tax-exempt
income is equal to the portion of the allocable amount that would have
been characterized as a dividend to which
[[Page 51108]]
section 245A, but not section 1059, would have applied if the allocable
amount had been distributed by a controlled foreign corporation to the
owner of the transferred shares immediately before the recognition
event. For purposes of this paragraph--
(1) The term transferred shares means the shares of a controlled
foreign corporation that S owns within the meaning of section 958(a) or
is considered to own by applying the rules of ownership of section
958(b) and that are indirectly transferred as part of the recognition
event; and
(2) The term allocable amount means the net offset tested income
amount (within the meaning of Sec. 1.1502-51(e)(14)) allocable to the
transferred shares.
(iii) * * *
(C) Adjustment for the used tested loss amount of a controlled
foreign corporation in relation to section 951A. S's noncapital,
nondeductible expense includes its amount of used tested loss amount
(within the meaning of Sec. 1.1502-51(c)(2)) with respect to a
controlled foreign corporation (within the meaning of section 957) for
a U.S. shareholder inclusion year (within the meaning of Sec. 1.951A-
1(e)(4)).
* * * * *
(j) Applicability date--(1) In general. Paragraph (b)(4)(iv) of
this section applies to any original consolidated Federal income tax
return due (without extensions) after June 14, 2007. For original
consolidated Federal income tax returns due (without extensions) after
May 30, 2006, and on or before June 14, 2007, see Sec. 1.1502-32T as
contained in 26 CFR part 1 in effect on April 1, 2007. For original
consolidated Federal income tax returns due (without extensions) on or
before May 30, 2006, see Sec. 1.1502-32 as contained in 26 CFR part 1
in effect on April 1, 2006.
(2) Adjustment for the offset tested income amount, net offset
tested income amount, and used tested loss amount of a controlled
foreign corporation. Paragraphs (b)(3)(ii)(E), (b)(3)(ii)(F), and
(b)(3)(iii)(C) of this section apply to any consolidated Federal income
tax return for a taxable year in which or with which the taxable year
of a controlled foreign corporation beginning after December 31, 2017,
ends.
* * * * *
0
Par. 14. Section 1.1502-51 is added to read as follows:
Sec. 1.1502-51 Consolidated section 951A.
(a) In general. This section provides rules for applying section
951A and Sec. Sec. 1.951A-1 through 1.951A-7 (the section 951A
regulations) to each member of a consolidated group (each, a member)
that is a United States shareholder of any controlled foreign
corporation. Paragraph (b) describes the inclusion of the GILTI
inclusion amount by a member of a consolidated group. Paragraph (c)
modifies the rules provided in Sec. 1.951A-6(e) for adjustments to
basis related to used tested loss amount. Paragraph (d) provides rules
governing basis adjustments to member stock resulting from the
application of Sec. 1.951A-6(e) and paragraph (c) of this section.
Paragraph (e) provides definitions for purposes of this section.
Paragraph (f) provides examples illustrating the rules of this section.
Paragraph (g) provides an applicability date.
(b) Calculation of the GILTI inclusion amount for a member of a
consolidated group. Each member who is a United States shareholder of
any controlled foreign corporation includes in gross income in the U.S.
shareholder inclusion year the member's GILTI inclusion amount, if any,
for the U.S. shareholder inclusion year. See section 951A(a) and Sec.
1.951A-1(b). The GILTI inclusion amount of a member for a U.S.
shareholder inclusion year is the excess (if any) of the member's net
CFC tested income for the U.S. shareholder inclusion year, over the
member's net deemed tangible income return for the U.S. shareholder
inclusion year, determined using the definitions provided in paragraph
(e) of this section.
(c) Adjustments to basis related to used tested loss amount--(1) In
general. The adjusted basis of the section 958(a) stock of a controlled
foreign corporation that is owned (directly or indirectly) by a member
(specified stock) or an interest in a foreign entity other than a
controlled foreign corporation by reason of which a domestic
corporation owns (within the meaning of section 958(a)(2)) stock of a
controlled foreign corporation is adjusted immediately before its
disposition pursuant to Sec. 1.951A-6(e). The amount of the adjustment
is determined using the rules provided in paragraphs (c)(2), (3), and
(4) of this section.
(2) Determination of used tested loss amount. For purposes of the
section 951A regulations and this section, the term used tested loss
amount means, with respect to a member and a tested loss CFC for a U.S.
shareholder inclusion year--
(i) In the case of the consolidated group tested income equaling or
exceeding the consolidated group tested loss for a U.S. shareholder
inclusion year, the member's pro rata share (determined under Sec.
1.951A-1(d)(4)) of the tested loss of the tested loss CFC for the U.S.
shareholder inclusion year.
(ii) In the case of the consolidated group tested income being less
than the consolidated group tested loss for a U.S. shareholder
inclusion year, the amount that bears the same ratio to the member's
pro rata share (determined under Sec. 1.951A-1(d)(4)) of the tested
loss of the tested loss CFC for the U.S. shareholder inclusion year as
the consolidated group tested income for the U.S. shareholder inclusion
year bears to the consolidated group tested loss for the U.S.
shareholder inclusion year.
(3) Determination of offset tested income amount. For purposes of
the section 951A regulations and this section, the term offset tested
income amount means, with respect to a member and a tested income CFC
for a U.S. shareholder inclusion year--
(i) In the case of the consolidated group tested income exceeding
the consolidated group tested loss for a U.S. shareholder inclusion
year, the amount that bears the same ratio to the member's pro rata
share (determined under Sec. 1.951A-1(d)(2)) of the tested income of
the tested income CFC for the U.S. shareholder inclusion year as the
consolidated group tested loss for the U.S. shareholder inclusion year
bears to the consolidated group tested income for the U.S. shareholder
inclusion year.
(ii) In the case of the consolidated group tested income equaling
or being less than the consolidated group tested loss for a U.S.
shareholder inclusion year, the member's pro rata share (determined
under Sec. 1.951A-1(d)(2)) of the tested income of the tested income
CFC for the U.S. shareholder inclusion year.
(4) Special rule for disposition by a controlled foreign
corporation less than 100 percent owned by a single domestic
corporation. For purposes of determining the application of Sec.
1.951A-6(e)(7), the amount of stock in the controlled foreign
corporation a member owns, within the meaning of section 958(a),
includes any stock that the member is considered as owning by applying
the rules of ownership of section 958(b).
(5) Special rule for intercompany nonrecognition transactions. If a
member engages in a nonrecognition transaction (within the meaning of
section 7701(a)(45)), with another member in which stock of a
controlled foreign corporation that has a net used tested loss amount
is directly transferred, the adjusted basis of the nonrecognition
property (within the meaning of section 358) received in the
nonrecognition transaction is
[[Page 51109]]
immediately reduced by the amount of the net used tested loss amount.
In cases of intercompany transactions that are governed by Sec. 1.368-
2(l), the reduction in basis pursuant to this paragraph (c)(5) is made
prior to the application of Sec. 1.1502-13(f)(3). See Sec. 1.1502-
13(f)(7), Example 4(c).
(d) Adjustments to the basis of a member. For adjustments to the
basis of a member related to paragraph (c) of this section, see Sec.
1.1502-32(b)(3)(ii)(E), (b)(3)(ii)(F), and (b)(3)(iii)(C).
(e) Definitions. The following definitions apply for purposes of
the section--
(1) Aggregate tested income. With respect to a member, the term
aggregate tested income means the aggregate of the member's pro rata
share (determined under Sec. 1.951A-1(d)(2)) of the tested income of
each tested income CFC for a U.S. shareholder inclusion year.
(2) Aggregate tested loss. With respect to a member, the term
aggregate tested loss means the aggregate of the member's pro rata
share (determined under Sec. 1.951A-1(d)(4)) of the tested loss of
each tested loss CFC for a U.S. shareholder inclusion year.
(3) Allocable share. The term allocable share means, with respect
to a member that is a United States shareholder and a U.S. shareholder
inclusion year--
(i) With respect to consolidated group QBAI, the product of the
consolidated group QBAI of the member's consolidated group and the
member's GILTI allocation ratio.
(ii) With respect to consolidated group specified interest expense,
the product of the consolidated group specified interest expense of the
member's consolidated group and the member's GILTI allocation ratio.
(iii) With respect to consolidated group tested loss, the product
of the consolidated group tested loss of the member's consolidated
group and the member's GILTI allocation ratio.
(4) Consolidated group QBAI. With respect to a consolidated group,
the term consolidated group QBAI means the sum of each member's pro
rata share (determined under Sec. 1.951A-1(d)(3)) of the qualified
business asset investment of each tested income CFC for a U.S.
shareholder inclusion year.
(5) Consolidated group specified interest expense. With respect to
a consolidated group, the term consolidated group specified interest
expense means the excess (if any) of--
(i) The sum of each member's pro rata share (determined under Sec.
1.951A-1(d)(5)) of the tested interest expense of each controlled
foreign corporation for the U.S. shareholder inclusion year, over
(ii) The sum of each member's pro rata share (determined under
Sec. 1.951A-1(d)(6)) of the tested interest income of each controlled
foreign corporation for the U.S. shareholder inclusion year.
(6) Consolidated group tested income. With respect to a
consolidated group, the term consolidated group tested income means the
sum of each member's aggregate tested income for a U.S. shareholder
inclusion year.
(7) Consolidated group tested loss. With respect to a consolidated
group, the term consolidated group tested loss means the sum of each
member's aggregate tested loss for a U.S. shareholder inclusion year.
(8) Controlled foreign corporation. The term controlled foreign
corporation means a controlled foreign corporation as defined in
section 957.
(9) Deemed tangible income return. With respect to a member, the
term deemed tangible income return means 10 percent of the member's
allocable share of the consolidated group QBAI.
(10) GILTI allocation ratio. With respect to a member, the term
GILTI allocation ratio means the ratio of--
(i) The aggregate tested income of the member for a U.S.
shareholder inclusion year, to
(ii) The consolidated group tested income of the consolidated group
of which the member is a member for the U.S. shareholder inclusion
year.
(11) GILTI inclusion amount. With respect to a member, the term
GILTI inclusion amount has the meaning provided in paragraph (b) of
this section.
(12) Net CFC tested income. With respect to a member, the term net
CFC tested income means the excess (if any) of--
(i) The member's aggregate tested income, over
(ii) The member's allocable share of the consolidated group tested
loss.
(13) Net deemed tangible income return. With respect to a member,
the term net deemed tangible income return means the excess (if any) of
the member's deemed tangible income return over the member's allocable
share of the consolidated group specified interest expense.
(14) Net offset tested income amount. The term net offset tested
income amount means, with respect to a member and a controlled foreign
corporation, the excess (if any) of the amount described in paragraph
(e)(15)(ii) of this section over the amount described in paragraph
(e)(15)(i) of this section.
(15) Net used tested loss amount. The term net used tested loss
amount means, with respect to a member and a controlled foreign
corporation, the excess (if any) of --
(i) The aggregate of the member's pro rata share of each used
tested loss amount of the controlled foreign corporation for each U.S.
shareholder inclusion year over
(ii) The aggregate of the member's pro rata share of each offset
tested income amount of the controlled foreign corporation for each
U.S. shareholder inclusion year.
(16) Offset tested income amount. The term offset tested income
amount has the meaning provided in paragraph (c)(3) of this section.
(17) Qualified business asset investment. The term qualified
business asset investment has the meaning provided in Sec. 1.951A-
3(b).
(18) Tested income. The term tested income has the meaning provided
in Sec. 1.951A-2(b)(1).
(19) Tested income CFC. The term tested income CFC has the meaning
provided in Sec. 1.951A-2(b)(1).
(20) Tested interest expense. The term tested interest expense has
the meaning provided in Sec. 1.951A-4(b)(1).
(21) Tested interest income. The term tested interest income has
the meaning provided in Sec. 1.951A-4(b)(2).
(22) Tested loss. The term tested loss has the meaning provided in
Sec. 1.951A-2(b)(2).
(23) Tested loss CFC. The term tested loss CFC has the meaning
provided in Sec. 1.951A-2(b)(2).
(24) United States shareholder. The term United States shareholder
has the meaning provided in Sec. 1.951-1(g)(1).
(25) U.S. shareholder inclusion year. The term U.S. shareholder
inclusion year has the meaning provided in Sec. 1.951A-1(e)(4).
(26) Used tested loss amount. The term used tested loss amount has
the meaning provided in paragraph (c)(2) of this section.
(f) Examples. The following examples illustrate the rules of this
section. For purposes of the examples in this section, unless otherwise
stated: P is the common parent of the P consolidated group; P owns all
of the single class of stock of subsidiaries USS1, USS2, and USS3, all
of whom are members of the P consolidated group; CFC1, CFC2, CFC3, and
CFC4 are all controlled foreign corporations (within the meaning of
paragraph (e)(8) of this section); and the taxable year of all persons
is the calendar year.
(1) Example 1: Calculation of net CFC tested income within a
consolidated group
[[Page 51110]]
when all CFCs are wholly owned by a member-- (i) Facts. USS1 owns
all of the single class of stock of CFC1. USS2 owns all of the
single class of stock of each of CFC2 and CFC3. USS3 owns all of the
single class of stock of CFC4. In Year 1, CFC1 has tested loss of
$100, CFC2 has tested income of $200x, CFC3 has tested loss of
$200x, and CFC4 has tested income of $600x. Neither CFC2 nor CFC4
has qualified business asset investment in Year 1.
(ii) Analysis--(A) Consolidated group tested income and GILTI
allocation ratio. USS1 has no aggregate tested income; USS2's
aggregate tested income is $200x, its pro rata share (within the
meaning of Sec. 1.951A-1(d)(2)) of CFC2's tested income; and USS3's
aggregate tested income is $600x, its pro rata share (within the
meaning of Sec. 1.951A-1(d)(2)) of CFC4's tested income. Therefore,
under paragraph (e)(6) of this section, the P consolidated group's
consolidated group tested income is $800x ($200x + $600x). As a
result, the GILTI allocation ratios of USS1, USS2, and USS3 are 0
($0/$800x), 0.25 ($200x/$800x), and 0.75 ($600x/$800x),
respectively.
(B) Consolidated group tested loss. Under paragraph (e)(7) of
this section, the P consolidated group's consolidated group tested
loss is $300x ($100x + $200x), the aggregate of USS1's aggregate
tested loss, which is equal to its pro rata share (within the
meaning of Sec. 1.951A-1(d)(4)) of CFC1's tested loss ($100x), and
USS2's aggregate tested loss, which is equal to its pro rata share
(within the meaning of Sec. 1.951A-1(d)(4)) of CFC3's tested loss
($200x). Under paragraph (e)(3)(iii) of this section, a member's
allocable share of the consolidated group tested loss is the product
of the consolidated group tested loss of the member's consolidated
group and the member's GILTI allocation ratio. Therefore, the
allocable shares of the consolidated group tested loss of USS1,
USS2, and USS3 are $0 (0 x $300x), $75x (0.25 x $300x), and $225x
(0.75 x $300x), respectively.
(C) Calculation of net CFC tested income. Under paragraph
(e)(12) of this section, a member's net CFC tested income is the
excess (if any) of the member's aggregate tested income over the
member's allocable share of the consolidated group tested loss. As a
result, USS1's, USS2's, and USS3's net CFC tested income amounts are
$0 ($0-$0), $125x ($200x-$75x), and $375x ($600x-$225x),
respectively.
(2) Example 2: Calculation of net CFC tested income within a
consolidated group when ownership of a tested loss CFC is split
between members-- (i) Facts. The facts are the same as in paragraph
(i) of Example 1, except that USS2 and USS3 each own 50% of the
single class of stock of CFC3.
(ii) Analysis. As in paragraph (ii) of Example 1, USS1 has no
aggregate tested income and a GILTI allocation ratio of 0, USS2 has
$200x of aggregate tested income and a GILTI allocation ratio of
0.25, and USS3 has $600x of aggregate tested income and a GILTI
allocation ratio of 0.75. Additionally, the P consolidated group's
consolidated group tested loss is $300x (the aggregate of USS1's
aggregate tested loss, which is equal to its pro rata share (within
the meaning of Sec. 1.951A-1(d)(4)) of CFC1's tested loss ($100x);
USS2's aggregate tested loss, which is equal to its pro rata share
(within the meaning of Sec. 1.951A-1(d)(4)) of CFC3's tested loss
($100x); and USS3's aggregate tested loss, which is equal to its pro
rata share (within the meaning of Sec. 1.951A-1(d)(4)) of CFC3's
tested loss ($100x)). As a result, under paragraph (e)(12) of this
section, as in paragraph (ii)(C) of Example 1, USS1's, USS2's, and
USS3's net CFC tested income amounts are $0 ($0--$0), $125x ($200x--
$75x), and $375x ($600x--$225x), respectively.
(3) Example 3: Calculation of GILTI inclusion amount-- (i)
Facts. The facts are the same as in paragraph (i) of Example 1,
except that CFC2 and CFC4 have qualified business asset investment
of $500x and $2000x, respectively, for Year 1. In Year 1, CFC1 and
CFC4 each have tested interest expense (within the meaning of Sec.
1.951A-4(b)(1)) of $25x, and CFC1, CFC2, CFC3, and CFC4 have $0 of
tested interest income (within the meaning of Sec. 1.951A-4(b)(2)).
CFC1's tested loss of $100x and CFC4's tested income of $600x take
into account the interest paid.
(ii) Analysis--(A) GILTI allocation ratio. As in paragraph (ii)
of Example 1, the GILTI allocation ratios of USS1, USS2, and USS3
are 0 ($0/$800x), 0.25 ($200x/$800x), and 0.75 ($600x/$800x),
respectively.
(B) Consolidated group QBAI. Under paragraph (e)(4) of this
section, the P consolidated group's consolidated group QBAI is
$2,500x ($500x + $2,000x), the aggregate of USS2's pro rata share
(determined under Sec. 1.951A-1(d)(3)) of the qualified business
asset investment of CFC2 and USS3's pro rata share (determined under
Sec. 1.951A-1(d)(3)) of the qualified business asset investment of
CFC4. Under paragraph (e)(3)(i) of this section, a member's
allocable share of consolidated group QBAI is the product of the
consolidated group QBAI of the member's consolidated group and the
member's GILTI allocation ratio. Therefore, the allocable shares of
the consolidated group QBAI of each of USS1, USS2, and USS3 are $0
(0 x $2,500x), $625x (0.25 x $2,500x), and $1,875x (0.75 x $2,500x),
respectively.
(C) Consolidated group specified interest expense--(1) Pro rata
share of tested interest expense. USS1's pro rata share of the
tested interest expense of CFC1 is $25x, the amount by which the
tested interest expense increases USS1's pro rata share of CFC1's
tested loss (from $75x to $100x) for Year 1. USS3's pro rata share
of the tested interest expense of CFC4 is also $25x, the amount by
which the tested interest expense decreases USS1's pro rata share of
CFC4's tested income (from $625x to $600x). See Sec. 1.951A-
1(d)(5).
(2) Consolidated group specified interest expense. Under
paragraph (e)(5) of this section, the P consolidated group's
consolidated group specified interest expense is $50x, the excess of
the sum of each member's pro rata share of the tested interest
expense of each controlled foreign corporation ($50x, $25x from USS1
+ $25x from USS3), over the sum of each member's pro rata share of
tested interest income ($0). Under paragraph (e)(3)(ii) of this
section, a member's allocable share of consolidated group specified
interest expense is the product of the consolidated group specified
interest expense of the member's consolidated group and the member's
GILTI allocation ratio. Therefore, the allocable shares of
consolidated group specified interest expense of USS1, USS2, and
USS3 are $0 (0 x $50x), $12.50x (0.25 x $50x), and $37.50x (0.75 x
$50x), respectively.
(D) Calculation of deemed tangible income return. Under
paragraph (e)(9) of this section, a member's deemed tangible income
return means 10 percent of the member's allocable share of the
consolidated group QBAI. As a result, USS1's, USS2's, and USS3's
deemed tangible income returns are $0 (0-$0), $62.50x (0.1 - $625x),
and $187.50x (0.1 - $1,875x), respectively.
(E) Calculation of net deemed tangible income return. Under
paragraph (e)(13) of this section, a member's net deemed tangible
income return means the excess (if any) of a member's deemed
tangible income return over the member's allocable share of the
consolidated group specified interest. As a result, USS1's, USS2's,
and USS3's net deemed tangible income returns are $0 ($0-$0), $50x
($62.50x-$12.50x), and $150x ($187.50x-$37.50x), respectively.
(F) Calculation of GILTI inclusion amount. Under paragraph (b)
of this section, a member's GILTI inclusion amount for a U.S.
shareholder inclusion year is the excess (if any) of the member's
net CFC tested income for the U.S. shareholder inclusion year, over
the shareholder's net deemed tangible income return for the U.S.
shareholder inclusion year. As described in paragraph (ii)(C) of
Example 1, the amounts of USS1's, USS2's, and USS3's net CFC tested
income are $0, $125x, and $375x, respectively. As described in
paragraph (ii)(E) of this Example 3, the amounts of USS1's, USS2's,
and USS3's net deemed tangible income return are $0, $50x, and
$150x, respectively. As a result, under paragraph (b) of this
section, USS1's, USS2's, and USS3's GILTI inclusion amounts are $0
($0-$0), $75x ($125x-$50x), and $225x ($375x-$150x), respectively.
(G) Calculation of used tested loss amount and offset tested
income amount. As described in paragraph (ii)(A) of Example 1, P
consolidated group's consolidated group tested income is $800x. As
described in paragraph (ii)(B) of Example 1, P consolidated group's
consolidated group tested loss is $300x. Therefore, the P
consolidated group's consolidated group tested income exceeds its
consolidated group tested loss. As a result, USS1 has a $100x used
tested loss amount with respect to CFC1 and USS2 has a $200x used
tested loss amount with respect to CFC3. Additionally, USS2 has a
$75x offset tested income amount with respect to CFC2 ($200x x
$300x/$800x) and USS3 has a $225x offset tested income amount with
respect to CFC3 ($600x x $300x/$800x). See paragraph (c) of this
section. P will adjust its basis in USS1 and USS2 pursuant to the
rule in Sec. 1.1502-32(b)(3)(iii)(C).
(g) Applicability date. This section applies to taxable years of
foreign corporations beginning after December
[[Page 51111]]
31, 2017, and to taxable years of United States shareholders in which
or with which such taxable years of foreign corporations end.
0
Par. 15. Section 1.6038-2 is amended by:
0
1. Revising the section heading.
0
2. Revising the first sentence in paragraph (a).
0
3. Revising paragraph (m).
The revisions read as follows:
Sec. 1.6038-2 Information returns required of United States persons
with respect to annual accounting periods of certain foreign
corporations.
(a) Requirement of return. Every U.S. person shall make a separate
annual information return with respect to each annual accounting period
(described in paragraph (e) of this section) of each foreign
corporation which that person controls (as defined in paragraph (b) of
this section) at any time during such annual accounting period. * * *
* * * * *
(m) Applicability dates. This section applies to taxable years of
foreign corporations beginning on or after October 3, 2018. See 26 CFR
1.6038-2 (revised as of April 1, 2018) for rules applicable to taxable
years of foreign corporations beginning before such date.
0
Par. 16. Section 1.6038-5 is added to read as follows:
Sec. 1.6038-5 Information returns required of certain United States
persons to report amounts determined with respect to certain foreign
corporations for global intangible low-taxed income (GILTI) purposes.
(a) Requirement of return. Except as provided in paragraph (d) of
this section, each United States person who is a United States
shareholder (as defined in section 951(b)) of any controlled foreign
corporation must make an annual return on Form 8992, ``U.S. Shareholder
Calculation of Global Intangible Low-Taxed Income (GILTI),'' (or
successor form) for each U.S. shareholder inclusion year (as defined in
Sec. 1.951A-1(e)(4)) setting forth the information with respect to
each such controlled foreign corporation, in such form and manner, as
Form 8992 (or successor form) prescribes.
(b) Time and manner for filing. Returns on Form 8992 (or successor
form) required under paragraph (a) of this section for a taxable year
must be filed with the United States person's income tax return on or
before the due date (taking into account extensions) for filing that
person's income tax return.
(c) Failure to furnish information--(1) Penalties. If any person
required to file Form 8992 (or successor form) under section 6038 and
this section fails to furnish the information prescribed on Form 8992
within the time prescribed by paragraph (b) of this section, the
penalties imposed by section 6038(b) and (c) may apply.
(2) Increase in penalty. If a failure described in paragraph (c)(1)
of this section continues for more than 90 days after the date on which
the Director of Field Operations, Area Director, or Director of
Compliance Campus Operations mails notice of such failure to the person
required to file Form 8992, such person shall pay a penalty of $10,000,
in addition to the penalty imposed by section 6038(b)(1), for each 30-
day period (or a fraction of) during which such failure continues after
such 90-day period has expired. The additional penalty imposed by
section 6038(b)(2) and this paragraph (c)(2) shall be limited to a
maximum of $50,000 for each failure.
(3) Reasonable cause--(i) For purposes of section 6038(b) and (c)
and this section, the time prescribed for furnishing information under
paragraph (b) of this section, and the beginning of the 90-day period
after mailing of notice by the director under paragraph (c)(2) of this
section, shall be treated as being not earlier than the last day on
which reasonable cause existed for failure to furnish the information.
(ii) To show that reasonable cause existed for failure to furnish
information as required by section 6038 and this section, the person
required to report such information must make an affirmative showing of
all facts alleged as reasonable cause for such failure in a written
statement containing a declaration that it is made under the penalties
of perjury. The statement must be filed with the director where the
return is required to be filed. The director shall determine whether
the failure to furnish information was due to reasonable cause, and if
so, the period of time for which such reasonable cause existed. In the
case of a return that has been filed as required by this section except
for an omission of, or error with respect to, some of the information
required, if the person who filed the return establishes to the
satisfaction of the director that the person has substantially complied
with this section, then the omission or error shall not constitute a
failure under this section.
(d) Exception from filing requirement. Any United States person
that does not own, within the meaning of section 958(a), stock of a
controlled foreign corporation in which the United States person is a
United States shareholder for a taxable year is not required to file
Form 8992. For this purpose, a U.S. shareholder partner (as defined in
Sec. 1.951A-5(e)(3)) with respect to a partnership CFC (as defined in
Sec. 1.951A-5(e)(2)) is treated as owning, within the meaning of
section 958(a), stock of the partnership CFC.
(e) Applicability date. This section applies to taxable years of
controlled foreign corporations beginning on or after October 3, 2018.
Kirsten Wielobob,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2018-20304 Filed 10-3-18; 4:15 pm]
BILLING CODE 4830-01-P