Guidance Under Section 958 (Rules for Determining Stock Ownership) and Section 951A (Global Intangible Low-Taxed Income), 29114-29133 [2019-12436]

Download as PDF jspears on DSK30JT082PROD with PROPOSALS 29114 Federal Register / Vol. 84, No. 120 / Friday, June 21, 2019 / Proposed Rules example with regard to medically necessary drugs in shortage? 6. If a showing of comparative advantage were made a requirement for approval of new opioid analgesics, what would be the impact on development of such products? 7. If a showing of comparative advantage were made a requirement for approval of new opioid analgesics, what would be the impact on patients, providers, and on the public health generally? Please consider that the existing opioid market consists largely of relatively inexpensive generic drugs. 8. In what other ways should FDA be considering the existing armamentarium of therapies to treat pain when reviewing an application for the approval of a new opioid analgesic? To what extent would new authorities be required? 9. Please comment on whether new pre-approval incentives are needed to better support and encourage development of therapeutics intended to treat pain or addiction. If so, what new incentives would be most effective, and what new authorities might FDA need to offer them? If the new incentives are offered through a designation process (analogous to breakthrough designation), what should be the criteria for designation? Registration and Requests for Oral Presentations: The FDA Conference Center at the White Oak location is a Federal facility with security procedures and limited seating. Attendees can register at https://www.eventbrite.com/ e/fda-standards-for-future-opioidtherapy-approvals-part-15-meetingtickets-60645674846. Attendees have the following options: • Presenter—Presenters will give a timed presentation followed by a timed question and answer period by the panel. 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Commenters must register no later than September 10, 2019. • In-Person Attendee—In-person attendees will attend the meeting at the FDA White Oak facility. • Webcast Attendee—For those unable to attend in person, FDA will provide a live webcast of the hearing. Webcast attendees will be provided with a link via email to use to view the streaming webcast of the public hearing. Attendees shall register for only one person. Those without internet or email access can register and/or request to participate as an open public hearing speaker or a formal presenter by contacting Nicole Zelenak by the above dates (see FOR FURTHER INFORMATION CONTACT). FDA will try to accommodate all persons who wish to register. Registration may close early if slots are full. Individuals and organizations with common interests may consolidate or coordinate their presentations and request time for a joint presentation. Individual organizations are limited to a single presentation slot. 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Transcripts: Please be advised that as soon as a transcript is available, it will be accessible at https:// www.regulations.gov. It may be viewed at the Dockets Management Staff (see Comments). A transcript will also be available in either hard copy or on CD– ROM, after submission of a Freedom of Information request. The Freedom of Information office address is available on the Agency’s website at https:// www.fda.gov. PO 00000 Frm 00023 Fmt 4702 Sfmt 4702 III. Notice of Hearing Under 21 CFR Part 15 The Commissioner of Food and Drugs is announcing that the public hearing will be held in accordance with 21 CFR part 15. The hearing will be conducted by a presiding officer, who will be accompanied by FDA senior management from the Office of the Commissioner, the Center for Drug Evaluation and Research, Center for Biologics Evaluation and Research, and the Center for Devices and Radiological Health. Under § 15.30(f), the hearing is informal and the rules of evidence do not apply. No participant may interrupt the presentation of another participant. Only the presiding officer and panel members can pose questions; they can question any person during or at the conclusion of each presentation. Public hearings under part 15 are subject to FDA’s policy and procedures for electronic media coverage of FDA’s public administrative proceedings (21 CFR part 10, subpart C). Under § 10.205, representatives of the media may be permitted, subject to certain limitations, to videotape, film, or otherwise record FDA’s public administrative proceedings, including presentations by participants. Persons attending FDA’s public hearings are advised that FDA is not responsible for providing access to electrical outlets. The hearing will be transcribed as stipulated in § 15.30(b) (see Transcripts). To the extent that the conditions for the hearing, as described in this notice, conflict with any provisions set out in part 15, this notice acts as a waiver of those provisions as specified in § 15.30(h). Dated: June 17, 2019. Lowell J. Schiller, Principal Associate Commissioner for Policy. [FR Doc. 2019–13219 Filed 6–20–19; 8:45 am] BILLING CODE 4164–01–P DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1 [REG–101828–19] RIN 1545–BP15 Guidance Under Section 958 (Rules for Determining Stock Ownership) and Section 951A (Global Intangible LowTaxed Income) Internal Revenue Service (IRS), Treasury. ACTION: Notice of proposed rulemaking. AGENCY: E:\FR\FM\21JNP1.SGM 21JNP1 Federal Register / Vol. 84, No. 120 / Friday, June 21, 2019 / Proposed Rules This document contains proposed regulations regarding the treatment of domestic partnerships for purposes of determining amounts included in the gross income of their partners with respect to foreign corporations. In addition, this document contains proposed regulations under the global intangible low-taxed income provisions regarding gross income that is subject to a high rate of foreign tax. The proposed regulations would affect United States persons that own stock of foreign corporations through domestic partnerships and United States shareholders of foreign corporations. DATES: Written or electronic comments and requests for a public hearing must be received by September 19, 2019. ADDRESSES: Send submissions to: Internal Revenue Service, CC:PA:LPD:PR (REG–101828–19), Room 5203, Post Office Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be handdelivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG–101828–19), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue NW, Washington, DC 20024, or sent electronically, via the Federal eRulemaking Portal at www.regulations.gov (indicate IRS and REG–101828–19). FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations under §§ 1.951–1, 1.956–1, and 1.958–1, Joshua P. Roffenbender at (202) 317– 6934; concerning the proposed regulations under §§ 1.951A–0, 1.951A– 2, 1.951A–7, and 1.954–1, Jorge M. Oben at (202) 317–6934; concerning the proposed regulations under § 1.1502–51, Katherine H. Zhang at (202) 317–6848 or Kevin M. Jacobs at (202) 317–5332; concerning submissions of comments or requests for a public hearing, Regina Johnson at (202) 317–6901 (not toll free numbers). SUPPLEMENTARY INFORMATION: SUMMARY: jspears on DSK30JT082PROD with PROPOSALS Background I. Subpart F Before Enactment of Section 951A The Revenue Act of 1962 (the ‘‘1962 Act’’), Public Law 87–834, sec. 12, 76 Stat. at 1006, enacted subpart F of part III, subchapter N, chapter 1 of the 1954 Internal Revenue Code (‘‘subpart F’’), as amended. See sections 951 through 965 of the Internal Revenue Code (‘‘Code’’).1 Congress created the subpart F regime to limit the use of corporations organized in low-tax jurisdictions for the purposes 1 Except as otherwise stated, all section references in this preamble are to the Internal Revenue Code. VerDate Sep<11>2014 17:15 Jun 20, 2019 Jkt 247001 of obtaining indefinite deferral of U.S. tax on certain earnings—generally earnings that are passive or highly mobile—that would otherwise be subject to Federal income tax. H.R. Rep. No. 1447 at 57–58 (1962); S. Rep. No. 1881 at 78–80 (1962). Subpart F generally requires a United States shareholder (as defined in section 951(b)) (‘‘U.S. shareholder’’) to include in its gross income (‘‘subpart F inclusion’’) its pro rata share of subpart F income (as defined in section 952) earned by a controlled foreign corporation (‘‘CFC’’) (as defined in section 957(a)) and its pro rata share of earnings and profits (‘‘E&P’’) invested in certain United States property by the CFC. See section 951(a)(1)(A) and (B) and section 956(a). For purposes of both section 951(a)(1)(A) and (B), the determination of a U.S. shareholder’s pro rata share of any amount with respect to a CFC is determined by reference to the stock of the CFC that the shareholder owns (within the meaning of section 958(a)). See sections 951(a)(1) and (2) and 956(a). Section 957(a) defines a CFC as any foreign corporation if U.S. shareholders own (within the meaning of section 958(a)), or are considered as owning by applying the ownership rules of section 958(b), more than 50 percent of the total combined voting power or value of stock of such corporation on any day during the taxable year of such foreign corporation. Section 951(b) defines a U.S. shareholder of a foreign corporation as a United States person (‘‘U.S. person’’) that owns (within the meaning of section 958(a)), or is considered as owning by applying the ownership rules of section 958(b), at least 10 percent of the total combined voting power or value of stock of the foreign corporation. Section 957(c) generally defines a U.S. person by reference to section 7701(a)(30), which defines a U.S. person as a citizen or resident of the United States, a domestic partnership, a domestic corporation, and certain estates and trusts. Stock owned within the meaning of section 958(a) is stock owned directly and stock owned indirectly under section 958(a)(2). Section 958(a)(2) provides that stock owned, directly or indirectly, by or for a foreign corporation, foreign partnership, foreign trust, or foreign estate is considered to be owned proportionately by its shareholders, partners, or beneficiaries. Section 958(a)(2) does not provide rules addressing stock owned by domestic entities, including domestic partnerships. Section 958(b) provides in relevant part that the constructive ownership PO 00000 Frm 00024 Fmt 4702 Sfmt 4702 29115 rules of section 318(a) apply, with certain modifications, for purposes of determining whether any U.S. person is a U.S. shareholder or any foreign corporation is a CFC. These rules apply to treat a person as owning the stock owned, directly or indirectly, by another person, generally without regard to whether the person to or from which stock is attributed is domestic or foreign. In particular, section 318(a)(2)(A) provides in relevant part that stock owned, directly or indirectly, by or for a partnership is considered as owned proportionately by its partners, and section 318(a)(3)(A) provides that stock owned, directly or indirectly, by or for a partner is considered as owned by the partnership. Further, in determining stock treated as owned by partners of a partnership under section 318(a)(2)(A), section 958(b)(2) provides in relevant part that a partnership that owns, directly or indirectly, more than 50 percent of the voting power of a corporation is considered as owning all the stock entitled to vote. However, a U.S. person that is a U.S. shareholder of a CFC by reason of constructive ownership under section 958(b), but that does not own stock in the CFC within the meaning of section 958(a), does not have a subpart F inclusion with respect to the CFC. II. Treatment of Domestic Partnerships as Entities or Aggregates of Their Partners, in General For purposes of applying a particular provision of the Code, a partnership may be treated as either an entity separate from its partners or as an aggregate of its partners. Under an aggregate approach, the partners of a partnership, and not the partnership, are treated as owning the partnership’s assets and conducting the partnership’s operations. Under an entity approach, the partnership is respected as separate and distinct from its partners, and therefore the partnership, and not the partners, is treated as owning the partnership’s assets and conducting the partnership’s operations. Based upon the authority of subchapter K and the policies underlying a particular provision of the Code, a partnership is treated as an aggregate of its partners or as an entity separate from its partners, depending on which characterization is more appropriate to carry out the scope and purpose of the Code provision. See H.R. Rep. No. 83–2543, at 59 (1954) (Conf. Rep.) (‘‘Both the House provisions and the Senate amendment provide for the use of the ‘entity’ approach in the treatment of transactions between a partner and a partnership . . . . No inference is E:\FR\FM\21JNP1.SGM 21JNP1 jspears on DSK30JT082PROD with PROPOSALS 29116 Federal Register / Vol. 84, No. 120 / Friday, June 21, 2019 / Proposed Rules intended, however, that a partnership is to be considered as a separate entity for the purpose of applying other provisions of the internal revenue laws if the concept of the partnership as a collection of individuals is more appropriate for such provisions.’’). See also Casel v. Commissioner, 79 T.C. 424, 433 (1982) (‘‘When the 1954 Code was adopted by Congress, the conference report . . . clearly stated that whether an aggregate or entity theory of partnerships should be applied to a particular Code section depends upon which theory is more appropriate to such section.’’); Holiday Village Shopping Center v. United States, 5 Cl. Ct. 566, 570 (1984), aff’d 773 F.2d 276 (Fed. Cir. 1985) (‘‘[T]he proper inquiry is not whether a partnership is an entity or an aggregate for purposes of applying the internal revenue laws generally, but rather which is the more appropriate and more consistent with Congressional intent with respect to the operation of the particular provision of the Internal Revenue Code at issue.’’); § 1.701– 2(e)(1) (‘‘The Commissioner can treat a partnership as an aggregate of its partners in whole or in part as appropriate to carry out the purpose of any provision of the Internal Revenue Code . . . .’’). Consistent with this authority under subchapter K, the Treasury Department and the IRS have adopted an aggregate approach to partnerships to carry out the purpose of various provisions, including international provisions, of the Code. For example, regulations under section 871 treat domestic and foreign partnerships as aggregates of their partners in applying the 10 percent shareholder test of section 871(h)(3) to determine whether interest paid to a partnership would be considered portfolio interest under section 871(h)(2). See § 1.871–14(g)(3)(i). An aggregate approach to partnerships was also adopted in regulations issued under section 367(a) to address the transfer of property by a domestic or foreign partnership to a foreign corporation in an exchange described in section 367(a)(1). See § 1.367(a)–1T(c)(3)(i)(A). Similarly, the Treasury Department and the IRS adopted an aggregate approach to foreign partnerships for purposes of applying the regulations under section 367(b). See § 1.367(b)–2(k); see also §§ 1.367(e)–1(b)(2) (treating stock and securities of a distributing corporation owned by or for a partnership (domestic or foreign) as owned proportionately by its partners) and 1.861–9(e)(2) (requiring certain corporate partners to apportion interest expense, including the partner’s distributive share of partnership interest VerDate Sep<11>2014 17:15 Jun 20, 2019 Jkt 247001 expense, by reference to the partner’s assets). III. Treatment of Domestic Partnerships as Entities or Aggregates for Purposes of Subpart F Before the Tax Cuts and Jobs Act Since the enactment of subpart F, domestic partnerships have generally been treated as entities, rather than as aggregates of their partners, for purposes of determining whether U.S. shareholders own more than 50 percent of the stock (by voting power or value) of a foreign corporation and thus whether a foreign corporation is a CFC. See § 1.701–2(f), Example 3 (concluding that a foreign corporation wholly owned by a domestic partnership is a CFC for purposes of applying the look-through rules of section 904(d)(3)). In addition, domestic partnerships have generally been treated as entities for purposes of treating a domestic partnership as the U.S. shareholder that has the subpart F inclusion with respect to such foreign corporation. But cf. §§ 1.951–1(h) and 1.965–1(e) (treating certain domestic partnerships owned by CFCs as foreign partnerships for purposes of determining the U.S. shareholder that has the subpart F inclusion with respect to CFCs owned by such domestic partnerships). If a domestic partnership is treated as the U.S. shareholder with the subpart F inclusion, then each partner of the partnership has a distributive share of the partnership’s subpart F inclusion, regardless of whether the partner itself is a U.S. shareholder. See section 702. This entity treatment is consistent with the inclusion of a domestic partnership in the definition of a U.S. person in section 7701(a)(30), which term is used in the definition of U.S. shareholder by reference to section 957(c). It is also consistent with the legislative history to section 951, which describes domestic partnerships as being included within the definition of a U.S. person and, therefore, a U.S. shareholder. See, for example, S. Rep. No. 1881 at 80 n.1 (1962) (‘‘U.S. shareholders are defined in the bill as ‘U.S. persons’ with 10-percent stockholding. U.S. persons, in general, are U.S. citizens and residents and domestic corporations, partnerships and estates or trusts.’’). Furthermore, entity treatment is consistent with sections 958(b) and 318(a)(3)(A), which treat a partnership (including a domestic partnership) as owning the stock owned by its partners for purposes of determining whether the foreign corporation is owned more than 50 percent by U.S. shareholders. PO 00000 Frm 00025 Fmt 4702 Sfmt 4702 In contrast to the historical treatment of domestic partnerships as entities for purposes of subpart F, foreign partnerships are generally treated as aggregates of their partners for purposes of determining stock ownership under section 958(a). See section 958(a)(2). Accordingly, whether a foreign corporation owned by a foreign partnership is a CFC is determined based on the proportionate amount of stock owned by domestic partners of the partnership and, if the foreign corporation is a CFC, partners that are U.S. shareholders have the subpart F inclusion with respect to the CFC. IV. Section 951A A. In general The Tax Cuts and Jobs Act, Public Law 115–97 (the ‘‘Act’’) established a participation exemption system for the taxation of certain foreign income by allowing a domestic corporation a 100 percent dividends received deduction for the foreign-source portion of a dividend received from a specified 10 percent-owned foreign corporation. See section 14101(a) of the Act and section 245A. The Act’s legislative history expresses concern that the new participation exemption could heighten the incentive to shift profits to low-tax foreign jurisdictions or tax havens absent base erosion protections. See S. Comm. on the Budget, Reconciliation Recommendations Pursuant to H. Con. Res. 71, S. Print No. 115–20, at 370 (2017) (‘‘Senate Explanation’’). For example, without appropriate limits, domestic corporations might be incentivized to shift income to lowtaxed foreign affiliates, and the income could potentially be distributed back to domestic corporate shareholders without the imposition of any U.S. tax. See id. To prevent base erosion, the Act retained the subpart F regime and enacted section 951A, which applies to taxable years of foreign corporations beginning after December 31, 2017, and to taxable years of U.S. shareholders in which or with which such taxable years of foreign corporations end. Section 951A requires a U.S. shareholder of any CFC for any taxable year to include in gross income the shareholder’s global intangible lowtaxed income (‘‘GILTI inclusion’’) for such taxable year in a manner similar to a subpart F inclusion for many purposes of the Code. See sections 951A(a) and (f)(1)(A); H.R. Rep. No. 115–466, at 641 (2017) (Conf. Rep.) (‘‘[A] U.S. shareholder of any CFC must include in gross income for a taxable year its [GILTI] in a manner generally similar to inclusions of subpart F income.’’). E:\FR\FM\21JNP1.SGM 21JNP1 jspears on DSK30JT082PROD with PROPOSALS Federal Register / Vol. 84, No. 120 / Friday, June 21, 2019 / Proposed Rules Similar to a subpart F inclusion, the determination of a U.S. shareholder’s GILTI inclusion begins with the calculation of relevant items—such as tested income, tested loss, and qualified business asset investment—of each CFC owned by the shareholder (‘‘tested items’’). See section 951A(c)(2) and (d) and §§ 1.951A–2 through –4. A U.S. shareholder then determines its pro rata share of each of these CFC-level tested items in a manner similar to a U.S. shareholder’s pro rata share of subpart F income under section 951(a)(2). See section 951A(e)(1) and § 1.951A–1(d). In contrast to a subpart F inclusion, however, a U.S. shareholder’s pro rata shares of the tested items of a CFC are not amounts included in gross income, but rather are amounts taken into account by the U.S. shareholder in determining the amount of its GILTI inclusion for the taxable year. Section 951A(b) and § 1.951A–1(c). Thus, a U.S. shareholder does not compute a separate GILTI inclusion amount under section 951A(a) with respect to each CFC for a taxable year, but rather computes a single GILTI inclusion amount by reference to all of its CFCs. Section 951A itself does not contain specific rules regarding the treatment of domestic partnerships and their partners for purposes of GILTI. However, proposed regulations under section 951A that were published in the Federal Register on October 10, 2018, (REG–104390–18, 83 FR 51072) (‘‘GILTI proposed regulations’’) reflect a hybrid approach that treats a domestic partnership that is a U.S. shareholder with respect to a CFC (‘‘U.S. shareholder partnership’’) as an entity with respect to some partners but as an aggregate of its partners with respect to others. Under the hybrid approach, with respect to partners that are not U.S. shareholders of a CFC owned by a domestic partnership, a U.S. shareholder partnership calculates a GILTI inclusion amount and its partners have a distributive share of such amount (if any). See proposed § 1.951A–5(b)(1). However, with respect to partners that are themselves U.S. shareholders of a CFC owned by a domestic partnership (‘‘U.S. shareholder partners’’), the partnership is treated in the same manner as a foreign partnership, with the result that the U.S. shareholder partners are treated as proportionately owning, within the meaning of section 958(a), stock owned by the domestic partnership for purposes of determining their own GILTI inclusion amounts. See proposed § 1.951A–5(c). In the preamble to the GILTI proposed regulations, the Treasury Department and the IRS rejected a pure entity approach to VerDate Sep<11>2014 17:15 Jun 20, 2019 Jkt 247001 section 951A, because treating a domestic partnership as the section 958(a) owner of stock in all cases would frustrate the GILTI framework by creating unintended planning opportunities for well advised taxpayers and traps for the unwary. However, the Treasury Department and the IRS also did not adopt a pure aggregate approach to domestic partnerships for GILTI because such an approach would be inconsistent with the existing treatment of domestic partnerships as entities for purposes of subpart F. The Treasury Department and the IRS received many comments in response to the hybrid approach of the GILTI proposed regulations. The comments generally advised against adopting the hybrid approach due primarily to concerns with complexity and administrability arising from the treatment of a partnership as an entity with respect to some partners but as an aggregate with respect to other partners. The comments also generally advised against adopting a pure entity approach because such an approach would result in different treatment for similarly situated taxpayers depending on whether a U.S. shareholder owned stock of a foreign corporation through a domestic partnership or a foreign partnership, which is treated as an aggregate of its partners for purposes of determining CFC status and section 958(a) ownership. The majority of comments on this issue recommended at least some form of aggregate approach for domestic partnerships for purposes of the GILTI regime; some of these comments suggested that an aggregate approach is supported by analogy to other situations where regulations apply an aggregate approach to partnerships. See, for example, §§ 1.954–1(g)(1) and 1.871–14(g)(3)(i). In response to these comments, the Treasury Department and the IRS are issuing final regulations under section 951A in the Rules and Regulations section of this issue of the Federal Register (‘‘GILTI final regulations’’) that treat stock owned by a domestic partnership as owned within the meaning of section 958(a) by its partners for purposes of determining a partner’s GILTI inclusion amount under section 951A. The Treasury Department and the IRS concluded that applying an aggregate approach for purposes of determining a partner’s GILTI inclusion amount under section 951A is necessary to ensure that, consistent with the purpose and operation of section 951A, a single GILTI inclusion amount is determined for each taxpayer based on its economic interests in all of its CFCs. The GILTI final regulations apply to PO 00000 Frm 00026 Fmt 4702 Sfmt 4702 29117 taxable years of foreign corporations beginning after December 31, 2017, and to taxable years of U.S. shareholders in which or with which such taxable years of foreign corporations end. Some comments also recommended adopting an aggregate approach for purposes of section 951, especially if the GILTI final regulations adopt an aggregate approach. These comments generally asserted that there is insufficient policy justification for treating domestic partnerships differently than foreign partnerships for purposes of U.S. shareholder and CFC determinations because the choice of law under which a partnership is organized should be irrelevant. In this regard, these comments criticized entity treatment of domestic partnerships because it results in each partner including in income its distributive share of a domestic partnership’s subpart F inclusion with respect to a CFC, even if that partner is not a U.S. shareholder itself and thus would not have had a subpart F inclusion with respect to such CFC if the domestic partnership were instead foreign. B. High-Tax Gross Tested Income Section 951A(c)(2)(A)(i) provides that the gross tested income of a CFC for a taxable year is all the gross income of the CFC for the year, determined without regard to certain items. See also § 1.951A–2(c)(1). In particular, section 951A(c)(2)(A)(i)(III) excludes from gross tested income any gross income excluded from foreign base company income (as defined in section 954) (‘‘FBCI’’) or insurance income (as defined in section 953) of a CFC by reason of the exception under section 954(b)(4) (the ‘‘GILTI high tax exclusion’’). The GILTI proposed regulations clarified that the GILTI high tax exclusion applies only to income that is excluded from FBCI and insurance income solely by reason of an election made to exclude the income under the high tax exception of section 954(b)(4) and § 1.954–1(d)(5). See proposed § 1.951A–2(c)(1)(iii). Numerous comments requested that the scope of the GILTI high tax exclusion be expanded in the final regulations. These comments asserted that the legislative history to section 951A indicates that Congress intended that income of a CFC should be taxed as GILTI only if it is subject to a low rate of foreign tax, regardless of whether the income is active or passive. Comments also suggested that the GILTI high tax exclusion does not require that income be excluded ‘‘solely’’ by reason of section 954(b)(4). The comments argued E:\FR\FM\21JNP1.SGM 21JNP1 29118 Federal Register / Vol. 84, No. 120 / Friday, June 21, 2019 / Proposed Rules that the GILTI high tax exclusion could be interpreted to exclude any item of income that would be FBCI or insurance income, but for another exception to FBCI (for instance, the active financing exception under section 954(h) and the active insurance exception under section 954(i)). Of the comments recommending an expansion of the GILTI high tax exclusion, some recommended that the GILTI high tax exclusion apply to income taxed at a rate above 13.125 percent, while others recommended that the GILTI high tax exclusion apply to income taxed at a rate above 90 percent of the maximum rate of tax specified in section 11, or 18.9 percent. The comments recommended that the GILTI high tax exclusion be applied either on a CFCby-CFC basis or an item-by-item basis. Alternatively, comments recommended that the scope of the GILTI high tax exclusion be expanded under section 951A(f) by treating, on an elective basis, a GILTI inclusion as a subpart F inclusion that is potentially excludible from FBCI or insurance income under section 954(b)(4), or by modifying the GILTI high tax exclusion to exclude any item of income subject to a sufficiently high effective foreign tax rate such that it would be excludible under section 954(b)(4) if it were FBCI or insurance income. Other comments recommended the creation of a rebuttable presumption that all income of a CFC is subpart F income, regardless of whether such income is of a character included in FBCI or insurance income, and therefore, if the taxpayer chose not to rebut the presumption, the income would be excluded from gross tested income either because it is included in subpart F income (and thus excluded from gross tested income by reason of the subpart F exclusion under section 951A(c)(2)(A)(i)(II)) or because the income is excluded from subpart F income by reason of section 954(b)(4) (and thus excluded from gross tested income by reason of the GILTI high tax exclusion). The GILTI final regulations adopt the GILTI high tax exclusion of the proposed regulations without change. Explanation of Provisions jspears on DSK30JT082PROD with PROPOSALS I. Partnerships A. Adoption of Aggregate Treatment for Purposes of Section 951 After considering the alternatives, the Treasury Department and the IRS have concluded that, to be consistent with the treatment of domestic partnerships under section 951A, a domestic partnership should also generally be treated as an aggregate of its partners in VerDate Sep<11>2014 17:15 Jun 20, 2019 Jkt 247001 determining stock owned under section 958(a) for purposes of section 951. Therefore, the proposed regulations provide that, for purposes of sections 951 and 951A, and for purposes of any provision that applies by reference to sections 951 and 951A (for example, sections 959, 960, and 961), a domestic partnership is not treated as owning stock of a foreign corporation within the meaning of section 958(a). See proposed § 1.958–1(d)(1). Furthermore, the proposed regulations provide that, for purposes of determining the stock owned under section 958(a) by a partner of a domestic partnership, a domestic partnership is treated in the same manner as a foreign partnership. See id. This rule does not apply, however, for purposes of determining whether any U.S. person is a U.S. shareholder, whether a U.S. shareholder is a controlling domestic shareholder (as defined in § 1.964–1(c)(5)), or whether a foreign corporation is a CFC. See proposed § 1.958–1(d)(2). Accordingly, under the proposed regulations, a domestic partnership that owns a foreign corporation is treated as an entity for purposes of determining whether the partnership and its partners are U.S. shareholders, whether the partnership is a controlling domestic shareholder, and whether the foreign corporation is a CFC, but the partnership is treated as an aggregate of its partners for purposes of determining whether, and to what extent, its partners have inclusions under sections 951 and 951A and for purposes of any other provision that applies by reference to sections 951 and 951A. For purposes of subpart F, a foreign partnership is explicitly treated as an aggregate of its partners, and rules regarding this aggregate treatment are relatively well-developed and understood. Therefore, rather than developing a new standard for the treatment of a domestic partnership as an aggregate of its partners, the Treasury Department and the IRS have determined that it would be simpler and more administrable to adopt, by reference, the rules related to foreign partnerships for this limited purpose. The GILTI final regulations adopt the same approach for purposes of section 951A. See § 1.951A–1(e). As a result, under the proposed regulations, stock owned directly or indirectly by or for a domestic partnership will generally be treated as owned proportionately by its partners for purposes of sections 951(a) and 951A and any provision that applies by reference to sections 951 and 951A. The Treasury Department and the IRS have determined that, as a result of the PO 00000 Frm 00027 Fmt 4702 Sfmt 4702 enactment of the GILTI regime, it is no longer appropriate to treat domestic partnerships as entities that are separate from their owners for purposes of determining whether, and to what extent, a partner has an inclusion under section 951. Congress intended for the subpart F and GILTI regimes to work in tandem by providing that both regimes apply to U.S. shareholders of CFCs, that GILTI is included in a U.S. shareholder’s gross income in a manner similar to a subpart F inclusion for many purposes of the Code, and that gross income taken into account in determining the subpart F income of a CFC is not taken into account in determining the tested income of such CFC (and, therefore, in determining the GILTI inclusion amount of a U.S. shareholder of such CFC). See section 951A(c)(2)(i)(II) and 951A(f); see also Senate Explanation at 373 (‘‘Although GILTI inclusions do not constitute subpart F income, GILTI inclusions are generally treated similarly to subpart F inclusions.’’). As a result, treating domestic partnerships inconsistently for subpart F and GILTI purposes would be inconsistent with legislative intent. Furthermore, inconsistent approaches to the treatment of domestic partnerships for purposes of subpart F and GILTI would introduce substantial complexity and uncertainty, particularly with respect to foreign tax credits, previously taxed earnings and profits (‘‘PTEP’’) and related basis rules, or any other provision the application of which turns on the owner of stock under section 958(a) and, thus, the U.S. person that has the relevant inclusion. For example, if a domestic partnership were treated as an aggregate of its partners for purposes of GILTI but as an entity for purposes of subpart F, regulations would need to address separately the maintenance of PTEP accounts at the domestic partnership level for subpart F and the maintenance of PTEP accounts at the partner level for GILTI. Similarly, regulations would need to provide separate rules for basis adjustments under section 961 with respect to a domestic partnership and its CFCs depending on whether an amount was included under section 951 or section 951A. The increased complexity of regulations resulting from treating domestic partnerships differently for purposes of subpart F and GILTI would, in turn, increase the burden on taxpayers to comply with, and on the IRS to administer, such regulations. Conversely, aggregate treatment of domestic partnerships in determining section 958(a) stock ownership for purposes of determining a partner’s E:\FR\FM\21JNP1.SGM 21JNP1 jspears on DSK30JT082PROD with PROPOSALS Federal Register / Vol. 84, No. 120 / Friday, June 21, 2019 / Proposed Rules inclusion under both the GILTI and subpart F regimes will result in substantial simplification, as compared to disparate treatment, and will harmonize the two regimes. The Treasury Department and the IRS also considered extending aggregate treatment for all purposes of subpart F, including for purposes of determining whether a foreign corporation is a CFC under section 957(a). However, the Treasury Department and the IRS determined that an approach that treats a domestic partnership as an aggregate for purposes of determining CFC status is inconsistent with relevant statutory provisions. As discussed in part III of the Background section of this preamble, the Code clearly contemplates that a domestic partnership can be a U.S. shareholder under section 951(b), including by attribution from its partners. See sections 7701(a)(30), 957(c), 951(b), 958(b), 318(a)(2)(A), and 318(a)(3)(A). An approach that treats a domestic partnership as an aggregate for purposes of determining CFC status would not give effect to the statutory treatment of a domestic partnership as a U.S. shareholder. By contrast, neither section 958(a) nor any other provision of the Code specifies whether and to what extent a domestic partnership should be treated as an entity or an aggregate for purposes of determining stock ownership under section 958(a) for purposes of sections 951 and 951A. According to the legislative history to the 1962 Act, section 958(a) is a ‘‘limited rule of stock ownership for determining the amount taxable to a United States person,’’ whereas section 958(b) is ‘‘a broader set of constructive rules of ownership for determining whether the requisite ownership by United States persons exists so as to make a corporation a controlled foreign corporation or a United States person has the requisite ownership to be liable for tax under section 951(a).’’ S. Rep. No. 1881 at 254 (1962). In light of the changes adopted in the Act (including the introduction of the GILTI regime), it is consistent with the intent of the Act to provide that domestic partnerships are treated in the same manner as foreign partnerships under section 958(a)(2) for purposes of sections 951(a) and 951A and any provision that applies by reference to sections 951 and 951A. As discussed in parts II and IV.A. of the Background section of this preamble, a domestic partnership may be treated as an aggregate of its partners or as an entity separate from its partners for purposes of a provision, depending on which characterization is more appropriate to carry out the purpose of the provision. VerDate Sep<11>2014 17:15 Jun 20, 2019 Jkt 247001 In this regard, the Treasury Department and the IRS have determined that treating a domestic partnership as an aggregate for purposes of sections 951 and 951A is appropriate because the partners of the partnership generally are the ultimate taxable owners of the CFC and thus their inclusions under sections 951 and 951A are properly computed at the partner level regardless of whether the partnership is foreign or domestic. Based on the foregoing, the Treasury Department and the IRS have determined that a domestic partnership should be treated consistently as an aggregate of its partners in determining the ownership of stock within the meaning of section 958(a) for purposes of sections 951 and 951A, and any provision that applies by reference to section 951 or section 951A, except for purposes of determining whether a U.S. person is a U.S. shareholder, whether a U.S. shareholder is a controlling domestic shareholder (as defined in § 1.964–1(c)(5)), and whether a foreign corporation is a CFC. See proposed § 1.958–1(d). This aggregate treatment does not apply for any other purposes of the Code, including for purposes of section 1248. However, the Treasury Department and the IRS request comments on other provisions in the Code that apply by reference to ownership within the meaning of section 958(a) for which aggregate treatment for domestic partnerships would be appropriate. The Treasury Department and the IRS also request comments on whether, and for which purposes, the aggregate treatment for domestic partnerships should be extended to the determination of the controlling domestic shareholders (as defined in § 1.964–1(c)(5)) of a CFC, such that some or all of the partners who are U.S. shareholders of the CFC, rather than the partnership, make any elections applicable to the CFC for purposes of sections 951 and 951A. B. Applicability Date and Comment Request With Respect to Transition The proposed regulations are proposed to apply to taxable years of foreign corporations beginning on or after the date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register (the ‘‘finalization date’’), and to taxable years of a U.S. person in which or with which such taxable years of foreign corporations end. See proposed § 1.958–1(d)(4). With respect to taxable years of foreign corporations beginning before the finalization date, the proposed regulations provide that a domestic partnership may apply § 1.958–1(d), as included in the final PO 00000 Frm 00028 Fmt 4702 Sfmt 4702 29119 regulations, for taxable years of a foreign corporation beginning after December 31, 2017, and for taxable years of a domestic partnership in which or with which such taxable years of the foreign corporation end (the ‘‘applicable years’’), provided that the partnership, domestic partnerships that are related (within the meaning of section 267 or 707) to the partnership, and certain partners consistently apply § 1.958–1(d) with respect to all foreign corporations whose stock they own within the meaning of section 958(a) (generally determined without regard to § 1.958– 1(d)). See proposed § 1.958–1(d)(4). A domestic partnership may rely on proposed § 1.958–1(d) with respect to taxable years beginning after December 31, 2017, and beginning before the date that these regulations are published as final regulations in the Federal Register, provided that the partnership, domestic partnerships that are related (within the meaning of section 267 or 707) to the partnership, and certain partners consistently apply proposed § 1.958– 1(d) with respect to all foreign corporations whose stock they own within the meaning of section 958(a) (generally determined without regard to proposed § 1.958–1(d)). See id. Once proposed § 1.958–1(d) applies as a final regulation, § 1.951A–1(e) and § 1.951–1(h) (providing an aggregate treatment of domestic partnerships, but only for purposes of section 951A and limited subpart F purposes, respectively) would be unnecessary because the scope of those regulations would effectively be subsumed by § 1.958–1(d). Therefore, the proposed regulations would revise the applicability dates of § 1.951A–1(e) and § 1.951–1(h), so that those provisions do not apply once the final regulations under section 958 apply. Historically, domestic partnerships have been treated as owning stock within the meaning of section 958(a) for purposes of determining their subpart F inclusions, and thus PTEP accounts were maintained, and related basis adjustments were made, at the partnership level. Upon the finalization of the proposed regulations, domestic partnerships will cease to be treated as owning stock of foreign corporations under section 958(a) for purposes of determining a subpart F inclusion, and instead their partners will be treated as owning stock under section 958(a). The Treasury Department and the IRS request comments on appropriate rules for the transition to the aggregate approach to domestic partnerships described in the proposed regulations. Comments are specifically requested as to necessary adjustments to PTEP and E:\FR\FM\21JNP1.SGM 21JNP1 29120 Federal Register / Vol. 84, No. 120 / Friday, June 21, 2019 / Proposed Rules related basis amounts and capital accounts after finalization. In addition, comments are requested as to whether aggregate treatment of domestic partnerships should be extended to other ‘‘pass-through’’ entities, such as certain trusts or estates. Comments are also requested with respect to the application of the PFIC regime after finalization, and whether elections (including elections under sections 1295 and 1296) and income inclusions under the PFIC rules are more appropriately made at the level of the domestic partnership or at the level of the partners. Specifically, the Treasury Department and the IRS are considering the operation of the PFIC regime where U.S. persons are partners of a domestic partnership that owns stock of a foreign corporation that is a PFIC, some of those partners might themselves be U.S. shareholders of the foreign corporation, and the foreign corporation might not be treated as a PFIC with respect to such U.S. shareholders under section 1297(d) if the foreign corporation is also a CFC. Comments should consider how any recommended approach would interact with the determinations of a partner’s basis in its interest and capital accounts determined and maintained in accordance with § 1.704–1(b)(2). jspears on DSK30JT082PROD with PROPOSALS II. GILTI High Tax Exclusion A. Expansion To Exclude Other HighTaxed Income In response to comments, the Treasury Department and the IRS have determined that the GILTI high tax exclusion should be expanded (on an elective basis) to include certain hightaxed income even if that income would not otherwise be FBCI or insurance income. In particular, the Treasury Department and the IRS have determined that taxpayers should be permitted to elect to apply the exception under section 954(b)(4) with respect to certain classes of income that are subject to high foreign taxes within the meaning of that provision. Before the Act, such an election would have had no effect with respect to items of income that were excluded from FBCI or insurance income for other reasons. Nevertheless, section 954(b)(4) is not explicitly restricted in its application to an item of income that first qualifies as FBCI or insurance income; rather, the provision applies to ‘‘any item of income received by a controlled foreign corporation.’’ Therefore, any item of gross income, including an item that would otherwise be gross tested income, could be excluded from FBCI or insurance income ‘‘by reason of’’ section 954(b)(4) VerDate Sep<11>2014 17:15 Jun 20, 2019 Jkt 247001 if the provision is one of the reasons for such exclusion, even if the exception under section 954(b)(4) is not the sole reason. Any item thus excluded from FBCI or insurance income by reason of section 954(b)(4) would then also be excluded from gross tested income under the GILTI high tax exclusion, as modified in these proposed regulations. The legislative history evidences an intent to exclude high-taxed income from gross tested income. See Senate Explanation at 371 (‘‘The Committee believes that certain items of income earned by CFCs should be excluded from the GILTI, either because they should be exempt from U.S. tax—as they are generally not the type of income that is the source of base erosion concerns—or are already taxed currently by the United States. Items of income excluded from GILTI because they are exempt from U.S. tax under the bill include foreign oil and gas extraction income (which is generally immobile) and income subject to high levels of foreign tax.’’). The proposed regulations, which permit taxpayers to electively exclude a CFC’s high-taxed income from gross tested income, are consistent, therefore, with this legislative history. Furthermore, an election to exclude a CFC’s high-taxed income from gross tested income allows a U.S. shareholder to ensure that its high-taxed non-subpart F income is eligible for the same treatment as its high-taxed FBCI and insurance income, and thus eliminates an incentive for taxpayers to restructure their CFC operations in order to convert gross tested income into FBCI for the sole purpose of availing themselves of section 954(b)(4) and, thus, the GILTI high tax exclusion. For the foregoing reasons, the proposed regulations provide that an election may be made for a CFC to exclude under section 954(b)(4), and thus to exclude from gross tested income, gross income subject to foreign income tax at an effective rate that is greater than 90 percent of the rate that would apply if the income were subject to the maximum rate of tax specified in section 11 (18.9 percent based on the current rate of 21 percent). See proposed § 1.951A–2(c)(6)(i). The election is made by the CFC’s controlling domestic shareholders with respect to the CFC for a CFC inclusion year by attaching a statement to an amended or filed return in accordance with forms, instructions, or administrative pronouncements. See proposed § 1.951A–2(c)(6)(v)(A). If an election is made with respect to a CFC, the election applies to exclude from gross tested income all the CFC’s items of income for the taxable year that meet the effective rate test in proposed PO 00000 Frm 00029 Fmt 4702 Sfmt 4702 § 1.951A–2(c)(6)(iii) and is binding on all the U.S. shareholders of the CFC. See proposed § 1.951A–2(c)(6)(v)(B). The election is effective for a CFC for the CFC inclusion year for which it is made and all subsequent CFC inclusion years of the CFC unless revoked by the controlling domestic shareholders of the CFC. See proposed § 1.951A– 2(c)(6)(v)(C). An election may generally be revoked by the controlling domestic shareholders of the CFC for any CFC inclusion year. See proposed § 1.951A– 2(c)(6)(v)(D)(1). However, upon revocation for a CFC inclusion year, a new election generally cannot be made for any CFC inclusion year of the CFC that begins within sixty months after the close of the CFC inclusion year for which the election was revoked, and that subsequent election cannot be revoked for a CFC inclusion year that begins within sixty months after the close of the CFC inclusion year for which the subsequent election was made. See proposed § 1.951A– 2(c)(6)(v)(D)(2)(i). An exception to this 60-month limitation may be permitted by the Commissioner with respect to a CFC if the CFC undergoes a change of control. See proposed § 1.951A– 2(c)(6)(v)(D)(2)(ii). Finally, if a CFC is a member of a controlling domestic shareholder group, the election applies with respect to each member of the controlling domestic shareholder group. See proposed § 1.951A–2(c)(6)(v)(E)(1). A ‘‘controlling domestic shareholder group’’ is defined as two or more CFCs if more than 50 percent of the stock (by voting power) of each CFC is owned (within the meaning of section 958(a)) by the same controlling domestic shareholder (or persons related to such controlling domestic shareholder) or, if no single controlling domestic shareholder owns (within the meaning of section 958(a)) more than 50 percent of the stock (by voting power) of each corporation, more than 50 percent of the stock (by voting power) of each corporation is owned (within the meaning of section 958(a)) in the aggregate by the same controlling domestic shareholders and each controlling domestic shareholder owns (within the meaning of section 958(a)) the same percentage of stock in each CFC. See proposed § 1.951A– 2(c)(6)(v)(E)(2). Accordingly, an election made under proposed § 1.951A– 2(c)(6)(v) applies with respect to each item of income of each CFC in a group of commonly controlled CFCs that meets the effective rate test in proposed § 1.951A–2(c)(6)(iii). The Treasury Department and the IRS request comments on the manner and terms of E:\FR\FM\21JNP1.SGM 21JNP1 jspears on DSK30JT082PROD with PROPOSALS Federal Register / Vol. 84, No. 120 / Friday, June 21, 2019 / Proposed Rules the election for the exception from gross tested income, including whether the limitations with respect to revocations and the consistency requirements should be modified, such as by allowing the election to be made on an item-byitem or a CFC-by-CFC basis. In general, the relevant items of income for purposes of the election under section 954(b)(4) pursuant to proposed § 1.951A–2(c)(6) are all items of gross tested income attributable to a qualified business unit (‘‘QBU’’). See proposed § 1.951A–2(c)(6)(ii)(A)(1). For example, a CFC that owns a disregarded entity that qualifies as a QBU may have one item of income with respect to the CFC itself (which is a per se QBU) and another item of income with respect to the disregarded entity. The proposed regulations provide that the gross income attributable to a QBU is determined by reference to the items of gross income reflected on the books and records of the QBU, determined under Federal income tax principles, except that income attributable to a QBU must be adjusted to account for certain disregarded payments. See proposed § 1.951A–2(c)(6)(ii)(A)(2). The proposed regulations provide an example to illustrate the application of this rule. See proposed § 1.951A–2(c)(6)(vi). Comments are requested on whether additional rules are needed to properly account for other instances in which the income base upon which foreign tax is imposed does not match the items of income reflected on the books and records of the QBU determined under Federal income tax principles. For example, comments are requested on whether special rules are needed for associating taxes with income with respect to partnerships (including hybrid partnerships), disregarded entities, or reverse hybrid entities, and how to address circumstances in which QBUs are permitted to share losses or determine tax liability based on combined income for foreign tax purposes. Comments are also requested as to whether all of a CFC’s QBUs located within a single foreign country or possession should be combined for purposes of performing the effective rate test in proposed § 1.951A–2(c)(6)(iii) and whether the definition of QBU should be modified for purposes of the GILTI high tax exclusion in respect of the requirement to have a trade or business, maintain books and records, or other rules relating to QBUs. Under § 1.954–1(d)(3), the determination of taxes paid or accrued with respect to an item of income for purposes of the exception under section 954(b)(4) is determined for each U.S. shareholder based on the amount of VerDate Sep<11>2014 17:15 Jun 20, 2019 Jkt 247001 foreign income taxes that would be deemed paid under section 960 if the item of income were included by the U.S. shareholder under section 951(a)(1)(A). Calculating the effective tax rate for purposes of the election under section 954(b)(4) with respect to gross tested income by reference to section 960(d) would not be consistent with the aggregate nature of the computation under section 960(d). Furthermore, the Treasury Department and the IRS have determined that the Act’s change to section 960(a) from a pooling based approach to an annual attribution of taxes to income requires revising § 1.954–1(d)(3). Therefore, the proposed regulations provide that for purposes of both the exception under section 954(b)(4) and the GILTI high tax exclusion, the effective rate of foreign tax imposed on an item of income is determined solely at the CFC level by allocating and apportioning the foreign income taxes paid or accrued by the CFC in the current year to the CFC’s gross income in that year based on the rules described in the regulations under section 960 for determining foreign income taxes ‘‘properly attributable’’ to income. See § 1.960–1(d), as proposed to be amended in 83 FR 63257 (December 7, 2018). To the extent foreign income taxes are allocated and apportioned to items of income that are excluded from gross tested income by the GILTI high tax exclusion, none of those foreign income taxes are properly attributable to tested income and thus none are allowed as a deemed paid credit under section 960. See § 1.960–1(e), as proposed to be amended in 83 FR 63259 (December 7, 2018). In addition, if an item of income is excluded from gross tested income by reason of the GILTI high tax exclusion, the property used to produce that income, because not used in the production of gross tested income, does not qualify as specified tangible property, in whole or in part, and therefore the adjusted basis in the property is not taken into account in determining qualified business asset investment. See § 1.951A–3(b) and (c)(1). The proposed regulations also clarify the scope of each item of income under § 1.954–1(c)(1)(iii), consistent with the rules under § 1.960–1(d)(2)(ii)(B), as proposed to be amended in 83 FR 63257 (December 7, 2018). B. Applicability Date The changes related to the election to exclude a CFC’s gross income subject to high foreign income taxes under section 954(b)(4) are proposed to apply to taxable years of foreign corporations PO 00000 Frm 00030 Fmt 4702 Sfmt 4702 29121 beginning on or after the date that final regulations are published in the Federal Register, and to taxable years of U.S. shareholders in which or with which such taxable years of foreign corporations end. Special Analyses I. Regulatory Planning and Review— Economic Analysis Executive Orders 13771, 13563, and 12866 direct agencies to assess costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits, including potential economic, environmental, public health and safety effects, distributive impacts, and equity. Executive Order 13563 emphasizes the importance of quantifying both costs and benefits, reducing costs, harmonizing rules, and promoting flexibility. The Executive Order 13771 designation for any final rule resulting from the proposed regulation will be informed by comments received. The preliminary Executive Order 13771 designation for this proposed rule is regulatory. The proposed regulation has been designated by the Office of Information and Regulatory Affairs (OIRA) as subject to review under Executive Order 12866 pursuant to the Memorandum of Agreement (MOA, April 11, 2018) between the Treasury Department and the Office of Management and Budget regarding review of tax regulations. OIRA has designated this proposed regulation as economically significant under section 1(c) of the MOA. Accordingly, these proposed regulations have been reviewed by the Office of Management and Budget. For more detail on the economic analysis, please refer to the following analysis. A. Need for the Proposed Regulations The proposed regulations are required to provide a mechanism by which taxpayers can elect the high tax exception of section 954(b)(4) in order to exclude certain high-taxed income from taxation under section 951A and to conform the treatment of domestic partnerships for purposes of the subpart F regime with the treatment of domestic partnerships for purposes of section 951A. B. Background The Tax Cuts and Jobs Act (the ‘‘Act’’) established a system under which certain earnings of a foreign corporation can be repatriated to a corporate U.S. shareholder without U.S. tax. See section 14101(a) of the Act and section 245A. However, Congress recognized E:\FR\FM\21JNP1.SGM 21JNP1 jspears on DSK30JT082PROD with PROPOSALS 29122 Federal Register / Vol. 84, No. 120 / Friday, June 21, 2019 / Proposed Rules that, without any base protection measures, this system, known as a participation exemption system, could incentivize taxpayers to allocate income—in particular, mobile income from intangible property that would otherwise be subject to the full U.S. corporate tax rate—to controlled foreign corporations (‘‘CFCs’’) operating in lowor zero-tax jurisdictions. See Senate Explanation at 365. Therefore, Congress enacted section 951A in order to subject intangible income earned by a CFC to U.S. tax on a current basis, similar to the treatment of a CFC’s subpart F income under section 951(a)(1)(A). However, in order to not harm the competitive position of U.S. corporations relative to their foreign peers, the global intangible low tax income (‘‘GILTI’’) of a corporate U.S. shareholder is effectively taxed at a reduced rate by reason of the deduction under section 250 (with the resulting U.S. tax further reduced by a portion of foreign tax credits under section 960(d)). Id. The GILTI final regulations generally provide structure and clarity for the implementation of section 951A. However, the Treasury Department and the IRS determined that there remained two outstanding issues pertinent to the implementation of GILTI. The first of these issues pertains to the GILTI high tax exclusion under section 951A(c)(2)(A)(i)(III), which excludes from gross tested income any gross income excluded from foreign base company income (‘‘FBCI’’) (as defined in section 954) and insurance income (as defined in section 953) by reason of section 954(b)(4). The GILTI proposed regulations limited the application of the exclusion to income that would be included in FBCI or insurance income but for the high tax exception of section 954(b)(4). See proposed § 1.951A– 2(c)(1)(iii). However, comments to the GILTI proposed regulations recommended that the statute be interpreted so that the GILTI high tax exclusion applies on an elective basis to a broader category of income, that is, any income that is subject to a high rate of foreign tax. Other comments suggested that because taxpayers have the ability to structure transactions so that they would qualify as FBCI or insurance income, the regulations should allow a taxpayer to elect to treat all income, or all high-taxed income, as FBCI or insurance income, with the result that such income would then be excluded from gross tested income under the GILTI high tax exclusion. Comments noted that, under the narrower application of the exclusion under the GILTI proposed regulations, VerDate Sep<11>2014 17:15 Jun 20, 2019 Jkt 247001 taxpayers would be incentivized to affirmatively plan into subpart F income to permit such taxpayers to elect the high tax exception under section 954(b)(4) with respect to such income or to allow taxpayers to carry foreign tax credits attributable to such income to another taxable year under section 904(c). However, restructuring activities to convert gross tested income into subpart F income may cost significant time and money and is economically inefficient. The GILTI final regulations adopt this narrower application. See proposed § 1.951A–2(c)(1)(iii). However, the preamble to the GILTI final regulations indicated that proposed regulations would be issued to propose a framework under which taxpayers would be permitted to make an election to apply the high tax exception of section 954(b)(4) with respect to income that would otherwise be gross tested income in order to exclude that income from gross tested income by reason of the GILTI high tax exclusion. The second of these issues pertains to the treatment of domestic partnerships for purposes of the subpart F regime. A U.S. shareholder of a CFC is required to include in gross income its pro rata share of the CFC’s subpart F income under section 951(a)(1)(A), the amount determined under section 956, under section 951(a)(1)(B), and its GILTI inclusion amount under section 951A(a). Since the enactment of subpart F, domestic partnerships have generally been treated as entities separate from their partners, rather than as aggregates of their partners, for purposes of the subpart F regime, including for purposes of treating a domestic partnership as the U.S. shareholder that has the subpart F inclusion with respect to a CFC owned by the partnership. However, the GILTI final regulations generally adopt an aggregate approach to domestic partnerships for purposes of section 951A and the section 951A regulations. See § 1.951A–1(e)(1). Because the GILTI final regulations apply only for purposes of section 951A, absent the proposed regulations, a domestic partnership would still be treated as an entity for purposes of the subpart F regime. This inconsistency in the treatment of a domestic partnership for the purposes of section 951A and for purposes of the subpart F regime is problematic because it necessitates complicated coordination rules which could greatly increase compliance and administrative burden. Therefore, the proposed regulations conform the treatment of domestic partnerships for purposes of the subpart F regime with PO 00000 Frm 00031 Fmt 4702 Sfmt 4702 the treatment of domestic partnerships for purposes of section 951A. C. Economic Analysis 1. Baseline The Treasury Department and the IRS have assessed the benefits and costs of the proposed regulations relative to a no-action baseline reflecting anticipated Federal income tax-related behavior in the absence of these proposed regulations. 2. Summary of Economic Effects To assess the economic effects of the proposed regulations, the Treasury Department and the IRS considered economic effects arising from two provisions of the proposed regulations. These are (i) effects arising from the provision that provides substance and clarity regarding the application of the GILTI high tax exclusion in 951A(c)(2)(A)(i)(III) and (ii) simplification and coordination effects arising from conforming the treatment of domestic partnerships for purposes of subpart F with their treatment for purposes of section 951A. The Treasury Department and the IRS have not undertaken quantitative estimates of these effects because any such quantitative estimates would be highly uncertain. For example, the proposed regulations include provisions that permit controlling domestic shareholders of CFCs to elect to apply the high tax exception of section 954(b)(4) to items of gross income that are subject to a foreign tax rate that is greater than 18.9 percent (based on the current U.S. corporate tax rate of 21 percent) for purposes of excluding such income from gross tested income under the GILTI high tax exclusion. Whether controlling domestic shareholders will choose to make the election will depend on their specific facts and circumstances, such as their U.S. expenses allocated to section 951A category income, their foreign tax credit position, and the distribution of their foreign activity between high- and lowtax jurisdictions.2 Because GILTI is new, 2 Specifically, the U.S. tax system reduces double taxation on a U.S. shareholder’s GILTI inclusion amount by crediting a portion of certain foreign taxes paid by CFCs against the U.S. tax on the U.S. shareholder’s GILTI inclusion amount. However, the U.S. foreign tax credit regime requires taxpayers to allocate U.S. deductible expenses, including interest, research and experimentation, and general and administrative expenses, to their foreign source income in the categories described in section 904(d) when determining the allowable foreign tax credits. The allocated expenses reduce net foreign source income within the section 904(d) categories, which can reduce allowable foreign tax credits. This may result in a smaller foreign tax credit than would be allowed if the limitation on foreign tax credits was E:\FR\FM\21JNP1.SGM 21JNP1 Federal Register / Vol. 84, No. 120 / Friday, June 21, 2019 / Proposed Rules jspears on DSK30JT082PROD with PROPOSALS the Treasury Department and the IRS do not have readily available data to project these items in this context. Furthermore, the election would be made with respect to qualified business units (QBUs) rather than with respect to CFCs or specific items of income, and the Treasury Department and the IRS do not have readily available data on activities at the QBU level. In addition, due to the taxpayer-specific nature of the factors influencing a decision to utilize the GILTI high-tax exclusion, the Treasury Department and the IRS do not have readily available data or models to predict the marginal effective tax rates that would prevail under these provisions for the varied forms of foreign investments that taxpayers might consider and thus cannot predict with reasonable precision the difference in economic activity, relative to the baseline, that might be undertaken by taxpayers based on this election. The proposed regulations also contain provisions to conform the treatment of domestic partnerships for purposes of subpart F with their treatment for purposes of section 951A. Under the proposed regulations, the tax treatment of domestic partners that are U.S. shareholders of a CFC owned by the domestic partnership differs from the tax treatment of domestic partners that are not U.S. shareholders of such CFC. The Treasury Department and the IRS do not have readily available data to identify these types of partners. The Treasury Department and the IRS further do not have readily available data or models to predict with reasonable precision the set of marginal effective tax rates that taxpayers might face under these provisions nor the effects of those marginal effective tax rates on economic activity relative to the baseline. With these considerations in mind, parts I.C.3.a.ii and iii of this Special Analyses section explain the rationale behind the proposed regulations’ approach to the GILTI high tax exclusion and qualitatively evaluate the alternatives considered. Part 1.C.3.b of this Special Analyses section explains determined based only on the local country tax assessed on the tested income taken into account in determining GILTI. The election to apply the high tax exception of section 954(b)(4) with respect to any high-taxed income allows taxpayers to eliminate the need to use foreign tax credits to reduce GILTI tax liability on such income by removing such income from gross tested income; however, taxpayers choosing the election will not be able to use the foreign tax credits associated with that income against other section 951A category income, and they will not be able to use the tangible assets owned by high tax QBUs in their QBAI computation. Therefore, taxpayers will have to evaluate their individual facts and circumstances to determine whether they should make the election. VerDate Sep<11>2014 17:15 Jun 20, 2019 Jkt 247001 the rationale for the coordination in the treatment of domestic partnerships and qualitatively evaluates the alternatives considered. 3. Economic Effects of Specific Provisions The Treasury Department and IRS solicit comments on each of the items discussed in this Special Analyses section and on any other items of the proposed regulations not discussed in this section. The Treasury Department and the IRS particularly solicit comments that provide data, other evidence, or models that could enhance the rigor of the process by which the final regulations might be developed. a. Exclusion of Income Subject to High Rate of Foreign Tax i. Description The proposed regulations permit U.S. shareholders of CFCs to make an election under section 954(b)(4) with respect to high-taxed income in order to exclude such income from gross tested income under the GILTI high tax exclusion. Under section 954(b)(4), high-taxed income is defined as income subject to a foreign effective tax rate greater than 90 percent of the maximum U.S. corporate tax rate (18.9 percent based on the current U.S. corporate tax rate of 21 percent). Under the proposed regulations, the determination as to whether income is high-taxed is made at the QBU level. However, an election made with respect to a CFC applies with respect to each high-taxed QBU of the CFC (including potentially the CFC itself), and a U.S. shareholder that makes the election with respect to a CFC generally must make the same election with respect to each of its CFCs. In general, the election may be made or revoked at any time, except that, if a U.S. shareholder revokes an election with respect to a CFC, the U.S. shareholder cannot make the election again within five years after the revocation, and then if subsequently made, the election cannot be revoked again within five years of the subsequent election. ii. Alternatives Considered for Determining the Scope of the GILTI High Tax Exclusion The Treasury Department and the IRS considered a number of options to address the types of income excluded from gross tested income by the GILTI high tax exclusion. The options were (i) to exclude from gross tested income only income that would be subpart F income but for the high tax exception of section 954(b)(4); (ii) in addition to excluding the aforementioned income, PO 00000 Frm 00032 Fmt 4702 Sfmt 4702 29123 to exclude from gross tested income on an elective basis an item of gross income that is excluded by reason of another exception to subpart F, if such income is subject to a foreign effective tax rate greater than 18.9 percent; and (iii) to exclude from gross tested income on an elective basis any item of gross income subject to a foreign effective tax rate greater than 18.9 percent. The Treasury Department and the IRS considered the other recommended options discussed in part IV.B of the Background section, but determined that those other options are not authorized by the relevant statutory provisions. The first option considered was to exclude from gross tested income only income that would be FBCI or insurance income but for the high tax exception of section 954(b)(4), which is the interpretation of the GILTI high tax exclusion in the GILTI proposed regulations. This narrow approach is consistent with a reasonable interpretation of the statutory text, which excludes from gross tested income only income that is excluded from subpart F income ‘‘by reason of section 954(b)(4).’’ Moreover, this approach is consistent with current regulations under section 954, which permit an election under section 954(b)(4) only with respect to income that is not otherwise excluded from subpart F income by reason of another exception (for example, section 954(c)(6) or 954(h)). However, under this approach, taxpayers with hightaxed gross tested income would have incentives to restructure their foreign operations in order to convert their gross tested income into subpart F income. For instance, a taxpayer could restructure its operations to have a CFC purchase personal property from, or sell personal property to, a related person without substantially contributing to the manufacture of the property in its country of incorporation, with the result that the CFC’s income from the disposition of the property is foreign base company sales income within the meaning of section 954(d). Any such restructuring may be unduly costly and only available to certain taxpayers. Further, such reorganization to realize a specific income treatment suggests that tax instead of business considerations are determining business structures. This can lead to higher compliance costs and inefficient investment. Therefore, the Treasury Department and the IRS rejected this option. The second option considered was to broaden the application of the GILTI high tax exclusion to allow taxpayers to elect under the high tax exception of section 954(b)(4) to exclude from gross E:\FR\FM\21JNP1.SGM 21JNP1 jspears on DSK30JT082PROD with PROPOSALS 29124 Federal Register / Vol. 84, No. 120 / Friday, June 21, 2019 / Proposed Rules tested income an item of gross income that is subject to a foreign effective tax rate greater than 18.9 percent, if such income was also excluded from FBCI or insurance income by reason of another exception to subpart F. Under this interpretation, income such as active financing income that is excluded from subpart F income under section 954(h), active rents or royalties that are excluded from subpart F income under 954(c)(2)(A), and related party payments that are excluded from subpart F income under section 954(c)(6) could also be excluded from gross tested income under the GILTI high tax exclusion if such items of income are high taxed within the meaning of section 954(b)(4). This broader approach represents a plausible interpretation of the GILTI high tax exclusion; that is, that an item of income could be excluded both ‘‘by reason of section 954(b)(4)’’ and by reason of another exception. However, this approach would provide taxpayers the ability to exclude their CFCs’ hightaxed income that would be subpart F income but for an exception (for example, active financing income), while denying taxpayers the same ability with respect to their CFCs’ hightaxed income that is not subpart F income in the first instance (for example, active business income), without any general economic benefit from such differential treatment. Furthermore, taxpayers with items of high-taxed income that are not subpart F income would still be incentivized to restructure their foreign operations in order to convert their high-taxed gross tested income into subpart F income, which poses the same compliance costs and inefficiencies as the first option. Therefore, the Treasury Department and the IRS rejected this option. The third option, which is adopted in the proposed regulations, is to provide an election to broaden the scope of the high tax exception under section 954(b)(4) for purposes of the GILTI high tax exclusion to apply to any item of income that is subject to a foreign effective tax rate greater than 18.9 percent. The proposed regulations permit controlling domestic shareholders of CFCs to elect to apply the high tax exception under section 954(b)(4) to items of gross income that would not otherwise be FBCI or insurance income. If this high tax exception is elected, the GILTI high tax exclusion will exclude the item of gross income from gross tested income. Under the election, an item of gross income is subject to a high rate of foreign tax if, after taking into account properly allocable expenses, the net item of VerDate Sep<11>2014 17:15 Jun 20, 2019 Jkt 247001 income is subject to a foreign effective tax rate greater than 90 percent of the maximum U.S. corporate tax rate (18.9 percent based on the current U.S. corporate tax rate of 21 percent). This option therefore establishes a framework for applying the high tax exception under section 954(b)(4), including rules to determine the scope of an item of income that would otherwise be gross tested income to which the election applies and to determine the rate of foreign tax on such item. The approach chosen by the proposed regulations is consistent with the legislative history to section 951A, which evidences an intent to tax lowtaxed income of CFCs that presents base erosion concerns. The approach is also supported by a reasonable interpretation of the high tax exception of section 954(b)(4), which applies to ‘‘any item of income’’ of a CFC, not just income that would otherwise be FBCI or insurance income. Furthermore, contrary to the first two options, this approach permits all similarly situated taxpayers with CFCs subject to a high rate of foreign tax to make the election with respect to such income to exclude it from gross tested income, and reduces the incentive for taxpayers to restructure their operations to convert their hightaxed gross tested income into subpart F income for U.S. tax purposes. For taxpayers that make the election, this approach reduces the taxpayers’ cost of capital on foreign investment by reducing U.S. tax on such taxpayers’ GILTI relative to the baseline. At the margin, the lower cost of capital may increase foreign investment by U.S.parented firms. Further, removing hightaxed tested income from the GILTI tax base could change the incentives for the location of tangible assets. The magnitude of these effects is highly uncertain because of the uncertainty surrounding the number and attributes of the taxpayers that will find it advantageous to make the election and because the relationship between the marginal effective tax rate at the QBU level and foreign investment by U.S. taxpayers is not well known. In addition, the impact of tax considerations on taxpayer investment decisions depends on a number of international tax provisions, many of which interact in complex ways. iii. Alternatives Considered for Determining High-Taxed Income The Treasury Department and the IRS next considered options for determining whether an item of income is subject to the foreign effective tax rate described in section 954(b)(4). The options considered were (i) apply the PO 00000 Frm 00033 Fmt 4702 Sfmt 4702 determination on an item-by-item basis; (ii) apply the determination on a CFCby-CFC basis; or (iii) apply the determination on a QBU-by-QBU basis. The first option was to determine whether income is high-taxed income within the meaning of section 954(b)(4) on an item-by-item basis. This approach would be consistent with the language of section 954(b)(4), which applies to an ‘‘item of income’’ of a CFC that is sufficiently high tax. However, this approach would be complex and difficult to administer because it would require analyzing each item of income to determine whether, under Federal tax principles, such item is subject to a sufficiently high foreign effective tax rate. In fact, for this reason, the current regulations that implement the high tax exception of section 954(b)(4) for purposes of subpart F income do not require an item-by-item determination and aggregate all items of income into separate categories of income for purposes of determining whether each such category is high tax. See § 1.954– 1(d)(2). Therefore, the Treasury Department and the IRS rejected this option. The second option was to apply the determination based on all the items of income of the CFC. On the one hand, this approach would minimize complexity and would be relatively easy to administer. On the other hand, this approach could permit inappropriate tax planning, such as combining operations subject to different rates of tax into a single CFC. This would have the effect of ‘‘blending’’ the rates of foreign tax imposed on the income, which could result in low- or non-taxed income being excluded as high-taxed income by being blended with much higher-taxed income. The low-taxed income in this scenario is precisely the sort of base erosion-type income that the legislative history describes section 951A as intending to tax, and such tax motivated planning behavior is economically inefficient. The third option, which is adopted in the proposed regulations, is to apply the high tax exception based on the items of gross income of a QBU of the CFC. Under this approach, the net income that is taxed by the foreign jurisdiction in each QBU must be determined. For example, if a CFC earned $100x of tested income through a QBU in Country A and was taxed at a 30 percent rate and earned $100x of tested income through another QBU in Country B and was taxed at 0 percent, the blended rate of tax on all of the CFC’s tested income is 15 percent ($30x tax/$200x tested income). However, if the high tax exception applies to each of a CFC’s E:\FR\FM\21JNP1.SGM 21JNP1 Federal Register / Vol. 84, No. 120 / Friday, June 21, 2019 / Proposed Rules QBUs based on the income earned by that QBU then the blending of different rates would be minimized. Although applying the high tax exception on the basis of a QBU, rather than the CFC as a whole, may be more complex and administratively burdensome under certain circumstances, it more accurately pinpoints income subject to a high rate of foreign tax and therefore continues to subject to tax the low-taxed base erosion-type income that the legislative history describes section 951A as intending to tax. Accordingly, the proposed regulations apply the high tax exception of section 954(b)(4) based on the items of net income of each QBU of the CFC. iv. Affected Taxpayers jspears on DSK30JT082PROD with PROPOSALS The proposed regulations potentially affect those taxpayers that have at least one CFC with at least one QBU (including, potentially, the CFC itself) that has high-taxed income. A taxpayer with CFCs that have a mix of high-taxed and low-taxed income (determined on a QBU-by-QBU basis) will need to evaluate the benefit of eliminating any tax under section 951A with respect to high-taxed income with the costs of forgoing the use of such taxes against other section 951A category income and the use of tangible assets in the computation of QBAI. Taxpayers with CFCs that have only low-taxed income are not eligible to elect the high tax exception and hence are unaffected by this provision. The Treasury Department and the IRS estimate that there are approximately 4,000 business entities (corporations, S corporations, and partnerships) with at least one CFC that pays a foreign effective tax rate above 18.9 percent. The Treasury Department and the IRS further estimate that, for the partnerships with at least one CFC that pays a foreign effective tax rate greater than 18.9 percent, there are approximately 1,500 partners that have a large enough share to potentially qualify as a 10 percent U.S. shareholder of the CFC.3 The 4,000 business entities and the 1,500 partners provide an approximate estimate of the number of 3 Data are from IRS’s Research, Applied Analytics, and Statistics division based on E-file data available in the Compliance Data Warehouse, for tax years 2015 and 2016. The counts include Category 4 and Category 5 IRS Form 5471 filers. Category 4 filers are U.S. persons who had control of a foreign corporation during the annual accounting period of the foreign corporation. Category 5 filers are U.S. shareholders who own stock in a foreign corporation that is a CFC and who owned that stock on the last day in the tax year of the foreign corporation in that year in which it was a CFC. For full definitions, see https://www.irs.gov/ pub/irs-pdf/i5471.pdf. VerDate Sep<11>2014 17:15 Jun 20, 2019 Jkt 247001 taxpayers that could potentially be affected by an election into the high tax exception. The figure is approximate since there is an imperfect correspondence between high-taxed CFCs and high-taxed QBUs, and, furthermore, not all taxpayers that are eligible for the election would choose to make the election. The Treasury Department and the IRS do not have readily available data to determine how many of these taxpayers would benefit from the election. Tabulations from the IRS Statistics of Income 2014 Form 5471 file 4 further indicate that approximately 85 percent of earnings and profits before taxes of CFCs are subject to an average foreign effective tax rate that is less than or equal to 18.9 percent, accounting for approximately 30 percent of CFCs. The data indicate several examples of jurisdictions with effective tax rates above 18.9 percent, such as France, Italy, and Japan. However, information is not readily available to determine how many QBUs are part of the same CFC and what the effective foreign tax rates are with respect to such QBUs. Furthermore, the determination of whether or not to elect the high tax exception will be made at the shareholder (not CFC) level, after having evaluated the full impact of doing so across all of the shareholder’s CFCs. Taxpayers potentially more likely to elect the high tax exception are those taxpayers with CFCs that only operate in high-tax jurisdictions. b. Domestic Partnership Treatment for Subpart F i. Description Under the statute, a U.S. shareholder of a CFC is required to include in gross income its pro rata share of the CFC’s subpart F income under section 951(a)(1)(A), the amount determined under section 956, under section 951(a)(1)(B), and its GILTI inclusion amount under section 951A. The Code does not explicitly prescribe the treatment of domestic partnerships and their partners for purposes of subpart F. However, domestic partnerships have generally been treated as entities separate from their partners, rather than as aggregates of their partners, for purposes of subpart F, including for purposes of determining the amount included in the gross income of the domestic partnership (and the distributive share of such amount of its domestic partners) under section 951(a). 4 The IRS Statistics of Income Tax Stats report on Controlled Foreign Corporations can be accessed here: https://www.irs.gov/statistics/soi-tax-statscontrolled-foreign-corporations. PO 00000 Frm 00034 Fmt 4702 Sfmt 4702 29125 The GILTI final regulations adopt an aggregate approach to domestic partnerships, but this aggregate treatment applies only for purposes of section 951A. ii. Alternatives Considered The Treasury Department and the IRS considered two options for the treatment of domestic partnerships for purposes of subpart F. The first option was to retain the entity approach to domestic partnerships for purposes of subpart F. While this approach would be consistent with the longstanding entity approach to domestic partnerships for purposes of subpart F inclusions, it would result in domestic partnerships being treated inconsistently for purposes of subpart F and section 951A, despite both regimes applying to U.S. shareholders and their CFCs. This inconsistent treatment of domestic partnerships could result in a domestic partnership including subpart F income in gross income under section 951(a) and its partners including GILTI in their gross income under section 951A(a), which would introduce substantial complexity and uncertainty in the application of provisions that require basis and E&P adjustments with respect to CFCs and their U.S. shareholders for amounts included in income under sections 951(a) and 951A(a). This option would also continue the inconsistent treatment of domestic partnerships and foreign partnerships (which generally are treated as aggregates) for purposes of the subpart F rules, despite the lack of a substantial policy justification for treating domestic partners of a partnership differently based upon the law under which the partnership is created or organized. In this regard, this option would require ‘‘small’’ partners of a domestic partnership (that is, partners that are not themselves U.S. shareholders of CFCs owned by the domestic partnership) to include in income their distributive share of the domestic partnership’s subpart F inclusion with respect to CFCs of which the small partners are not themselves U.S. shareholders. In contrast, if the domestic partnership were instead a foreign partnership, the small partners would not include any amount in gross income under section 951(a) (or a distributive share of such amount) with respect to CFCs of which such partners were not U.S. shareholders. The second option would adopt an aggregate approach to domestic partnerships by treating stock owned by a domestic partnership as being owned proportionately by its partners for purposes of determining the U.S. E:\FR\FM\21JNP1.SGM 21JNP1 29126 Federal Register / Vol. 84, No. 120 / Friday, June 21, 2019 / Proposed Rules shareholder that has the subpart F inclusion. This approach is consistent with the approach adopted for section 951A in the GILTI final regulations. Under this approach, a domestic partnership would not be the U.S. shareholder of a foreign corporation that includes subpart F income in its gross income under section 951(a). Instead, only the partners of the domestic partnership that are U.S. shareholders of a CFC owned through the domestic partnership would include subpart F income of the CFC in their gross income. This approach is supported by public comments requesting harmonization of the treatment of domestic partnerships for purposes of the GILTI and subpart F regimes. The harmonization of the treatment of domestic partnerships for purposes of the GILTI and subpart F regimes is expected to result in substantial simplification of related rules (for example, previously taxed earnings and profits and related basis rules), consistency in the treatment of domestic partnerships and foreign partnerships, and the reduction of burden (both administrative burden and tax liability) on taxpayers that are small partners. This third option is effectuated in the proposed regulations by using the existing framework for foreign partnerships, which is well-developed and more administrable than a new framework. iii. Affected Taxpayers The Treasury Department and the IRS estimate that there were approximately 7,000 U.S. partnerships with CFCs that e-filed at least one Form 5471 as Category 4 or 5 filers in 2015 and 2016.5 The identified partnerships had approximately 2 million partners, as indicated by the number of Schedules K–1 filed by the partnerships. This number includes both domestic and foreign partners, so it substantially overstates the number of partners that would be affected by the proposed regulations, which potentially affect only domestic partners.6 The proposed regulations affect domestic partners that are U.S. shareholders of a CFC owned by the domestic partnership because such partners will determine their subpart F inclusion amount by reference to their pro rata shares of subpart F income of CFCs owned by the partnership. Domestic partners that are not U.S. shareholders of a CFC owned by the domestic partnership will neither determine their own subpart F inclusion amount by reference to their pro rata shares of subpart F income of CFCs owned by the partnership nor include in their income a distributive share of the partnership’s subpart F inclusion amount. This latter group is likely to be a substantial portion of domestic partners given the high number of partners per partnership, and they will have lower compliance costs as a result of the proposed regulations. Because it is not possible to precisely identify these types of partners based on available data, this number is an upper bound of partners who would have been affected by this rule had this rule been in effect in 2015 or 2016. II. Paperwork Reduction Act The collection of information in these proposed regulations is in proposed § 1.951A–2(c)(6)(v). The collection of information in proposed § 1.951A– 2(c)(6)(v) is an election that a controlling domestic shareholder of a CFC may make to apply the high tax exception of section 954(b)(4) to gross income of a CFC. The election is made by attaching a statement to an original or amended income tax return in order to elect to apply the high tax exception of section 954(b)(4) to gross income of a CFC. For purposes of the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)) (‘‘PRA’’), the reporting burden associated with proposed § 1.951A– 2(c)(6)(v) will be reflected in the PRA submission associated with income tax returns in the Form 990 series, Form 1120 series, Form 1040 series, Form 1041 series, and Form 1065 series (see chart at the end of this part II for the current status of the PRA submissions for these forms). In 2018, the IRS released and invited comments on drafts of the above five forms in order to give members of the public advance notice and an opportunity to submit comments. The IRS received no comments on the portions of the forms that relate to section 951A during the comment period. Consequently, the IRS made the forms available in late 2018 and early 2019 for use by the public. The IRS is contemplating making additional changes to forms to take into account these proposed regulations. The IRS estimates the number of affected filers to be the following: TAX FORMS IMPACTED Number of respondents (estimated) Collection of information § 1.951A–2(c)(6)(v) Election to apply the high tax exception of section 954(b)(4) to gross income of a CFC. Forms to which the information may be attached 25,000–35,000 Form 990 series, Form 1120 series, Form 1040 series, Form 1041 series, and Form 1065 series. jspears on DSK30JT082PROD with PROPOSALS Source: MeF, DCS, and IRS’s Compliance Data Warehouse. This estimate is based on filers of income tax returns with a Form 5471, ‘‘Information Return of U.S. Persons With Respect to Certain Foreign Corporations,’’ attached because only filers that are U.S. shareholders of CFCs would be subject to the information collection requirements. The current status of the PRA submissions related to the tax forms that will be revised as a result of the information collection in proposed § 1.951A–2(c)(6)(v) is provided in the accompanying table. The reporting burdens associated with the information collection in the proposed regulations are included in the aggregated burden estimates for OMB control numbers 1545–0123 (which represents a total estimated burden time for all forms and schedules for corporations of 3.157 billion hours and total estimated monetized costs of $58.148 billion ($2017)), 1545–0074 (which represents a 5 Data are from IRS’s Research, Applied Analytics, and Statistics division based on data available in the Compliance Data Warehouse. Category 4 filer includes a U.S. person who had control of a foreign corporation during the annual accounting period of the foreign corporation. Category 5 includes a U.S. shareholder who owns stock in a foreign corporation that is a CFC and who owned that stock on the last day in the tax year of the foreign corporation in that year in which it was a CFC. For full definitions, see https://www.irs.gov/ pub/irs-pdf/i5471.pdf. 6 This analysis is based on the tax data readily available to the Treasury Department at this time. Some variables may be available on tax forms that are not available for statistical purposes. Moreover, with new tax provisions, such as section 951A, relevant data may not be available for a number of years for statistical purposes. VerDate Sep<11>2014 17:15 Jun 20, 2019 Jkt 247001 PO 00000 Frm 00035 Fmt 4702 Sfmt 4702 E:\FR\FM\21JNP1.SGM 21JNP1 Federal Register / Vol. 84, No. 120 / Friday, June 21, 2019 / Proposed Rules total estimated burden time, including all other related forms and schedules for individuals, of 1.784 billion hours and total estimated monetized costs of $31.764 billion ($2017)), 1545–0092 (which represents a total estimated burden time, including all other related forms and schedules for trusts and estates, of 307,844,800 hours and total estimated monetized costs of $9.950 billion ($2016)), and 1545–0047 (which represents a total estimated burden time, including all other related forms and schedules for tax-exempt organizations, of 50.450 million hours and total estimated monetized costs of $1,297,300,000 ($2017)). The overall burden estimates provided for these OMB control numbers are aggregate amounts that relate to the entire package of forms associated with the applicable OMB control number and will in the future include, but not isolate, the estimated burden of the tax forms that Form Type of filer Forms 990 .................. Tax exempt entities (NEW Model). will be revised as a result of the information collection in the proposed regulations. These numbers are therefore unrelated to the future calculations needed to assess the burden imposed by the proposed regulations. These burdens have been reported for other regulations related to the taxation of cross-border income and the Treasury Department and the IRS urge readers to recognize that these numbers are duplicates and to guard against overcounting the burden that international tax provisions imposed prior to the Act. No burden estimates specific to the forms affected by the proposed regulations are currently available. The Treasury Department and the IRS have not estimated the burden, including that of any new information collections, related to the requirements under the proposed regulations. The Treasury Department and the IRS estimate PRA burdens on a taxpayerOMB No.(s) 1545–0047 29127 type basis rather than a provisionspecific basis. Those estimates would capture both changes made by the Act and those that arise out of discretionary authority exercised in the final regulations. The Treasury Department and the IRS request comments on all aspects of information collection burdens related to the proposed regulations, including estimates for how much time it would take to comply with the paperwork burdens described above for each relevant form and ways for the IRS to minimize the paperwork burden. Proposed revisions (if any) to these forms that reflect the information collections contained in these proposed regulations will be made available for public comment at https://apps.irs.gov/ app/picklist/list/draftTaxForms.htm and will not be finalized until after these forms have been approved by OMB under the PRA. Status Approved by OIRA 12/21/2018 until 12/31/2019. The form will be updated with OMB number 1545–0047 and the corresponding PRA Notice on the next revision. Link: https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=201811-1545-003 Form 1040 .................. Individual (NEW Model). 1545–0074 Limited Scope submission (1040 only) approved on 12/7/2018 until 12/31/2019. Full ICR submission for all forms in 6/2019. 60 Day FRN not published yet for full collection. Link: https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=201808-1545-031 Form 1041 .................. Trusts and estates 1545–0092 Submitted to OIRA for review on 9/27/2018. Link: https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=201806-1545-014 Form 1065 and 1120 Business (NEW Model). 1545–0123 Approved by OIRA 12/21/2018 until 12/31/2019. jspears on DSK30JT082PROD with PROPOSALS Link: https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=201805-1545-019 III. Regulatory Flexibility Act It is hereby certified that these proposed regulations will not have a significant economic impact on a substantial number of small entities within the meaning of section 601(6) of the Regulatory Flexibility Act (5 U.S.C. chapter 6). Section 951A generally affects U.S. shareholders of CFCs. The reporting burden in proposed § 1.951A–2(c)(6)(v) affects controlling domestic shareholders of a CFC that elect to apply the high tax exception of section 954(b)(4) to gross income of a CFC. Controlling domestic shareholders are generally U.S. shareholders who, in the aggregate, own more than 50 percent of VerDate Sep<11>2014 17:15 Jun 20, 2019 Jkt 247001 the total combined voting power of all classes of stock of the foreign corporation entitled to vote. As an initial matter, foreign corporations are not considered small entities. Nor are U.S. taxpayers considered small entities to the extent the taxpayers are natural persons or entities other than small entities. Thus, proposed § 1.951A– 2(c)(6)(v) generally only affects small entities if a U.S. taxpayer that is a U.S. shareholder of a CFC is a small entity. Examining the gross receipts of the efiled Forms 5471 that is the basis of the 25,000—35,000 respondent estimates, the Treasury Department and the IRS have determined that the tax revenue from section 951A estimated by the PO 00000 Frm 00036 Fmt 4702 Sfmt 4702 Joint Committee on Taxation for businesses of all sizes is less than 0.3 percent of gross receipts as shown in the table below. Based on data for 2015 and 2016, total gross receipts for all businesses with gross receipts under $25 million is $60 billion while those over $25 million is $49.1 trillion. Given that tax on GILTI inclusion amounts is correlated with gross receipts, this results in businesses with less than $25 million in gross receipts accounting for approximately 0.01 percent of the tax revenue. Data are not readily available to determine the sectoral breakdown of these entities. Based on this analysis, smaller businesses are not significantly impacted by these proposed regulations. E:\FR\FM\21JNP1.SGM 21JNP1 29128 Federal Register / Vol. 84, No. 120 / Friday, June 21, 2019 / Proposed Rules 2017 (billion) JCT tax revenue ........................................ Total gross receipts ................................... Percent ...................................................... 2018 (billion) 7.7 30,727 0.03 12.5 53,870 0.02 2019 (billion) 9.6 566,676 0.02 2020 (billion) 9.5 59,644 0.02 2021 (billion) 2022 (billion) 9.3 62,684 0.01 9.0 65,865 0.01 2023 (billion) 9.2 69,201 0.01 2024 (billion) 9.3 72,710 0.01 2025 (billion) 2026 (billion) 15.1 76,348 0.02 21.2 80,094 0.03 jspears on DSK30JT082PROD with PROPOSALS Source: Research, Applied Analytics and Statistics division (IRS), Compliance Data Warehouse (IRS) (E-filed Form 5471, category 4 or 5, C and S corporations and partnerships); Conference Report, at 689. The data to assess the number of small entities potentially affected by proposed § 1.951A–2(c)(6)(v) are not readily available. However, businesses that are U.S. shareholders of CFCs are generally not small businesses because the ownership of sufficient stock in a CFC in order to be a U.S. shareholder generally entails significant resources and investment. The Treasury Department and the IRS welcome comments on whether the proposed regulations would affect a substantial number of small entities in any particular industry. Regardless of the number of small entities potentially affected by proposed § 1.951A–2(c)(6)(v), the Treasury Department and the IRS have concluded that there is no significant economic impact on such entities as a result of proposed § 1.951A–2(c)(6)(v). As discussed above, smaller businesses are not significantly impacted by the proposed regulations. Furthermore, the requirements in proposed § 1.951A– 2(c)(6)(v) apply only if a taxpayer chooses to make an election to apply a favorable rule. Consequently, the Treasury Department and the IRS have determined that proposed § 1.951A– 2(c)(6)(v) will not have a significant economic impact on a substantial number of small entities. Accordingly, it is hereby certified that the collection of information requirements of proposed § 1.951A–2(c)(6)(v) would not have a significant economic impact on a substantial number of small entities. Notwithstanding this certification, the Treasury Department and the IRS invite comments from the public on the impact of proposed § 1.951A–2(c)(6)(v) on small entities. The treatment of domestic partnerships as an aggregate of their partners in these proposed regulations for purposes of subpart F would reduce the burden on partners that are not U.S. shareholders of a CFC owned by the partnership because these partners will no longer be required to include in income a distributive share of subpart F income. The proposed regulations would also reduce burden on domestic partnerships that hold CFCs because these partnerships would no longer be required to calculate their partners’ distributive share of subpart F income, resulting in compliance cost savings for VerDate Sep<11>2014 17:15 Jun 20, 2019 Jkt 247001 the affected partnerships. As described in section II of this Special Analyses section, the Treasury Department and the IRS estimate that there are approximately 7,000 U.S. partnerships with CFCs that e-filed at least one Form 5471 as Category 4 or 5 filers in 2015 and 2016.7 The identified partnerships had approximately 2 million domestic and foreign partners. However, this figure overstates the number of partners that would be affected by the proposed regulations, because the proposed regulations would not affect foreign partners of the affected U.S. partnerships. Of affected U.S. partnerships, business entities are a minority of the affected domestic partners. Because data to identify the size of domestic partners that are business entities are not readily available, this number is a high upper bound and is magnitudes greater than the number of affected domestic partners that are small businesses. Consequently, the Treasury Department and the IRS have determined that the proposed regulations will not have a significant economic impact on a substantial number of small entities. Accordingly, it is hereby certified that the proposed regulations would not have a significant economic impact on a substantial number of small entities. Pursuant to section 7805(f) of the Code, this notice of proposed rulemaking has been submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small businesses. IV. Unfunded Mandates Reform Act Section 202 of the Unfunded Mandates Reform Act of 1995 requires that agencies assess anticipated costs and benefits and take certain other actions before issuing a final rule that includes any Federal mandate that may result in expenditures in any one year 7 Data are from IRS’s Research, Applied Analytics, and Statistics division based on data available in the Compliance Data Warehouse. Category 4 filer includes a U.S. person who had control of a foreign corporation during the annual accounting period of the foreign corporation. Category 5 includes a U.S. shareholder who owns stock in a foreign corporation that is a CFC and who owned that stock on the last day in the tax year of the foreign corporation in that year in which it was a CFC. For full definitions, see https://www.irs.gov/ pub/irs-pdf/i5471.pdf. PO 00000 Frm 00037 Fmt 4702 Sfmt 4702 by a state, local, or tribal government, in the aggregate, or by the private sector, of $100 million in 1995 dollars, updated annually for inflation. In 2019, that threshold is approximately $154 million. These proposed regulations do not include any Federal mandate that may result in expenditures by state, local, or tribal governments, or by the private sector in excess of that threshold. V. Executive Order 13132: Federalism Executive Order 13132 (entitled ‘‘Federalism’’) prohibits an agency from publishing any rule that has federalism implications if the rule either imposes substantial, direct compliance costs on state and local governments, and is not required by statute, or preempts state law, unless the agency meets the consultation and funding requirements of section 6 of the Executive Order. These proposed regulations do not have federalism implications and do not impose substantial direct compliance costs on state and local governments or preempt state law within the meaning of the Executive Order. Comments and Requests for Public Hearing Before the proposed regulations are adopted as final regulations, consideration will be given to any comments that are submitted timely to the IRS as prescribed in this preamble under the ADDRESSES heading. The Treasury Department and the IRS request comments on all aspects of the proposed regulations and on changes to forms related to the proposed regulations. See also parts I.B and II.A of the Explanation of Provisions section (requesting specific comments related to the aggregate approach to domestic partnerships and GILTI high tax exclusion, respectively). All comments will be available at www.regulations.gov or upon request. A public hearing will be scheduled if requested in writing by any person that timely submits written comments. If a public hearing is scheduled, then notice of the date, time, and place for the public hearing will be published in the Federal Register. E:\FR\FM\21JNP1.SGM 21JNP1 Federal Register / Vol. 84, No. 120 / Friday, June 21, 2019 / Proposed Rules Drafting Information The principal authors of these regulations are Joshua P. Roffenbender and Jorge M. Oben of the Office of Associate Chief Counsel (International). However, other personnel from the Treasury Department and the IRS participated in their development. List of Subjects in 26 CFR Part 1 Income taxes, Reporting and recordkeeping requirements. Proposed Amendments to the Regulations Accordingly, 26 CFR part 1 is proposed to be amended as follows: PART 1—INCOME TAXES Paragraph 1. The authority citation for part 1 continues to read in part as follows: ■ Authority: 26 U.S.C. 7805. Par. 2. Section 1.951–1 is amended by adding paragraph (a)(4) and revising the last sentence of paragraph (i) to read as follows: ■ § 1.951–1 Amounts included in gross income of United States shareholders. * * * * (a) * * * (4) See § 1.958–1(d)(1) for ownership of stock of a foreign corporation through a domestic partnership for purposes of sections 951 and 951A and for purposes of any other provision that applies by reference to section 951 or 951A. * * * * * (i) * * * Paragraph (h) of this section applies to taxable years of domestic partnerships ending on or after May 14, 2010, but does not apply to determine the stock of a controlled foreign corporation owned (within the meaning of section 958(a)) by a United States person for taxable years of the controlled foreign corporation beginning on or after the date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register, and for taxable years of United States persons in which or with which such taxable years of the controlled foreign corporation end. ■ Par. 3. Section 1.951A–0 is amended by adding entries for § 1.951A–7(a), § 1.951A–7(b), and § 1.951A–7(c) to read as follows: jspears on DSK30JT082PROD with PROPOSALS * § 1.951A–0 Outline of section 951A regulations. * * * § 1.951A–7 * * Applicability dates. (a) In general. (b) High tax exclusion. (c) Domestic partnerships. VerDate Sep<11>2014 17:15 Jun 20, 2019 Jkt 247001 Par. 4. Section 1.951A–2 is amended by revising paragraph (c)(1)(iii) and adding paragraph (c)(6) to read as follows: ■ § 1.951A–2 Tested income and tested loss. * * * * * (c) * * * (1) * * * (iii) Gross income excluded from the foreign base company income (as defined in section 954) or the insurance income (as defined in section 953) of the corporation by reason of the exception described in section 954(b)(4) pursuant to an election under § 1.954–1(d), or a tentative gross tested income item of the corporation that qualifies for the exception described in section 954(b)(4) pursuant to an election under paragraph (c)(6) of this section, * * * * * (6) Election for application of high tax exception of section 954(b)(4)—(i) In general. For purposes of section 951A(c)(2)(A)(i)(II) and paragraph (c)(1)(iii) of this section, a tentative gross tested income item of a controlled foreign corporation for a CFC inclusion year qualifies for the exception described in section 954(b)(4) if— (A) An election made under paragraph (c)(6)(v)(A) of this section is effective with respect to the controlled foreign corporation for the CFC inclusion year; and (B) The tentative net tested income item with respect to the tentative gross tested income item was subject to foreign income taxes at an effective rate that is greater than 90 percent of the rate that would apply if the income were subject to the maximum rate of tax specified in section 11. (ii) Definitions—(A) Tentative gross tested income item—(1) In general. A single tentative gross tested income item with respect to a controlled foreign corporation for a CFC inclusion year is the aggregate of all items of gross income attributable to a single qualified business unit (QBU) of the controlled foreign corporation in such CFC inclusion year that would be gross tested income without regard to this paragraph (c)(6) and that would be in a single tested income group (as defined in § 1.960–1(d)(2)(ii)(C)). For this purpose, a QBU is defined in section 989(a) and the regulations under that section, and a controlled foreign corporation’s QBUs includes QBUs owned by the controlled foreign corporation in addition to the QBU that is the controlled foreign corporation. Therefore, a controlled foreign corporation may have multiple tentative gross tested income items. PO 00000 Frm 00038 Fmt 4702 Sfmt 4702 29129 (2) Income attributable to a QBU. Gross income is attributable to a QBU if the gross income is properly reflected on the books and records of the QBU. Such gross income must be determined under Federal income tax principles, except that the principles of § 1.904– 4(f)(2)(vi) (without regard to the exclusion described in § 1.904– 4(f)(2)(vi)(C)(1)) apply to adjust gross income of a QBU to reflect disregarded payments. (B) Tentative net tested income item. A tentative net tested income item with respect to a tentative gross tested income item is determined by allocating and apportioning deductions (not including any items described in § 1.951A–2(c)(5)) to the tentative gross tested income item under the principles of § 1.960–1(d)(3) by treating each single tentative gross tested income item as gross income in a separate tested income group. (iii) Effective rate at which taxes are imposed. For a CFC inclusion year of a controlled foreign corporation, the effective rate with respect to the controlled foreign corporation’s tentative net tested income items is determined separately for each such item. The effective rate at which taxes are imposed on a tentative net tested income item is— (A) The U.S. dollar amount of foreign income taxes paid or accrued with respect to the tentative net tested income item, determined by applying paragraph (c)(6)(iv) of this section; divided by (B) The U.S. dollar amount of the tentative net tested income item, increased by the amount of foreign income taxes referred to in paragraph (c)(6)(iv) of this section. (iv) Taxes paid or accrued with respect to a tentative net tested income item. For a CFC inclusion year, the amount of foreign income taxes paid or accrued by a controlled foreign corporation with respect to a tentative net tested income item of the controlled foreign corporation for purposes of this paragraph (c)(6) is the U.S. dollar amount of the controlled foreign corporation’s current year taxes (as defined in § 1.960–1(b)(4)) that would be allocated and apportioned under the principles of § 1.960–1(d)(3)(ii) to the tentative net tested income item by treating such tentative net tested income item as being in a separate tested income group. If the principles of § 1.904–4(f)(2)(vi) apply to adjust the gross income of a QBU to account for disregarded payments as provided in paragraph (c)(6)(ii)(A)(2) of this section, the principles of § 1.904–6(a)(2) apply to allocate and apportion foreign income E:\FR\FM\21JNP1.SGM 21JNP1 jspears on DSK30JT082PROD with PROPOSALS 29130 Federal Register / Vol. 84, No. 120 / Friday, June 21, 2019 / Proposed Rules taxes imposed by reason of the disregarded payments. Except to the extent provided in the next sentence, the amount of foreign income taxes paid or accrued with respect to a tentative net tested income item, determined in the manner provided in this paragraph (c)(6), will not be affected by a subsequent reduction in foreign income taxes attributable to a distribution to shareholders of all or part of such income. To the extent the foreign income taxes paid or accrued by the controlled foreign corporation are reasonably certain to be returned by the foreign jurisdiction imposing such taxes to a shareholder, directly or indirectly, through any means (including, but not limited to, a refund, credit, payment, discharge of an obligation, or any other method) on a subsequent distribution to such shareholder, the foreign income taxes are not treated as paid or accrued for purposes of this paragraph (c)(6)(iv). (v) Rules regarding the election—(A) Manner of making election. An election is made under this paragraph (c)(6)(v)(A) with respect to a controlled foreign corporation for a CFC inclusion year— (1) By the controlling domestic shareholders (as defined in § 1.964– 1(c)(5)), by attaching a statement to such effect with an original or amended income tax return for the U.S. shareholder inclusion year of each controlling domestic shareholder in which or with which such CFC inclusion year ends, and including any additional information required by applicable administrative pronouncements; or (2) In accordance with the rules provided in forms or instructions. (B) Scope of election. An election made under paragraph (c)(6)(v)(A) of this section that is effective with respect to a controlled foreign corporation for a CFC inclusion year applies with respect to each tentative gross tested income item of the controlled foreign corporation for the CFC inclusion year and is binding on all United States shareholders of the controlled foreign corporation. (C) Duration of election. An election made under paragraph (c)(6)(v)(A) of this section is effective for a CFC inclusion year of a controlled foreign corporation for which the election is made and all subsequent CFC inclusion years of such corporation unless revoked by the controlling domestic shareholders of the controlled foreign corporation under paragraph (c)(6)(v)(D)(1) of this section. (D) Revocation of election—(1) In general. Except as provided in paragraph (c)(6)(v)(D)(2) of this section, VerDate Sep<11>2014 17:15 Jun 20, 2019 Jkt 247001 the election made under paragraph (c)(6)(v)(A) of this section with respect to a controlled foreign corporation for a CFC inclusion year is revoked by the controlling domestic shareholders of the controlled foreign corporation in the same manner as prescribed for an election in paragraph (c)(6)(v)(A) of this section. (2) Limitations by reason of revocation—(i) In general. Except as provided in paragraph (c)(6)(v)(D)(2)(ii) of this section, if an election with respect to a controlled foreign corporation for a CFC inclusion year is revoked under paragraph (c)(6)(v)(D)(1) of this section, a new election cannot be made under paragraph (c)(6)(v)(A) of this section with respect to the controlled foreign corporation for any CFC inclusion year that begins within sixty months following the close of the CFC inclusion year for which the previous election was revoked, and such subsequent election cannot be revoked under paragraph (c)(6)(v)(D)(1) of this section with respect to the controlled foreign corporation for any CFC inclusion year that begins within sixty months following the close of the CFC inclusion year for which the subsequent election was made. (ii) Exception for change of control. The Commissioner may permit a controlled foreign corporation to make an election under paragraph (c)(6)(v)(A) of this section or revoke an election under paragraph (c)(6)(v)(D)(1) of this section with respect to any CFC inclusion year within the sixty-month period described in paragraph (c)(6)(v)(D)(2)(i) of this section if more than 50 percent of the total combined voting power of all classes of the stock of the controlled foreign corporation entitled to vote as of the beginning of such CFC inclusion year are owned (within the meaning of section 958(a)) by persons that did not own any interests in the controlled foreign corporation as of the close of the CFC inclusion year for which the prior election or revocation with respect to the controlled foreign corporation became effective. For purposes of the preceding sentence, a person includes any person bearing a relationship described in section 267(b) or 707(b)(1) with respect to the person. (E) Rules applicable to controlling domestic shareholder groups—(1) In general. In the case of a controlled foreign corporation that is a member of a controlling domestic shareholder group, an election is made under paragraph (c)(6)(v)(A) of this section or revoked under paragraph (c)(6)(v)(D)(1) of this section with respect to each member of the controlling domestic PO 00000 Frm 00039 Fmt 4702 Sfmt 4702 shareholder group (including any member that joins the controlling domestic shareholder group after the election or revocation) and the rules in paragraphs (c)(6)(v)(A) through (D) of this section apply by reference to the controlling domestic shareholder group. (2) Definition of controlling domestic shareholder group. For purposes of paragraph (c)(6)(v)(E)(1) of this section, the term controlling domestic shareholder group means two or more controlled foreign corporations (each a member) if more than 50 percent of the total combined voting power of all classes of the stock of each corporation is owned (within the meaning of section 958(a)) by the same controlling domestic shareholder or, if no single controlling domestic shareholder owns (within the meaning of section 958(a)) more than 50 percent of the total combined voting power of all classes of the stock of each corporation, more than 50 percent of the total combined voting power of all classes of the stock of each corporation is owned (within the meaning of section 958(a)) by the same controlling domestic shareholders and each controlling domestic shareholder owns (within the meaning of section 958(a)) the same percentage of stock in each controlled foreign corporation. For purposes of the preceding sentence, a controlling domestic shareholder includes any person bearing a relationship described in section 267(b) or 707(b)(1) to the controlling domestic shareholder. (vi) Example. The following example illustrates the application of this paragraph (c)(6). (A) Example: Effect of disregarded payments between QBUs—(1) Facts—(i) FP, a controlled foreign corporation organized in Country A, conducts a trade or business in Country A (the Country A Business) and reflects items of income, gain, loss, and expense attributable to the Country A Business on the books and records of FP’s home office. Under § 1.989(a)–1(b)(2)(i)(A), FP is a QBU. FP’s functional currency is the U.S. dollar. FP has a calendar year taxable year in both the United States and Country A. An election is made under paragraph (c)(6)(v)(A) of this section that is effective for FP’s CFC inclusion year. (ii) FP owns FDE, a Country B disregarded entity (within the meaning of § 1.904– 4(f)(3)(i)). FDE conducts activities in Country B that constitute a trade or business within the meaning of § 1.989(a)–1(c) (the Country B Business), and reflects items of income, gain, loss, and expense attributable to the Country B Business on the books and records of FDE. Under § 1.989(a)–1(b)(2)(ii)(B), the Country B Business conducted through FDE is a QBU. The Country B Business’s functional currency is the U.S. dollar. FDE has a calendar year taxable year in Country B. (iii) On Date A in Year 1, FDE accrues $100x of interest income from X, an E:\FR\FM\21JNP1.SGM 21JNP1 jspears on DSK30JT082PROD with PROPOSALS Federal Register / Vol. 84, No. 120 / Friday, June 21, 2019 / Proposed Rules unrelated third party, and reflects the accrual on the books and records of the Country B business. FP excludes the $100x from foreign personal holding company income by reason of section 954(h). Subsequently, on Date B in Year 1, FDE accrues and pays $20x of interest to FP. FP reflects the interest income item on the books and records of the Country A Business. FDE reflects the $20x of interest expense on the books and records of the Country B Business. (iv) Country A imposes no tax on income. Country B imposes a 25% tax on income. For Country B income tax purposes, FDE (which is not disregarded under Country B income tax principles) recognizes $80x of taxable income ($100x interest income, less a $20x deduction for the interest paid to FP). Accordingly, FDE incurs a Country B income tax liability with respect to Year 1, the U.S. dollar amount of which is $20x. For Federal income tax purposes, if FDE were not a disregarded entity (within the meaning of § 1.904–4(f)(3)(i)), FP would recognize $20x of income in Year 1, and FDE would recognize $80x of taxable income in Year 1. Other than the $20x expense accrued with respect to the income tax imposed by Country B, FP incurs no deductions in Year 1 for Federal income tax purposes. (2) Analysis—(i) Under paragraph (c)(6)(ii)(A)(1) of this section, a separate tentative gross tested income item must be determined with respect to FP’s Country A Business and Country B Business (each of which is a QBU). To determine the separate tentative gross tested income items with respect to its Country A Business and Country B Business, FP must determine the gross income that is attributable to the Country A Business and the Country B Business under paragraph (c)(6)(ii)(A)(2) of this section. Without regard to the $20x interest payment from FDE to FP, gross income attributable to the Country A Business would be $0 (that is, $20x of interest income reflected on the books and records of the Country A Business, reduced by $20x attributable to a payment that is disregarded for Federal income tax purposes). Similarly, without regard to the $20x interest payment from FDE to FP, gross income attributable to the Country B Business would be $100x (that is, $100x of interest income reflected on the books and records of the Country B Business, unreduced by the $20x payment from FDE to FP). However, the $20x payment from FDE to FP is a disregarded payment within the meaning of § 1.904–4(f)(3)(ii), and would, under the principles of § 1.904–4(f)(2)(vi) (without regard to the exclusion described in § 1.904–4(f)(2)(vi)(C)(1)), adjust the gross income of the Country A Business from $0 to $20x and the gross income of the Country B Business from $100x to $80x (in each case, by virtue of the $20x disregarded interest payment from FDE to FP). Accordingly, FP’s tentative gross tested income attributable to the Country A Business is $20x and its tentative gross tested income attributable to the Country B Business is $80x. (ii) Under paragraph (c)(6)(ii)(B) of this section, because there are no deductions allocated or apportioned under § 1.960– 1(d)(3) to the tentative gross tested income VerDate Sep<11>2014 17:15 Jun 20, 2019 Jkt 247001 29131 items of the Country A Business, FP’s tentative net tested income item attributable to the Country A Business is $20x. Taking into account the $20x deduction for Country B income taxes that are allocable to the Country B Business under § 1.960–1(d)(3), FP’s tentative net tested income item attributable to the Country B Business is $60x under paragraph (c)(6)(ii)(B) of this section (tentative gross tested income of $80x less the $20x deduction). (iii) Under paragraphs (c)(6)(iii) and (iv) of this section, for Year 1 (a CFC inclusion year of FP), the effective rate with respect to FP’s $60x tentative net tested income item attributable to its Country B Business is 25%: $20x (the U.S. dollar amount of the Country B taxes accrued with respect to FP’s tentative tested net income item attributable to the Country B Business) divided by $80x (the U.S. dollar amount of FP’s $60x tentative net tested income item, increased by the $20x amount of Country B income taxes accrued with respect to that tentative net tested income item), expressed as a percentage. Therefore, FP’s tentative net tested income item attributable to the Country B Business was subject to foreign income taxes at an effective rate (25%) that is greater than 18.9% (which is 90% of the rate that would apply if the income were subject to the maximum rate of tax specified in section 11, which is 21%). Accordingly, the requirement of paragraph (c)(6)(i)(B) of this section is satisfied with respect to FP’s tentative gross tested income item attributable to the Country B Business in Year 1. Further, the requirement of paragraph (c)(6)(i)(A) of this section is satisfied because an election described in paragraph (c)(6)(v)(A) of this section was made with respect to FP for Year 1. Accordingly, FP’s $80x item of tentative gross tested income attributable to its Country B Business qualifies for the high tax exception of section 954(b)(4) under paragraph (c)(6)(i) of this section. (iv) FP’s $20x item of tentative net tested income attributable to its Country A Business is not subject to foreign income tax, and therefore does not satisfy the requirement of paragraph (c)(6)(i)(B) of this section. Accordingly, FP’s $20x item of tentative gross tested income attributable to the Country A Business does not qualify for the high tax exception of section 954(b)(4) under paragraph (c)(6)(i) of this section. adopting these rules as final regulations in the Federal Register, and to taxable years of United States shareholders in which or with which such taxable years of foreign corporations end. (c) Domestic partnerships. Section 1.951A–1(e) applies to taxable years of foreign corporations beginning after December 31, 2017, and before the date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register, and to taxable years of United States persons in which or with which such taxable years of foreign corporations end. ■ Par. 6. Section 1.954–1 is amended by: ■ 1. Adding ‘‘or’’ to the end of paragraph (c)(1)(iii)(A)(2)(ii). ■ 2. Removing and reserving paragraphs (c)(1)(iii)(A)(2)(iii) and (iv). ■ 3. Adding paragraphs (c)(1)(iii)(A)(3) and (c)(1)(iv). ■ 4. Removing the language ‘‘foreign base company oil related income, as defined in section 954(g), or’’ in the second sentence of paragraph (d)(1) introductory text. ■ 5. Adding a new sentence after the fourth sentence in paragraph (d)(1) introductory text. ■ 6. Removing the language ‘‘imposed by a foreign country or countries’’ in paragraph (d)(1)(ii). ■ 7. Removing the language ‘‘in a chain of corporations through which a distribution is made’’ in the first sentence in paragraph (d)(2) introductory text. ■ 8. Removing the language ‘‘(or deemed paid or accrued)’’ in paragraph (d)(2)(i). ■ 9. Revising the heading and the first sentence of paragraph (d)(3)(i). ■ 10. Removing the second sentence of paragraph (d)(3)(i). ■ 11. Removing and reserving paragraphs (d)(4)(iii) and (d)(7). The additions and revisions read as follows: Par. 5. Section 1.951A–7 is revised to read as follows: § 1.954–1 ■ § 1.951A–7 Applicability dates. (a) In general. Except as otherwise provided in this section, sections 1.951A–1 through 1.951A–6 apply to taxable years of foreign corporations beginning after December 31, 2017, and to taxable years of United States shareholders in which or with which such taxable years of foreign corporations end. (b) High tax exclusion. Section 1.951A–2(c)(1)(iii) and (c)(6) applies to taxable years of foreign corporations beginning on or after the date of publication of the Treasury decision PO 00000 Frm 00040 Fmt 4702 Sfmt 4702 Foreign base company income. * * * * * (c) * * * (1) * * * (iii) * * * (A) * * * (3) Amount of a single item. For purposes of paragraph (c)(1)(iii)(A) of this section, the aggregate amount from all transactions that falls within a single separate category (as defined in § 1.904– 5(a)(4)(v)) and is described in paragraph (c)(1)(iii)(A)(1)(i) of this section is a single item of income. Similarly, the aggregate amount from all transactions that falls within a single separate category (as defined in § 1.904– 5(a)(4)(v)) and is described in each one E:\FR\FM\21JNP1.SGM 21JNP1 jspears on DSK30JT082PROD with PROPOSALS 29132 Federal Register / Vol. 84, No. 120 / Friday, June 21, 2019 / Proposed Rules of paragraphs (c)(1)(iii)(A)(1)(ii) through (c)(1)(iii)(A)(1)(v) of this section is in each case a separate single item of income. The same principles apply for transactions described in each one of paragraphs (c)(1)(iii)(A)(2)(i) through (v) of this section. * * * * * (iv) Treatment of deductions or loss attributable to disqualified basis. For purposes of paragraph (c)(1)(i) of this section (and in the case of insurance income, paragraph (a)(6) of this section), in determining the amount of a net item of foreign base company income or insurance income, deductions or loss described in § 1.951A–2(c)(5) are not allocated and apportioned to gross foreign base company income or gross insurance income. (d) * * * (1) * * * For rules concerning the application of the high tax exception of sections 954(b)(4) and 951A(c)(2)(A)(i)(III) to tentative gross tested income items, see § 1.951A– 2(c)(1)(iii) and (c)(6). * * * * * * * * (3) * * * (i) In general. The amount of foreign income taxes paid or accrued by a controlled foreign corporation with respect to a net item of income for purposes of section 954(b)(4) and this paragraph (d) is the U.S. dollar amount of the controlled foreign corporation’s current year taxes (as defined in § 1.960–1(b)(4)) that are allocated and apportioned under § 1.960–1(d)(3)(ii) to the subpart F income group (as defined in § 1.960–1(d)(2)(ii)(B)) that corresponds with the net item of income. * * * * * * * * ■ Par. 7. Section 1.954–1, as proposed to be amended at 83 FR 63200 (December 7, 2018), is further amended by: ■ 1. Removing and reserving paragraph (d)(3)(ii). ■ 2. Redesignating paragraphs (h)(1) and (h)(2) as paragraphs (h)(2) and (h)(3), respectively. ■ 3. Adding a new paragraph (h)(1). ■ 4. Removing the language ‘‘Paragraphs (d)(3)(i) and (ii)’’ in newly redesignated paragraph (h)(2) and adding ‘‘The last two sentences in paragraph (d)(3)(i)’’ in its place. The addition reads as follows: § 1.954–1 Foreign base company income. * * * * * (h) * * * (1) Paragraphs (c)(1)(iii)(A)(3) and (c)(1)(iv) of this section and portion of paragraph (d)(3)(i) of this section. Paragraphs (c)(1)(iii)(A)(3) and (c)(1)(iv) VerDate Sep<11>2014 17:15 Jun 20, 2019 Jkt 247001 of this section and the first sentence of paragraph (d)(3)(i) of this section apply to taxable years of a controlled foreign corporation beginning on or after the date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register. * * * * * ■ Par. 8. Section 1.956–1, as amended May 23, 2019, at 84 FR 23717, effective July 22, 2019, is further amended by revising the first sentence of paragraph (g)(4) to read as follows: § 1.956–1 Shareholder’s pro rata share of the average of the amounts of United States property held by a controlled foreign corporation. * * * * * (g) * * * (4) Paragraphs (a)(2) and (3) of this section apply to taxable years of controlled foreign corporations beginning on or after July 22, 2019, and to taxable years of a United States shareholder in which or with which such taxable years of the controlled foreign corporations end, but the last sentence of paragraph (a)(2)(i) and paragraphs (a)(2)(iii) and (a)(3)(iv) of this section do not apply to taxable years of controlled foreign corporations beginning on or after the date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register, and to taxable years of a United States shareholder in which or with which such taxable years of the controlled foreign corporations end. * * * * * * * * ■ Par. 9. Section 1.958–1 is amended by: ■ 1. Redesignating paragraph (d) as paragraph (e). ■ 2. Adding a new paragraph (d). The addition reads as follows: § 1.958–1 stock. Direct and indirect ownership of * * * * * (d) Stock owned through domestic partnerships—(1) In general. Except as otherwise provided in paragraph (d)(2) of this section, for purposes of section 951 and section 951A, and for purposes of any other provision that applies by reference to section 951 or section 951A, a domestic partnership is not treated as owning stock of a foreign corporation within the meaning of section 958(a). When the preceding sentence applies, a domestic partnership is treated in the same manner as a foreign partnership under section 958(a)(2) and paragraph (b) of this section for purposes of determining the persons that own stock of the foreign corporation within the meaning of section 958(a). PO 00000 Frm 00041 Fmt 4702 Sfmt 4702 (2) Non-application for determination of status as United States shareholder or controlled foreign corporation. Paragraph (d)(1) of this section does not apply for purposes of determining whether any United States person is a United States shareholder (as defined in section 951(b)), whether any United States shareholder is a controlling domestic shareholder (as defined in § 1.964–1(c)(5)), or whether any foreign corporation is a controlled foreign corporation (as defined in section 957(a)). (3) Examples. The following examples illustrate the application of this paragraph (d). (i) Example 1—(A) Facts. USP, a domestic corporation, and Individual A, a United States citizen unrelated to USP, own 95% and 5%, respectively, of PRS, a domestic partnership. PRS owns 100% of the single class of stock of FC, a foreign corporation. (B) Analysis—(1) CFC and United States shareholder determinations. Under paragraph (d)(2) of this section, the determination of whether PRS, USP, and Individual A (each a United States person) are United States shareholders of FC and whether FC is a controlled foreign corporation is made without regard to paragraph (d)(1) of this section. PRS, a United States person, owns 100% of the total combined voting power or value of the FC stock within the meaning of section 958(a). Accordingly, PRS is a United States shareholder under section 951(b), and FC is a controlled foreign corporation under section 957(a). USP is a United States shareholder of FC because it owns 95% of the total combined voting power or value of the FC stock under sections 958(b) and 318(a)(2)(A). Individual A, however, is not a United States shareholder of FC because Individual A owns only 5% of the total combined voting power or value of the FC stock under sections 958(b) and 318(a)(2)(A). (2) Application of sections 951 and 951A. Under paragraph (d)(1) of this section, for purposes of sections 951 and 951A, PRS is not treated as owning (within the meaning of section 958(a)) the FC stock; instead, PRS is treated in the same manner as a foreign partnership for purposes of determining the FC stock owned by USP and Individual A under section 958(a)(2) and paragraph (b) of this section. Therefore, for purposes of sections 951 and 951A, USP is treated as owning 95% of the FC stock under section 958(a), and Individual A is treated as owning 5% of the FC stock under section 958(a). USP is a United States shareholder of FC, and therefore USP determines its income inclusions under section 951 and 951A based on its ownership of FC stock under section 958(a). However, because Individual A is not a United States shareholder of FC, Individual A does not have an income inclusion under section 951 with respect to FC or a pro rata share of any amount of FC for purposes of section 951A. (ii) Example 2—(A) Facts. USP, a domestic corporation, and Individual A, a United States citizen, own 90% and 10%, E:\FR\FM\21JNP1.SGM 21JNP1 Federal Register / Vol. 84, No. 120 / Friday, June 21, 2019 / Proposed Rules jspears on DSK30JT082PROD with PROPOSALS respectively, of PRS1, a domestic partnership. PRS1 and Individual B, a nonresident alien individual, own 90% and 10%, respectively, of PRS2, a domestic partnership. PRS2 owns 100% of the single class of stock of FC, a foreign corporation. USP, Individual A, and Individual B are unrelated to each other. (B) Analysis—(1) CFC and United States shareholder determination. Under paragraph (d)(2) of this section, the determination of whether PRS1, PRS2, USP, and Individual A (each a United States person) are United States shareholders of FC and whether FC is a controlled foreign corporation is made without regard to paragraph (d)(1) of this section. PRS2 owns 100% of the total combined voting power or value of the FC stock within the meaning of section 958(a). Accordingly, PRS2 is a United States shareholder under section 951(b), and FC is a controlled foreign corporation under section 957(a). Under sections 958(b) and 318(a)(2)(A), PRS1 is treated as owning 90% of the FC stock owned by PRS2. Accordingly, PRS1 is a United States shareholder under section 951(b). Further, under section 958(b)(2), PRS1 is treated as owning 100% of the FC stock for purposes of determining the FC stock treated as owned by USP and Individual A under section 318(a)(2)(A). Therefore, USP is treated as owning 90% of the FC stock under section 958(b) (100% x 100% x 90%), and Individual A is treated as owning 10% of the FC stock under section 958(b) (100% x 100% x 10%). Accordingly, both USP and Individual A are United States shareholders of FC under section 951(b). (2) Application of sections 951 and 951A. Under paragraph (d)(1) of this section, for purposes of sections 951 and 951A, PRS1 and PRS2 are not treated as owning (within the meaning of section 958(a)) the FC stock; instead, PRS1 and PRS2 are treated in the same manner as foreign partnerships for purposes of determining the FC stock owned by USP and Individual A under section 958(a)(2) and paragraph (b) of this section. Therefore, for purposes of determining the amount included in gross income under sections 951 and 951A, USP is treated as owning 81% (100% x 90% x 90%) of the FC stock under section 958(a), and Individual A is treated as owning 9% (100% x 90% x 10%) of the FC stock under section 958(a). Because USP and Individual A are both United States shareholders of FC, USP and Individual A determine their respective inclusions under sections 951 and 951A based on their ownership of FC stock under section 958(a). (4) Applicability date. Paragraphs (d)(1) through (3) of this section apply to taxable years of foreign corporations beginning on or after the date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register, and to taxable years of United States persons in which or with which such taxable years of foreign corporations end. For taxable years that precede the taxable years described in the preceding sentence, a domestic partnership may apply those VerDate Sep<11>2014 17:15 Jun 20, 2019 Jkt 247001 paragraphs to taxable years of a foreign corporation beginning after December 31, 2017, and to taxable years of the domestic partnership in which or with which such taxable years of the foreign corporation end, provided that the partnership, its partners that are United States shareholders of the foreign corporation, and other domestic partnerships that bear relationships described in section 267(b) or 707(b) to the partnership (and their United States shareholder partners) consistently apply paragraph (d) of this section with respect to all foreign corporations whose stock the domestic partnerships own within the meaning of section 958(a) (determined without regard to paragraph (d)(1) of this section). * * * * * ■ Par. 10. Section 1.1502–51 is amended by revising the last sentence in paragraph (b) and adding paragraph (g)(2) to read as follows: § 1.1502–51 Consolidated section 951A. * * * * * (b) * * * In addition, see § 1.958– 1(d). * * * * * (g) * * * (2) The last sentence of paragraph (b) of this section. The last sentence of paragraph (b) of this section applies to taxable years of United States shareholders described in § 1.958– 1(d)(4). Kirsten Wielobob, Deputy Commissioner for Services and Enforcement. [FR Doc. 2019–12436 Filed 6–14–19; 4:15 pm] BILLING CODE 4830–01–P DEPARTMENT OF HOMELAND SECURITY Coast Guard 33 CFR Part 165 [Docket Number USCG–2019–0419] RIN 1625–AA00 Safety Zone; USA Triathlon Age Group National Championships Lake Erie, Cleveland, OH Coast Guard, DHS. Notice of proposed rulemaking. AGENCY: ACTION: The Coast Guard proposes to establish a temporary safety zone for certain waters of Lake Erie during the USA Triathlon National Championships. This action is necessary to provide for the safety of life on the navigable waters near Edgewater SUMMARY: PO 00000 Frm 00042 Fmt 4702 Sfmt 4702 29133 Park, Cleveland, OH during the swim events of the multiple triathlons over the course of three days. This proposed rulemaking would prohibit persons and vessels from being in the safety zone unless authorized by the Captain of the Port Buffalo or a designated representative. We invite your comments on this proposed rulemaking. DATES: Comments and related material must be received by the Coast Guard on or before July 22, 2019. ADDRESSES: You may submit comments identified by docket number USCG– 2019–0419 using the Federal eRulemaking Portal at http:// www.regulations.gov. See the ‘‘Public Participation and Request for Comments’’ portion of the SUPPLEMENTARY INFORMATION section for further instructions on submitting comments. If you have questions about this proposed rulemaking, call or email LT Ryan Junod, Chief of Waterways Management, U.S. Coast Guard Marine Safety Unit Cleveland; telephone 216–937–6004, email D09-SMB-SECBuffalo-WWM@ uscg.mil. FOR FURTHER INFORMATION CONTACT: SUPPLEMENTARY INFORMATION: I. Table of Abbreviations CFR Code of Federal Regulations DHS Department of Homeland Security FR Federal Register NPRM Notice of proposed rulemaking § Section U.S.C. United States Code II. Background, Purpose, and Legal Basis On January 29, 2019, USA Triathlon notified the Coast Guard that it will be conducting the USA Triathlon Age Group National Championships from 10:00 a.m. to 1:30 p.m. on August 09, 2019, from 5:00 a.m. to 5:30 p.m. on August 10, 2019, and from 5:00 a.m. to 12:00 p.m. on August 11, 2019. The swim portion of the multiple triathlon events will be held off Edgewater Park in Lake Erie, Cleveland, OH. Hazards from swim events include participants swimming in an area that has a high amount of recreational vessel traffic and interfering with vessels intending to operate in that location, as well as swimming within approaches to public and private marinas. The Captain of the Port Buffalo determined that potential hazards associated with the swim events would be a safety concern for anyone intending to participate in this event or for vessels that operate in their vicinity. The purpose of this rulemaking is to protect the safety of the event participants and transiting vessels on E:\FR\FM\21JNP1.SGM 21JNP1

Agencies

[Federal Register Volume 84, Number 120 (Friday, June 21, 2019)]
[Proposed Rules]
[Pages 29114-29133]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-12436]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-101828-19]
RIN 1545-BP15


Guidance Under Section 958 (Rules for Determining Stock 
Ownership) and Section 951A (Global Intangible Low-Taxed Income)

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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[[Page 29115]]

SUMMARY: This document contains proposed regulations regarding the 
treatment of domestic partnerships for purposes of determining amounts 
included in the gross income of their partners with respect to foreign 
corporations. In addition, this document contains proposed regulations 
under the global intangible low-taxed income provisions regarding gross 
income that is subject to a high rate of foreign tax. The proposed 
regulations would affect United States persons that own stock of 
foreign corporations through domestic partnerships and United States 
shareholders of foreign corporations.

DATES: Written or electronic comments and requests for a public hearing 
must be received by September 19, 2019.

ADDRESSES: Send submissions to: Internal Revenue Service, CC:PA:LPD:PR 
(REG-101828-19), Room 5203, Post Office Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand-delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
101828-19), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue NW, Washington, DC 20024, or sent electronically, via the 
Federal eRulemaking Portal at www.regulations.gov (indicate IRS and 
REG-101828-19).

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations 
under Sec. Sec.  1.951-1, 1.956-1, and 1.958-1, Joshua P. Roffenbender 
at (202) 317-6934; concerning the proposed regulations under Sec. Sec.  
1.951A-0, 1.951A-2, 1.951A-7, and 1.954-1, Jorge M. Oben at (202) 317-
6934; concerning the proposed regulations under Sec.  1.1502-51, 
Katherine H. Zhang at (202) 317-6848 or Kevin M. Jacobs at (202) 317-
5332; concerning submissions of comments or requests for a public 
hearing, Regina Johnson at (202) 317-6901 (not toll free numbers).

SUPPLEMENTARY INFORMATION: 

Background

I. Subpart F Before Enactment of Section 951A

    The Revenue Act of 1962 (the ``1962 Act''), Public Law 87-834, sec. 
12, 76 Stat. at 1006, enacted subpart F of part III, subchapter N, 
chapter 1 of the 1954 Internal Revenue Code (``subpart F''), as 
amended. See sections 951 through 965 of the Internal Revenue Code 
(``Code'').\1\ Congress created the subpart F regime to limit the use 
of corporations organized in low-tax jurisdictions for the purposes of 
obtaining indefinite deferral of U.S. tax on certain earnings--
generally earnings that are passive or highly mobile--that would 
otherwise be subject to Federal income tax. H.R. Rep. No. 1447 at 57-58 
(1962); S. Rep. No. 1881 at 78-80 (1962). Subpart F generally requires 
a United States shareholder (as defined in section 951(b)) (``U.S. 
shareholder'') to include in its gross income (``subpart F inclusion'') 
its pro rata share of subpart F income (as defined in section 952) 
earned by a controlled foreign corporation (``CFC'') (as defined in 
section 957(a)) and its pro rata share of earnings and profits 
(``E&P'') invested in certain United States property by the CFC. See 
section 951(a)(1)(A) and (B) and section 956(a). For purposes of both 
section 951(a)(1)(A) and (B), the determination of a U.S. shareholder's 
pro rata share of any amount with respect to a CFC is determined by 
reference to the stock of the CFC that the shareholder owns (within the 
meaning of section 958(a)). See sections 951(a)(1) and (2) and 956(a).
---------------------------------------------------------------------------

    \1\ Except as otherwise stated, all section references in this 
preamble are to the Internal Revenue Code.
---------------------------------------------------------------------------

    Section 957(a) defines a CFC as any foreign corporation if U.S. 
shareholders own (within the meaning of section 958(a)), or are 
considered as owning by applying the ownership rules of section 958(b), 
more than 50 percent of the total combined voting power or value of 
stock of such corporation on any day during the taxable year of such 
foreign corporation. Section 951(b) defines a U.S. shareholder of a 
foreign corporation as a United States person (``U.S. person'') that 
owns (within the meaning of section 958(a)), or is considered as owning 
by applying the ownership rules of section 958(b), at least 10 percent 
of the total combined voting power or value of stock of the foreign 
corporation. Section 957(c) generally defines a U.S. person by 
reference to section 7701(a)(30), which defines a U.S. person as a 
citizen or resident of the United States, a domestic partnership, a 
domestic corporation, and certain estates and trusts.
    Stock owned within the meaning of section 958(a) is stock owned 
directly and stock owned indirectly under section 958(a)(2). Section 
958(a)(2) provides that stock owned, directly or indirectly, by or for 
a foreign corporation, foreign partnership, foreign trust, or foreign 
estate is considered to be owned proportionately by its shareholders, 
partners, or beneficiaries. Section 958(a)(2) does not provide rules 
addressing stock owned by domestic entities, including domestic 
partnerships.
    Section 958(b) provides in relevant part that the constructive 
ownership rules of section 318(a) apply, with certain modifications, 
for purposes of determining whether any U.S. person is a U.S. 
shareholder or any foreign corporation is a CFC. These rules apply to 
treat a person as owning the stock owned, directly or indirectly, by 
another person, generally without regard to whether the person to or 
from which stock is attributed is domestic or foreign. In particular, 
section 318(a)(2)(A) provides in relevant part that stock owned, 
directly or indirectly, by or for a partnership is considered as owned 
proportionately by its partners, and section 318(a)(3)(A) provides that 
stock owned, directly or indirectly, by or for a partner is considered 
as owned by the partnership. Further, in determining stock treated as 
owned by partners of a partnership under section 318(a)(2)(A), section 
958(b)(2) provides in relevant part that a partnership that owns, 
directly or indirectly, more than 50 percent of the voting power of a 
corporation is considered as owning all the stock entitled to vote. 
However, a U.S. person that is a U.S. shareholder of a CFC by reason of 
constructive ownership under section 958(b), but that does not own 
stock in the CFC within the meaning of section 958(a), does not have a 
subpart F inclusion with respect to the CFC.

II. Treatment of Domestic Partnerships as Entities or Aggregates of 
Their Partners, in General

    For purposes of applying a particular provision of the Code, a 
partnership may be treated as either an entity separate from its 
partners or as an aggregate of its partners. Under an aggregate 
approach, the partners of a partnership, and not the partnership, are 
treated as owning the partnership's assets and conducting the 
partnership's operations. Under an entity approach, the partnership is 
respected as separate and distinct from its partners, and therefore the 
partnership, and not the partners, is treated as owning the 
partnership's assets and conducting the partnership's operations. Based 
upon the authority of subchapter K and the policies underlying a 
particular provision of the Code, a partnership is treated as an 
aggregate of its partners or as an entity separate from its partners, 
depending on which characterization is more appropriate to carry out 
the scope and purpose of the Code provision. See H.R. Rep. No. 83-2543, 
at 59 (1954) (Conf. Rep.) (``Both the House provisions and the Senate 
amendment provide for the use of the `entity' approach in the treatment 
of transactions between a partner and a partnership . . . . No 
inference is

[[Page 29116]]

intended, however, that a partnership is to be considered as a separate 
entity for the purpose of applying other provisions of the internal 
revenue laws if the concept of the partnership as a collection of 
individuals is more appropriate for such provisions.''). See also Casel 
v. Commissioner, 79 T.C. 424, 433 (1982) (``When the 1954 Code was 
adopted by Congress, the conference report . . . clearly stated that 
whether an aggregate or entity theory of partnerships should be applied 
to a particular Code section depends upon which theory is more 
appropriate to such section.''); Holiday Village Shopping Center v. 
United States, 5 Cl. Ct. 566, 570 (1984), aff'd 773 F.2d 276 (Fed. Cir. 
1985) (``[T]he proper inquiry is not whether a partnership is an entity 
or an aggregate for purposes of applying the internal revenue laws 
generally, but rather which is the more appropriate and more consistent 
with Congressional intent with respect to the operation of the 
particular provision of the Internal Revenue Code at issue.''); Sec.  
1.701-2(e)(1) (``The Commissioner can treat a partnership as an 
aggregate of its partners in whole or in part as appropriate to carry 
out the purpose of any provision of the Internal Revenue Code . . . 
.'').
    Consistent with this authority under subchapter K, the Treasury 
Department and the IRS have adopted an aggregate approach to 
partnerships to carry out the purpose of various provisions, including 
international provisions, of the Code. For example, regulations under 
section 871 treat domestic and foreign partnerships as aggregates of 
their partners in applying the 10 percent shareholder test of section 
871(h)(3) to determine whether interest paid to a partnership would be 
considered portfolio interest under section 871(h)(2). See Sec.  1.871-
14(g)(3)(i). An aggregate approach to partnerships was also adopted in 
regulations issued under section 367(a) to address the transfer of 
property by a domestic or foreign partnership to a foreign corporation 
in an exchange described in section 367(a)(1). See Sec.  1.367(a)-
1T(c)(3)(i)(A). Similarly, the Treasury Department and the IRS adopted 
an aggregate approach to foreign partnerships for purposes of applying 
the regulations under section 367(b). See Sec.  1.367(b)-2(k); see also 
Sec. Sec.  1.367(e)-1(b)(2) (treating stock and securities of a 
distributing corporation owned by or for a partnership (domestic or 
foreign) as owned proportionately by its partners) and 1.861-9(e)(2) 
(requiring certain corporate partners to apportion interest expense, 
including the partner's distributive share of partnership interest 
expense, by reference to the partner's assets).

III. Treatment of Domestic Partnerships as Entities or Aggregates for 
Purposes of Subpart F Before the Tax Cuts and Jobs Act

    Since the enactment of subpart F, domestic partnerships have 
generally been treated as entities, rather than as aggregates of their 
partners, for purposes of determining whether U.S. shareholders own 
more than 50 percent of the stock (by voting power or value) of a 
foreign corporation and thus whether a foreign corporation is a CFC. 
See Sec.  1.701-2(f), Example 3 (concluding that a foreign corporation 
wholly owned by a domestic partnership is a CFC for purposes of 
applying the look-through rules of section 904(d)(3)). In addition, 
domestic partnerships have generally been treated as entities for 
purposes of treating a domestic partnership as the U.S. shareholder 
that has the subpart F inclusion with respect to such foreign 
corporation. But cf. Sec. Sec.  1.951-1(h) and 1.965-1(e) (treating 
certain domestic partnerships owned by CFCs as foreign partnerships for 
purposes of determining the U.S. shareholder that has the subpart F 
inclusion with respect to CFCs owned by such domestic partnerships). If 
a domestic partnership is treated as the U.S. shareholder with the 
subpart F inclusion, then each partner of the partnership has a 
distributive share of the partnership's subpart F inclusion, regardless 
of whether the partner itself is a U.S. shareholder. See section 702.
    This entity treatment is consistent with the inclusion of a 
domestic partnership in the definition of a U.S. person in section 
7701(a)(30), which term is used in the definition of U.S. shareholder 
by reference to section 957(c). It is also consistent with the 
legislative history to section 951, which describes domestic 
partnerships as being included within the definition of a U.S. person 
and, therefore, a U.S. shareholder. See, for example, S. Rep. No. 1881 
at 80 n.1 (1962) (``U.S. shareholders are defined in the bill as `U.S. 
persons' with 10-percent stockholding. U.S. persons, in general, are 
U.S. citizens and residents and domestic corporations, partnerships and 
estates or trusts.''). Furthermore, entity treatment is consistent with 
sections 958(b) and 318(a)(3)(A), which treat a partnership (including 
a domestic partnership) as owning the stock owned by its partners for 
purposes of determining whether the foreign corporation is owned more 
than 50 percent by U.S. shareholders.
    In contrast to the historical treatment of domestic partnerships as 
entities for purposes of subpart F, foreign partnerships are generally 
treated as aggregates of their partners for purposes of determining 
stock ownership under section 958(a). See section 958(a)(2). 
Accordingly, whether a foreign corporation owned by a foreign 
partnership is a CFC is determined based on the proportionate amount of 
stock owned by domestic partners of the partnership and, if the foreign 
corporation is a CFC, partners that are U.S. shareholders have the 
subpart F inclusion with respect to the CFC.

IV. Section 951A

A. In general

    The Tax Cuts and Jobs Act, Public Law 115-97 (the ``Act'') 
established a participation exemption system for the taxation of 
certain foreign income by allowing a domestic corporation a 100 percent 
dividends received deduction for the foreign-source portion of a 
dividend received from a specified 10 percent-owned foreign 
corporation. See section 14101(a) of the Act and section 245A. The 
Act's legislative history expresses concern that the new participation 
exemption could heighten the incentive to shift profits to low-tax 
foreign jurisdictions or tax havens absent base erosion protections. 
See S. Comm. on the Budget, Reconciliation Recommendations Pursuant to 
H. Con. Res. 71, S. Print No. 115-20, at 370 (2017) (``Senate 
Explanation''). For example, without appropriate limits, domestic 
corporations might be incentivized to shift income to low-taxed foreign 
affiliates, and the income could potentially be distributed back to 
domestic corporate shareholders without the imposition of any U.S. tax. 
See id. To prevent base erosion, the Act retained the subpart F regime 
and enacted section 951A, which applies to taxable years of foreign 
corporations beginning after December 31, 2017, and to taxable years of 
U.S. shareholders in which or with which such taxable years of foreign 
corporations end.
    Section 951A requires a U.S. shareholder of any CFC for any taxable 
year to include in gross income the shareholder's global intangible 
low-taxed income (``GILTI inclusion'') for such taxable year in a 
manner similar to a subpart F inclusion for many purposes of the Code. 
See sections 951A(a) and (f)(1)(A); H.R. Rep. No. 115-466, at 641 
(2017) (Conf. Rep.) (``[A] U.S. shareholder of any CFC must include in 
gross income for a taxable year its [GILTI] in a manner generally 
similar to inclusions of subpart F income.'').

[[Page 29117]]

Similar to a subpart F inclusion, the determination of a U.S. 
shareholder's GILTI inclusion begins with the calculation of relevant 
items--such as tested income, tested loss, and qualified business asset 
investment--of each CFC owned by the shareholder (``tested items''). 
See section 951A(c)(2) and (d) and Sec. Sec.  1.951A-2 through -4. A 
U.S. shareholder then determines its pro rata share of each of these 
CFC-level tested items in a manner similar to a U.S. shareholder's pro 
rata share of subpart F income under section 951(a)(2). See section 
951A(e)(1) and Sec.  1.951A-1(d).
    In contrast to a subpart F inclusion, however, a U.S. shareholder's 
pro rata shares of the tested items of a CFC are not amounts included 
in gross income, but rather are amounts taken into account by the U.S. 
shareholder in determining the amount of its GILTI inclusion for the 
taxable year. Section 951A(b) and Sec.  1.951A-1(c). Thus, a U.S. 
shareholder does not compute a separate GILTI inclusion amount under 
section 951A(a) with respect to each CFC for a taxable year, but rather 
computes a single GILTI inclusion amount by reference to all of its 
CFCs.
    Section 951A itself does not contain specific rules regarding the 
treatment of domestic partnerships and their partners for purposes of 
GILTI. However, proposed regulations under section 951A that were 
published in the Federal Register on October 10, 2018, (REG-104390-18, 
83 FR 51072) (``GILTI proposed regulations'') reflect a hybrid approach 
that treats a domestic partnership that is a U.S. shareholder with 
respect to a CFC (``U.S. shareholder partnership'') as an entity with 
respect to some partners but as an aggregate of its partners with 
respect to others. Under the hybrid approach, with respect to partners 
that are not U.S. shareholders of a CFC owned by a domestic 
partnership, a U.S. shareholder partnership calculates a GILTI 
inclusion amount and its partners have a distributive share of such 
amount (if any). See proposed Sec.  1.951A-5(b)(1). However, with 
respect to partners that are themselves U.S. shareholders of a CFC 
owned by a domestic partnership (``U.S. shareholder partners''), the 
partnership is treated in the same manner as a foreign partnership, 
with the result that the U.S. shareholder partners are treated as 
proportionately owning, within the meaning of section 958(a), stock 
owned by the domestic partnership for purposes of determining their own 
GILTI inclusion amounts. See proposed Sec.  1.951A-5(c). In the 
preamble to the GILTI proposed regulations, the Treasury Department and 
the IRS rejected a pure entity approach to section 951A, because 
treating a domestic partnership as the section 958(a) owner of stock in 
all cases would frustrate the GILTI framework by creating unintended 
planning opportunities for well advised taxpayers and traps for the 
unwary. However, the Treasury Department and the IRS also did not adopt 
a pure aggregate approach to domestic partnerships for GILTI because 
such an approach would be inconsistent with the existing treatment of 
domestic partnerships as entities for purposes of subpart F.
    The Treasury Department and the IRS received many comments in 
response to the hybrid approach of the GILTI proposed regulations. The 
comments generally advised against adopting the hybrid approach due 
primarily to concerns with complexity and administrability arising from 
the treatment of a partnership as an entity with respect to some 
partners but as an aggregate with respect to other partners. The 
comments also generally advised against adopting a pure entity approach 
because such an approach would result in different treatment for 
similarly situated taxpayers depending on whether a U.S. shareholder 
owned stock of a foreign corporation through a domestic partnership or 
a foreign partnership, which is treated as an aggregate of its partners 
for purposes of determining CFC status and section 958(a) ownership. 
The majority of comments on this issue recommended at least some form 
of aggregate approach for domestic partnerships for purposes of the 
GILTI regime; some of these comments suggested that an aggregate 
approach is supported by analogy to other situations where regulations 
apply an aggregate approach to partnerships. See, for example, 
Sec. Sec.  1.954-1(g)(1) and 1.871-14(g)(3)(i).
    In response to these comments, the Treasury Department and the IRS 
are issuing final regulations under section 951A in the Rules and 
Regulations section of this issue of the Federal Register (``GILTI 
final regulations'') that treat stock owned by a domestic partnership 
as owned within the meaning of section 958(a) by its partners for 
purposes of determining a partner's GILTI inclusion amount under 
section 951A. The Treasury Department and the IRS concluded that 
applying an aggregate approach for purposes of determining a partner's 
GILTI inclusion amount under section 951A is necessary to ensure that, 
consistent with the purpose and operation of section 951A, a single 
GILTI inclusion amount is determined for each taxpayer based on its 
economic interests in all of its CFCs. The GILTI final regulations 
apply to taxable years of foreign corporations beginning after December 
31, 2017, and to taxable years of U.S. shareholders in which or with 
which such taxable years of foreign corporations end.
    Some comments also recommended adopting an aggregate approach for 
purposes of section 951, especially if the GILTI final regulations 
adopt an aggregate approach. These comments generally asserted that 
there is insufficient policy justification for treating domestic 
partnerships differently than foreign partnerships for purposes of U.S. 
shareholder and CFC determinations because the choice of law under 
which a partnership is organized should be irrelevant. In this regard, 
these comments criticized entity treatment of domestic partnerships 
because it results in each partner including in income its distributive 
share of a domestic partnership's subpart F inclusion with respect to a 
CFC, even if that partner is not a U.S. shareholder itself and thus 
would not have had a subpart F inclusion with respect to such CFC if 
the domestic partnership were instead foreign.

B. High-Tax Gross Tested Income

    Section 951A(c)(2)(A)(i) provides that the gross tested income of a 
CFC for a taxable year is all the gross income of the CFC for the year, 
determined without regard to certain items. See also Sec.  1.951A-
2(c)(1). In particular, section 951A(c)(2)(A)(i)(III) excludes from 
gross tested income any gross income excluded from foreign base company 
income (as defined in section 954) (``FBCI'') or insurance income (as 
defined in section 953) of a CFC by reason of the exception under 
section 954(b)(4) (the ``GILTI high tax exclusion'').
    The GILTI proposed regulations clarified that the GILTI high tax 
exclusion applies only to income that is excluded from FBCI and 
insurance income solely by reason of an election made to exclude the 
income under the high tax exception of section 954(b)(4) and Sec.  
1.954-1(d)(5). See proposed Sec.  1.951A-2(c)(1)(iii).
    Numerous comments requested that the scope of the GILTI high tax 
exclusion be expanded in the final regulations. These comments asserted 
that the legislative history to section 951A indicates that Congress 
intended that income of a CFC should be taxed as GILTI only if it is 
subject to a low rate of foreign tax, regardless of whether the income 
is active or passive. Comments also suggested that the GILTI high tax 
exclusion does not require that income be excluded ``solely'' by reason 
of section 954(b)(4). The comments argued

[[Page 29118]]

that the GILTI high tax exclusion could be interpreted to exclude any 
item of income that would be FBCI or insurance income, but for another 
exception to FBCI (for instance, the active financing exception under 
section 954(h) and the active insurance exception under section 
954(i)). Of the comments recommending an expansion of the GILTI high 
tax exclusion, some recommended that the GILTI high tax exclusion apply 
to income taxed at a rate above 13.125 percent, while others 
recommended that the GILTI high tax exclusion apply to income taxed at 
a rate above 90 percent of the maximum rate of tax specified in section 
11, or 18.9 percent. The comments recommended that the GILTI high tax 
exclusion be applied either on a CFC-by-CFC basis or an item-by-item 
basis.
    Alternatively, comments recommended that the scope of the GILTI 
high tax exclusion be expanded under section 951A(f) by treating, on an 
elective basis, a GILTI inclusion as a subpart F inclusion that is 
potentially excludible from FBCI or insurance income under section 
954(b)(4), or by modifying the GILTI high tax exclusion to exclude any 
item of income subject to a sufficiently high effective foreign tax 
rate such that it would be excludible under section 954(b)(4) if it 
were FBCI or insurance income. Other comments recommended the creation 
of a rebuttable presumption that all income of a CFC is subpart F 
income, regardless of whether such income is of a character included in 
FBCI or insurance income, and therefore, if the taxpayer chose not to 
rebut the presumption, the income would be excluded from gross tested 
income either because it is included in subpart F income (and thus 
excluded from gross tested income by reason of the subpart F exclusion 
under section 951A(c)(2)(A)(i)(II)) or because the income is excluded 
from subpart F income by reason of section 954(b)(4) (and thus excluded 
from gross tested income by reason of the GILTI high tax exclusion).
    The GILTI final regulations adopt the GILTI high tax exclusion of 
the proposed regulations without change.

Explanation of Provisions

I. Partnerships

A. Adoption of Aggregate Treatment for Purposes of Section 951

    After considering the alternatives, the Treasury Department and the 
IRS have concluded that, to be consistent with the treatment of 
domestic partnerships under section 951A, a domestic partnership should 
also generally be treated as an aggregate of its partners in 
determining stock owned under section 958(a) for purposes of section 
951. Therefore, the proposed regulations provide that, for purposes of 
sections 951 and 951A, and for purposes of any provision that applies 
by reference to sections 951 and 951A (for example, sections 959, 960, 
and 961), a domestic partnership is not treated as owning stock of a 
foreign corporation within the meaning of section 958(a). See proposed 
Sec.  1.958-1(d)(1). Furthermore, the proposed regulations provide 
that, for purposes of determining the stock owned under section 958(a) 
by a partner of a domestic partnership, a domestic partnership is 
treated in the same manner as a foreign partnership. See id. This rule 
does not apply, however, for purposes of determining whether any U.S. 
person is a U.S. shareholder, whether a U.S. shareholder is a 
controlling domestic shareholder (as defined in Sec.  1.964-1(c)(5)), 
or whether a foreign corporation is a CFC. See proposed Sec.  1.958-
1(d)(2). Accordingly, under the proposed regulations, a domestic 
partnership that owns a foreign corporation is treated as an entity for 
purposes of determining whether the partnership and its partners are 
U.S. shareholders, whether the partnership is a controlling domestic 
shareholder, and whether the foreign corporation is a CFC, but the 
partnership is treated as an aggregate of its partners for purposes of 
determining whether, and to what extent, its partners have inclusions 
under sections 951 and 951A and for purposes of any other provision 
that applies by reference to sections 951 and 951A.
    For purposes of subpart F, a foreign partnership is explicitly 
treated as an aggregate of its partners, and rules regarding this 
aggregate treatment are relatively well-developed and understood. 
Therefore, rather than developing a new standard for the treatment of a 
domestic partnership as an aggregate of its partners, the Treasury 
Department and the IRS have determined that it would be simpler and 
more administrable to adopt, by reference, the rules related to foreign 
partnerships for this limited purpose. The GILTI final regulations 
adopt the same approach for purposes of section 951A. See Sec.  1.951A-
1(e). As a result, under the proposed regulations, stock owned directly 
or indirectly by or for a domestic partnership will generally be 
treated as owned proportionately by its partners for purposes of 
sections 951(a) and 951A and any provision that applies by reference to 
sections 951 and 951A.
    The Treasury Department and the IRS have determined that, as a 
result of the enactment of the GILTI regime, it is no longer 
appropriate to treat domestic partnerships as entities that are 
separate from their owners for purposes of determining whether, and to 
what extent, a partner has an inclusion under section 951. Congress 
intended for the subpart F and GILTI regimes to work in tandem by 
providing that both regimes apply to U.S. shareholders of CFCs, that 
GILTI is included in a U.S. shareholder's gross income in a manner 
similar to a subpart F inclusion for many purposes of the Code, and 
that gross income taken into account in determining the subpart F 
income of a CFC is not taken into account in determining the tested 
income of such CFC (and, therefore, in determining the GILTI inclusion 
amount of a U.S. shareholder of such CFC). See section 
951A(c)(2)(i)(II) and 951A(f); see also Senate Explanation at 373 
(``Although GILTI inclusions do not constitute subpart F income, GILTI 
inclusions are generally treated similarly to subpart F inclusions.''). 
As a result, treating domestic partnerships inconsistently for subpart 
F and GILTI purposes would be inconsistent with legislative intent.
    Furthermore, inconsistent approaches to the treatment of domestic 
partnerships for purposes of subpart F and GILTI would introduce 
substantial complexity and uncertainty, particularly with respect to 
foreign tax credits, previously taxed earnings and profits (``PTEP'') 
and related basis rules, or any other provision the application of 
which turns on the owner of stock under section 958(a) and, thus, the 
U.S. person that has the relevant inclusion. For example, if a domestic 
partnership were treated as an aggregate of its partners for purposes 
of GILTI but as an entity for purposes of subpart F, regulations would 
need to address separately the maintenance of PTEP accounts at the 
domestic partnership level for subpart F and the maintenance of PTEP 
accounts at the partner level for GILTI. Similarly, regulations would 
need to provide separate rules for basis adjustments under section 961 
with respect to a domestic partnership and its CFCs depending on 
whether an amount was included under section 951 or section 951A. The 
increased complexity of regulations resulting from treating domestic 
partnerships differently for purposes of subpart F and GILTI would, in 
turn, increase the burden on taxpayers to comply with, and on the IRS 
to administer, such regulations. Conversely, aggregate treatment of 
domestic partnerships in determining section 958(a) stock ownership for 
purposes of determining a partner's

[[Page 29119]]

inclusion under both the GILTI and subpart F regimes will result in 
substantial simplification, as compared to disparate treatment, and 
will harmonize the two regimes.
    The Treasury Department and the IRS also considered extending 
aggregate treatment for all purposes of subpart F, including for 
purposes of determining whether a foreign corporation is a CFC under 
section 957(a). However, the Treasury Department and the IRS determined 
that an approach that treats a domestic partnership as an aggregate for 
purposes of determining CFC status is inconsistent with relevant 
statutory provisions. As discussed in part III of the Background 
section of this preamble, the Code clearly contemplates that a domestic 
partnership can be a U.S. shareholder under section 951(b), including 
by attribution from its partners. See sections 7701(a)(30), 957(c), 
951(b), 958(b), 318(a)(2)(A), and 318(a)(3)(A). An approach that treats 
a domestic partnership as an aggregate for purposes of determining CFC 
status would not give effect to the statutory treatment of a domestic 
partnership as a U.S. shareholder.
    By contrast, neither section 958(a) nor any other provision of the 
Code specifies whether and to what extent a domestic partnership should 
be treated as an entity or an aggregate for purposes of determining 
stock ownership under section 958(a) for purposes of sections 951 and 
951A. According to the legislative history to the 1962 Act, section 
958(a) is a ``limited rule of stock ownership for determining the 
amount taxable to a United States person,'' whereas section 958(b) is 
``a broader set of constructive rules of ownership for determining 
whether the requisite ownership by United States persons exists so as 
to make a corporation a controlled foreign corporation or a United 
States person has the requisite ownership to be liable for tax under 
section 951(a).'' S. Rep. No. 1881 at 254 (1962). In light of the 
changes adopted in the Act (including the introduction of the GILTI 
regime), it is consistent with the intent of the Act to provide that 
domestic partnerships are treated in the same manner as foreign 
partnerships under section 958(a)(2) for purposes of sections 951(a) 
and 951A and any provision that applies by reference to sections 951 
and 951A. As discussed in parts II and IV.A. of the Background section 
of this preamble, a domestic partnership may be treated as an aggregate 
of its partners or as an entity separate from its partners for purposes 
of a provision, depending on which characterization is more appropriate 
to carry out the purpose of the provision. In this regard, the Treasury 
Department and the IRS have determined that treating a domestic 
partnership as an aggregate for purposes of sections 951 and 951A is 
appropriate because the partners of the partnership generally are the 
ultimate taxable owners of the CFC and thus their inclusions under 
sections 951 and 951A are properly computed at the partner level 
regardless of whether the partnership is foreign or domestic.
    Based on the foregoing, the Treasury Department and the IRS have 
determined that a domestic partnership should be treated consistently 
as an aggregate of its partners in determining the ownership of stock 
within the meaning of section 958(a) for purposes of sections 951 and 
951A, and any provision that applies by reference to section 951 or 
section 951A, except for purposes of determining whether a U.S. person 
is a U.S. shareholder, whether a U.S. shareholder is a controlling 
domestic shareholder (as defined in Sec.  1.964-1(c)(5)), and whether a 
foreign corporation is a CFC. See proposed Sec.  1.958-1(d). This 
aggregate treatment does not apply for any other purposes of the Code, 
including for purposes of section 1248. However, the Treasury 
Department and the IRS request comments on other provisions in the Code 
that apply by reference to ownership within the meaning of section 
958(a) for which aggregate treatment for domestic partnerships would be 
appropriate. The Treasury Department and the IRS also request comments 
on whether, and for which purposes, the aggregate treatment for 
domestic partnerships should be extended to the determination of the 
controlling domestic shareholders (as defined in Sec.  1.964-1(c)(5)) 
of a CFC, such that some or all of the partners who are U.S. 
shareholders of the CFC, rather than the partnership, make any 
elections applicable to the CFC for purposes of sections 951 and 951A.

B. Applicability Date and Comment Request With Respect to Transition

    The proposed regulations are proposed to apply to taxable years of 
foreign corporations beginning on or after the date of publication of 
the Treasury decision adopting these rules as final regulations in the 
Federal Register (the ``finalization date''), and to taxable years of a 
U.S. person in which or with which such taxable years of foreign 
corporations end. See proposed Sec.  1.958-1(d)(4). With respect to 
taxable years of foreign corporations beginning before the finalization 
date, the proposed regulations provide that a domestic partnership may 
apply Sec.  1.958-1(d), as included in the final regulations, for 
taxable years of a foreign corporation beginning after December 31, 
2017, and for taxable years of a domestic partnership in which or with 
which such taxable years of the foreign corporation end (the 
``applicable years''), provided that the partnership, domestic 
partnerships that are related (within the meaning of section 267 or 
707) to the partnership, and certain partners consistently apply Sec.  
1.958-1(d) with respect to all foreign corporations whose stock they 
own within the meaning of section 958(a) (generally determined without 
regard to Sec.  1.958-1(d)). See proposed Sec.  1.958-1(d)(4). A 
domestic partnership may rely on proposed Sec.  1.958-1(d) with respect 
to taxable years beginning after December 31, 2017, and beginning 
before the date that these regulations are published as final 
regulations in the Federal Register, provided that the partnership, 
domestic partnerships that are related (within the meaning of section 
267 or 707) to the partnership, and certain partners consistently apply 
proposed Sec.  1.958-1(d) with respect to all foreign corporations 
whose stock they own within the meaning of section 958(a) (generally 
determined without regard to proposed Sec.  1.958-1(d)). See id.
    Once proposed Sec.  1.958-1(d) applies as a final regulation, Sec.  
1.951A-1(e) and Sec.  1.951-1(h) (providing an aggregate treatment of 
domestic partnerships, but only for purposes of section 951A and 
limited subpart F purposes, respectively) would be unnecessary because 
the scope of those regulations would effectively be subsumed by Sec.  
1.958-1(d). Therefore, the proposed regulations would revise the 
applicability dates of Sec.  1.951A-1(e) and Sec.  1.951-1(h), so that 
those provisions do not apply once the final regulations under section 
958 apply.
    Historically, domestic partnerships have been treated as owning 
stock within the meaning of section 958(a) for purposes of determining 
their subpart F inclusions, and thus PTEP accounts were maintained, and 
related basis adjustments were made, at the partnership level. Upon the 
finalization of the proposed regulations, domestic partnerships will 
cease to be treated as owning stock of foreign corporations under 
section 958(a) for purposes of determining a subpart F inclusion, and 
instead their partners will be treated as owning stock under section 
958(a). The Treasury Department and the IRS request comments on 
appropriate rules for the transition to the aggregate approach to 
domestic partnerships described in the proposed regulations. Comments 
are specifically requested as to necessary adjustments to PTEP and

[[Page 29120]]

related basis amounts and capital accounts after finalization. In 
addition, comments are requested as to whether aggregate treatment of 
domestic partnerships should be extended to other ``pass-through'' 
entities, such as certain trusts or estates.
    Comments are also requested with respect to the application of the 
PFIC regime after finalization, and whether elections (including 
elections under sections 1295 and 1296) and income inclusions under the 
PFIC rules are more appropriately made at the level of the domestic 
partnership or at the level of the partners. Specifically, the Treasury 
Department and the IRS are considering the operation of the PFIC regime 
where U.S. persons are partners of a domestic partnership that owns 
stock of a foreign corporation that is a PFIC, some of those partners 
might themselves be U.S. shareholders of the foreign corporation, and 
the foreign corporation might not be treated as a PFIC with respect to 
such U.S. shareholders under section 1297(d) if the foreign corporation 
is also a CFC. Comments should consider how any recommended approach 
would interact with the determinations of a partner's basis in its 
interest and capital accounts determined and maintained in accordance 
with Sec.  1.704-1(b)(2).

II. GILTI High Tax Exclusion

A. Expansion To Exclude Other High-Taxed Income

    In response to comments, the Treasury Department and the IRS have 
determined that the GILTI high tax exclusion should be expanded (on an 
elective basis) to include certain high-taxed income even if that 
income would not otherwise be FBCI or insurance income. In particular, 
the Treasury Department and the IRS have determined that taxpayers 
should be permitted to elect to apply the exception under section 
954(b)(4) with respect to certain classes of income that are subject to 
high foreign taxes within the meaning of that provision. Before the 
Act, such an election would have had no effect with respect to items of 
income that were excluded from FBCI or insurance income for other 
reasons. Nevertheless, section 954(b)(4) is not explicitly restricted 
in its application to an item of income that first qualifies as FBCI or 
insurance income; rather, the provision applies to ``any item of income 
received by a controlled foreign corporation.'' Therefore, any item of 
gross income, including an item that would otherwise be gross tested 
income, could be excluded from FBCI or insurance income ``by reason 
of'' section 954(b)(4) if the provision is one of the reasons for such 
exclusion, even if the exception under section 954(b)(4) is not the 
sole reason. Any item thus excluded from FBCI or insurance income by 
reason of section 954(b)(4) would then also be excluded from gross 
tested income under the GILTI high tax exclusion, as modified in these 
proposed regulations.
    The legislative history evidences an intent to exclude high-taxed 
income from gross tested income. See Senate Explanation at 371 (``The 
Committee believes that certain items of income earned by CFCs should 
be excluded from the GILTI, either because they should be exempt from 
U.S. tax--as they are generally not the type of income that is the 
source of base erosion concerns--or are already taxed currently by the 
United States. Items of income excluded from GILTI because they are 
exempt from U.S. tax under the bill include foreign oil and gas 
extraction income (which is generally immobile) and income subject to 
high levels of foreign tax.''). The proposed regulations, which permit 
taxpayers to electively exclude a CFC's high-taxed income from gross 
tested income, are consistent, therefore, with this legislative 
history. Furthermore, an election to exclude a CFC's high-taxed income 
from gross tested income allows a U.S. shareholder to ensure that its 
high-taxed non-subpart F income is eligible for the same treatment as 
its high-taxed FBCI and insurance income, and thus eliminates an 
incentive for taxpayers to restructure their CFC operations in order to 
convert gross tested income into FBCI for the sole purpose of availing 
themselves of section 954(b)(4) and, thus, the GILTI high tax 
exclusion.
    For the foregoing reasons, the proposed regulations provide that an 
election may be made for a CFC to exclude under section 954(b)(4), and 
thus to exclude from gross tested income, gross income subject to 
foreign income tax at an effective rate that is greater than 90 percent 
of the rate that would apply if the income were subject to the maximum 
rate of tax specified in section 11 (18.9 percent based on the current 
rate of 21 percent). See proposed Sec.  1.951A-2(c)(6)(i). The election 
is made by the CFC's controlling domestic shareholders with respect to 
the CFC for a CFC inclusion year by attaching a statement to an amended 
or filed return in accordance with forms, instructions, or 
administrative pronouncements. See proposed Sec.  1.951A-2(c)(6)(v)(A). 
If an election is made with respect to a CFC, the election applies to 
exclude from gross tested income all the CFC's items of income for the 
taxable year that meet the effective rate test in proposed Sec.  
1.951A-2(c)(6)(iii) and is binding on all the U.S. shareholders of the 
CFC. See proposed Sec.  1.951A-2(c)(6)(v)(B). The election is effective 
for a CFC for the CFC inclusion year for which it is made and all 
subsequent CFC inclusion years of the CFC unless revoked by the 
controlling domestic shareholders of the CFC. See proposed Sec.  
1.951A-2(c)(6)(v)(C).
    An election may generally be revoked by the controlling domestic 
shareholders of the CFC for any CFC inclusion year. See proposed Sec.  
1.951A-2(c)(6)(v)(D)(1). However, upon revocation for a CFC inclusion 
year, a new election generally cannot be made for any CFC inclusion 
year of the CFC that begins within sixty months after the close of the 
CFC inclusion year for which the election was revoked, and that 
subsequent election cannot be revoked for a CFC inclusion year that 
begins within sixty months after the close of the CFC inclusion year 
for which the subsequent election was made. See proposed Sec.  1.951A-
2(c)(6)(v)(D)(2)(i). An exception to this 60-month limitation may be 
permitted by the Commissioner with respect to a CFC if the CFC 
undergoes a change of control. See proposed Sec.  1.951A-
2(c)(6)(v)(D)(2)(ii).
    Finally, if a CFC is a member of a controlling domestic shareholder 
group, the election applies with respect to each member of the 
controlling domestic shareholder group. See proposed Sec.  1.951A-
2(c)(6)(v)(E)(1). A ``controlling domestic shareholder group'' is 
defined as two or more CFCs if more than 50 percent of the stock (by 
voting power) of each CFC is owned (within the meaning of section 
958(a)) by the same controlling domestic shareholder (or persons 
related to such controlling domestic shareholder) or, if no single 
controlling domestic shareholder owns (within the meaning of section 
958(a)) more than 50 percent of the stock (by voting power) of each 
corporation, more than 50 percent of the stock (by voting power) of 
each corporation is owned (within the meaning of section 958(a)) in the 
aggregate by the same controlling domestic shareholders and each 
controlling domestic shareholder owns (within the meaning of section 
958(a)) the same percentage of stock in each CFC. See proposed Sec.  
1.951A-2(c)(6)(v)(E)(2). Accordingly, an election made under proposed 
Sec.  1.951A-2(c)(6)(v) applies with respect to each item of income of 
each CFC in a group of commonly controlled CFCs that meets the 
effective rate test in proposed Sec.  1.951A-2(c)(6)(iii). The Treasury 
Department and the IRS request comments on the manner and terms of

[[Page 29121]]

the election for the exception from gross tested income, including 
whether the limitations with respect to revocations and the consistency 
requirements should be modified, such as by allowing the election to be 
made on an item-by-item or a CFC-by-CFC basis.
    In general, the relevant items of income for purposes of the 
election under section 954(b)(4) pursuant to proposed Sec.  1.951A-
2(c)(6) are all items of gross tested income attributable to a 
qualified business unit (``QBU''). See proposed Sec.  1.951A-
2(c)(6)(ii)(A)(1). For example, a CFC that owns a disregarded entity 
that qualifies as a QBU may have one item of income with respect to the 
CFC itself (which is a per se QBU) and another item of income with 
respect to the disregarded entity. The proposed regulations provide 
that the gross income attributable to a QBU is determined by reference 
to the items of gross income reflected on the books and records of the 
QBU, determined under Federal income tax principles, except that income 
attributable to a QBU must be adjusted to account for certain 
disregarded payments. See proposed Sec.  1.951A-2(c)(6)(ii)(A)(2). The 
proposed regulations provide an example to illustrate the application 
of this rule. See proposed Sec.  1.951A-2(c)(6)(vi).
    Comments are requested on whether additional rules are needed to 
properly account for other instances in which the income base upon 
which foreign tax is imposed does not match the items of income 
reflected on the books and records of the QBU determined under Federal 
income tax principles. For example, comments are requested on whether 
special rules are needed for associating taxes with income with respect 
to partnerships (including hybrid partnerships), disregarded entities, 
or reverse hybrid entities, and how to address circumstances in which 
QBUs are permitted to share losses or determine tax liability based on 
combined income for foreign tax purposes. Comments are also requested 
as to whether all of a CFC's QBUs located within a single foreign 
country or possession should be combined for purposes of performing the 
effective rate test in proposed Sec.  1.951A-2(c)(6)(iii) and whether 
the definition of QBU should be modified for purposes of the GILTI high 
tax exclusion in respect of the requirement to have a trade or 
business, maintain books and records, or other rules relating to QBUs.
    Under Sec.  1.954-1(d)(3), the determination of taxes paid or 
accrued with respect to an item of income for purposes of the exception 
under section 954(b)(4) is determined for each U.S. shareholder based 
on the amount of foreign income taxes that would be deemed paid under 
section 960 if the item of income were included by the U.S. shareholder 
under section 951(a)(1)(A). Calculating the effective tax rate for 
purposes of the election under section 954(b)(4) with respect to gross 
tested income by reference to section 960(d) would not be consistent 
with the aggregate nature of the computation under section 960(d). 
Furthermore, the Treasury Department and the IRS have determined that 
the Act's change to section 960(a) from a pooling based approach to an 
annual attribution of taxes to income requires revising Sec.  1.954-
1(d)(3). Therefore, the proposed regulations provide that for purposes 
of both the exception under section 954(b)(4) and the GILTI high tax 
exclusion, the effective rate of foreign tax imposed on an item of 
income is determined solely at the CFC level by allocating and 
apportioning the foreign income taxes paid or accrued by the CFC in the 
current year to the CFC's gross income in that year based on the rules 
described in the regulations under section 960 for determining foreign 
income taxes ``properly attributable'' to income. See Sec.  1.960-1(d), 
as proposed to be amended in 83 FR 63257 (December 7, 2018).
    To the extent foreign income taxes are allocated and apportioned to 
items of income that are excluded from gross tested income by the GILTI 
high tax exclusion, none of those foreign income taxes are properly 
attributable to tested income and thus none are allowed as a deemed 
paid credit under section 960. See Sec.  1.960-1(e), as proposed to be 
amended in 83 FR 63259 (December 7, 2018). In addition, if an item of 
income is excluded from gross tested income by reason of the GILTI high 
tax exclusion, the property used to produce that income, because not 
used in the production of gross tested income, does not qualify as 
specified tangible property, in whole or in part, and therefore the 
adjusted basis in the property is not taken into account in determining 
qualified business asset investment. See Sec.  1.951A-3(b) and (c)(1).
    The proposed regulations also clarify the scope of each item of 
income under Sec.  1.954-1(c)(1)(iii), consistent with the rules under 
Sec.  1.960-1(d)(2)(ii)(B), as proposed to be amended in 83 FR 63257 
(December 7, 2018).

B. Applicability Date

    The changes related to the election to exclude a CFC's gross income 
subject to high foreign income taxes under section 954(b)(4) are 
proposed to apply to taxable years of foreign corporations beginning on 
or after the date that final regulations are published in the Federal 
Register, and to taxable years of U.S. shareholders in which or with 
which such taxable years of foreign corporations end.

Special Analyses

I. Regulatory Planning and Review--Economic Analysis

    Executive Orders 13771, 13563, and 12866 direct agencies to assess 
costs and benefits of available regulatory alternatives and, if 
regulation is necessary, to select regulatory approaches that maximize 
net benefits, including potential economic, environmental, public 
health and safety effects, distributive impacts, and equity. Executive 
Order 13563 emphasizes the importance of quantifying both costs and 
benefits, reducing costs, harmonizing rules, and promoting flexibility. 
The Executive Order 13771 designation for any final rule resulting from 
the proposed regulation will be informed by comments received. The 
preliminary Executive Order 13771 designation for this proposed rule is 
regulatory.
    The proposed regulation has been designated by the Office of 
Information and Regulatory Affairs (OIRA) as subject to review under 
Executive Order 12866 pursuant to the Memorandum of Agreement (MOA, 
April 11, 2018) between the Treasury Department and the Office of 
Management and Budget regarding review of tax regulations. OIRA has 
designated this proposed regulation as economically significant under 
section 1(c) of the MOA. Accordingly, these proposed regulations have 
been reviewed by the Office of Management and Budget. For more detail 
on the economic analysis, please refer to the following analysis.

A. Need for the Proposed Regulations

    The proposed regulations are required to provide a mechanism by 
which taxpayers can elect the high tax exception of section 954(b)(4) 
in order to exclude certain high-taxed income from taxation under 
section 951A and to conform the treatment of domestic partnerships for 
purposes of the subpart F regime with the treatment of domestic 
partnerships for purposes of section 951A.

B. Background

    The Tax Cuts and Jobs Act (the ``Act'') established a system under 
which certain earnings of a foreign corporation can be repatriated to a 
corporate U.S. shareholder without U.S. tax. See section 14101(a) of 
the Act and section 245A. However, Congress recognized

[[Page 29122]]

that, without any base protection measures, this system, known as a 
participation exemption system, could incentivize taxpayers to allocate 
income--in particular, mobile income from intangible property that 
would otherwise be subject to the full U.S. corporate tax rate--to 
controlled foreign corporations (``CFCs'') operating in low- or zero-
tax jurisdictions. See Senate Explanation at 365. Therefore, Congress 
enacted section 951A in order to subject intangible income earned by a 
CFC to U.S. tax on a current basis, similar to the treatment of a CFC's 
subpart F income under section 951(a)(1)(A). However, in order to not 
harm the competitive position of U.S. corporations relative to their 
foreign peers, the global intangible low tax income (``GILTI'') of a 
corporate U.S. shareholder is effectively taxed at a reduced rate by 
reason of the deduction under section 250 (with the resulting U.S. tax 
further reduced by a portion of foreign tax credits under section 
960(d)). Id.
    The GILTI final regulations generally provide structure and clarity 
for the implementation of section 951A. However, the Treasury 
Department and the IRS determined that there remained two outstanding 
issues pertinent to the implementation of GILTI. The first of these 
issues pertains to the GILTI high tax exclusion under section 
951A(c)(2)(A)(i)(III), which excludes from gross tested income any 
gross income excluded from foreign base company income (``FBCI'') (as 
defined in section 954) and insurance income (as defined in section 
953) by reason of section 954(b)(4). The GILTI proposed regulations 
limited the application of the exclusion to income that would be 
included in FBCI or insurance income but for the high tax exception of 
section 954(b)(4). See proposed Sec.  1.951A-2(c)(1)(iii). However, 
comments to the GILTI proposed regulations recommended that the statute 
be interpreted so that the GILTI high tax exclusion applies on an 
elective basis to a broader category of income, that is, any income 
that is subject to a high rate of foreign tax. Other comments suggested 
that because taxpayers have the ability to structure transactions so 
that they would qualify as FBCI or insurance income, the regulations 
should allow a taxpayer to elect to treat all income, or all high-taxed 
income, as FBCI or insurance income, with the result that such income 
would then be excluded from gross tested income under the GILTI high 
tax exclusion. Comments noted that, under the narrower application of 
the exclusion under the GILTI proposed regulations, taxpayers would be 
incentivized to affirmatively plan into subpart F income to permit such 
taxpayers to elect the high tax exception under section 954(b)(4) with 
respect to such income or to allow taxpayers to carry foreign tax 
credits attributable to such income to another taxable year under 
section 904(c). However, restructuring activities to convert gross 
tested income into subpart F income may cost significant time and money 
and is economically inefficient. The GILTI final regulations adopt this 
narrower application. See proposed Sec.  1.951A-2(c)(1)(iii). However, 
the preamble to the GILTI final regulations indicated that proposed 
regulations would be issued to propose a framework under which 
taxpayers would be permitted to make an election to apply the high tax 
exception of section 954(b)(4) with respect to income that would 
otherwise be gross tested income in order to exclude that income from 
gross tested income by reason of the GILTI high tax exclusion.
    The second of these issues pertains to the treatment of domestic 
partnerships for purposes of the subpart F regime. A U.S. shareholder 
of a CFC is required to include in gross income its pro rata share of 
the CFC's subpart F income under section 951(a)(1)(A), the amount 
determined under section 956, under section 951(a)(1)(B), and its GILTI 
inclusion amount under section 951A(a). Since the enactment of subpart 
F, domestic partnerships have generally been treated as entities 
separate from their partners, rather than as aggregates of their 
partners, for purposes of the subpart F regime, including for purposes 
of treating a domestic partnership as the U.S. shareholder that has the 
subpart F inclusion with respect to a CFC owned by the partnership. 
However, the GILTI final regulations generally adopt an aggregate 
approach to domestic partnerships for purposes of section 951A and the 
section 951A regulations. See Sec.  1.951A-1(e)(1). Because the GILTI 
final regulations apply only for purposes of section 951A, absent the 
proposed regulations, a domestic partnership would still be treated as 
an entity for purposes of the subpart F regime. This inconsistency in 
the treatment of a domestic partnership for the purposes of section 
951A and for purposes of the subpart F regime is problematic because it 
necessitates complicated coordination rules which could greatly 
increase compliance and administrative burden. Therefore, the proposed 
regulations conform the treatment of domestic partnerships for purposes 
of the subpart F regime with the treatment of domestic partnerships for 
purposes of section 951A.

C. Economic Analysis

1. Baseline
    The Treasury Department and the IRS have assessed the benefits and 
costs of the proposed regulations relative to a no-action baseline 
reflecting anticipated Federal income tax-related behavior in the 
absence of these proposed regulations.
2. Summary of Economic Effects
    To assess the economic effects of the proposed regulations, the 
Treasury Department and the IRS considered economic effects arising 
from two provisions of the proposed regulations. These are (i) effects 
arising from the provision that provides substance and clarity 
regarding the application of the GILTI high tax exclusion in 
951A(c)(2)(A)(i)(III) and (ii) simplification and coordination effects 
arising from conforming the treatment of domestic partnerships for 
purposes of subpart F with their treatment for purposes of section 
951A.
    The Treasury Department and the IRS have not undertaken 
quantitative estimates of these effects because any such quantitative 
estimates would be highly uncertain. For example, the proposed 
regulations include provisions that permit controlling domestic 
shareholders of CFCs to elect to apply the high tax exception of 
section 954(b)(4) to items of gross income that are subject to a 
foreign tax rate that is greater than 18.9 percent (based on the 
current U.S. corporate tax rate of 21 percent) for purposes of 
excluding such income from gross tested income under the GILTI high tax 
exclusion. Whether controlling domestic shareholders will choose to 
make the election will depend on their specific facts and 
circumstances, such as their U.S. expenses allocated to section 951A 
category income, their foreign tax credit position, and the 
distribution of their foreign activity between high- and low-tax 
jurisdictions.\2\ Because GILTI is new,

[[Page 29123]]

the Treasury Department and the IRS do not have readily available data 
to project these items in this context. Furthermore, the election would 
be made with respect to qualified business units (QBUs) rather than 
with respect to CFCs or specific items of income, and the Treasury 
Department and the IRS do not have readily available data on activities 
at the QBU level. In addition, due to the taxpayer-specific nature of 
the factors influencing a decision to utilize the GILTI high-tax 
exclusion, the Treasury Department and the IRS do not have readily 
available data or models to predict the marginal effective tax rates 
that would prevail under these provisions for the varied forms of 
foreign investments that taxpayers might consider and thus cannot 
predict with reasonable precision the difference in economic activity, 
relative to the baseline, that might be undertaken by taxpayers based 
on this election.
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    \2\ Specifically, the U.S. tax system reduces double taxation on 
a U.S. shareholder's GILTI inclusion amount by crediting a portion 
of certain foreign taxes paid by CFCs against the U.S. tax on the 
U.S. shareholder's GILTI inclusion amount. However, the U.S. foreign 
tax credit regime requires taxpayers to allocate U.S. deductible 
expenses, including interest, research and experimentation, and 
general and administrative expenses, to their foreign source income 
in the categories described in section 904(d) when determining the 
allowable foreign tax credits. The allocated expenses reduce net 
foreign source income within the section 904(d) categories, which 
can reduce allowable foreign tax credits. This may result in a 
smaller foreign tax credit than would be allowed if the limitation 
on foreign tax credits was determined based only on the local 
country tax assessed on the tested income taken into account in 
determining GILTI. The election to apply the high tax exception of 
section 954(b)(4) with respect to any high-taxed income allows 
taxpayers to eliminate the need to use foreign tax credits to reduce 
GILTI tax liability on such income by removing such income from 
gross tested income; however, taxpayers choosing the election will 
not be able to use the foreign tax credits associated with that 
income against other section 951A category income, and they will not 
be able to use the tangible assets owned by high tax QBUs in their 
QBAI computation. Therefore, taxpayers will have to evaluate their 
individual facts and circumstances to determine whether they should 
make the election.
---------------------------------------------------------------------------

    The proposed regulations also contain provisions to conform the 
treatment of domestic partnerships for purposes of subpart F with their 
treatment for purposes of section 951A. Under the proposed regulations, 
the tax treatment of domestic partners that are U.S. shareholders of a 
CFC owned by the domestic partnership differs from the tax treatment of 
domestic partners that are not U.S. shareholders of such CFC. The 
Treasury Department and the IRS do not have readily available data to 
identify these types of partners. The Treasury Department and the IRS 
further do not have readily available data or models to predict with 
reasonable precision the set of marginal effective tax rates that 
taxpayers might face under these provisions nor the effects of those 
marginal effective tax rates on economic activity relative to the 
baseline.
    With these considerations in mind, parts I.C.3.a.ii and iii of this 
Special Analyses section explain the rationale behind the proposed 
regulations' approach to the GILTI high tax exclusion and qualitatively 
evaluate the alternatives considered. Part 1.C.3.b of this Special 
Analyses section explains the rationale for the coordination in the 
treatment of domestic partnerships and qualitatively evaluates the 
alternatives considered.
3. Economic Effects of Specific Provisions
    The Treasury Department and IRS solicit comments on each of the 
items discussed in this Special Analyses section and on any other items 
of the proposed regulations not discussed in this section. The Treasury 
Department and the IRS particularly solicit comments that provide data, 
other evidence, or models that could enhance the rigor of the process 
by which the final regulations might be developed.
a. Exclusion of Income Subject to High Rate of Foreign Tax
i. Description
    The proposed regulations permit U.S. shareholders of CFCs to make 
an election under section 954(b)(4) with respect to high-taxed income 
in order to exclude such income from gross tested income under the 
GILTI high tax exclusion. Under section 954(b)(4), high-taxed income is 
defined as income subject to a foreign effective tax rate greater than 
90 percent of the maximum U.S. corporate tax rate (18.9 percent based 
on the current U.S. corporate tax rate of 21 percent). Under the 
proposed regulations, the determination as to whether income is high-
taxed is made at the QBU level. However, an election made with respect 
to a CFC applies with respect to each high-taxed QBU of the CFC 
(including potentially the CFC itself), and a U.S. shareholder that 
makes the election with respect to a CFC generally must make the same 
election with respect to each of its CFCs. In general, the election may 
be made or revoked at any time, except that, if a U.S. shareholder 
revokes an election with respect to a CFC, the U.S. shareholder cannot 
make the election again within five years after the revocation, and 
then if subsequently made, the election cannot be revoked again within 
five years of the subsequent election.
ii. Alternatives Considered for Determining the Scope of the GILTI High 
Tax Exclusion
    The Treasury Department and the IRS considered a number of options 
to address the types of income excluded from gross tested income by the 
GILTI high tax exclusion. The options were (i) to exclude from gross 
tested income only income that would be subpart F income but for the 
high tax exception of section 954(b)(4); (ii) in addition to excluding 
the aforementioned income, to exclude from gross tested income on an 
elective basis an item of gross income that is excluded by reason of 
another exception to subpart F, if such income is subject to a foreign 
effective tax rate greater than 18.9 percent; and (iii) to exclude from 
gross tested income on an elective basis any item of gross income 
subject to a foreign effective tax rate greater than 18.9 percent. The 
Treasury Department and the IRS considered the other recommended 
options discussed in part IV.B of the Background section, but 
determined that those other options are not authorized by the relevant 
statutory provisions.
    The first option considered was to exclude from gross tested income 
only income that would be FBCI or insurance income but for the high tax 
exception of section 954(b)(4), which is the interpretation of the 
GILTI high tax exclusion in the GILTI proposed regulations. This narrow 
approach is consistent with a reasonable interpretation of the 
statutory text, which excludes from gross tested income only income 
that is excluded from subpart F income ``by reason of section 
954(b)(4).'' Moreover, this approach is consistent with current 
regulations under section 954, which permit an election under section 
954(b)(4) only with respect to income that is not otherwise excluded 
from subpart F income by reason of another exception (for example, 
section 954(c)(6) or 954(h)). However, under this approach, taxpayers 
with high-taxed gross tested income would have incentives to 
restructure their foreign operations in order to convert their gross 
tested income into subpart F income. For instance, a taxpayer could 
restructure its operations to have a CFC purchase personal property 
from, or sell personal property to, a related person without 
substantially contributing to the manufacture of the property in its 
country of incorporation, with the result that the CFC's income from 
the disposition of the property is foreign base company sales income 
within the meaning of section 954(d). Any such restructuring may be 
unduly costly and only available to certain taxpayers. Further, such 
reorganization to realize a specific income treatment suggests that tax 
instead of business considerations are determining business structures. 
This can lead to higher compliance costs and inefficient investment. 
Therefore, the Treasury Department and the IRS rejected this option.
    The second option considered was to broaden the application of the 
GILTI high tax exclusion to allow taxpayers to elect under the high tax 
exception of section 954(b)(4) to exclude from gross

[[Page 29124]]

tested income an item of gross income that is subject to a foreign 
effective tax rate greater than 18.9 percent, if such income was also 
excluded from FBCI or insurance income by reason of another exception 
to subpart F. Under this interpretation, income such as active 
financing income that is excluded from subpart F income under section 
954(h), active rents or royalties that are excluded from subpart F 
income under 954(c)(2)(A), and related party payments that are excluded 
from subpart F income under section 954(c)(6) could also be excluded 
from gross tested income under the GILTI high tax exclusion if such 
items of income are high taxed within the meaning of section 954(b)(4). 
This broader approach represents a plausible interpretation of the 
GILTI high tax exclusion; that is, that an item of income could be 
excluded both ``by reason of section 954(b)(4)'' and by reason of 
another exception. However, this approach would provide taxpayers the 
ability to exclude their CFCs' high-taxed income that would be subpart 
F income but for an exception (for example, active financing income), 
while denying taxpayers the same ability with respect to their CFCs' 
high-taxed income that is not subpart F income in the first instance 
(for example, active business income), without any general economic 
benefit from such differential treatment. Furthermore, taxpayers with 
items of high-taxed income that are not subpart F income would still be 
incentivized to restructure their foreign operations in order to 
convert their high-taxed gross tested income into subpart F income, 
which poses the same compliance costs and inefficiencies as the first 
option. Therefore, the Treasury Department and the IRS rejected this 
option.
    The third option, which is adopted in the proposed regulations, is 
to provide an election to broaden the scope of the high tax exception 
under section 954(b)(4) for purposes of the GILTI high tax exclusion to 
apply to any item of income that is subject to a foreign effective tax 
rate greater than 18.9 percent. The proposed regulations permit 
controlling domestic shareholders of CFCs to elect to apply the high 
tax exception under section 954(b)(4) to items of gross income that 
would not otherwise be FBCI or insurance income. If this high tax 
exception is elected, the GILTI high tax exclusion will exclude the 
item of gross income from gross tested income. Under the election, an 
item of gross income is subject to a high rate of foreign tax if, after 
taking into account properly allocable expenses, the net item of income 
is subject to a foreign effective tax rate greater than 90 percent of 
the maximum U.S. corporate tax rate (18.9 percent based on the current 
U.S. corporate tax rate of 21 percent). This option therefore 
establishes a framework for applying the high tax exception under 
section 954(b)(4), including rules to determine the scope of an item of 
income that would otherwise be gross tested income to which the 
election applies and to determine the rate of foreign tax on such item.
    The approach chosen by the proposed regulations is consistent with 
the legislative history to section 951A, which evidences an intent to 
tax low-taxed income of CFCs that presents base erosion concerns. The 
approach is also supported by a reasonable interpretation of the high 
tax exception of section 954(b)(4), which applies to ``any item of 
income'' of a CFC, not just income that would otherwise be FBCI or 
insurance income. Furthermore, contrary to the first two options, this 
approach permits all similarly situated taxpayers with CFCs subject to 
a high rate of foreign tax to make the election with respect to such 
income to exclude it from gross tested income, and reduces the 
incentive for taxpayers to restructure their operations to convert 
their high-taxed gross tested income into subpart F income for U.S. tax 
purposes.
    For taxpayers that make the election, this approach reduces the 
taxpayers' cost of capital on foreign investment by reducing U.S. tax 
on such taxpayers' GILTI relative to the baseline. At the margin, the 
lower cost of capital may increase foreign investment by U.S.-parented 
firms. Further, removing high-taxed tested income from the GILTI tax 
base could change the incentives for the location of tangible assets. 
The magnitude of these effects is highly uncertain because of the 
uncertainty surrounding the number and attributes of the taxpayers that 
will find it advantageous to make the election and because the 
relationship between the marginal effective tax rate at the QBU level 
and foreign investment by U.S. taxpayers is not well known. In 
addition, the impact of tax considerations on taxpayer investment 
decisions depends on a number of international tax provisions, many of 
which interact in complex ways.
iii. Alternatives Considered for Determining High-Taxed Income
    The Treasury Department and the IRS next considered options for 
determining whether an item of income is subject to the foreign 
effective tax rate described in section 954(b)(4). The options 
considered were (i) apply the determination on an item-by-item basis; 
(ii) apply the determination on a CFC-by-CFC basis; or (iii) apply the 
determination on a QBU-by-QBU basis.
    The first option was to determine whether income is high-taxed 
income within the meaning of section 954(b)(4) on an item-by-item 
basis. This approach would be consistent with the language of section 
954(b)(4), which applies to an ``item of income'' of a CFC that is 
sufficiently high tax. However, this approach would be complex and 
difficult to administer because it would require analyzing each item of 
income to determine whether, under Federal tax principles, such item is 
subject to a sufficiently high foreign effective tax rate. In fact, for 
this reason, the current regulations that implement the high tax 
exception of section 954(b)(4) for purposes of subpart F income do not 
require an item-by-item determination and aggregate all items of income 
into separate categories of income for purposes of determining whether 
each such category is high tax. See Sec.  1.954-1(d)(2). Therefore, the 
Treasury Department and the IRS rejected this option.
    The second option was to apply the determination based on all the 
items of income of the CFC. On the one hand, this approach would 
minimize complexity and would be relatively easy to administer. On the 
other hand, this approach could permit inappropriate tax planning, such 
as combining operations subject to different rates of tax into a single 
CFC. This would have the effect of ``blending'' the rates of foreign 
tax imposed on the income, which could result in low- or non-taxed 
income being excluded as high-taxed income by being blended with much 
higher-taxed income. The low-taxed income in this scenario is precisely 
the sort of base erosion-type income that the legislative history 
describes section 951A as intending to tax, and such tax motivated 
planning behavior is economically inefficient.
    The third option, which is adopted in the proposed regulations, is 
to apply the high tax exception based on the items of gross income of a 
QBU of the CFC. Under this approach, the net income that is taxed by 
the foreign jurisdiction in each QBU must be determined. For example, 
if a CFC earned $100x of tested income through a QBU in Country A and 
was taxed at a 30 percent rate and earned $100x of tested income 
through another QBU in Country B and was taxed at 0 percent, the 
blended rate of tax on all of the CFC's tested income is 15 percent 
($30x tax/$200x tested income). However, if the high tax exception 
applies to each of a CFC's

[[Page 29125]]

QBUs based on the income earned by that QBU then the blending of 
different rates would be minimized. Although applying the high tax 
exception on the basis of a QBU, rather than the CFC as a whole, may be 
more complex and administratively burdensome under certain 
circumstances, it more accurately pinpoints income subject to a high 
rate of foreign tax and therefore continues to subject to tax the low-
taxed base erosion-type income that the legislative history describes 
section 951A as intending to tax. Accordingly, the proposed regulations 
apply the high tax exception of section 954(b)(4) based on the items of 
net income of each QBU of the CFC.
iv. Affected Taxpayers
    The proposed regulations potentially affect those taxpayers that 
have at least one CFC with at least one QBU (including, potentially, 
the CFC itself) that has high-taxed income. A taxpayer with CFCs that 
have a mix of high-taxed and low-taxed income (determined on a QBU-by-
QBU basis) will need to evaluate the benefit of eliminating any tax 
under section 951A with respect to high-taxed income with the costs of 
forgoing the use of such taxes against other section 951A category 
income and the use of tangible assets in the computation of QBAI. 
Taxpayers with CFCs that have only low-taxed income are not eligible to 
elect the high tax exception and hence are unaffected by this 
provision.
    The Treasury Department and the IRS estimate that there are 
approximately 4,000 business entities (corporations, S corporations, 
and partnerships) with at least one CFC that pays a foreign effective 
tax rate above 18.9 percent. The Treasury Department and the IRS 
further estimate that, for the partnerships with at least one CFC that 
pays a foreign effective tax rate greater than 18.9 percent, there are 
approximately 1,500 partners that have a large enough share to 
potentially qualify as a 10 percent U.S. shareholder of the CFC.\3\ The 
4,000 business entities and the 1,500 partners provide an approximate 
estimate of the number of taxpayers that could potentially be affected 
by an election into the high tax exception. The figure is approximate 
since there is an imperfect correspondence between high-taxed CFCs and 
high-taxed QBUs, and, furthermore, not all taxpayers that are eligible 
for the election would choose to make the election. The Treasury 
Department and the IRS do not have readily available data to determine 
how many of these taxpayers would benefit from the election.
---------------------------------------------------------------------------

    \3\ Data are from IRS's Research, Applied Analytics, and 
Statistics division based on E-file data available in the Compliance 
Data Warehouse, for tax years 2015 and 2016. The counts include 
Category 4 and Category 5 IRS Form 5471 filers. Category 4 filers 
are U.S. persons who had control of a foreign corporation during the 
annual accounting period of the foreign corporation. Category 5 
filers are U.S. shareholders who own stock in a foreign corporation 
that is a CFC and who owned that stock on the last day in the tax 
year of the foreign corporation in that year in which it was a CFC. 
For full definitions, see https://www.irs.gov/pub/irs-pdf/i5471.pdf.
---------------------------------------------------------------------------

    Tabulations from the IRS Statistics of Income 2014 Form 5471 file 
\4\ further indicate that approximately 85 percent of earnings and 
profits before taxes of CFCs are subject to an average foreign 
effective tax rate that is less than or equal to 18.9 percent, 
accounting for approximately 30 percent of CFCs. The data indicate 
several examples of jurisdictions with effective tax rates above 18.9 
percent, such as France, Italy, and Japan. However, information is not 
readily available to determine how many QBUs are part of the same CFC 
and what the effective foreign tax rates are with respect to such QBUs. 
Furthermore, the determination of whether or not to elect the high tax 
exception will be made at the shareholder (not CFC) level, after having 
evaluated the full impact of doing so across all of the shareholder's 
CFCs. Taxpayers potentially more likely to elect the high tax exception 
are those taxpayers with CFCs that only operate in high-tax 
jurisdictions.
---------------------------------------------------------------------------

    \4\ The IRS Statistics of Income Tax Stats report on Controlled 
Foreign Corporations can be accessed here: https://www.irs.gov/statistics/soi-tax-stats-controlled-foreign-corporations.
---------------------------------------------------------------------------

b. Domestic Partnership Treatment for Subpart F
i. Description
    Under the statute, a U.S. shareholder of a CFC is required to 
include in gross income its pro rata share of the CFC's subpart F 
income under section 951(a)(1)(A), the amount determined under section 
956, under section 951(a)(1)(B), and its GILTI inclusion amount under 
section 951A. The Code does not explicitly prescribe the treatment of 
domestic partnerships and their partners for purposes of subpart F. 
However, domestic partnerships have generally been treated as entities 
separate from their partners, rather than as aggregates of their 
partners, for purposes of subpart F, including for purposes of 
determining the amount included in the gross income of the domestic 
partnership (and the distributive share of such amount of its domestic 
partners) under section 951(a). The GILTI final regulations adopt an 
aggregate approach to domestic partnerships, but this aggregate 
treatment applies only for purposes of section 951A.
ii. Alternatives Considered
    The Treasury Department and the IRS considered two options for the 
treatment of domestic partnerships for purposes of subpart F. The first 
option was to retain the entity approach to domestic partnerships for 
purposes of subpart F. While this approach would be consistent with the 
longstanding entity approach to domestic partnerships for purposes of 
subpart F inclusions, it would result in domestic partnerships being 
treated inconsistently for purposes of subpart F and section 951A, 
despite both regimes applying to U.S. shareholders and their CFCs. This 
inconsistent treatment of domestic partnerships could result in a 
domestic partnership including subpart F income in gross income under 
section 951(a) and its partners including GILTI in their gross income 
under section 951A(a), which would introduce substantial complexity and 
uncertainty in the application of provisions that require basis and E&P 
adjustments with respect to CFCs and their U.S. shareholders for 
amounts included in income under sections 951(a) and 951A(a). This 
option would also continue the inconsistent treatment of domestic 
partnerships and foreign partnerships (which generally are treated as 
aggregates) for purposes of the subpart F rules, despite the lack of a 
substantial policy justification for treating domestic partners of a 
partnership differently based upon the law under which the partnership 
is created or organized. In this regard, this option would require 
``small'' partners of a domestic partnership (that is, partners that 
are not themselves U.S. shareholders of CFCs owned by the domestic 
partnership) to include in income their distributive share of the 
domestic partnership's subpart F inclusion with respect to CFCs of 
which the small partners are not themselves U.S. shareholders. In 
contrast, if the domestic partnership were instead a foreign 
partnership, the small partners would not include any amount in gross 
income under section 951(a) (or a distributive share of such amount) 
with respect to CFCs of which such partners were not U.S. shareholders.
    The second option would adopt an aggregate approach to domestic 
partnerships by treating stock owned by a domestic partnership as being 
owned proportionately by its partners for purposes of determining the 
U.S.

[[Page 29126]]

shareholder that has the subpart F inclusion. This approach is 
consistent with the approach adopted for section 951A in the GILTI 
final regulations. Under this approach, a domestic partnership would 
not be the U.S. shareholder of a foreign corporation that includes 
subpart F income in its gross income under section 951(a). Instead, 
only the partners of the domestic partnership that are U.S. 
shareholders of a CFC owned through the domestic partnership would 
include subpart F income of the CFC in their gross income.
    This approach is supported by public comments requesting 
harmonization of the treatment of domestic partnerships for purposes of 
the GILTI and subpart F regimes. The harmonization of the treatment of 
domestic partnerships for purposes of the GILTI and subpart F regimes 
is expected to result in substantial simplification of related rules 
(for example, previously taxed earnings and profits and related basis 
rules), consistency in the treatment of domestic partnerships and 
foreign partnerships, and the reduction of burden (both administrative 
burden and tax liability) on taxpayers that are small partners. This 
third option is effectuated in the proposed regulations by using the 
existing framework for foreign partnerships, which is well-developed 
and more administrable than a new framework.
iii. Affected Taxpayers
    The Treasury Department and the IRS estimate that there were 
approximately 7,000 U.S. partnerships with CFCs that e-filed at least 
one Form 5471 as Category 4 or 5 filers in 2015 and 2016.\5\ The 
identified partnerships had approximately 2 million partners, as 
indicated by the number of Schedules K-1 filed by the partnerships. 
This number includes both domestic and foreign partners, so it 
substantially overstates the number of partners that would be affected 
by the proposed regulations, which potentially affect only domestic 
partners.\6\ The proposed regulations affect domestic partners that are 
U.S. shareholders of a CFC owned by the domestic partnership because 
such partners will determine their subpart F inclusion amount by 
reference to their pro rata shares of subpart F income of CFCs owned by 
the partnership. Domestic partners that are not U.S. shareholders of a 
CFC owned by the domestic partnership will neither determine their own 
subpart F inclusion amount by reference to their pro rata shares of 
subpart F income of CFCs owned by the partnership nor include in their 
income a distributive share of the partnership's subpart F inclusion 
amount. This latter group is likely to be a substantial portion of 
domestic partners given the high number of partners per partnership, 
and they will have lower compliance costs as a result of the proposed 
regulations. Because it is not possible to precisely identify these 
types of partners based on available data, this number is an upper 
bound of partners who would have been affected by this rule had this 
rule been in effect in 2015 or 2016.
---------------------------------------------------------------------------

    \5\ Data are from IRS's Research, Applied Analytics, and 
Statistics division based on data available in the Compliance Data 
Warehouse. Category 4 filer includes a U.S. person who had control 
of a foreign corporation during the annual accounting period of the 
foreign corporation. Category 5 includes a U.S. shareholder who owns 
stock in a foreign corporation that is a CFC and who owned that 
stock on the last day in the tax year of the foreign corporation in 
that year in which it was a CFC. For full definitions, see https://www.irs.gov/pub/irs-pdf/i5471.pdf.
    \6\ This analysis is based on the tax data readily available to 
the Treasury Department at this time. Some variables may be 
available on tax forms that are not available for statistical 
purposes. Moreover, with new tax provisions, such as section 951A, 
relevant data may not be available for a number of years for 
statistical purposes.
---------------------------------------------------------------------------

II. Paperwork Reduction Act

    The collection of information in these proposed regulations is in 
proposed Sec.  1.951A-2(c)(6)(v). The collection of information in 
proposed Sec.  1.951A-2(c)(6)(v) is an election that a controlling 
domestic shareholder of a CFC may make to apply the high tax exception 
of section 954(b)(4) to gross income of a CFC. The election is made by 
attaching a statement to an original or amended income tax return in 
order to elect to apply the high tax exception of section 954(b)(4) to 
gross income of a CFC. For purposes of the Paperwork Reduction Act of 
1995 (44 U.S.C. 3507(d)) (``PRA''), the reporting burden associated 
with proposed Sec.  1.951A-2(c)(6)(v) will be reflected in the PRA 
submission associated with income tax returns in the Form 990 series, 
Form 1120 series, Form 1040 series, Form 1041 series, and Form 1065 
series (see chart at the end of this part II for the current status of 
the PRA submissions for these forms). In 2018, the IRS released and 
invited comments on drafts of the above five forms in order to give 
members of the public advance notice and an opportunity to submit 
comments. The IRS received no comments on the portions of the forms 
that relate to section 951A during the comment period. Consequently, 
the IRS made the forms available in late 2018 and early 2019 for use by 
the public. The IRS is contemplating making additional changes to forms 
to take into account these proposed regulations.
    The IRS estimates the number of affected filers to be the 
following:

                           Tax Forms Impacted
------------------------------------------------------------------------
                                                         Forms to which
  Collection of information     Number of respondents    the information
                                     (estimated)         may be attached
------------------------------------------------------------------------
Sec.   1.951A-2(c)(6)(v)                 25,000-35,000  Form 990 series,
 Election to apply the high                              Form 1120
 tax exception of section                                series, Form
 954(b)(4) to gross income of                            1040 series,
 a CFC.                                                  Form 1041
                                                         series, and
                                                         Form 1065
                                                         series.
------------------------------------------------------------------------
Source: MeF, DCS, and IRS's Compliance Data Warehouse.

    This estimate is based on filers of income tax returns with a Form 
5471, ``Information Return of U.S. Persons With Respect to Certain 
Foreign Corporations,'' attached because only filers that are U.S. 
shareholders of CFCs would be subject to the information collection 
requirements.
    The current status of the PRA submissions related to the tax forms 
that will be revised as a result of the information collection in 
proposed Sec.  1.951A-2(c)(6)(v) is provided in the accompanying table. 
The reporting burdens associated with the information collection in the 
proposed regulations are included in the aggregated burden estimates 
for OMB control numbers 1545-0123 (which represents a total estimated 
burden time for all forms and schedules for corporations of 3.157 
billion hours and total estimated monetized costs of $58.148 billion 
($2017)), 1545-0074 (which represents a

[[Page 29127]]

total estimated burden time, including all other related forms and 
schedules for individuals, of 1.784 billion hours and total estimated 
monetized costs of $31.764 billion ($2017)), 1545-0092 (which 
represents a total estimated burden time, including all other related 
forms and schedules for trusts and estates, of 307,844,800 hours and 
total estimated monetized costs of $9.950 billion ($2016)), and 1545-
0047 (which represents a total estimated burden time, including all 
other related forms and schedules for tax-exempt organizations, of 
50.450 million hours and total estimated monetized costs of 
$1,297,300,000 ($2017)). The overall burden estimates provided for 
these OMB control numbers are aggregate amounts that relate to the 
entire package of forms associated with the applicable OMB control 
number and will in the future include, but not isolate, the estimated 
burden of the tax forms that will be revised as a result of the 
information collection in the proposed regulations. These numbers are 
therefore unrelated to the future calculations needed to assess the 
burden imposed by the proposed regulations. These burdens have been 
reported for other regulations related to the taxation of cross-border 
income and the Treasury Department and the IRS urge readers to 
recognize that these numbers are duplicates and to guard against 
overcounting the burden that international tax provisions imposed prior 
to the Act. No burden estimates specific to the forms affected by the 
proposed regulations are currently available. The Treasury Department 
and the IRS have not estimated the burden, including that of any new 
information collections, related to the requirements under the proposed 
regulations. The Treasury Department and the IRS estimate PRA burdens 
on a taxpayer-type basis rather than a provision-specific basis. Those 
estimates would capture both changes made by the Act and those that 
arise out of discretionary authority exercised in the final 
regulations.
    The Treasury Department and the IRS request comments on all aspects 
of information collection burdens related to the proposed regulations, 
including estimates for how much time it would take to comply with the 
paperwork burdens described above for each relevant form and ways for 
the IRS to minimize the paperwork burden. Proposed revisions (if any) 
to these forms that reflect the information collections contained in 
these proposed regulations will be made available for public comment at 
https://apps.irs.gov/app/picklist/list/draftTaxForms.htm and will not 
be finalized until after these forms have been approved by OMB under 
the PRA.

----------------------------------------------------------------------------------------------------------------
                 Form                        Type of filer          OMB No.(s)                Status
----------------------------------------------------------------------------------------------------------------
Forms 990............................  Tax exempt entities (NEW        1545-0047  Approved by OIRA 12/21/2018
                                        Model).                                    until 12/31/2019. The form
                                                                                   will be updated with OMB
                                                                                   number 1545-0047 and the
                                                                                   corresponding PRA Notice on
                                                                                   the next revision.
                                      --------------------------------------------------------------------------
                                        Link: https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=201811-1545-003 003
                                      --------------------------------------------------------------------------
Form 1040............................  Individual (NEW Model)...       1545-0074  Limited Scope submission (1040
                                                                                   only) approved on 12/7/2018
                                                                                   until 12/31/2019. Full ICR
                                                                                   submission for all forms in 6/
                                                                                   2019. 60 Day FRN not
                                                                                   published yet for full
                                                                                   collection.
                                      --------------------------------------------------------------------------
                                        Link: https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=201808-1545-031 031
                                      --------------------------------------------------------------------------
Form 1041............................  Trusts and estates.......       1545-0092  Submitted to OIRA for review
                                                                                   on 9/27/2018.
                                      --------------------------------------------------------------------------
                                        Link: https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=201806-1545-014 014
                                      --------------------------------------------------------------------------
Form 1065 and 1120...................  Business (NEW Model).....       1545-0123  Approved by OIRA 12/21/2018
                                                                                   until 12/31/2019.
                                      --------------------------------------------------------------------------
                                        Link: https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=201805-1545-019 019
----------------------------------------------------------------------------------------------------------------

III. Regulatory Flexibility Act

    It is hereby certified that these proposed regulations will not 
have a significant economic impact on a substantial number of small 
entities within the meaning of section 601(6) of the Regulatory 
Flexibility Act (5 U.S.C. chapter 6).
    Section 951A generally affects U.S. shareholders of CFCs. The 
reporting burden in proposed Sec.  1.951A-2(c)(6)(v) affects 
controlling domestic shareholders of a CFC that elect to apply the high 
tax exception of section 954(b)(4) to gross income of a CFC. 
Controlling domestic shareholders are generally U.S. shareholders who, 
in the aggregate, own more than 50 percent of the total combined voting 
power of all classes of stock of the foreign corporation entitled to 
vote. As an initial matter, foreign corporations are not considered 
small entities. Nor are U.S. taxpayers considered small entities to the 
extent the taxpayers are natural persons or entities other than small 
entities. Thus, proposed Sec.  1.951A-2(c)(6)(v) generally only affects 
small entities if a U.S. taxpayer that is a U.S. shareholder of a CFC 
is a small entity.
    Examining the gross receipts of the e-filed Forms 5471 that is the 
basis of the 25,000--35,000 respondent estimates, the Treasury 
Department and the IRS have determined that the tax revenue from 
section 951A estimated by the Joint Committee on Taxation for 
businesses of all sizes is less than 0.3 percent of gross receipts as 
shown in the table below. Based on data for 2015 and 2016, total gross 
receipts for all businesses with gross receipts under $25 million is 
$60 billion while those over $25 million is $49.1 trillion. Given that 
tax on GILTI inclusion amounts is correlated with gross receipts, this 
results in businesses with less than $25 million in gross receipts 
accounting for approximately 0.01 percent of the tax revenue. Data are 
not readily available to determine the sectoral breakdown of these 
entities. Based on this analysis, smaller businesses are not 
significantly impacted by these proposed regulations.

[[Page 29128]]



--------------------------------------------------------------------------------------------------------------------------------------------------------
                                               2017       2018       2019       2020       2021       2022       2023       2024       2025       2026
                                            (billion)  (billion)  (billion)  (billion)  (billion)  (billion)  (billion)  (billion)  (billion)  (billion)
--------------------------------------------------------------------------------------------------------------------------------------------------------
JCT tax revenue...........................        7.7       12.5        9.6        9.5        9.3        9.0        9.2        9.3       15.1       21.2
Total gross receipts......................     30,727     53,870    566,676     59,644     62,684     65,865     69,201     72,710     76,348     80,094
Percent...................................       0.03       0.02       0.02       0.02       0.01       0.01       0.01       0.01       0.02       0.03
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: Research, Applied Analytics and Statistics division (IRS), Compliance Data Warehouse (IRS) (E-filed Form 5471, category 4 or 5, C and S
  corporations and partnerships); Conference Report, at 689.

    The data to assess the number of small entities potentially 
affected by proposed Sec.  1.951A-2(c)(6)(v) are not readily available. 
However, businesses that are U.S. shareholders of CFCs are generally 
not small businesses because the ownership of sufficient stock in a CFC 
in order to be a U.S. shareholder generally entails significant 
resources and investment. The Treasury Department and the IRS welcome 
comments on whether the proposed regulations would affect a substantial 
number of small entities in any particular industry.
    Regardless of the number of small entities potentially affected by 
proposed Sec.  1.951A-2(c)(6)(v), the Treasury Department and the IRS 
have concluded that there is no significant economic impact on such 
entities as a result of proposed Sec.  1.951A-2(c)(6)(v). As discussed 
above, smaller businesses are not significantly impacted by the 
proposed regulations. Furthermore, the requirements in proposed Sec.  
1.951A-2(c)(6)(v) apply only if a taxpayer chooses to make an election 
to apply a favorable rule. Consequently, the Treasury Department and 
the IRS have determined that proposed Sec.  1.951A-2(c)(6)(v) will not 
have a significant economic impact on a substantial number of small 
entities. Accordingly, it is hereby certified that the collection of 
information requirements of proposed Sec.  1.951A-2(c)(6)(v) would not 
have a significant economic impact on a substantial number of small 
entities. Notwithstanding this certification, the Treasury Department 
and the IRS invite comments from the public on the impact of proposed 
Sec.  1.951A-2(c)(6)(v) on small entities.
    The treatment of domestic partnerships as an aggregate of their 
partners in these proposed regulations for purposes of subpart F would 
reduce the burden on partners that are not U.S. shareholders of a CFC 
owned by the partnership because these partners will no longer be 
required to include in income a distributive share of subpart F income. 
The proposed regulations would also reduce burden on domestic 
partnerships that hold CFCs because these partnerships would no longer 
be required to calculate their partners' distributive share of subpart 
F income, resulting in compliance cost savings for the affected 
partnerships. As described in section II of this Special Analyses 
section, the Treasury Department and the IRS estimate that there are 
approximately 7,000 U.S. partnerships with CFCs that e-filed at least 
one Form 5471 as Category 4 or 5 filers in 2015 and 2016.\7\ The 
identified partnerships had approximately 2 million domestic and 
foreign partners. However, this figure overstates the number of 
partners that would be affected by the proposed regulations, because 
the proposed regulations would not affect foreign partners of the 
affected U.S. partnerships. Of affected U.S. partnerships, business 
entities are a minority of the affected domestic partners. Because data 
to identify the size of domestic partners that are business entities 
are not readily available, this number is a high upper bound and is 
magnitudes greater than the number of affected domestic partners that 
are small businesses. Consequently, the Treasury Department and the IRS 
have determined that the proposed regulations will not have a 
significant economic impact on a substantial number of small entities. 
Accordingly, it is hereby certified that the proposed regulations would 
not have a significant economic impact on a substantial number of small 
entities.
---------------------------------------------------------------------------

    \7\ Data are from IRS's Research, Applied Analytics, and 
Statistics division based on data available in the Compliance Data 
Warehouse. Category 4 filer includes a U.S. person who had control 
of a foreign corporation during the annual accounting period of the 
foreign corporation. Category 5 includes a U.S. shareholder who owns 
stock in a foreign corporation that is a CFC and who owned that 
stock on the last day in the tax year of the foreign corporation in 
that year in which it was a CFC. For full definitions, see https://www.irs.gov/pub/irs-pdf/i5471.pdf.
---------------------------------------------------------------------------

    Pursuant to section 7805(f) of the Code, this notice of proposed 
rulemaking has been submitted to the Chief Counsel for Advocacy of the 
Small Business Administration for comment on its impact on small 
businesses.

IV. Unfunded Mandates Reform Act

    Section 202 of the Unfunded Mandates Reform Act of 1995 requires 
that agencies assess anticipated costs and benefits and take certain 
other actions before issuing a final rule that includes any Federal 
mandate that may result in expenditures in any one year by a state, 
local, or tribal government, in the aggregate, or by the private 
sector, of $100 million in 1995 dollars, updated annually for 
inflation. In 2019, that threshold is approximately $154 million. These 
proposed regulations do not include any Federal mandate that may result 
in expenditures by state, local, or tribal governments, or by the 
private sector in excess of that threshold.

V. Executive Order 13132: Federalism

    Executive Order 13132 (entitled ``Federalism'') prohibits an agency 
from publishing any rule that has federalism implications if the rule 
either imposes substantial, direct compliance costs on state and local 
governments, and is not required by statute, or preempts state law, 
unless the agency meets the consultation and funding requirements of 
section 6 of the Executive Order. These proposed regulations do not 
have federalism implications and do not impose substantial direct 
compliance costs on state and local governments or preempt state law 
within the meaning of the Executive Order.

Comments and Requests for Public Hearing

    Before the proposed regulations are adopted as final regulations, 
consideration will be given to any comments that are submitted timely 
to the IRS as prescribed in this preamble under the ADDRESSES heading. 
The Treasury Department and the IRS request comments on all aspects of 
the proposed regulations and on changes to forms related to the 
proposed regulations. See also parts I.B and II.A of the Explanation of 
Provisions section (requesting specific comments related to the 
aggregate approach to domestic partnerships and GILTI high tax 
exclusion, respectively).
    All comments will be available at www.regulations.gov or upon 
request. A public hearing will be scheduled if requested in writing by 
any person that timely submits written comments. If a public hearing is 
scheduled, then notice of the date, time, and place for the public 
hearing will be published in the Federal Register.

[[Page 29129]]

Drafting Information

    The principal authors of these regulations are Joshua P. 
Roffenbender and Jorge M. Oben of the Office of Associate Chief Counsel 
(International). However, other personnel from the Treasury Department 
and the IRS participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority:  26 U.S.C. 7805.

0
Par. 2. Section 1.951-1 is amended by adding paragraph (a)(4) and 
revising the last sentence of paragraph (i) to read as follows:


Sec.  1.951-1  Amounts included in gross income of United States 
shareholders.

* * * * *
    (a) * * *
    (4) See Sec.  1.958-1(d)(1) for ownership of stock of a foreign 
corporation through a domestic partnership for purposes of sections 951 
and 951A and for purposes of any other provision that applies by 
reference to section 951 or 951A.
* * * * *
    (i) * * * Paragraph (h) of this section applies to taxable years of 
domestic partnerships ending on or after May 14, 2010, but does not 
apply to determine the stock of a controlled foreign corporation owned 
(within the meaning of section 958(a)) by a United States person for 
taxable years of the controlled foreign corporation beginning on or 
after the date of publication of the Treasury decision adopting these 
rules as final regulations in the Federal Register, and for taxable 
years of United States persons in which or with which such taxable 
years of the controlled foreign corporation end.
0
Par. 3. Section 1.951A-0 is amended by adding entries for Sec.  1.951A-
7(a), Sec.  1.951A-7(b), and Sec.  1.951A-7(c) to read as follows:


Sec.  1.951A-0  Outline of section 951A regulations.

* * * * *


Sec.  1.951A-7  Applicability dates.

    (a) In general.
    (b) High tax exclusion.
    (c) Domestic partnerships.
0
Par. 4. Section 1.951A-2 is amended by revising paragraph (c)(1)(iii) 
and adding paragraph (c)(6) to read as follows:


Sec.  1.951A-2  Tested income and tested loss.

* * * * *
    (c) * * *
    (1) * * *
    (iii) Gross income excluded from the foreign base company income 
(as defined in section 954) or the insurance income (as defined in 
section 953) of the corporation by reason of the exception described in 
section 954(b)(4) pursuant to an election under Sec.  1.954-1(d), or a 
tentative gross tested income item of the corporation that qualifies 
for the exception described in section 954(b)(4) pursuant to an 
election under paragraph (c)(6) of this section,
* * * * *
    (6) Election for application of high tax exception of section 
954(b)(4)--(i) In general. For purposes of section 951A(c)(2)(A)(i)(II) 
and paragraph (c)(1)(iii) of this section, a tentative gross tested 
income item of a controlled foreign corporation for a CFC inclusion 
year qualifies for the exception described in section 954(b)(4) if--
    (A) An election made under paragraph (c)(6)(v)(A) of this section 
is effective with respect to the controlled foreign corporation for the 
CFC inclusion year; and
    (B) The tentative net tested income item with respect to the 
tentative gross tested income item was subject to foreign income taxes 
at an effective rate that is greater than 90 percent of the rate that 
would apply if the income were subject to the maximum rate of tax 
specified in section 11.
    (ii) Definitions--(A) Tentative gross tested income item--(1) In 
general. A single tentative gross tested income item with respect to a 
controlled foreign corporation for a CFC inclusion year is the 
aggregate of all items of gross income attributable to a single 
qualified business unit (QBU) of the controlled foreign corporation in 
such CFC inclusion year that would be gross tested income without 
regard to this paragraph (c)(6) and that would be in a single tested 
income group (as defined in Sec.  1.960-1(d)(2)(ii)(C)). For this 
purpose, a QBU is defined in section 989(a) and the regulations under 
that section, and a controlled foreign corporation's QBUs includes QBUs 
owned by the controlled foreign corporation in addition to the QBU that 
is the controlled foreign corporation. Therefore, a controlled foreign 
corporation may have multiple tentative gross tested income items.
    (2) Income attributable to a QBU. Gross income is attributable to a 
QBU if the gross income is properly reflected on the books and records 
of the QBU. Such gross income must be determined under Federal income 
tax principles, except that the principles of Sec.  1.904-4(f)(2)(vi) 
(without regard to the exclusion described in Sec.  1.904-
4(f)(2)(vi)(C)(1)) apply to adjust gross income of a QBU to reflect 
disregarded payments.
    (B) Tentative net tested income item. A tentative net tested income 
item with respect to a tentative gross tested income item is determined 
by allocating and apportioning deductions (not including any items 
described in Sec.  1.951A-2(c)(5)) to the tentative gross tested income 
item under the principles of Sec.  1.960-1(d)(3) by treating each 
single tentative gross tested income item as gross income in a separate 
tested income group.
    (iii) Effective rate at which taxes are imposed. For a CFC 
inclusion year of a controlled foreign corporation, the effective rate 
with respect to the controlled foreign corporation's tentative net 
tested income items is determined separately for each such item. The 
effective rate at which taxes are imposed on a tentative net tested 
income item is--
    (A) The U.S. dollar amount of foreign income taxes paid or accrued 
with respect to the tentative net tested income item, determined by 
applying paragraph (c)(6)(iv) of this section; divided by
    (B) The U.S. dollar amount of the tentative net tested income item, 
increased by the amount of foreign income taxes referred to in 
paragraph (c)(6)(iv) of this section.
    (iv) Taxes paid or accrued with respect to a tentative net tested 
income item. For a CFC inclusion year, the amount of foreign income 
taxes paid or accrued by a controlled foreign corporation with respect 
to a tentative net tested income item of the controlled foreign 
corporation for purposes of this paragraph (c)(6) is the U.S. dollar 
amount of the controlled foreign corporation's current year taxes (as 
defined in Sec.  1.960-1(b)(4)) that would be allocated and apportioned 
under the principles of Sec.  1.960-1(d)(3)(ii) to the tentative net 
tested income item by treating such tentative net tested income item as 
being in a separate tested income group. If the principles of Sec.  
1.904-4(f)(2)(vi) apply to adjust the gross income of a QBU to account 
for disregarded payments as provided in paragraph (c)(6)(ii)(A)(2) of 
this section, the principles of Sec.  1.904-6(a)(2) apply to allocate 
and apportion foreign income

[[Page 29130]]

taxes imposed by reason of the disregarded payments. Except to the 
extent provided in the next sentence, the amount of foreign income 
taxes paid or accrued with respect to a tentative net tested income 
item, determined in the manner provided in this paragraph (c)(6), will 
not be affected by a subsequent reduction in foreign income taxes 
attributable to a distribution to shareholders of all or part of such 
income. To the extent the foreign income taxes paid or accrued by the 
controlled foreign corporation are reasonably certain to be returned by 
the foreign jurisdiction imposing such taxes to a shareholder, directly 
or indirectly, through any means (including, but not limited to, a 
refund, credit, payment, discharge of an obligation, or any other 
method) on a subsequent distribution to such shareholder, the foreign 
income taxes are not treated as paid or accrued for purposes of this 
paragraph (c)(6)(iv).
    (v) Rules regarding the election--(A) Manner of making election. An 
election is made under this paragraph (c)(6)(v)(A) with respect to a 
controlled foreign corporation for a CFC inclusion year--
    (1) By the controlling domestic shareholders (as defined in Sec.  
1.964-1(c)(5)), by attaching a statement to such effect with an 
original or amended income tax return for the U.S. shareholder 
inclusion year of each controlling domestic shareholder in which or 
with which such CFC inclusion year ends, and including any additional 
information required by applicable administrative pronouncements; or
    (2) In accordance with the rules provided in forms or instructions.
    (B) Scope of election. An election made under paragraph 
(c)(6)(v)(A) of this section that is effective with respect to a 
controlled foreign corporation for a CFC inclusion year applies with 
respect to each tentative gross tested income item of the controlled 
foreign corporation for the CFC inclusion year and is binding on all 
United States shareholders of the controlled foreign corporation.
    (C) Duration of election. An election made under paragraph 
(c)(6)(v)(A) of this section is effective for a CFC inclusion year of a 
controlled foreign corporation for which the election is made and all 
subsequent CFC inclusion years of such corporation unless revoked by 
the controlling domestic shareholders of the controlled foreign 
corporation under paragraph (c)(6)(v)(D)(1) of this section.
    (D) Revocation of election--(1) In general. Except as provided in 
paragraph (c)(6)(v)(D)(2) of this section, the election made under 
paragraph (c)(6)(v)(A) of this section with respect to a controlled 
foreign corporation for a CFC inclusion year is revoked by the 
controlling domestic shareholders of the controlled foreign corporation 
in the same manner as prescribed for an election in paragraph 
(c)(6)(v)(A) of this section.
    (2) Limitations by reason of revocation--(i) In general. Except as 
provided in paragraph (c)(6)(v)(D)(2)(ii) of this section, if an 
election with respect to a controlled foreign corporation for a CFC 
inclusion year is revoked under paragraph (c)(6)(v)(D)(1) of this 
section, a new election cannot be made under paragraph (c)(6)(v)(A) of 
this section with respect to the controlled foreign corporation for any 
CFC inclusion year that begins within sixty months following the close 
of the CFC inclusion year for which the previous election was revoked, 
and such subsequent election cannot be revoked under paragraph 
(c)(6)(v)(D)(1) of this section with respect to the controlled foreign 
corporation for any CFC inclusion year that begins within sixty months 
following the close of the CFC inclusion year for which the subsequent 
election was made.
    (ii) Exception for change of control. The Commissioner may permit a 
controlled foreign corporation to make an election under paragraph 
(c)(6)(v)(A) of this section or revoke an election under paragraph 
(c)(6)(v)(D)(1) of this section with respect to any CFC inclusion year 
within the sixty-month period described in paragraph (c)(6)(v)(D)(2)(i) 
of this section if more than 50 percent of the total combined voting 
power of all classes of the stock of the controlled foreign corporation 
entitled to vote as of the beginning of such CFC inclusion year are 
owned (within the meaning of section 958(a)) by persons that did not 
own any interests in the controlled foreign corporation as of the close 
of the CFC inclusion year for which the prior election or revocation 
with respect to the controlled foreign corporation became effective. 
For purposes of the preceding sentence, a person includes any person 
bearing a relationship described in section 267(b) or 707(b)(1) with 
respect to the person.
    (E) Rules applicable to controlling domestic shareholder groups--
(1) In general. In the case of a controlled foreign corporation that is 
a member of a controlling domestic shareholder group, an election is 
made under paragraph (c)(6)(v)(A) of this section or revoked under 
paragraph (c)(6)(v)(D)(1) of this section with respect to each member 
of the controlling domestic shareholder group (including any member 
that joins the controlling domestic shareholder group after the 
election or revocation) and the rules in paragraphs (c)(6)(v)(A) 
through (D) of this section apply by reference to the controlling 
domestic shareholder group.
    (2) Definition of controlling domestic shareholder group. For 
purposes of paragraph (c)(6)(v)(E)(1) of this section, the term 
controlling domestic shareholder group means two or more controlled 
foreign corporations (each a member) if more than 50 percent of the 
total combined voting power of all classes of the stock of each 
corporation is owned (within the meaning of section 958(a)) by the same 
controlling domestic shareholder or, if no single controlling domestic 
shareholder owns (within the meaning of section 958(a)) more than 50 
percent of the total combined voting power of all classes of the stock 
of each corporation, more than 50 percent of the total combined voting 
power of all classes of the stock of each corporation is owned (within 
the meaning of section 958(a)) by the same controlling domestic 
shareholders and each controlling domestic shareholder owns (within the 
meaning of section 958(a)) the same percentage of stock in each 
controlled foreign corporation. For purposes of the preceding sentence, 
a controlling domestic shareholder includes any person bearing a 
relationship described in section 267(b) or 707(b)(1) to the 
controlling domestic shareholder.
    (vi) Example. The following example illustrates the application of 
this paragraph (c)(6).

    (A) Example: Effect of disregarded payments between QBUs--(1) 
Facts--(i) FP, a controlled foreign corporation organized in Country 
A, conducts a trade or business in Country A (the Country A 
Business) and reflects items of income, gain, loss, and expense 
attributable to the Country A Business on the books and records of 
FP's home office. Under Sec.  1.989(a)-1(b)(2)(i)(A), FP is a QBU. 
FP's functional currency is the U.S. dollar. FP has a calendar year 
taxable year in both the United States and Country A. An election is 
made under paragraph (c)(6)(v)(A) of this section that is effective 
for FP's CFC inclusion year.
    (ii) FP owns FDE, a Country B disregarded entity (within the 
meaning of Sec.  1.904-4(f)(3)(i)). FDE conducts activities in 
Country B that constitute a trade or business within the meaning of 
Sec.  1.989(a)-1(c) (the Country B Business), and reflects items of 
income, gain, loss, and expense attributable to the Country B 
Business on the books and records of FDE. Under Sec.  1.989(a)-
1(b)(2)(ii)(B), the Country B Business conducted through FDE is a 
QBU. The Country B Business's functional currency is the U.S. 
dollar. FDE has a calendar year taxable year in Country B.
    (iii) On Date A in Year 1, FDE accrues $100x of interest income 
from X, an

[[Page 29131]]

unrelated third party, and reflects the accrual on the books and 
records of the Country B business. FP excludes the $100x from 
foreign personal holding company income by reason of section 954(h). 
Subsequently, on Date B in Year 1, FDE accrues and pays $20x of 
interest to FP. FP reflects the interest income item on the books 
and records of the Country A Business. FDE reflects the $20x of 
interest expense on the books and records of the Country B Business.
    (iv) Country A imposes no tax on income. Country B imposes a 25% 
tax on income. For Country B income tax purposes, FDE (which is not 
disregarded under Country B income tax principles) recognizes $80x 
of taxable income ($100x interest income, less a $20x deduction for 
the interest paid to FP). Accordingly, FDE incurs a Country B income 
tax liability with respect to Year 1, the U.S. dollar amount of 
which is $20x. For Federal income tax purposes, if FDE were not a 
disregarded entity (within the meaning of Sec.  1.904-4(f)(3)(i)), 
FP would recognize $20x of income in Year 1, and FDE would recognize 
$80x of taxable income in Year 1. Other than the $20x expense 
accrued with respect to the income tax imposed by Country B, FP 
incurs no deductions in Year 1 for Federal income tax purposes.
    (2) Analysis--(i) Under paragraph (c)(6)(ii)(A)(1) of this 
section, a separate tentative gross tested income item must be 
determined with respect to FP's Country A Business and Country B 
Business (each of which is a QBU). To determine the separate 
tentative gross tested income items with respect to its Country A 
Business and Country B Business, FP must determine the gross income 
that is attributable to the Country A Business and the Country B 
Business under paragraph (c)(6)(ii)(A)(2) of this section. Without 
regard to the $20x interest payment from FDE to FP, gross income 
attributable to the Country A Business would be $0 (that is, $20x of 
interest income reflected on the books and records of the Country A 
Business, reduced by $20x attributable to a payment that is 
disregarded for Federal income tax purposes). Similarly, without 
regard to the $20x interest payment from FDE to FP, gross income 
attributable to the Country B Business would be $100x (that is, 
$100x of interest income reflected on the books and records of the 
Country B Business, unreduced by the $20x payment from FDE to FP). 
However, the $20x payment from FDE to FP is a disregarded payment 
within the meaning of Sec.  1.904-4(f)(3)(ii), and would, under the 
principles of Sec.  1.904-4(f)(2)(vi) (without regard to the 
exclusion described in Sec.  1.904-4(f)(2)(vi)(C)(1)), adjust the 
gross income of the Country A Business from $0 to $20x and the gross 
income of the Country B Business from $100x to $80x (in each case, 
by virtue of the $20x disregarded interest payment from FDE to FP). 
Accordingly, FP's tentative gross tested income attributable to the 
Country A Business is $20x and its tentative gross tested income 
attributable to the Country B Business is $80x.
    (ii) Under paragraph (c)(6)(ii)(B) of this section, because 
there are no deductions allocated or apportioned under Sec.  1.960-
1(d)(3) to the tentative gross tested income items of the Country A 
Business, FP's tentative net tested income item attributable to the 
Country A Business is $20x. Taking into account the $20x deduction 
for Country B income taxes that are allocable to the Country B 
Business under Sec.  1.960-1(d)(3), FP's tentative net tested income 
item attributable to the Country B Business is $60x under paragraph 
(c)(6)(ii)(B) of this section (tentative gross tested income of $80x 
less the $20x deduction).
    (iii) Under paragraphs (c)(6)(iii) and (iv) of this section, for 
Year 1 (a CFC inclusion year of FP), the effective rate with respect 
to FP's $60x tentative net tested income item attributable to its 
Country B Business is 25%: $20x (the U.S. dollar amount of the 
Country B taxes accrued with respect to FP's tentative tested net 
income item attributable to the Country B Business) divided by $80x 
(the U.S. dollar amount of FP's $60x tentative net tested income 
item, increased by the $20x amount of Country B income taxes accrued 
with respect to that tentative net tested income item), expressed as 
a percentage. Therefore, FP's tentative net tested income item 
attributable to the Country B Business was subject to foreign income 
taxes at an effective rate (25%) that is greater than 18.9% (which 
is 90% of the rate that would apply if the income were subject to 
the maximum rate of tax specified in section 11, which is 21%). 
Accordingly, the requirement of paragraph (c)(6)(i)(B) of this 
section is satisfied with respect to FP's tentative gross tested 
income item attributable to the Country B Business in Year 1. 
Further, the requirement of paragraph (c)(6)(i)(A) of this section 
is satisfied because an election described in paragraph (c)(6)(v)(A) 
of this section was made with respect to FP for Year 1. Accordingly, 
FP's $80x item of tentative gross tested income attributable to its 
Country B Business qualifies for the high tax exception of section 
954(b)(4) under paragraph (c)(6)(i) of this section.
    (iv) FP's $20x item of tentative net tested income attributable 
to its Country A Business is not subject to foreign income tax, and 
therefore does not satisfy the requirement of paragraph (c)(6)(i)(B) 
of this section. Accordingly, FP's $20x item of tentative gross 
tested income attributable to the Country A Business does not 
qualify for the high tax exception of section 954(b)(4) under 
paragraph (c)(6)(i) of this section.

0
Par. 5. Section 1.951A-7 is revised to read as follows:


Sec.  1.951A-7  Applicability dates.

    (a) In general. Except as otherwise provided in this section, 
sections 1.951A-1 through 1.951A-6 apply to taxable years of foreign 
corporations beginning after December 31, 2017, and to taxable years of 
United States shareholders in which or with which such taxable years of 
foreign corporations end.
    (b) High tax exclusion. Section 1.951A-2(c)(1)(iii) and (c)(6) 
applies to taxable years of foreign corporations beginning on or after 
the date of publication of the Treasury decision adopting these rules 
as final regulations in the Federal Register, and to taxable years of 
United States shareholders in which or with which such taxable years of 
foreign corporations end.
    (c) Domestic partnerships. Section 1.951A-1(e) applies to taxable 
years of foreign corporations beginning after December 31, 2017, and 
before the date of publication of the Treasury decision adopting these 
rules as final regulations in the Federal Register, and to taxable 
years of United States persons in which or with which such taxable 
years of foreign corporations end.
0
Par. 6. Section 1.954-1 is amended by:
0
1. Adding ``or'' to the end of paragraph (c)(1)(iii)(A)(2)(ii).
0
2. Removing and reserving paragraphs (c)(1)(iii)(A)(2)(iii) and (iv).
0
3. Adding paragraphs (c)(1)(iii)(A)(3) and (c)(1)(iv).
0
4. Removing the language ``foreign base company oil related income, as 
defined in section 954(g), or'' in the second sentence of paragraph 
(d)(1) introductory text.
0
5. Adding a new sentence after the fourth sentence in paragraph (d)(1) 
introductory text.
0
6. Removing the language ``imposed by a foreign country or countries'' 
in paragraph (d)(1)(ii).
0
7. Removing the language ``in a chain of corporations through which a 
distribution is made'' in the first sentence in paragraph (d)(2) 
introductory text.
0
8. Removing the language ``(or deemed paid or accrued)'' in paragraph 
(d)(2)(i).
0
9. Revising the heading and the first sentence of paragraph (d)(3)(i).
0
10. Removing the second sentence of paragraph (d)(3)(i).
0
11. Removing and reserving paragraphs (d)(4)(iii) and (d)(7).
    The additions and revisions read as follows:


Sec.  1.954-1  Foreign base company income.

* * * * *
    (c) * * *
    (1) * * *
    (iii) * * *
    (A) * * *
    (3) Amount of a single item. For purposes of paragraph 
(c)(1)(iii)(A) of this section, the aggregate amount from all 
transactions that falls within a single separate category (as defined 
in Sec.  1.904-5(a)(4)(v)) and is described in paragraph 
(c)(1)(iii)(A)(1)(i) of this section is a single item of income. 
Similarly, the aggregate amount from all transactions that falls within 
a single separate category (as defined in Sec.  1.904-5(a)(4)(v)) and 
is described in each one

[[Page 29132]]

of paragraphs (c)(1)(iii)(A)(1)(ii) through (c)(1)(iii)(A)(1)(v) of 
this section is in each case a separate single item of income. The same 
principles apply for transactions described in each one of paragraphs 
(c)(1)(iii)(A)(2)(i) through (v) of this section.
* * * * *
    (iv) Treatment of deductions or loss attributable to disqualified 
basis. For purposes of paragraph (c)(1)(i) of this section (and in the 
case of insurance income, paragraph (a)(6) of this section), in 
determining the amount of a net item of foreign base company income or 
insurance income, deductions or loss described in Sec.  1.951A-2(c)(5) 
are not allocated and apportioned to gross foreign base company income 
or gross insurance income.
    (d) * * *
    (1) * * * For rules concerning the application of the high tax 
exception of sections 954(b)(4) and 951A(c)(2)(A)(i)(III) to tentative 
gross tested income items, see Sec.  1.951A-2(c)(1)(iii) and (c)(6). * 
* *
* * * * *
    (3) * * *
    (i) In general. The amount of foreign income taxes paid or accrued 
by a controlled foreign corporation with respect to a net item of 
income for purposes of section 954(b)(4) and this paragraph (d) is the 
U.S. dollar amount of the controlled foreign corporation's current year 
taxes (as defined in Sec.  1.960-1(b)(4)) that are allocated and 
apportioned under Sec.  1.960-1(d)(3)(ii) to the subpart F income group 
(as defined in Sec.  1.960-1(d)(2)(ii)(B)) that corresponds with the 
net item of income. * * *
* * * * *
0
Par. 7. Section 1.954-1, as proposed to be amended at 83 FR 63200 
(December 7, 2018), is further amended by:
0
1. Removing and reserving paragraph (d)(3)(ii).
0
2. Redesignating paragraphs (h)(1) and (h)(2) as paragraphs (h)(2) and 
(h)(3), respectively.
0
3. Adding a new paragraph (h)(1).
0
4. Removing the language ``Paragraphs (d)(3)(i) and (ii)'' in newly 
redesignated paragraph (h)(2) and adding ``The last two sentences in 
paragraph (d)(3)(i)'' in its place.
    The addition reads as follows:


Sec.  1.954-1  Foreign base company income.

* * * * *
    (h) * * *
    (1) Paragraphs (c)(1)(iii)(A)(3) and (c)(1)(iv) of this section and 
portion of paragraph (d)(3)(i) of this section. Paragraphs 
(c)(1)(iii)(A)(3) and (c)(1)(iv) of this section and the first sentence 
of paragraph (d)(3)(i) of this section apply to taxable years of a 
controlled foreign corporation beginning on or after the date of 
publication of the Treasury decision adopting these rules as final 
regulations in the Federal Register.
* * * * *
0
Par. 8. Section 1.956-1, as amended May 23, 2019, at 84 FR 23717, 
effective July 22, 2019, is further amended by revising the first 
sentence of paragraph (g)(4) to read as follows:


Sec.  1.956-1  Shareholder's pro rata share of the average of the 
amounts of United States property held by a controlled foreign 
corporation.

* * * * *
    (g) * * *
    (4) Paragraphs (a)(2) and (3) of this section apply to taxable 
years of controlled foreign corporations beginning on or after July 22, 
2019, and to taxable years of a United States shareholder in which or 
with which such taxable years of the controlled foreign corporations 
end, but the last sentence of paragraph (a)(2)(i) and paragraphs 
(a)(2)(iii) and (a)(3)(iv) of this section do not apply to taxable 
years of controlled foreign corporations beginning on or after the date 
of publication of the Treasury decision adopting these rules as final 
regulations in the Federal Register, and to taxable years of a United 
States shareholder in which or with which such taxable years of the 
controlled foreign corporations end. * * *
* * * * *
0
Par. 9. Section 1.958-1 is amended by:
0
1. Redesignating paragraph (d) as paragraph (e).
0
2. Adding a new paragraph (d).
    The addition reads as follows:


Sec.  1.958-1  Direct and indirect ownership of stock.

* * * * *
    (d) Stock owned through domestic partnerships--(1) In general. 
Except as otherwise provided in paragraph (d)(2) of this section, for 
purposes of section 951 and section 951A, and for purposes of any other 
provision that applies by reference to section 951 or section 951A, a 
domestic partnership is not treated as owning stock of a foreign 
corporation within the meaning of section 958(a). When the preceding 
sentence applies, a domestic partnership is treated in the same manner 
as a foreign partnership under section 958(a)(2) and paragraph (b) of 
this section for purposes of determining the persons that own stock of 
the foreign corporation within the meaning of section 958(a).
    (2) Non-application for determination of status as United States 
shareholder or controlled foreign corporation. Paragraph (d)(1) of this 
section does not apply for purposes of determining whether any United 
States person is a United States shareholder (as defined in section 
951(b)), whether any United States shareholder is a controlling 
domestic shareholder (as defined in Sec.  1.964-1(c)(5)), or whether 
any foreign corporation is a controlled foreign corporation (as defined 
in section 957(a)).
    (3) Examples. The following examples illustrate the application of 
this paragraph (d).

    (i) Example 1--(A) Facts. USP, a domestic corporation, and 
Individual A, a United States citizen unrelated to USP, own 95% and 
5%, respectively, of PRS, a domestic partnership. PRS owns 100% of 
the single class of stock of FC, a foreign corporation.
    (B) Analysis--(1) CFC and United States shareholder 
determinations. Under paragraph (d)(2) of this section, the 
determination of whether PRS, USP, and Individual A (each a United 
States person) are United States shareholders of FC and whether FC 
is a controlled foreign corporation is made without regard to 
paragraph (d)(1) of this section. PRS, a United States person, owns 
100% of the total combined voting power or value of the FC stock 
within the meaning of section 958(a). Accordingly, PRS is a United 
States shareholder under section 951(b), and FC is a controlled 
foreign corporation under section 957(a). USP is a United States 
shareholder of FC because it owns 95% of the total combined voting 
power or value of the FC stock under sections 958(b) and 
318(a)(2)(A). Individual A, however, is not a United States 
shareholder of FC because Individual A owns only 5% of the total 
combined voting power or value of the FC stock under sections 958(b) 
and 318(a)(2)(A).
    (2) Application of sections 951 and 951A. Under paragraph (d)(1) 
of this section, for purposes of sections 951 and 951A, PRS is not 
treated as owning (within the meaning of section 958(a)) the FC 
stock; instead, PRS is treated in the same manner as a foreign 
partnership for purposes of determining the FC stock owned by USP 
and Individual A under section 958(a)(2) and paragraph (b) of this 
section. Therefore, for purposes of sections 951 and 951A, USP is 
treated as owning 95% of the FC stock under section 958(a), and 
Individual A is treated as owning 5% of the FC stock under section 
958(a). USP is a United States shareholder of FC, and therefore USP 
determines its income inclusions under section 951 and 951A based on 
its ownership of FC stock under section 958(a). However, because 
Individual A is not a United States shareholder of FC, Individual A 
does not have an income inclusion under section 951 with respect to 
FC or a pro rata share of any amount of FC for purposes of section 
951A.
    (ii) Example 2--(A) Facts. USP, a domestic corporation, and 
Individual A, a United States citizen, own 90% and 10%,

[[Page 29133]]

respectively, of PRS1, a domestic partnership. PRS1 and Individual 
B, a nonresident alien individual, own 90% and 10%, respectively, of 
PRS2, a domestic partnership. PRS2 owns 100% of the single class of 
stock of FC, a foreign corporation. USP, Individual A, and 
Individual B are unrelated to each other.
    (B) Analysis--(1) CFC and United States shareholder 
determination. Under paragraph (d)(2) of this section, the 
determination of whether PRS1, PRS2, USP, and Individual A (each a 
United States person) are United States shareholders of FC and 
whether FC is a controlled foreign corporation is made without 
regard to paragraph (d)(1) of this section. PRS2 owns 100% of the 
total combined voting power or value of the FC stock within the 
meaning of section 958(a). Accordingly, PRS2 is a United States 
shareholder under section 951(b), and FC is a controlled foreign 
corporation under section 957(a). Under sections 958(b) and 
318(a)(2)(A), PRS1 is treated as owning 90% of the FC stock owned by 
PRS2. Accordingly, PRS1 is a United States shareholder under section 
951(b). Further, under section 958(b)(2), PRS1 is treated as owning 
100% of the FC stock for purposes of determining the FC stock 
treated as owned by USP and Individual A under section 318(a)(2)(A). 
Therefore, USP is treated as owning 90% of the FC stock under 
section 958(b) (100% x 100% x 90%), and Individual A is treated as 
owning 10% of the FC stock under section 958(b) (100% x 100% x 10%). 
Accordingly, both USP and Individual A are United States 
shareholders of FC under section 951(b).
    (2) Application of sections 951 and 951A. Under paragraph (d)(1) 
of this section, for purposes of sections 951 and 951A, PRS1 and 
PRS2 are not treated as owning (within the meaning of section 
958(a)) the FC stock; instead, PRS1 and PRS2 are treated in the same 
manner as foreign partnerships for purposes of determining the FC 
stock owned by USP and Individual A under section 958(a)(2) and 
paragraph (b) of this section. Therefore, for purposes of 
determining the amount included in gross income under sections 951 
and 951A, USP is treated as owning 81% (100% x 90% x 90%) of the FC 
stock under section 958(a), and Individual A is treated as owning 9% 
(100% x 90% x 10%) of the FC stock under section 958(a). Because USP 
and Individual A are both United States shareholders of FC, USP and 
Individual A determine their respective inclusions under sections 
951 and 951A based on their ownership of FC stock under section 
958(a).

    (4) Applicability date. Paragraphs (d)(1) through (3) of this 
section apply to taxable years of foreign corporations beginning on or 
after the date of publication of the Treasury decision adopting these 
rules as final regulations in the Federal Register, and to taxable 
years of United States persons in which or with which such taxable 
years of foreign corporations end. For taxable years that precede the 
taxable years described in the preceding sentence, a domestic 
partnership may apply those paragraphs to taxable years of a foreign 
corporation beginning after December 31, 2017, and to taxable years of 
the domestic partnership in which or with which such taxable years of 
the foreign corporation end, provided that the partnership, its 
partners that are United States shareholders of the foreign 
corporation, and other domestic partnerships that bear relationships 
described in section 267(b) or 707(b) to the partnership (and their 
United States shareholder partners) consistently apply paragraph (d) of 
this section with respect to all foreign corporations whose stock the 
domestic partnerships own within the meaning of section 958(a) 
(determined without regard to paragraph (d)(1) of this section).
* * * * *
0
Par. 10. Section 1.1502-51 is amended by revising the last sentence in 
paragraph (b) and adding paragraph (g)(2) to read as follows:


Sec.  1.1502-51  Consolidated section 951A.

* * * * *
    (b) * * * In addition, see Sec.  1.958-1(d).
* * * * *
    (g) * * *
    (2) The last sentence of paragraph (b) of this section. The last 
sentence of paragraph (b) of this section applies to taxable years of 
United States shareholders described in Sec.  1.958-1(d)(4).

Kirsten Wielobob,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2019-12436 Filed 6-14-19; 4:15 pm]
 BILLING CODE 4830-01-P