Guidance Under Sections 951A and 954 Regarding Income Subject to a High Rate of Foreign Tax, 44620-44649 [2020-15351]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 85, Number 142 (Thursday, July 23, 2020)]
[Rules and Regulations]
[Pages 44620-44649]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-15351]



[[Page 44619]]

Vol. 85

Thursday,

No. 142

July 23, 2020

Part III





Department of the Treasury





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Internal Revenue Service





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12 CFR Parts 1206, 1225 and 1240





Guidance Under Sections 951A and 954 Regarding Income Subject to a High 
Rate of Foreign Tax; Final Rule

26 CFR Part 1





Guidance Under Section 954(b)(4) Regarding Income Subject to a High 
Rate of Foreign Tax; Proposed Rule

Federal Register / Vol. 85 , No. 142 / Thursday, July 23, 2020 / 
Rules and Regulations

[[Page 44620]]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9902]
RIN 1545-BP15


Guidance Under Sections 951A and 954 Regarding Income Subject to 
a High Rate of Foreign Tax

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations under the global 
intangible low-taxed income and subpart F income provisions of the 
Internal Revenue Code regarding the treatment of income that is subject 
to a high rate of foreign tax. The final regulations affect United 
States shareholders of foreign corporations. This guidance relates to 
changes made to the applicable law by the Tax Cuts and Jobs Act, which 
was enacted on December 22, 2017.

DATES: 
    Effective date: These regulations are effective on September 21, 
2020.
    Applicability dates: For dates of applicability, see Sec. Sec.  
1.951A-7(b) and 1.954-1(h)(1) and (3).

FOR FURTHER INFORMATION CONTACT: Jorge M. Oben or Larry R. Pounders at 
(202) 317-6934 (not a toll-free number).

SUPPLEMENTARY INFORMATION: 

Background

    Section 951A, which contains the global intangible low-taxed income 
(``GILTI'') rules, was added to the Internal Revenue Code (the 
``Code'') by the Tax Cuts and Jobs Act, Public Law 115-97, 131 Stat. 
2054, 2208 (December 22, 2017) (the ``Act''). On October 10, 2018, the 
Department of the Treasury (``Treasury Department'') and the IRS 
published proposed regulations (REG-104390-18) under sections 951, 
951A, 1502, and 6038 in the Federal Register (83 FR 51072). On June 21, 
2019, the Treasury Department and the IRS published final regulations 
(T.D. 9866) in the Federal Register (84 FR 29288, as corrected at 84 FR 
44693) under sections 951, 951A, 1502, and 6038, and proposed 
regulations (REG-101828-19) under sections 951, 951A, 954, 956, 958, 
and 1502 in the Federal Register (84 FR 29114, as corrected at 84 FR 
37807) (``2019 proposed regulations''). Terms used but not defined in 
this preamble have the meaning provided in these final regulations.
    The Treasury Department and the IRS received written comments with 
respect to the 2019 proposed regulations. A public hearing on the 2019 
proposed regulations was not held because there were no requests to 
speak.
    This rulemaking finalizes the portion of the 2019 proposed 
regulations under sections 951A and 954 regarding the treatment of 
income subject to a high rate of foreign tax but does not finalize the 
portions of the 2019 proposed regulations under sections 951, 956, 958, 
and 1502 regarding the treatment of domestic partnerships. The Treasury 
Department and the IRS plan to finalize those regulations separately.
    Comments outside the scope of this rulemaking are generally not 
addressed but may be considered in connection with future guidance 
projects. All written comments received in response to the 2019 
proposed regulations are available at www.regulations.gov or upon 
request.

Summary of Comments and Explanation of Revisions

I. Overview

    The 2019 proposed regulations apply the high-tax exclusion set 
forth in section 951A(c)(2)(A)(i)(III) (the ``GILTI high-tax 
exclusion''), on an elective basis, to certain high-taxed income of a 
controlled foreign corporation (as defined in section 957) (``CFC'') 
regardless of whether the income would otherwise be foreign base 
company income (as defined in section 954) (``FBCI'') or insurance 
income (as defined in section 953). See proposed Sec.  1.951A-2(c)(6). 
The final regulations retain the basic approach and structure of the 
2019 proposed regulations, with certain revisions. This Summary of 
Comments and Explanation of Revisions discusses those revisions as well 
as comments received.
    As discussed in part IV of this Summary of Comments and Explanation 
of Revisions, numerous comments recommended that the application of the 
GILTI high-tax exclusion be conformed with the high-tax exception of 
section 954(b)(4) and Sec.  1.954-1(d)(5) (the ``subpart F high-tax 
exception''). The Treasury Department and the IRS agree that the GILTI 
high-tax exclusion and the subpart F high-tax exception should be 
conformed but have determined that the rules implementing the GILTI 
high-tax exclusion better reflect the policies underlying section 
954(b)(4) in light of the changes made by the Act. As a result, a 
separate notice of proposed rulemaking published in the Proposed Rules 
section of this issue of the Federal Register (REG-127732-19) (the 
``2020 proposed regulations'') proposes to generally conform the rules 
implementing the subpart F high-tax exception to the rules implementing 
the GILTI high-tax exclusion set forth in these final regulations, and 
provides for a single election under section 954(b)(4) for purposes of 
both subpart F income and tested income.

II. Calculation of Effective Foreign Tax Rate

A. QBU-by-QBU Determination

    The 2019 proposed regulations apply based on the effective foreign 
tax rate imposed on the aggregate of all items of tentative net tested 
income of a CFC attributable to a single qualified business unit (as 
defined in section 989(a)) (``QBU'') of the CFC that would be in a 
single tested income group. See proposed Sec.  1.951A-2(c)(6)(i)(B) and 
(c)(6)(ii)(A). The 2019 proposed regulations apply on a QBU-by-QBU 
basis to minimize the ``blending'' of income subject to different 
foreign tax rates and, as a result, more accurately identify income 
subject to a high rate of foreign tax such that low-taxed income 
continues to be subject to the GILTI regime in a manner consistent with 
its underlying policies.
    The Treasury Department and the IRS received several comments 
regarding the determination of the effective foreign tax rate on a QBU-
by-QBU basis. One comment supported the QBU-by-QBU determination. Other 
comments requested that the effective foreign tax rate test apply on a 
CFC-by-CFC basis and asserted that this approach would better align the 
GILTI high-tax exclusion with the subpart F high-tax exception. The 
comments also stated that a CFC-by-CFC approach would be consistent 
with the principles used to determine foreign income taxes deemed paid 
under proposed regulations under section 960 and would reduce 
complexity and compliance burdens. One comment noted that taxpayers are 
not required to conduct this type of QBU-level analysis for any other 
U.S. tax purpose and, thus, they may lack the systems, data, or 
personnel to do so. Other comments stated that nonconformity with the 
subpart F high-tax exception would encourage taxpayers to structure 
into the subpart F high-tax exception and questioned the authority to 
adopt a QBU-by-QBU approach given the general mechanics of the GILTI 
regime, which compute certain items at the CFC level before aggregating 
such items at the United States shareholder (as defined in section 
951(b)) (``U.S. shareholder'') level.
    Some comments suggested that there is not a significant risk of 
blending foreign income subject to different tax

[[Page 44621]]

rates and asserted that such blending should not give rise to policy 
concerns. Other comments stated that applying the effective foreign tax 
rate test on a CFC-by-CFC basis would ameliorate issues caused by 
differences between U.S. and foreign tax accounting methods.
    Consistent with the rules set forth in the 2019 proposed 
regulations, the Treasury Department and the IRS have determined that 
calculating the effective foreign tax rate on a CFC-by-CFC basis would 
inappropriately allow the blending of high-taxed and low-taxed income 
in a manner that is inconsistent with the purpose of section 951A, 
which is to limit potential base erosion incentives created by a 
participation exemption regime. Such blending would allow low-taxed 
income, which poses a significant base-erosion risk, to be excluded 
from the GILTI regime. While the legislative history indicates that 
high-taxed income does not present base erosion concerns, the policy 
rationale underlying that view does not extend to excluding low-taxed 
income from GILTI merely because it may be earned by an entity that 
also earns high-taxed income. See S. Comm. on the Budget, 
Reconciliation Recommendations Pursuant to H. Con. Res. 71, S. Print. 
No. 115-20, at 371 (2017) (``The Committee believes that certain items 
of income earned by CFCs should be excluded from the GILTI [regime], 
either because they should be exempt from U.S. tax--as they are 
generally not the type of income that is the source of the 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 QBU-by-QBU approach is also consistent with the legislative 
history to section 954(b)(4), which directs the Treasury Department and 
the IRS to allow reasonable groupings of items of income that are 
substantially taxed at the same rate in a single country. See H.R. Rep. 
No. 99-426, at 400-01 (1985) (``Although this rule applies separately 
with respect to each `item of income' received by a [CFC], the 
committee expects that the Secretary will provide rules permitting 
reasonable groupings of items of income that bear substantially equal 
effective rates of tax in a given country. For example, all interest 
income received by a [CFC] from sources within its country of 
incorporation may reasonably be treated as a single item of income for 
purposes of this rule, if such interest is subject to uniform taxing 
rules in that country.''). Therefore, consistent with this legislative 
history, generally only high-taxed income, and not low- or zero-taxed 
income, should be excluded from gross tested income. The GILTI high-tax 
exclusion carries out this purpose by determining the effective rate of 
tax on an item of income at a granular enough level to preclude 
inappropriate blending without imposing undue compliance burdens on 
taxpayers.
    Although greater blending of income subject to different rates of 
foreign tax may be permitted within a separate category under section 
904, a section 904 separate category is not an appropriate standard for 
determining an item of income under section 954(b)(4) because section 
904 applies, by its terms, to separate categories of income while 
section 954(b)(4) applies to items of income. Moreover, the purposes of 
sections 951A and 954(b)(4), which are primarily intended to address 
base erosion concerns, differ from the purposes of sections 901 and 
904, which are tailored to the avoidance of double taxation of foreign 
source income. The ability to credit foreign taxes against a broader 
class of income at the U.S. shareholder level does not compel a CFC-by-
CFC effective foreign tax rate computation for purposes of the GILTI 
high-tax exclusion. In addition, determining whether an item of income 
is high-taxed by grouping similar items at a QBU level has historically 
been required for certain passive income under Sec. Sec.  1.904-4(c) 
and 1.954-1(c)(1)(iii)(B). Consistent with the 2019 proposed 
regulations, Sec.  1.904-4(c) groups passive income items for purposes 
of determining whether they are subject to a high rate of tax on a QBU-
by-QBU basis.
    Finally, because the GILTI high-tax exclusion applies on an 
elective basis, taxpayers may choose not to make the election if the 
compliance burdens of the computation outweigh the benefits.
    For these reasons, the final regulations do not adopt a CFC-by-CFC 
approach. However, the final regulations replace the QBU-by-QBU 
approach with a more targeted approach based on ``tested units'' (as 
discussed in part III.A of this Summary of Comments and Explanation of 
Revisions), permit some additional blending of income under the tested 
unit combination rule (as discussed in part III.B of this Summary of 
Comments and Explanation of Revisions), and allow taxpayers additional 
flexibility by permitting the GILTI high-tax exclusion election to be 
made on an annual basis (as discussed in part IV.C of this Summary of 
Comments and Explanation of Revisions). Further, as noted in part I of 
this Summary of Comments and Explanation of Revisions, the separate 
notice of proposed rulemaking published concurrently with these final 
regulations conforms the rules implementing the subpart F high-tax 
exception with the GILTI high-tax exclusion, thereby eliminating the 
disparity between the two elections and the incentive for taxpayers to 
structure into the subpart F high-tax exception.

B. CFC-Level Determination of Foreign Taxes

    For purposes of the subpart F high-tax exception, the final 
regulations under Sec.  1.954-1(d)(3) (before modification by this 
Treasury decision) determined, for each U.S. shareholder, the foreign 
income taxes paid or accrued with respect to an item of income based on 
the amount of foreign income taxes that would be deemed paid under 
section 960 if the item of income were included in the gross income of 
the U.S. shareholder under section 951(a)(1)(A). The 2019 proposed 
regulations modify this determination, for purposes of both the subpart 
F high-tax exception and the GILTI high-tax exclusion, by referencing 
the amounts of income and taxes at the CFC level, rather than the 
amount of taxes that would be deemed paid at the U.S. shareholder 
level. See proposed Sec.  1.954-1(d)(3)(i) and proposed Sec.  1.951A-
2(c)(6)(iv). Specifically, foreign income taxes of the CFC for the 
current year are allocated and apportioned to the CFC's gross income 
based on the rules under Sec.  1.960-1(d), which determine foreign 
income taxes ``properly attributable'' to income. The 2019 proposed 
regulations modify this calculation because the determination of income 
and taxes at the CFC level is more consistent with the text of section 
954(b)(4), which refers to items of income (and tax imposed on such 
items) of the CFC. In addition, deemed paid credits for taxes properly 
attributable to tested income under section 960(d) are determined on an 
aggregate basis, which does not provide an accurate basis to determine 
the effective foreign tax rate on particular items of income of a CFC 
under the GILTI high-tax exclusion provided under section 954(b)(4).
    A comment requested that the effective foreign tax rate test be 
based on the shareholder's deemed paid credit for taxes properly 
attributable to tested income, as defined in section 960(d), over the 
shareholder's net CFC tested income, as defined in section 951A(c). The 
comment asserted that such an aggregate determination, which would 
mirror the calculation of the GILTI

[[Page 44622]]

inclusion, would be consistent with the GILTI legislative history, 
would produce more equitable results than those provided under the 2019 
proposed regulations, and would significantly reduce compliance and 
administrative burdens for taxpayers and the government.
    The Treasury Department and the IRS have concluded that this 
approach for calculating the effective foreign tax rate would be 
inconsistent with section 954(b)(4). Unlike a GILTI inclusion, which is 
based on the aggregate amounts of a U.S. shareholder's pro rata shares 
of certain items from all the CFCs in which the shareholder is a U.S. 
shareholder, section 954(b)(4) applies by its terms to items of income 
of a single CFC. That is, section 954(b)(4) applies with respect to 
``any item of income received by a CFC'' that is subject to a 
sufficiently high rate of foreign tax. Moreover, section 
951A(c)(2)(A)(i), which provides exclusions from tested income 
including the high-tax exclusion, refers to ``the gross income of such 
corporation.'' Nothing in section 954(b)(4), or section 
951A(c)(2)(A)(i)(III), suggests that the aggregate approach of the 
GILTI regime should or could apply for purposes of determining whether 
an item of income received by a CFC is subject to a sufficiently high 
level of foreign tax under section 954(b)(4). Thus, the final 
regulations do not adopt this comment.

C. Effective Foreign Tax Rate

1. Threshold Rate of Tax
    Consistent with section 954(b)(4), the 2019 proposed regulations 
apply the GILTI high-tax exclusion by comparing the effective foreign 
tax rate with 90 percent of the rate that would apply if the income 
were subject to the maximum rate of tax specified in section 11 
(currently 18.9 percent, based on a maximum rate of 21 percent). See 
proposed Sec.  1.951A-2(c)(6)(i)(B).
    Several comments requested that the GILTI high-tax exclusion 
instead be applied if the effective foreign tax rate is at least 13.125 
percent. One comment requested that it be based on a tax rate of 13.125 
percent for taxable years beginning on or before December 31, 2025, and 
16.406 percent for taxable years beginning after such date. The 
comments asserted that using a 13.125 percent rate would be consistent 
with the legislative history indicating that no residual tax should be 
due on GILTI subject to an effective foreign tax rate in excess of 
13.125 percent, which takes into account the 80 percent foreign tax 
credit allowance in section 960(d) and the 50 percent deduction under 
section 250, and that the rate should be adjusted for taxable years 
beginning after December 31, 2025, to correspond to the reduction in 
the amount of deduction allowed with respect to GILTI as provided in 
section 250(a)(3)(B).
    The Treasury Department and the IRS disagree with these comments. 
The GILTI high-tax exclusion is based on section 954(b)(4), which 
refers to a tax 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. The rate set forth in section 954(b)(4) does 
not vary depending on whether it applies for purposes of determining 
FBCI, insurance income, or tested income. Furthermore, the legislative 
history describing a 13.125 percent foreign tax rate addresses 
situations in which income is included in tested income and, 
consequently, subject to GILTI and the associated foreign tax credit 
rules under section 960(d).\1\ Those rules do not apply to income 
excluded from tested income by reason of the GILTI high-tax exclusion. 
Accordingly, the final regulations do not adopt these comments.
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    \1\ In addition, the assertion made by certain commenters that 
the law categorically provides that no residual U.S. tax is owed 
under GILTI at foreign effective tax rates of 13.125% is incorrect. 
See Joint Comm. on Tax'n, General Explanation of Public Law 115-97, 
at 381 & n.1753.
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2. Safe Harbors
    One comment asserted that the ``mechanical snapshot'' rule for 
determining the effective foreign tax rate under the 2019 proposed 
regulations can produce results that are unreasonable given timing 
differences between the U.S. and foreign tax bases. The comment stated 
that if an item is accounted for in one period for U.S. tax purposes, 
but in another period for foreign tax purposes, the CFC may appear to 
have a high effective foreign tax rate in one period, and a low 
effective foreign tax rate in the other period, when in fact it is 
simply subject to a rate of tax comparable to the U.S. rate on its 
foreign tax base over both periods. To address these timing 
differences, the comment suggested that the final regulations include 
two new methods, in addition to the method set forth in the 2019 
proposed regulations, for calculating the effective foreign tax rate, 
each of which could be safe harbors applied at the discretion of the 
taxpayer.
    Under the first suggested method, the GILTI high-tax exclusion 
would apply if the foreign statutory income tax rate to which a QBU's 
income is subject is sufficiently high and there is no special tax 
regime to which a material percentage of the QBU's income is subject. 
In such a case, the safe harbor would apply and all the income of the 
QBU would be eligible for the GILTI high-tax exclusion. The comment 
indicated that the foreign statutory rate could be determined by 
reference to publications maintained by the OECD and a special tax 
regime could be determined in a manner consistent with the 2016 U.S. 
Model Income Tax Treaty.
    The second suggested method would allow taxpayers to determine a 
QBU's effective foreign tax rate by reference to the average effective 
foreign tax rate in the current and preceding four taxable years. The 
comment asserted that this approach would smooth out timing differences 
and more accurately determine whether the QBU's income was in fact 
subject to relatively high rates of tax. The comment also noted that 
although the GILTI regime generally operates on an annual basis, the 
determination of whether the income of a QBU is subject to a rate of 
foreign tax comparable to the U.S. rate may be better determined over a 
longer period based on the facts and circumstances.
    The Treasury Department and the IRS have concluded that identifying 
special tax regimes, or determining the extent to which income would be 
subject to special tax regimes, would give rise to considerable 
complexity and administrative and compliance burdens for both taxpayers 
and the government. Similarly, the Treasury Department and the IRS have 
determined that using an average effective foreign tax rate over 
multiple taxable years would give rise to additional complexity and 
increase the burden on taxpayers and the government due, for example, 
to foreign tax redeterminations with respect to a QBU's income, such as 
an adjustment for a loss carryback. Such adjustments would not only 
affect the year of the redetermination, but also every other year that 
took the redetermination year into account in calculating the average 
effective foreign tax rate, potentially resulting in multiple amended 
returns attributable to a foreign tax redetermination for a single 
taxable year. A prior year averaging approach would also lead to 
distortive results, such as when the CFC had losses or volatile 
earnings. Accordingly, the final regulations do not adopt these safe 
harbors. As described in Part III.B. of this Summary of Comments, the 
tested unit combination rule should ameliorate some of the concerns 
raised by the comment.

[[Page 44623]]

D. Base and Timing Differences

1. In General
    The 2019 proposed regulations generally provide that the effective 
rate at which taxes are imposed for a taxable year is the U.S. dollar 
amount of foreign income taxes paid or accrued with respect to a 
tentative net tested income item,\2\ over the sum of the U.S. dollar 
amount of the tentative net tested income item and the amount of 
foreign income taxes paid or accrued with respect to the tentative net 
tested income item. See proposed Sec.  1.951A-2(c)(6)(iii). A tentative 
net tested income item is generally determined by taking into account 
certain items of gross income (determined under federal income tax 
principles) attributable to a QBU, less deductions (also determined 
under federal income tax principles) allocated and apportioned to such 
gross income. See 1.951A-2(c)(6)(ii)(A) and (B). Thus, the effective 
foreign tax rate is based on the amount of foreign income taxes paid or 
accrued on income attributable to the QBU as determined for federal 
income tax purposes, without regard to how the income is determined for 
foreign income tax purposes.
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    \2\ The final regulations adopt the term ``tentative tested 
income item,'' instead of the term ``tentative net tested income 
item.'' See Sec.  1.951A-2(c)(7)(iii).
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    The preamble to the 2019 proposed regulations requested comments on 
whether additional rules are needed to properly account for cases 
(other than disregarded payments) 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 for federal income tax 
purposes. The preamble cites examples of possible adjustments to 
address circumstances in which QBUs are permitted to share losses or 
determine tax liability based on combined income for foreign tax 
purposes.
2. Disregarded Payments
    The proposed regulations generally provide that gross income is 
attributable to a QBU if it is properly reflected on the books and 
records of the QBU, determined under federal income tax principles, 
except that such income is adjusted to account for certain disregarded 
payments. See proposed Sec.  1.951A-2(c)(6)(ii)(A)(2). The adjustments 
for disregarded payments are made under the principles of Sec.  1.904-
4(f)(2)(vi) (rules attributing gross income to a foreign branch), 
without regard to the exclusion for interest described in Sec.  1.904-
4(f)(2)(vi)(C)(1). See id.
    One comment suggested that a disregarded payment should not result 
in the reallocation of income between QBUs for purposes of computing 
the GILTI high-tax exclusion. The Treasury Department and IRS 
understand the comment's concern to be the potential inability to claim 
the GILTI high-tax exclusion in scenarios where a disregarded payment 
was made from a high-taxed CFC to a disregarded entity that paid no 
tax.
    The Treasury Department and the IRS have determined that, if a 
tested unit \3\ makes a disregarded payment to another tested unit, 
gross income should be reallocated among the tested units to 
appropriately associate the income with the tested unit in which it is 
subject to tax. This reallocation promotes conformity between the 
income attributed to a tested unit and the income of that tested unit 
that is subject to tax in the foreign country, and, therefore, this 
rule results in a more accurate grouping of items of income that are 
generally subject to the same or similar rates of foreign tax. In 
addition, treating disregarded payments in this manner is consistent 
with the treatment of regarded payments. For example, if a tested unit 
of a CFC were to make a regarded deductible payment that is taken into 
account by another tested unit of the CFC (such as a tested unit that 
is an interest in a partnership), the payment would be an item of gross 
income of the payee tested unit that may qualify for the GILTI high-tax 
exclusion based on the foreign taxes attributable to that tested unit. 
Moreover, the regarded deduction would be reflected in a reduced 
tentative net tested income item (relative to the result in the absence 
of adjustment for disregarded payments)--and, consequently, the 
denominator of the effective foreign tax rate fraction--with respect to 
the payor tested unit for purposes of assessing whether its gross 
income is subject to a high rate of foreign tax. For these reasons, the 
comment is not adopted.
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    \3\ As discussed in part III of this Summary of Comments and 
Explanation of Revisions, the final regulations adopt a ``tested 
unit'' standard that replaces the QBU standard used in the 2019 
proposed regulations.
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    The final regulations provide additional rules addressing 
disregarded payments, including providing additional detail on how the 
principles of Sec.  1.904-4(f)(2)(vi) should be applied. See Sec.  
1.951A-2(c)(7)(ii)(B)(2). For example, the final regulations provide 
that a disregarded payment of interest is allocated and apportioned 
ratably to all of the gross income attributable to the tested unit that 
is making the disregarded payment. See Sec.  1.951A-
2(c)(7)(ii)(B)(2)(iv). The final regulations also provide special 
ordering rules for reallocations with respect to multiple disregarded 
payments. See Sec.  1.951A-2(c)(7)(ii)(B)(2)(iv).
3. Foreign Net Operating Losses and Other Timing Differences
    Some comments requested that the final regulations allow taxpayers 
to elect to adjust either the numerator or denominator of the effective 
foreign tax rate fraction to take into account foreign net operating 
loss (``NOL'') carryforwards and other similar items. One comment 
asserted that, while the effective foreign tax rate calculation 
generally serves as an appropriate test, CFCs with a foreign NOL 
carryover may fail the test even though the rate of tax in the foreign 
country exceeds 18.9 percent. Another comment indicated that a CFC 
could fail the mechanical test in a single year although the same 
income is subject to a foreign tax that is substantially higher than 
the U.S. corporate tax rate because of timing differences (that is, 
differences in when income or deductions are taken into account for 
U.S. and foreign tax purposes).
    The Treasury Department and the IRS have determined that adjusting 
the numerator or denominator of the effective foreign tax rate fraction 
for foreign NOL carryforwards or other timing differences would result 
in considerable complexity and would impose a significant burden on 
both taxpayers and the government. It would require the application of 
foreign tax accounting rules, and complex coordination rules to 
reconcile their application with U.S. tax accounting rules, both in the 
current taxable year and other taxable years, to prevent an item of 
income, gain, deduction, loss, or credit from being duplicated or 
omitted. Accordingly, this comment is not adopted.

III. Adoption of Tested Unit Standard

A. In General

    As discussed in part II.A of this Summary of Comments and 
Explanation of Revisions, the 2019 proposed regulations propose a QBU-
by-QBU approach to identify the relevant items of income that may be 
eligible for the GILTI high-tax exclusion. For this purpose, the 
proposed regulations reference the definition of a QBU in section 
989(a), which provides that a QBU is any separate and clearly 
identifiable unit of a trade or business of a taxpayer that maintains 
separate books and records. See proposed 1.951A-2(c)(6)(ii)(A). 
Regulations under

[[Page 44624]]

section 989(a) provide guidance as to activities that constitute a 
trade or business (based on a facts-and-circumstances analysis) and the 
determination of separate books and records. See Sec.  1.989(a)-1(c) 
and (d). The preamble to the 2019 proposed regulations requested 
comments on whether the definition of a QBU should be modified for 
purposes of the GILTI high-tax exclusion, including the requirements to 
carry on activities that constitute a trade or business and to maintain 
books and records.
    One comment asserted that it is unclear whether certain activities 
constitute a trade or business under the facts-and-circumstances test 
set forth in the regulations under section 989(a) and that making such 
determinations would frequently be administratively burdensome. The 
comment indicated that in other cases it is also difficult to determine 
whether certain interrelated activities constitute a single QBU or 
multiple QBUs (for example, different functions performed by separate 
divisions operating within a single CFC). In addition, the comment 
suggested that taxpayers may engage in affirmative tax planning to 
avoid the QBU rule by, for example, breaking up the operations of a 
single large QBU of a CFC into smaller components that would not 
constitute trades or businesses, or by choosing to no longer maintain 
books and records for such sub-lines of business. Another comment 
criticized the QBU approach because some taxpayers may track business 
activities differently than other taxpayers, which may result in the 
inconsistent application of the QBU rules. Finally, a comment noted 
that not all companies have sufficient systems in place to accurately 
track items at the QBU level.
    The 2019 proposed regulations propose the QBU standard as a proxy 
for determining the type of entity, or level of activities, that would 
likely be subject to tax in a particular foreign country either on an 
entity basis or as a taxable presence, and, as a result, would likely 
result in items of income attributable to the QBU being subject to a 
different rate of foreign tax than that imposed on other income of the 
CFC. In response to these comments, the Treasury Department and the IRS 
have concluded that a more targeted approach should be applied for 
identifying income that is likely to be subject to foreign tax rates 
different from those imposed on other income earned by the CFC. This 
approach will generally limit the scope of the factual analysis 
necessary to apply these rules--for example, it does not depend on 
whether activities constitute a trade or business, or whether books and 
records are maintained--and thereby addresses many of the concerns 
raised in these comments. Accordingly, in lieu of the QBU standard in 
the 2019 proposed regulations, the final regulations generally apply 
the GILTI high-tax exclusion based on the gross tested income of a CFC 
that is attributable to a ``tested unit.'' See Sec.  1.951A-
2(c)(7)(ii). Unlike the QBU standard that serves as a proxy for being 
subject to foreign tax, the tested unit approach generally applies to 
the extent an entity, or the activities of an entity, are actually 
subject to tax, as either a tax resident or a permanent establishment 
(or similar taxable presence), under the tax law of a foreign country.
    The final regulations provide three categories of a tested unit. 
First, and consistent with the 2019 proposed regulations, a tested unit 
includes a CFC. See Sec.  1.951A-2(c)(7)(iv)(A)(1). Thus, if a CFC, 
which itself is a tested unit, has no other tested units, the GILTI 
high-tax exclusion is applied with respect to all the tentative gross 
tested income items (determined under Sec.  1.951A-2(c)(7)(ii)) of the 
CFC.
    Second, and also consistent with the 2019 proposed regulations, a 
tested unit generally includes an interest in a pass-through entity 
held, directly or indirectly, by a CFC. See Sec.  1.951A-
2(c)(7)(iv)(A)(2). For this purpose, a pass-through entity is defined 
to include, for example, a partnership or a disregarded entity. See 
Sec.  1.951A-2(c)(7)(ix)(B).
    More specifically, a CFC's interest in a pass-through entity is a 
tested unit if the pass-through entity meets one of two requirements. 
First, the CFC's interest in the pass-through entity is a tested unit 
if the pass-through entity is a tax resident of a foreign country 
because, in these cases, income earned by the CFC indirectly through 
the pass-through entity may be subject to tax at a rate different than 
the rate at which income earned by the CFC directly is subject to tax. 
See Sec.  1.951A-2(c)(7)(iv)(A)(2)(i). Second, the CFC's interest in 
the pass-through entity is a tested unit if the pass-through entity is 
not subject to tax as a resident, but is treated as a corporation (or 
as another entity that is not fiscally transparent) for purposes of the 
CFC's tax law, because in these cases income earned by the CFC 
indirectly through the pass-through entity may not be subject to tax in 
the foreign country of which the CFC is a tax resident; thus, for 
example, an interest in a domestic limited liability company that is a 
partnership for federal income tax purposes would typically be a tested 
unit. See Sec.  1.951A-2(c)(7)(iv)(A)(2)(ii). A CFC's interest in a 
pass-through entity (or the activities of a branch) that is not a 
tested unit is a ``transparent interest.'' See Sec.  1.951A-
2(c)(7)(ix)(C); see also the discussion on transparent interests in 
part III.C.3 of this Summary of Comments and Explanation of Revisions.
    This treatment of interests in pass-through entities in the final 
regulations is consistent with a comment suggesting that a pass-through 
entity should be treated as a tested unit if the entity is treated as a 
separate entity for purposes of a foreign tax law, but not if the 
entity is fiscally transparent (and thus not a tax resident) for 
purposes of the tax law of a foreign country.
    An interest in an entity, rather than the entity itself, is treated 
as a tested unit (or a transparent interest) because the entity may 
have multiple owners and the characterization of the interest as a 
tested unit may depend on each holder's tax treatment with respect to 
the interest. As a result, less than the entire entity may be 
characterized as a tested unit or a transparent interest. In addition, 
different interests in an entity held directly or indirectly by the 
same CFC may be characterized differently. The final regulations 
include an example that illustrates the application of this rule. See 
Sec.  1.951A-2(c)(8)(iii)(D) (Example 4).
    Finally, a tested unit includes a branch, or a portion of a branch, 
the activities of which are carried on directly or indirectly by a CFC, 
provided that either (i) the branch gives rise to a taxable presence in 
the country in which the branch is located, or (ii) the branch gives 
rise to a taxable presence under the owner's tax law, and the owner's 
tax law provides an exclusion, exemption, or other similar relief (such 
as a preferential rate) for income attributable to the branch. See 
Sec.  1.951A-2(c)(7)(iv)(A)(3). In these cases, the income indirectly 
earned by the owner through the branch is likely subject to tax at a 
rate different than the rate at which income directly earned by the 
owner is subject to tax. The Treasury Department and the IRS have 
determined that this branch tested unit rule addresses blending 
concerns related to an owner's taxable presence in another country in a 
more targeted manner than the ``activities'' QBU standard from the 2019 
proposed regulations. In addition, the Treasury Department and the IRS 
have determined that the branch tested unit rule will likely reduce 
compliance burdens, as compared to the QBU standard from the 2019 
proposed regulations, because the tested unit rule

[[Page 44625]]

depends on how activities are treated under foreign tax law, an 
analysis of which in most cases would be conducted independently of the 
final regulations (for example, to determine whether a tax return must 
be filed because activities in that country give rise to a taxable 
presence).
    For purposes of the tested unit rules, references to the tax law of 
a foreign country include statutes, regulations, administrative or 
judicial rulings, and treaties of the country. See Sec.  1.951A-
2(c)(7)(iv)(A)(2) and (3) (cross-referencing definitions in regulations 
under section 267A that incorporate the definition of the tax law of a 
country in Sec.  1.267A-5(a)(21)).
    The final regulations make clear that tested units are determined 
independently of one another. For example, even though a CFC is itself 
a tested unit, the CFC may have other tested units, such as a permanent 
establishment or an interest in a disregarded entity that, subject to 
the application of the combination rule discussed in part III.B of this 
Summary of Comments and Explanation of Revisions, must be treated 
separately for purposes of the GILTI high-tax exclusion. See Sec.  
1.951A-2(c)(8)(iii)(D) (Example 4).
    The final regulations also provide a rule that addresses cases 
where the same item is attributable to more than one tested unit in a 
tier of tested units. This may occur, for example, if an item is 
properly reflected both on the separate set of books and records of one 
tested unit, and on the separate set of books and records of a lower-
tier tested that is owned (directly or indirectly) by the first tested 
unit, because the books and records of the two tested units were 
prepared under different accounting standards. In such a case, the 
final regulations provide that the item is considered to be 
attributable only to the lowest-tier tested unit. See Sec.  1.951A-
2(c)(7)(iv)(B).

B. Combined Tested Units

    The 2019 proposed regulations apply separately to each QBU of a 
CFC. See proposed Sec.  1.951A-2(c)(6)(ii)(A)(1). However, the preamble 
to the 2019 proposed regulations requested comments as to whether all 
of a CFC's QBUs located within a single foreign country should be 
combined.
    Several comments recommended combining ``same-country'' QBUs, on an 
elective basis, noting it would reduce complexity and compliance 
burdens. Some comments asserted that a combined same-country QBU 
approach would be more consistent with congressional intent for the 
GILTI regime to target income in low- and zero-tax countries, would 
reduce certain variances (for example, due to business cycle 
fluctuations or differences between the U.S. and foreign tax bases), 
and would reduce incentives for tax-motivated restructuring. Another 
comment recommended that the final regulations include rules that would 
allow taxpayers to take into account a fiscal unity or similar grouping 
in determining the effective foreign tax rate.
    The Treasury Department and the IRS generally agree that a 
combination rule would reduce compliance burdens and would be 
consistent with the policies underlying the GILTI high-tax exclusion. 
Moreover, a combination rule may minimize the effect of timing and 
other differences between the U.S. and foreign tax bases. Accordingly, 
the final regulations generally provide that tested units of a CFC 
(including the CFC tested unit), other than certain nontaxed branch 
tested units, are treated as a single tested unit if the tested units 
are tax residents of, or located in, the same foreign country. See 
Sec.  1.951A-2(c)(7)(iv)(C)(1). In general, a nontaxed branch tested 
unit is a branch tested unit that does not give rise to a taxable 
presence under the tax law of the foreign country where the branch is 
located, but gives rise to a taxable presence under the tax law of the 
foreign country where the home office of the branch is a tax resident 
and such tax law provides an exclusion, exemption, or similar relief 
for purposes of taxing income attributable to the branch. See Sec.  
1.951A-2(c)(7)(iv)(A)(3). The tested unit combination rule does not 
apply to a nontaxed branch tested unit because such a tested unit 
typically would not be subject to tax (or to any meaningful level of 
tax) in any foreign country and thus combining it with other tested 
units (the income of which may be subject to a meaningful level of tax) 
could give rise to inappropriate blending. See Sec.  1.951A-
2(c)(7)(iv)(C)(2).
    The combination rule applies without regard to whether the tested 
units are subject to the same foreign tax rate because it would be 
inconsistent with the purpose of the combination rule to require 
taxpayers to determine the effective foreign tax rate imposed on the 
tested units separately, and simply comparing the statutory foreign tax 
rates may not be meaningful. In addition, the combination rule is not 
conditioned on the tested units having the same functional currency 
because the effective foreign tax rate is calculated in U.S. dollars 
and any differences in functional currency are unlikely to have a 
material effect on whether income qualifies for the GILTI high-tax 
exclusion. Finally, the combination rule is mandatory, and not 
elective, because providing an election would give rise to additional 
complexity, and related administrative and compliance burdens.

C. Books and Records

1. In General
    Under the 2019 proposed regulations, gross income is attributable 
to a QBU if it is properly reflected on the books and records of the 
QBU. See proposed Sec.  1.951A-2(c)(6)(ii)(A)(2). For this purpose, 
gross income is determined under federal income tax principles with 
certain adjustments to reflect disregarded payments. Id.
    As discussed in part III.A of this Summary of Comments and 
Explanation of Revisions, the final regulations adopt a tested unit 
standard, rather than a QBU standard, for purposes of determining a 
tentative gross tested income item. Nevertheless, the final regulations 
retain the general approach set forth under the 2019 proposed 
regulations of relying on a separate set of books and records (as 
modified to apply to tested units, rather than QBUs) as the starting 
point for determining gross income attributable to a tested unit. The 
Treasury Department and the IRS have concluded that applying the books-
and-records approach for tested units is appropriate because it serves 
as a reasonable proxy for determining the amount of gross income that 
the foreign country of the tested unit is likely to subject to tax. In 
addition, relying on a separate set of books and records is consistent 
with the approach taken under other provisions and, therefore, should 
promote administrability for both taxpayers and the government. See, 
for example, Sec. Sec.  1.904-4(f) (foreign branch category rules), 
1.987-2(b) (rules for determining items attributable to a QBU branch), 
and 1.1503(d)-5(c) (dual consolidated loss rules).
    The final regulations generally provide that items of gross income 
of a CFC are attributable to a tested unit of the CFC to the extent 
they are properly reflected on the separate set of books and records of 
the tested unit, or of the entity an interest in which is a tested unit 
(for example, in the case of certain partnerships). See Sec.  1.951A-
2(c)(7)(ii)(B). This rule starts with the items of gross income of the 
CFC for federal income tax purposes and then attributes those items to 
the CFC's tested units to the extent the items are properly reflected 
on the separate set of books and records of the tested units (with 
certain adjustments, such as to account for disregarded payments). For

[[Page 44626]]

example, if a CFC owns a partnership interest that is a tested unit, 
the items of gross income that the CFC derives through the partnership 
interest are attributed to the CFC's interest in the partnership to the 
extent that the items are properly reflected on the separate set of 
books and records of the partnership. Thus, this approach first gives 
effect to the rules that determine the items of gross income of the 
CFC, such as the rules under section 704 for purposes of determining a 
CFC partner's distributive share of items of a partnership, and then 
attributes those items to the tested units of the CFC depending on 
whether the items are properly reflected on the separate set of books 
and records. The final regulations include examples that illustrates 
the application of this rule. See Sec.  1.951A-2(c)(8)(D) (Example 4).
2. Separate Set of Books and Records
    The Treasury Department and the IRS have determined that a tested 
unit, or an entity an interest in which is a tested unit, generally 
will maintain a separate set of books and records that would be readily 
available for purposes of the final regulations. This is expected to be 
the case for a branch tested unit under Sec.  1.951A-2(c)(7)(iv)(A)(3) 
(involving a taxable presence), for example, because a separate set of 
books and records would ordinarily be required to compute the foreign 
tax liability arising in the taxing country (or for not taking into 
account items attributable to the taxable presence if determined only 
under the owner's tax law). Accordingly, the final regulations retain 
the general approach taken in the 2019 proposed regulations by defining 
a ``separate set of books and records'' by reference to Sec.  1.989(a)-
1(d). See Sec.  1.951A-2(c)(7)(v)(A).\4\
---------------------------------------------------------------------------

    \4\ The 2020 proposed regulations, however, replace the 
reference to ``books and records'' with a more specific standard 
based on items properly reflected on an ``applicable financial 
statement,'' and request comments.
---------------------------------------------------------------------------

3. Booking Rule for Transparent Interests
    The final regulations provide a special booking rule that applies 
to a transparent interest, which, as noted in part III.A of this 
Summary of Comments and Explanation of Revisions, is an interest in a 
pass-through entity (or the activities of a branch) that is not a 
tested unit. This rule, which is consistent with the rule in Sec.  
1.1503(d)-5(c)(3)(ii) (addressing similar interests for purposes of the 
dual consolidated loss rules), generally treats items properly 
reflected on the separate set of books and records of an entity an 
interest in which is a transparent interest as being properly reflected 
on the books and records of a tested unit that holds interests 
(directly or indirectly through other transparent interests) in the 
entity. See Sec.  1.951A-2(c)(7)(v)(C). This treatment is appropriate 
because income earned by the tested unit directly, as well as income 
earned by the tested unit indirectly through the transparent interest, 
is expected to be subject to residence-based tax in only the tested 
unit's country of residence (or location) and, as a result, it is 
unlikely that blending of income subject to different foreign tax rates 
would occur by reason of the tested unit's ownership of the transparent 
interest.
4. Tested Units That Fail To Maintain a Set of Books and Records
    The final regulations include a rule that applies if a separate set 
of books and records is not prepared for a tested unit or transparent 
interest. In such a case, items required to apply the GILTI high-tax 
exclusion that would be reflected on a separate set of books and 
records of the tested unit or transparent interest must be determined 
and treated as properly reflected on the separate set of books and 
records. See Sec.  1.951A-2(c)(7)(v)(B). This rule is intended to 
address cases where a separate set of books and records is not 
maintained, and to prevent the avoidance of the rules by choosing to 
not maintain a separate set of books and records.
5. Items of Gross Income Not Taken Into Account for Financial 
Accounting Purposes
    In some cases, items of gross income (determined under federal 
income tax principles) may not be properly reflected on a separate set 
of books and records because they are not taken into account for 
financial accounting purposes. This may occur when items are taken into 
account for federal income tax purposes and financial accounting 
purposes in different taxable years, or when items are taken into 
account for federal income tax purposes but are not taken into account 
for financial accounting purposes (for example, due to the mark-to-
market method of accounting). To ensure that these items of gross 
income are attributable to a tested unit in a CFC inclusion year, the 
final regulations clarify that the items are treated as properly 
reflected on a separate set of books and records if they would be so 
reflected if they were taken into account for financial accounting 
purposes in the CFC inclusion year in which they are taken into account 
for federal income tax purposes. See Sec.  1.951A-2(c)(7)(v)(D). No 
inference should be drawn from this clarification with respect to other 
similar rules that attribute items based on books and records, 
including under Sec.  1.904-4(f), Sec.  1.987-2(b), or Sec.  1.1503(d)-
5(c).

D. De Minimis Rules

    A comment recommended that the final regulations adopt two de 
minimis rules to simplify the application of the QBU-by-QBU approach. 
First, the comment suggested that taxpayers should be permitted to 
elect to treat all CFCs with income below a specified threshold as a 
single QBU. The Treasury Department and the IRS have determined that 
aggregating CFCs for this purpose would be inconsistent with section 
954(b)(4), which applies with respect to items of income of a single 
CFC. Accordingly, this recommendation is not adopted.
    Second, the comment suggested that taxpayers should be permitted to 
elect to aggregate QBUs within the same CFC that have a small amount of 
tested income (measured either in absolute terms or based on a 
percentage of the CFC's income). However, it is uncertain whether 
aggregating QBUs with small amounts of tested income will result in a 
significant amount of simplification because, for example, gross income 
would still have to be attributed to each QBU (taking into account 
disregarded payments) to determine whether the de minimis rule applies. 
The final regulations do not adopt the recommendation, but a de minimis 
rule is included in the 2020 proposed regulations to allow an 
opportunity for additional notice and comment.

IV. Rules Regarding the Election

A. Consistency Requirement

    The 2019 proposed regulations generally provide that if a CFC is a 
member of a controlling domestic shareholder group (``CFC group''),\5\ 
a GILTI high-tax exclusion election (or revocation) is either made with 
respect to each member of the CFC group or is not made for any member 
of the CFC group. See proposed Sec.  1.951A-2(c)(6)(v)(E)(1) and part 
IV.B of this Summary of Comments and Explanation of Revisions. The 
preamble to the 2019 proposed regulations requested comments on whether 
the consistency rule should be modified or removed, for example, by 
allowing the election to be made on an item-by-item or a CFC-by-CFC 
basis.
---------------------------------------------------------------------------

    \5\ The final regulations adopt the shorter and more descriptive 
term ``CFC group,'' instead of the term ``controlling domestic 
shareholder group.'' See Sec.  1.951A-2(c)(7)(viii)(E)(2).

---------------------------------------------------------------------------

[[Page 44627]]

    Several comments requested that the final regulations eliminate the 
consistency requirement such that the GILTI high-tax exclusion election 
can be made on a CFC-by-CFC basis, which would conform the exclusion to 
the subpart F high-tax exception. Some comments asserted that the 
consistency requirement is too restrictive because the GILTI regime 
generally applies to both low- and high-taxed income and the 
consistency requirement has the effect of applying the GILTI regime 
only to low-taxed income since all high-taxed income is excluded. 
Comments further asserted that determining whether making the election 
for all CFCs is beneficial, especially when involving multiple foreign 
countries, is a complex and difficult task and would increase 
taxpayers' compliance burden. Some comments stated that the elimination 
of the consistency requirement would enable taxpayers to minimize the 
unfavorable interaction between the GILTI regime and the rules for 
allocating and apportioning deductions. Other comments asserted that 
the consistency requirement would encourage taxpayers to implement 
structures that would convert tested income into subpart F income, 
which is contrary to one of the purposes of the GILTI high-tax 
exclusion. Finally, comments suggested that if the consistency 
requirement is included in the final regulations, it is likely that 
many taxpayers will not make the GILTI high-tax exclusion election.
    The Treasury Department and the IRS have determined that the 
consistency requirement is necessary due to the collateral effect that 
the GILTI high-tax exclusion has on the allocation and apportionment of 
deductions. Specifically, allowing CFC-by-CFC or tested unit-by-tested 
unit elections would encourage the selective use of the GILTI high-tax 
exclusion to inappropriately manipulate the section 904 foreign tax 
credit limitation. In this regard, deductions allocated and apportioned 
to income excluded under section 954(b)(4) will be subject to section 
904(b)(4), as described in Part V.A of this Summary of Comments and 
Explanation of Revisions, and thereby disregarded for purposes of 
determining a taxpayer's foreign tax credit limitation under section 
904. Without a consistency requirement, taxpayers may be able to 
include high-taxed income in GILTI to claim foreign tax credits up to 
the amount of their section 904 limitation, while electing to exclude 
the remainder of such income under the GILTI high-tax exclusion. 
Consequently, the taxpayer's section 904 limitation would not take into 
account all the deductions attributable to investments generating high-
taxed income, resulting in a distortive application of the foreign tax 
credit limitation under section 904. A consistency requirement prevents 
this result by ensuring that a taxpayer that seeks to cross-credit the 
foreign tax imposed on high-taxed tentative tested income against low-
taxed tentative tested income must take all of its high-taxed tentative 
tested income into account along with all of the deductions allocated 
and apportioned to that category of income. This concern does not arise 
with respect to other types of income that are excluded from tested 
income (for example, foreign oil and gas extraction income) because 
such items are always excluded (that is, there is no electivity as to 
whether they are included in tested income), and the foreign taxes 
attributable to that income can never be claimed as a credit against 
the U.S. tax imposed on section 951A inclusions.
    The Treasury Department and the IRS agree that the GILTI high-tax 
exclusion election and the subpart F high-tax exception election should 
apply consistently and, as noted in part I of this Summary of Comments 
and Explanation of Revisions, have determined that the subpart F high-
tax exception should be conformed to the GILTI high-tax exclusion, as 
discussed in the preamble to the 2020 proposed regulations. This is 
appropriate, in part, due to changes made by the Act. Before the Act, a 
consistency requirement would have had minimal effect because post-1986 
earnings and profits (including income excluded from subpart F income 
under section 954(b)(4)) could be distributed and would be included in 
income of the U.S. shareholder, and foreign taxes would be deemed paid 
under section 902, subject to the limitations imposed by section 904, 
which is a result consistent with a subpart F inclusion. Further, 
before the Act, an amount excluded under section 954(b)(4) largely 
resulted only in the deferral of income and deemed paid foreign taxes, 
rather than an exclusion of those items from the U.S. tax base, and 
deductions allocated and apportioned to such income would limit a 
taxpayer's ability to claim foreign tax credits in the future. After 
the Act, an election under section 954(b)(4) will result in a permanent 
change in the treatment of high-taxed income and the associated foreign 
taxes and deductions, increasing the significance, from a policy 
perspective, of inconsistent treatment.
    Thus, the Treasury Department and the IRS have determined that the 
policy underlying section 954(b)(4) is best furthered through a single 
election to exclude all high-taxed income from GILTI (and, subject to 
finalization of the 2020 proposed regulations, subpart F income) 
because that income does not pose a base erosion concern and is 
therefore not the type of income that Congress intended to include in 
tested income. However, because the application of section 954(b)(4), 
and the additional administrative burden associated with identifying 
high-taxed items of income, has always been elective, the Treasury 
Department and the IRS have determined that the exclusion of such 
income (and to the extent possible any additional burden associated 
with identifying such income) should continue to be limited to cases 
where a taxpayer elects the application of section 954(b)(4).
    The Treasury Department and the IRS have determined that it would 
be inappropriate to allow a taxpayer to selectively exclude and include 
income, once it makes an election under section 954(b)(4). Section 951A 
generally does not permit electivity in the determination of tested 
income. For example, a taxpayer cannot choose to include in tested 
income amounts that would be subpart F income but for the application 
of section 954(b)(4) (regardless of whether the election is made), nor 
may a taxpayer choose to include foreign oil and gas extraction income 
in tested income. Further, contrary to some comments, the Treasury 
Department and the IRS anticipate that the additional electivity is 
more likely to increase, rather than reduce, compliance burden as a 
result of the need for more numerous calculations. As a result, the 
Treasury Department and the IRS have concluded that the consistency 
rule should be retained; accordingly, this recommendation is not 
adopted.

B. Definition of CFC Group

    The 2019 proposed regulations define a CFC group based on two 
tests. Under the first test, a CFC group means two or more CFCs if more 
than 50 percent of the total combined voting power of the stock of each 
CFC is owned (within the meaning of section 958(a)) by the same 
controlling domestic shareholder (as defined in Sec.  1.964-1(c)(5)). 
See proposed Sec.  1.951A-2(c)(6)(v)(E)(2). The second test applies 
only if no single controlling domestic shareholder satisfies the first 
test. Under the second test, the 2019 proposed regulations provide that 
a CFC group means two or more CFCs if more than 50 percent of the total 
combined voting power of the stock of each CFC is owned (within the

[[Page 44628]]

meaning of section 958(a)) by the same controlling domestic 
shareholders and each such shareholder owns (within the meaning of 
section 958(a)) the same percentage of stock in each CFC. See id. For 
purposes of both tests, a controlling domestic corporate shareholder 
includes a related person (within the meaning of section 267(b) or 
707(b)(1)) (the ``related party rule''). See id.
    One comment raised several issues with the definition of a CFC 
group. For example, the comment stated that the application of the 
related party rule is circular because it requires the already-
determined existence of a controlling domestic shareholder to apply the 
rule that a controlling domestic shareholder includes persons related 
to the controlling domestic shareholder. In addition, the comment 
requested clarification as to whether, for purposes of determining the 
CFC group, section 958(a) ownership is limited to ownership by U.S. 
persons. The comment also raised several issues related to changes in 
ownership of CFCs, including issues arising in connection with 
simultaneous acquisitions of CFCs and acquisitions of controlling 
domestic shareholders.
    In response to these comments, the final regulations revise the 
definition of a CFC group. Under the final regulations, a CFC group is 
an affiliated group, as defined in section 1504(a), with certain 
modifications that broaden the definition. See Sec.  1.951A-
2(c)(7)(viii)(E)(2)(i). First, the affiliated group rules in section 
1504(a) apply without regard to section 1504(b)(1) through (6) (which 
exclude certain corporations, such as foreign corporations, from the 
definition of an ``includible corporation''). See id. Second, for 
purposes of determining whether a CFC is a member of a CFC group, the 
final regulations incorporate a ``more than 50 percent'' threshold 
instead of the ``at least 80 percent'' threshold in section 1504(a). 
See id. Stock ownership for this purpose is determined by applying the 
constructive ownership rules of section 318(a), with certain 
modifications. See id. These constructive ownership rules would, for 
example, cause two corporations owned directly by the same U.S. 
individual to be part of a CFC group.
    The final regulations provide that the determination of whether a 
CFC is included in a CFC group is made as of the close of the CFC 
inclusion year of the CFC that ends with or within the taxable years of 
the controlling domestic shareholders. See Sec.  1.951A-
2(c)(7)(viii)(E)(2)(ii). This rule is intended to address certain 
changes in ownership of CFCs, such as acquisitions and dispositions. 
The final regulations also provide that a CFC may be a member of only 
one CFC group and include a special tie-breaker rule for situations in 
which a CFC would be a member of more than one CFC group. See Sec.  
1.951A-2(c)(7)(viii)(E)(2)(iii).
    The final regulations also clarify that if a CFC is not a member of 
a CFC group, a high-tax election is made (or revoked) only with respect 
to the CFC and the rules regarding the election apply by reference to 
the CFC. See Sec.  1.951A-2(c)(7)(viii)(A). If, however, a CFC is a 
member of a CFC group, a high-tax election is made (or revoked) with 
respect to all members of the CFC group and the rules regarding the 
election apply by reference to the CFC group. See Sec.  1.951A-
2(c)(7)(viii)(E)(1).

C. Duration of Election

    The 2019 proposed regulations generally provide that the GILTI 
high-tax exclusion election is effective for the CFC inclusion year for 
which it is made and all subsequent CFC inclusion years, unless the 
election is revoked. See proposed Sec.  1.951A-2(c)(6)(v)(C). The 2019 
proposed regulations further provide that, subject to a ``change of 
control'' exception, if an election is revoked, then the CFC cannot 
make a new election for any CFC inclusion year that begins within 60 
months following the close of the CFC inclusion year for which the 
previous election was revoked (``60-month restriction''). See proposed 
Sec.  1.951A-2(c)(6)(v)(D)(2). The preamble to the 2019 proposed 
regulations requested comments on whether the 60-month restriction 
should be modified or removed.
    Several comments requested that the 60-month restriction be 
eliminated such that taxpayers would be permitted to make the GILTI 
high-tax exclusion election on an annual basis. Some comments reasoned 
that this change would be consistent with the subpart F high-tax 
exception, which is an annual election. Another comment asserted that 
taxpayers should be permitted to make the election annually to take 
into account significant fluctuations in foreign income that taxpayers 
generate from year to year, or the likely possibility that taxpayers 
may be subject to differing foreign tax rates from year to year as a 
result of economic factors and conditions beyond their control. 
Finally, a comment stated that taxpayers with a mix of high-taxed and 
low-taxed income attributable to their QBUs must evaluate various 
factors to determine whether an election should be made and, as those 
factors change from year to year, the 60-month restriction may force 
taxpayers to pay additional tax under the GILTI regime if future 
projections are incorrect.
    The Treasury Department and the IRS agree with these comments and 
have determined that, given that the final regulations adopt a tested 
unit-by-tested unit approach (in lieu of the QBU-by-QBU approach) and 
retain the consistency requirement set forth in the 2019 proposed 
regulations, the 60-month restriction is not necessary to prevent 
abuse. Accordingly, the final regulations do not include the 60-month 
restriction and, subject to the consistency requirement, taxpayers may 
elect the GILTI high-tax exclusion on an annual basis.
    Because the final regulations eliminate the 60-month restriction, 
comments requesting that the restriction be clarified in certain 
respects are moot and therefore not discussed.

D. Effect on Non-Controlling U.S. Shareholders

    One comment requested that the final regulations include a notice 
of election and revocation requirement, which would require any U.S. 
shareholder that makes or revokes an election to notify the CFC of such 
action and require any CFC that receives an election or revocation 
notice from a U.S. shareholder for a taxable year to notify its other 
U.S. shareholders of the action taken by the U.S. shareholder and its 
ownership percentage.
    The Treasury Department and the IRS agree that U.S. shareholders 
that are not controlling domestic shareholders of a CFC should be 
informed by the controlling domestic shareholders of the CFC if they 
make (or revoke) a GILTI high-tax exclusion election with respect to 
the CFC. Therefore, the final regulations clarify that the controlling 
domestic shareholders must provide notice of elections (or 
revocations), as required by Sec.  1.964-1(c)(3)(iii), to each U.S. 
shareholder that is not a controlling domestic shareholder. See Sec.  
1.951A-2(c)(7)(viii)(A)(1)(ii), (C) and (D).

E. Treatment of Domestic Partnerships as Controlling Domestic 
Shareholders

    The proposed regulations under section 958 in the 2019 proposed 
regulations provide, as a general rule, that for purposes of sections 
951 and 951A (and certain related provisions) 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). Under an exception 
to this general rule, a domestic partnership is treated as owning stock 
of a foreign corporation within the meaning of section 958(a) for 
purposes of determining whether any

[[Page 44629]]

U.S. shareholder is a controlling domestic shareholder. See proposed 
Sec.  1.958-1(d)(2). The preamble to the 2019 proposed regulations 
requested comments on this exception. The Treasury Department and the 
IRS intend to address comments received in response to this request in 
connection with finalizing the proposed regulations under sections 951, 
956, 958, and 1502.\6\
---------------------------------------------------------------------------

    \6\ Under currently applicable Sec.  1.951A-1(e)(2), a domestic 
partnership can be a controlling domestic shareholder--for example, 
for purposes of determining which party elects the GILTI high-tax 
exclusion under Sec.  1.951A-7(c)(7)(viii)(A), including potentially 
for taxable years beginning after December 31, 2017, under Sec.  
1.951A-7(b), as discussed in part VIII of this Summary of Comments 
and Explanation of Revisions.
---------------------------------------------------------------------------

F. Elections Made or Revoked on Amended Tax Returns

    The 2019 proposed regulations generally allow a taxpayer to make 
(or revoke) the GILTI high-tax exclusion election with an amended 
income tax return. See proposed Sec.  1.951A-2(c)(6)(v)(A)(1) and 
(c)(6)(v)(D)(1). One comment indicated that it was unclear how the 
binding effect of the election on all U.S. shareholders of a CFC 
operates when the controlling domestic shareholder makes (or revokes) 
the election on an amended return. In particular, the comment stated 
that it was unclear whether a U.S. shareholder, other than a 
controlling domestic shareholder, would be required to file an amended 
return reflecting the election (or revocation). The comment further 
raised concerns about the possibility that the assessment statute of 
limitations may limit the government's ability to assess any additional 
tax due as a result of such election (or revocation). The comment 
recommended that the final regulations clarify whether U.S. 
shareholders are required to file amended income tax returns when an 
election is made (or revoked) on an amended return.
    In general, the Treasury Department and the IRS agree with the 
comment that allowing the controlling domestic shareholders to make (or 
revoke) the GILTI high-tax exclusion election on an amended income tax 
return may change the amount of U.S. tax due with respect to U.S. 
shareholders other than the controlling domestic shareholders. Further, 
the election or revocation may change the amount of U.S. tax due with 
respect to all U.S. shareholders in intervening tax years. If the 
election were made (or revoked) on an amended return after some or all 
of these taxable years are no longer open for assessment under section 
6501, it may result in the issuance of refunds for certain taxable 
years of shareholders when corresponding deficiencies could not be 
assessed or collected. As a result, the final regulations provide that 
the election may be made (or revoked) on an amended federal income tax 
return only if all U.S. shareholders of the CFC file amended federal 
income tax returns (unless an original return has not yet been filed, 
in which case the original federal income tax return may be filed 
consistently with the election (or revocation)) for the taxable year 
(and for any other taxable year in which their U.S. tax liabilities 
would be increased by reason of that election (or revocation)) (or in 
the case of a partnership if any item reported by the partnership or 
any partnership-related item would change as a result of the election 
(or revocation)), within 24 months of the unextended due date of the 
original federal income tax return of the controlling domestic 
shareholder's inclusion year with or within which the CFC inclusion 
year, for which the election is made (or revoked), ends. See Sec.  
1.951A-2(c)(7)(viii)(A)(2) and (c)(7)(viii)(C). For administrative 
purposes, the final regulations also provide that amended federal 
income tax returns for all U.S. shareholders of the CFC for the CFC 
inclusion year must be filed within a single 6-month period (within the 
24-month period). See Sec.  1.951A-2(c)(7)(viii)(A)(2)(ii). The 
requirement that all amended federal income tax returns be filed within 
a 6-month period is to allow the IRS to timely evaluate refund claims 
or make additional assessments.
    The final regulations also clarify how these rules operate in the 
case of a U.S. shareholder that is a domestic partnership. See Sec.  
1.951A-2(c)(7)(viii)(A)(3) and (4). For example, the final regulations 
provide that in the case of a U.S. shareholder that is a partnership, 
the election may be made (or revoked) with an amended Form 1065 or an 
administrative adjustment request (as described in Sec.  301.6227-1), 
as applicable. See Sec.  1.951A-2(c)(7)(viii)(A)(3). The final 
regulations further provide that if a partnership files an 
administrative adjustment request, a partner that is a U.S. shareholder 
in the CFC is treated as having complied with these requirements (with 
respect to the portion of the interest held through the partnership) if 
the partner and the partnership timely comply with their obligations 
under section 6227 with respect to that administrative adjustment 
request. See Sec.  1.951A-2(c)(7)(viii)(A)(4).

V. Foreign Tax Credit Rules

A. Allocation and Apportionment of Deductions With Respect to CFC Stock

    One comment requested that the final regulations confirm that U.S. 
shareholder deductions properly allocated and apportioned to income 
excluded under the GILTI high-tax exclusion should not be taken into 
account for purposes of section 904 per the application of section 
904(b)(4)(B). Section 904(b)(4) applies with respect to deductions 
properly allocated and apportioned to income (other than amounts 
includible under section 951(a)(1) or 951A(a)) with respect to stock of 
a specified 10-percent owned foreign corporation (as defined in section 
245A(b)) or to such stock to the extent income with respect to such 
stock is other than amounts includible under section 951(a)(1) or 
951A(a). Accordingly, section 904(b)(4) applies to any deduction 
allocated and apportioned to dividend income for which a deduction is 
allowed under section 245A. See Sec.  1.904(b)-3(a)(1)(ii). Similarly, 
section 904(b)(4) applies to any deduction allocated and apportioned to 
stock of specified 10-percent owned foreign corporations in the section 
245A subgroup. See Sec.  1.904(b)-3(a)(1)(iii). For purposes of 
characterizing stock of a CFC under Sec.  1.861-13, income excluded 
under the GILTI high-tax exclusion should be treated as any other 
foreign or U.S. source gross income described in Sec.  1.861-
13(a)(1)(i)(A)(9) and (10). The portion of the value of the stock of 
the CFC relating to such income will be assigned to the section 245A 
subgroup under Sec.  1.861-13(a)(5)(ii) through (iv). As a result, the 
Treasury Department and the IRS have determined that the regulations 
are clear regarding the interaction of U.S. shareholder deductions 
allocated and apportioned to income excluded under the GILTI high-tax 
exclusion and section 904(b)(4), and no further rules are necessary.
    Another comment suggested that the final regulations turn off the 
application of section 904(b)(4) for deductions allocated and 
apportioned to income or stock that relates to earnings and profits 
arising from CFC income that is excluded by reason of the GILTI high-
tax exclusion. This comment indicated that allowing the application of 
section 904(b)(4) could incentivize taxpayers to inappropriately locate 
deductions related to high-taxed income in the United States. The 
Treasury Department and the IRS do not agree that taxpayers will have a 
material incentive to relocate deductions relating to high-taxed income 
to the United States as a

[[Page 44630]]

result of the application of section 904(b)(4) because the foreign tax 
rates required to qualify for the GILTI high-tax exclusion must 
generally be comparable to or higher than the U.S. corporate tax rate, 
and, thus, taxpayers will generally benefit from locating such 
deductions in the foreign country. In effect, the GILTI high-tax 
exclusion reduces the effect of federal income taxes on taxpayers' 
locational decisions with respect to investment and deductions, thereby 
increasing the likelihood that such decisions will be based on non-tax 
business considerations. Furthermore, section 904(b)(4) by its terms 
applies to income that is not includible under section 951(a)(1) or 
section 951A(a), and income excluded under the GILTI high-tax exclusion 
is not includible under either of those provisions. Accordingly, the 
comment is not adopted.

B. Determination of Taxes Paid or Accrued

    One comment asserted that the 2019 proposed regulations are unclear 
as to the determination of the foreign taxes paid or accrued and 
requested that the final regulations clarify that foreign income taxes 
include taxes imposed by a country (or countries) on the net item, as 
provided under current Sec.  1.954-1(d)(3)(i). The comment specifically 
notes, as an example, instances where two foreign countries tax the 
same income.
    The rules provided in Sec.  1.951A-2(c)(7)(iii) and (vii) are 
comparable to those provided in current Sec.  1.954-1(d)(3)(i); both 
sets of rules generally apply Sec.  1.904-6 to allocate and apportion 
foreign taxes to income. Although the GILTI high-tax exclusion requires 
that foreign taxes be associated with income on a narrower basis--the 
tested unit rather than the CFC--taxes imposed on the CFC that relate 
to income of the tested unit will generally be associated with the 
appropriate income under the rules in Sec.  1.904-6, regardless of 
whether such tax is imposed by one or more countries. The 2020 proposed 
regulations propose further conformity of the rules applicable for the 
computation of the effective foreign tax rate for both subpart F income 
and tested income.
    Further, in response to this comment, as well as similar comments 
received in response to the 2019 proposed regulations, the final 
regulations (T.D. 9882) relating to foreign tax credits published in 
the Federal Register (84 FR 69022) (``the 2019 Final FTC Regulations'') 
and these final regulations clarify the rules for associating foreign 
taxes with income. In particular, these final regulations clarify that 
the amount of foreign income taxes paid or accrued by a CFC with 
respect to a tentative tested income item is the U.S. dollar amount of 
the controlled foreign corporation's current year taxes that are 
allocated and apportioned to the related tentative gross tested income. 
See Sec.  1.951A-2(c)(7)(vii). The final regulations provide that the 
deductions for current year taxes are allocated and apportioned to a 
tentative gross tested income item under the principles of Sec.  1.960-
1(d)(3), by treating each tentative gross tested income item as 
assigned to a separate tested income group. See Sec.  1.951A-
2(c)(7)(iii)(A). As a result, the principles of Sec.  1.904-6(a)(1) 
generally apply to allocate and apportion foreign income taxes to a 
tentative gross tested income item. However, the principles of Sec.  
1.904-6(a)(2) are applied, in lieu of the principles of Sec.  1.904-
6(a)(1), to associate foreign taxes with income in the case of 
disregarded payments between tested units. See Sec.  1.960-1(d)(3) and 
Sec.  1.951A-2(c)(7)(iii)(B). The final regulations provide additional 
rules for how the principles of Sec.  1.904-6(a)(2) should be applied 
for purposes of the high-tax exception. See id. In addition, a new 
example illustrates how foreign income taxes are associated with income 
in the case of disregarded payments. See Sec.  1.951A-2(c)(8)(iii)(B) 
(Example 2). The Treasury Department and the IRS also published 
proposed regulations (REG-105495-19) relating to foreign tax credits in 
the Federal Register (84 FR 69124) that contain more detailed rules for 
associating foreign taxes with income, including in the case of 
disregarded payments.

C. Annual Accounting Periods and Foreign Tax Accruals

    The proposed regulations generally provide that the amount of 
foreign income taxes paid or accrued with respect to a tentative net 
tested income item are the CFC'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 the item as in a separate tested income group. 
See proposed Sec.  1.951A-2(c)(6)(iv). Taxes accrue, and are taken into 
account in determining foreign taxes deemed paid under section 960(d), 
when all the events have occurred that establish the fact of the 
liability and the amount of the liability can be determined with 
reasonable accuracy. See Sec.  1.960-1(b)(4). Therefore, withholding 
taxes accrue when the payment from which the tax is withheld is made, 
and net basis taxes on income recognized during a taxable period accrue 
on the last day of the taxable period. Id.
    Comments suggested that the final regulations provide special rules 
to address distortions that can arise from a mismatch between the U.S. 
and foreign taxable years. One comment recommended a ``closing of the 
books election'' whereby a taxpayer could elect to allocate and 
apportion its foreign taxes accrued in one U.S. taxable year across 
multiple U.S. taxable years, in proportion to the income accrued in 
each U.S. taxable year. Other comments recommended that taxpayers be 
permitted to adopt various alternative methods of accounting, including 
the use of the foreign taxable year to determine whether income is 
subject to a high rate of tax, or methods of accounting required under 
foreign law, such as mark-to-market.
    The Treasury Department and the IRS have determined that foreign 
taxes should be associated with U.S. income consistently for all 
federal income tax purposes, and that deviating from established 
principles for determining when income and foreign taxes are taken into 
account for purposes of the GILTI high-tax exclusion would be 
inappropriate. Allowing foreign taxes to be taken into account in 
applying the GILTI high-tax exclusion in a different year than the year 
in which the foreign taxes accrue could lead to double counting, or 
double-non-counting, of the foreign taxes. This could occur, for 
example, if a foreign tax that accrued in one year both caused a prior 
year tentative tested income item to be excluded as high-taxed and was 
creditable in the later year under section 960(d). While some comments 
also recommended changes to how foreign taxes are taken into account 
more generally, changes to the foreign tax credit regime are beyond the 
scope of this rulemaking. In addition, the Treasury Department and the 
IRS responded to similar comments in Part V of the Summary of Comments 
and Explanation of Revisions in the preamble to the 2019 Final FTC 
Regulations.
    Similar considerations would apply with respect to the adoption of 
alternative methods of accounting for tentative tested income items, 
such as the adoption of a foreign fiscal year as the testing period or 
mark-to-market accounting. The use of these methods would lead to 
potential double counting of items of income, gain, deduction, or loss 
in different U.S. taxable years for different purposes, or would 
require complex coordination rules with material changes to established 
rules

[[Page 44631]]

relating to when such items accrue for federal income tax purposes. 
Such changes are beyond the scope of this rulemaking and, accordingly, 
are not adopted.

VI. Removal of Examples in Sec.  1.954-1(d)(7)

    Current Sec.  1.954-1(d)(7) provides examples that illustrate the 
application of the rules set forth in Sec.  1.954-1(c) and (d). The 
Treasury Department and the IRS have determined that these examples 
need to be updated to properly reflect changes to current Sec.  1.954-1 
made in the final regulations, and to other provisions referenced in 
the examples. Therefore, the final regulations remove the examples in 
current Sec.  1.954-1(d)(7). No inference is intended as to the removal 
of these examples. Additional examples will be considered in connection 
with the Treasury decision adopting the 2020 proposed regulations as 
final regulations in the Federal Register.

VII. Authority

    The Treasury Department and the IRS are aware that questions have 
been raised regarding the statutory authority for the GILTI high-tax 
exclusion. As described in detail in the preamble to the 2019 proposed 
regulations (see 84 FR 29114), the Treasury Department and the IRS have 
determined that the GILTI high-tax exclusion is a valid interpretation 
of ambiguous statutory text in section 951A(c)(2)(A)(i)(III) and, after 
considering assertions to the contrary, concluded that this rationale 
provides authority to finalize the GILTI high-tax exclusion. See 
Michigan v. Environmental Protection Agency, 135 S.Ct. 2699, 2707 
(2015) (observing that a court must ``accept an agency's reasonable 
resolution of an ambiguity in a statute that the agency administers,'' 
provided that such interpretation ``operate[s] within the bounds of 
reasonable interpretation.''). Specifically, the regulation interprets 
the words ``by reason of'' in that provision as denoting independently 
sufficient causation. The assertion by some commenters to the contrary 
that the words ``by reason of'' unambiguously require ``but for'' 
causation is not supported by the case law. Terms such as ``by reason 
of'' have been equated with other causal terms, such as ``because of'' 
or ``as a result of,'' and have been interpreted flexibly based on the 
underlying context and purposes of the applicable provision. Several 
recent decisions have interpreted such terms as encompassing 
independently sufficient causation based on dicta in the Supreme 
Court's recent opinion in Burrage v. United States, 134 S.Ct. 881, 890 
(2014). See, e.g., United States v. Ewing, 749 Fed.Appx. 317, 327-28 
(6th Cir. 2018); United States v. Seals, 915 F.3d 1203, 1206-07 (8th 
Cir. 2019); United States v. Feldman, 936 F.3d 1288, 1317-18 (11th Cir. 
2019).
    In addition, commenters have suggested that, based on the statutory 
structure of sections 954(b)(4) and 951A(c)(2)(A)(i)(III), the 
provisions can only apply to income that would otherwise qualify as 
FBCI or insurance income. The Treasury Department and the IRS disagree 
with this assertion because it would require that income both qualify 
as FBCI or insurance income and be excluded from such categories of 
income for purposes of the same provision. Moreover, neither section 
954(b)(4) nor 951A(c)(2)(A)(i)(III) contains any limitation on the 
category of income to which the provisions can apply, instead referring 
broadly to ``any item of income'' and ``any gross income,'' 
respectively.
    Accordingly, the GILTI high-tax exclusion is a valid interpretation 
of section 951A(c)(2)(A)(i)(III) based on the statutory text and the 
legislative purposes and history underlying section 951A, each of which 
is described in detail in the preamble to the 2019 proposed 
regulations.

VIII. Applicability Dates

    Consistent with the applicability date in the 2019 proposed 
regulations, the final regulations provide that the GILTI high-tax 
exclusion applies to taxable years of foreign corporations beginning on 
or after July 23, 2020, and to taxable years of U.S. shareholders in 
which or with which such taxable years of foreign corporations end. See 
Sec.  1.951A-7(b).\7\
---------------------------------------------------------------------------

    \7\ Although this applicability date applies to Sec.  1.954-
1(c)(1)(iv) (clarifying the treatment of deductions and loss 
attributable to disqualified basis in determining a net item of 
foreign base company income or insurance income), the rules in Sec.  
1.951A-2(c)(5) (requiring deductions or loss attributable to 
disqualified basis to be allocated and apportioned solely to 
residual gross income) apply to taxable years of foreign 
corporations beginning after December 31, 2017, and to taxable years 
of U.S. shareholders in which or with which such taxable years of 
foreign corporations end. See Sec.  1.951A-7(a). See also proposed 
Sec.  1.951A-2(c)(6) (requiring deductions related to disqualified 
payments to be allocated and apportioned solely to residual CFC 
gross income), as proposed to be amended at 85 FR 19858 (April 8, 
2020), which would apply to taxable years of foreign corporations 
ending on or after April 7, 2020, and to taxable years of U.S. 
shareholders in which or with which such taxable years end. See 
proposed Sec.  1.951A-7(d).
---------------------------------------------------------------------------

    Several comments requested that taxpayers be permitted to apply the 
GILTI high-tax exclusion earlier than the proposed regulations would 
have allowed (for example, to taxable years beginning after December 
31, 2017). In response to the comments, the final regulations permit 
taxpayers to choose to apply the GILTI high-tax exclusion to taxable 
years of foreign corporations that begin after December 31, 2017, and 
before July 23, 2020, and to taxable years of U.S. shareholders in 
which or with which such taxable years of the foreign corporations end. 
See Sec.  1.951A-7(b). Any taxpayer that applies the GILTI high-tax 
exclusion retroactively must consistently apply the rules in this 
Treasury decision to each taxable year in which the taxpayer applies 
the GILTI high-tax exclusion. See id.

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, of reducing costs, of harmonizing rules, and of promoting 
flexibility. For purposes of Executive Order 13771, this final rule is 
regulatory.
    The Office of Management and Budget's Office of Information and 
Regulatory Affairs (OIRA) has designated these regulations as subject 
to review under Executive Order 12866 pursuant to the Memorandum of 
Agreement (April 11, 2018) between the Treasury Department and the 
Office of Management and Budget (OMB) regarding review of tax 
regulations. The Office of Information and Regulatory Affairs (OIRA) 
has designated the final rulemaking as significant under section 1(c) 
of the Memorandum of Agreement. Accordingly, OMB has reviewed the final 
regulations.

A. 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 federal income tax. However, 
Congress recognized that, without any anti-base erosion measures, this 
system could incentivize taxpayers to allocate income--in particular, 
mobile income from intangible property that would otherwise be subject 
to U.S. tax--to controlled foreign corporations (``CFCs'') operating in 
low- or zero-tax

[[Page 44632]]

jurisdictions. See Senate Committee on the Budget, 115th Cong., 
Reconciliation Recommendations Pursuant to H. Con. Res. 71, at 365 (the 
``Senate Explanation''). Therefore, Congress enacted section 951A in 
order to subject intangible income earned by a CFC to U.S. tax on a 
current basis, similar to the treatment of a CFC's subpart F income 
under section 951(a)(1)(A). However, in order to protect 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 federal income tax 
further reduced by a portion of foreign tax credits under section 
960(d)). Id.
    The Treasury Department and the IRS previously issued final and 
proposed regulations under section 951A on June 21, 2019 (``2019 
proposed regulations'').

B. Need for Regulations

    The final regulations are needed to provide a framework for 
taxpayers to elect to apply the statutory high-tax exception of section 
954(b)(4) and exclude certain high-taxed income from taxation under 
section 951A.

C. Overview of Regulations

    The final regulations provide that the GILTI high-tax exclusion in 
section 951A(c)(2)(A)(i)(III) applies to high-taxed income of a CFC 
that is excluded from foreign base company income (``FBCI'') or 
insurance income under section 954(b)(4) regardless if the income would 
otherwise be FBCI or insurance income.
    The final regulations provide rules to determine the effective rate 
of tax on foreign items of income for the purposes of applying the 
GILTI high-tax exclusion. The final regulations provide that the 
effective foreign tax rate is determined on a tested unit basis. They 
also provide rules to determine the net amount of income (in other 
words, the tentative tested income item) and the foreign taxes paid or 
accrued with respect to such net amount of income that are used to 
compute the effective rate of tax. In addition, the final regulations 
indicate how to make a GILTI high-tax exclusion election. The final 
regulations provide that the election, if made, must be made 
consistently for certain related CFCs. The final regulations also 
provide that taxpayers can make the election annually.

D. Economic Analysis

1. Baseline
    The Treasury Department and the IRS have assessed the benefits and 
costs of the final regulations relative to a no-action baseline 
reflecting anticipated federal income tax-related behavior in the 
absence of these regulations.
2. Summary of Economic Effects
    The final regulations provide certainty and clarity to taxpayers in 
applying section 954(b)(4) to certain high-tax income. In the absence 
of this clarity, there is a higher likelihood that taxpayers will 
interpret the rules regarding the high-tax exclusion differently. For 
example, when taxpayers hold varying interpretations of statutory 
language, one taxpayer may undertake an investment in a particular 
country while another taxpayer may decline to make this investment with 
this difference based solely on different interpretations of how income 
from that investment will be treated under section 951A and related 
provisions. If the investment would have been more productive if 
undertaken by the second taxpayer, this difference in beliefs about tax 
treatment is economically costly. The final regulations help to 
minimize this outcome. Clarity and certainty over tax treatment also 
reduce compliance costs and the costs of tax administration.
    The final regulations also work to apply the GILTI high-tax 
exclusion in a way that treats income similarly across all 
international business activity and without favoring one type of income 
over another. In general, such equitable treatment of income-generating 
activities can be expected to improve U.S. economic performance.
    The Treasury Department and the IRS project that the final 
regulations will have annual economic effects greater than $100 million 
($2020). This determination is based on the fact that many of the 
taxpayers potentially affected by these regulations are large 
multinational enterprises. Because of their substantial size, even 
modest changes in the treatment of their foreign-source income, 
relative to the no-action baseline, can lead to changes in patterns of 
economic activity that amount to at least $100 million per year.
    The Treasury Department and the IRS project that the final 
regulations may increase U.S. taxpayers' foreign investment in high-tax 
jurisdictions, since the final regulations may decrease the effective 
tax rate on high-tax foreign-source income for some U.S. taxpayers 
relative to the no-action baseline. The Treasury Department and the IRS 
have not undertaken more precise estimates of the economic effects of 
the regulations. We do not have readily available data or models to 
predict with reasonable precision the business decisions that taxpayers 
would make under the final regulations, such as the amount and location 
of their foreign business activities, versus alternative regulatory 
approaches, including the no-action baseline.
    In the absence of quantitative estimates, the Treasury Department 
and the IRS have undertaken a qualitative analysis of the economic 
effects of the final regulations relative to the no-action baseline and 
relative to alternative regulatory approaches.
3. Economic Analysis of Specific Provisions
a. Scope of the GILTI High-Tax Exclusion
    The GILTI high-tax exclusion in section 951A permits U.S. 
shareholders of CFCs to elect to exclude certain high-taxed income from 
gross tested income. The final regulations provide guidance on which 
types of high-taxed income are eligible for the high-tax exclusion.
    The Treasury Department and the IRS considered a number of options 
for defining income that is eligible for the GILTI high-tax exclusion. 
The options were (i) to exclude from gross tested income only income 
that would be subpart F income solely but for the high-tax exception of 
section 954(b)(4) applying to such income; (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 FBCI or insurance income, if such income 
is subject to an effective foreign tax rate above the statutory 
threshold; \8\ or (iii) to exclude from gross tested income on an 
elective basis any item of gross income subject to an effective foreign 
tax rate above the statutory threshold.
---------------------------------------------------------------------------

    \8\ The statutory threshold is 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).
---------------------------------------------------------------------------

    The first option excludes 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 scope of the 
GILTI high-tax exclusion in the final 951A regulations. 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 excluded from subpart F income by reason of another exception (for

[[Page 44633]]

example, section 954(c)(6) or 954(h)). However, under this approach, 
taxpayers with high-taxed gross tested income would have an incentive 
to structure their foreign operations in order to ensure that income 
that would otherwise qualify as gross tested income would instead 
qualify as subpart F income, to a greater degree than other regulatory 
approaches that provide a broader GILTI high-tax exclusion, such as the 
third option considered. For instance, under this option, a taxpayer 
could structure its operations to have a CFC purchase personal property 
from, or sell personal property to, a related person in order to 
generate foreign base company sales income described under section 
954(d) (assuming certain other exceptions are not satisfied). The 
result would be that the CFC's income from the disposition of the 
property meets the definition of FBCI and hence is eligible for the 
high-tax exception. Because businesses are largely not currently 
structured in this way, such an organization would entail 
restructuring, which would potentially be costly and only available to 
certain taxpayers yet would not provide any general economic benefit. 
In other words, such reorganization to realize a specific tax treatment 
would suggest that tax instead of business considerations are 
determining business structures and operations. This outcome may lead 
to higher compliance costs and less efficient patterns of business 
activity relative to a regulatory approach that provides a broader 
GILTI high-tax exclusion.
    The second option broadens the application of the GILTI high-tax 
exclusion, relative to the first option, to allow taxpayers to elect to 
exclude items of gross income that are subject to an effective foreign 
tax rate above the statutory threshold, 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).
    Under this approach, however, taxpayers would have 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 they 
would not be able to exclude their CFCs' high-taxed income that is not 
subpart F income in the first instance (for example, active business 
income). This may result in differential treatment of economically 
similar income, which generally leads to economically inefficient 
decision-making. 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.
    The third option, which was adopted in the proposed regulations and 
which these regulations finalize, provides an election to broaden the 
scope of the high-tax exception relative to the other two options 
considered. Under this option, the high-tax exception under section 
954(b)(4) for purposes of the GILTI high-tax exclusion applies to any 
item of income that is subject to an effective foreign tax rate greater 
than 90 percent of the maximum corporate tax rate (currently, 18.9 
percent based on a 21 percent corporate rate). The final 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 an effective foreign tax rate above the statutory 
threshold.
    Contrary to the first two options, this approach permits similarly 
situated taxpayers with CFCs subject to a high rate of foreign tax to 
make the election to exclude such income from gross tested income and 
reduces the incentive for taxpayers to restructure their operations or 
structures to convert their high-taxed gross tested income into FBCI or 
insurance income for federal income tax purposes.
    For taxpayers that make the election, this approach will lower U.S. 
tax on certain foreign income by reducing U.S. tax on a broader scope 
of the income of high-taxed tested units compared to the no-action 
baseline. If a taxpayer elects the high-tax exclusion, U.S. tax on 
other foreign income may increase due to complex interactions with 
other provisions in the corporate tax system, such as the expense 
allocation and foreign tax credit rules, although taxpayers will 
generally only make the election if this increase in tax on other 
foreign income is less than the decrease in tax on high-taxed income. 
Thus, this approach may reduce the taxpayers' cost of capital on high-
taxed foreign investment, and at the margin, the lower cost of capital 
may increase foreign investment in high-tax jurisdictions by U.S.-
parented firms relative to the baseline.
    The Treasury Department and the IRS have not undertaken estimation 
of these effects, relative to the no-action baseline, because we do not 
have readily available data or models to estimate with any reasonable 
precision: (i) The number and attributes of the taxpayers that will 
find it advantageous to make the election; (ii) the relationship 
between the marginal effective foreign tax rate at the tested unit 
level and foreign investment by U.S. taxpayers; and (iii) the range of 
marginal effective foreign tax rates at the tested unit level that 
taxpayers are likely to have under the final regulations versus the 
baseline or other regulatory approaches.
b. Aggregation of Income for Determination of the Effective Foreign Tax 
Rate
    The statute provides an exclusion from tested income for high-taxed 
income but does not provide sufficient detail for determining how 
income should be aggregated for determining the effective foreign tax 
rate that applies to that income, such that that income would be 
excluded. The Treasury Department and the IRS considered four options 
to address this issue: (i) Apply the determination of whether income is 
high-taxed on an item-by-item basis; (ii) apply the determination on a 
CFC-by-CFC basis; (iii) apply the determination on a qualified business 
unit (``QBU'')-by-QBU basis; and (iv) apply the determination on a 
tested unit-by-tested unit basis.
    The first option is to determine whether income is high-taxed 
income on an item-by-item basis, based on the item-by-item 
determination that is generally applicable under the current 
regulations that implement the high-tax exception of section 954(b)(4) 
for purposes of subpart F income. However, this would entail high 
compliance costs for taxpayers and be difficult to administer because 
it would require taxpayers to analyze each item of income to determine 
whether, under federal tax principles, the item is subject to a 
sufficiently high effective foreign tax rate. The Treasury Department 
and the IRS have not estimated the higher compliance costs that might 
have been

[[Page 44634]]

incurred under this regulatory option, relative to the final 
regulations.
    The second option, to apply the determination based on all the 
items of income of the CFC, 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 was proposed 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 and the 
blending of different tax rates within a CFC would be minimized. While 
this approach would more accurately separate high-taxed and low-taxed 
income, compared to applying the high-tax exception on the basis of a 
CFC, there were several comments to the proposed regulations that noted 
the difficulties in compliance and administration that would arise if 
the QBU standard were used, such as the difficulty in determining 
whether a set of activities constituted a trade or business and hence a 
QBU.
    The fourth option, which is adopted in the final regulations, is to 
apply the high-tax exception on the basis of the items of gross income 
of a tested unit of a CFC. The tested unit standard is a more targeted 
measure than the QBU standard and will be more easily applied to the 
GILTI high-tax exclusion than the QBU standard. Moreover, the tested 
unit standard, similarly to the QBU standard, will minimize the 
blending of different tax rates within a CFC. For example, if a CFC 
earned $100x of tested income through a tested unit in Country A and 
was taxed at a 30 percent rate and earned $100x of tested income 
through another tested unit 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. However, if the high-tax exception applies to each of a CFC's 
tested units based on the income earned by that tested unit, then the 
two tax rates would not be blended together. Although applying the 
high-tax exception on the basis of a tested unit, rather than the CFC 
as a whole, may be more complex and administratively burdensome under 
certain circumstances and may entail somewhat higher compliance costs 
(although most of the data the taxpayer would use for this purpose will 
likely be readily available to the taxpayer and will often overlap with 
data necessary to meet other compliance requirements), 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 final regulations apply the high-tax exception 
of section 954(b)(4) based on the items of net income of each tested 
unit of the CFC.
    The Treasury Department and the IRS have not estimated these 
effects, relative to the no-action baseline, because we do not have 
readily available data or models to estimate with any reasonable 
precision the compliance costs or restructuring costs affected by these 
provisions relative to the no-action baseline or other regulatory 
alternatives.
c. Grouping of Tested Units in Same Country
    The statute does not specify how items of income in the same 
country should be treated for the purpose of applying the GILTI high-
tax exclusion. To address this issue, the final regulations provide 
guidance on how a CFC's tested units in the same country should be 
treated in order to determine if income is high-taxed.
    Under the proposed regulations, effective foreign tax rates are 
determined separately for each QBU, even if other QBUs of the same CFC 
are located in the same county. Testing each QBU separately would limit 
the blending of income taxed at different rates and thus limit the 
likelihood that that no-taxed or low-taxed income would qualify for the 
high-tax exclusion through aggregation with higher-taxed income. This 
approach is consistent with the intent to subject low-taxed base 
erosion-type income to tax under section 951A, as described in the 
legislative history. However, comments noted that separate testing for 
each QBU would result in high compliance burdens for taxpayers and 
could result in tax rate calculations that do not reflect the rate of 
foreign tax on QBU income, especially in circumstances in which 
separate QBUs are able to share tax attributes through a fiscal unity, 
consolidation or similar means. If tax rate calculations do not 
properly reflect the rate of foreign tax on QBU, taxpayers may 
undertake inefficient business decisions when evaluated against the 
intent and purpose of the statute.
    In the final regulations, all tested units of a CFC in the same 
country are generally grouped together to determine the effective 
foreign tax rate for the purpose of applying the high-tax exclusion. 
Under this approach, low-taxed and high-taxed income are unlikely to be 
blended, since tested units in the same country are likely to be 
subject to the same statutory tax rate. Relative to the approach in the 
proposed regulations, this approach will lower compliance burdens for 
taxpayers because taxpayers will less frequently have to allocate and 
apportion taxes paid by one tested unit to another tested unit. In 
addition, this approach may also reduce the effect of fluctuations in 
effective foreign tax rates observed in individual tested units 
relative to the regulatory alternative in the proposed regulations. 
Since multiple tested units are grouped together, outlying effective 
foreign tax rates due to timing and base differences between the U.S. 
and foreign tax rules will counterbalance each other. Finally, this 
averaging of tax rates will decrease the incentives taxpayers face to 
undertake inefficient planning activities to achieve certain tax rates 
in individual tested units relative to a regulatory approach in which 
effective foreign tax rates were determined separately for tested units 
in the same country.
    The Treasury Department and the IRS have not undertaken estimation 
of these effects, relative to the no-action baseline, because data or 
models are not readily available to estimate with any reasonable 
precision the compliance costs or patterns of business activity 
affected by these provisions relative to the no-action baseline or 
other regulatory alternatives.
d. Foreign Net Operating Losses
    The statute provides an exclusion from tested income for income 
that is high-taxed but does not specify whether or how foreign net 
operating loss (``NOL'') carryovers should be accounted for in the 
computation of the effective foreign tax rate. To address this issue, 
the final regulations provide rules governing how foreign net operating 
loss carryforwards should be accounted for in the computation of the 
effective foreign tax rate.
    The proposed regulations generally provided that the effective 
foreign tax rate that determines whether a tested unit's income is 
considered high-taxed is computed using the amount of income as 
determined for federal income tax purposes, without regard for how the 
income is determined for

[[Page 44635]]

foreign tax purposes. Thus, under this approach, foreign NOL 
carryforwards do not factor into the effective foreign tax rate 
calculation, since foreign NOL carryforwards are not accounted for in 
the federal tax base under federal tax accounting principles. Some 
comments suggested that taxpayers should be able to make adjustments to 
the effective foreign tax rate calculation to account for foreign NOL 
carryforwards. These comments noted that NOLs carried forward to 
subsequent profitable tax years of a tested unit could lead to income 
subject to a high statutory foreign tax rate not being classified as 
high-taxed for the purposes of the GILTI high-tax exclusion. The 
effective foreign tax rate--calculated using the federal tax base--
could be lower than the statutory threshold, even if the smaller 
foreign base is taxed at a higher rate.
    The Treasury Department and the IRS decided to maintain the 
approach of the proposed regulations and to not provide rules that 
account for the use of foreign NOL carryforwards. The Treasury and IRS 
determined that carried forward NOLs are an example of timing 
differences between foreign and federal tax bases. Since there may be 
differences between when certain items are recognized for federal and 
foreign tax purposes, the effective foreign tax rate of a given tested 
unit calculated for the purpose of applying the high-tax exclusion may 
change from year to year even if the tax rate on its foreign base 
remains constant. Accounting for these differences would require 
complex rules akin to the deferred tax asset and tax liability rules 
used in financial accounting. Taxpayers would need to apply rules that 
reconcile foreign and federal tax accounting rules over multiple years. 
The Treasury Department and the IRS determined that these rules would 
add undue complexity and impose a substantial compliance burden on 
taxpayers and administrative burden on the government relative to the 
regulatory approach of the final regulations. The Treasury Department 
and the IRS have not attempted to estimate the compliance burden under 
this alternative regulatory approach relative to the final regulations.
e. Election Period
    The statute provides for an election to exclude high-taxed income 
from gross tested income but does not specify the length of the 
election period. To address this issue, proposed regulations provided 
that the election into the high-tax exclusion would be generally made 
or revoked for a five-year period. The five-year election period was 
intended to prevent taxpayers from manipulating the timing of income, 
expenses, and foreign income taxes in order to achieve inappropriate 
results. As a simple example, under a shorter election period, a 
taxpayer could accelerate certain expenses that are allocable to the 
income of a high-taxed tested unit into a year when the taxpayer elects 
into the high-tax exclusion. The following year, the taxpayer could 
revoke its election. Thereby, in the second year, the taxpayer would be 
able to use the foreign income taxes paid by the high-taxed tested unit 
as creditable taxes against income included under section 951A without 
the accelerated expenses reducing the amount of the foreign tax credit 
that could be claimed. In order to achieve tax savings through this 
manipulation, taxpayers would need to manipulate a large number of 
items annually, and the manipulation of these items would be costly 
without any corresponding increase in productive economic activity.
    Comments noted that the extended election period would require 
taxpayers to make five-year projections of a large number of variables 
on a tested unit-by-tested unit basis in order to determine whether to 
elect into the high-tax exclusion. The complexity of these projections 
would result in a large burden on taxpayers. Moreover, even with a 
shorter election period, taxpayers would likely face difficulty in 
engaging in tax planning by changing their election status. Existing 
rules limit taxpayers' discretion over the timing of recognition of 
income and expenses. The complexity of manipulating the timing of 
different items across all of a taxpayer's tested units, which is 
necessary under the final regulations because the election into the 
high-tax exclusion must be made for all related CFCs, would also create 
obstacles to using frequent changes in election status as part of tax 
reduction strategies. Therefore, the Treasury Department and IRS 
determined that the reduction in taxpayer compliance burdens 
significantly outweighed concerns about potential tax planning, and the 
Treasury Department and IRS adopted a one-year election period in the 
final regulations.
    The Treasury Department and the IRS have not undertaken estimation 
of these effects, relative to the no-action baseline, because data or 
models are not readily available to estimate with any reasonable 
precision the compliance costs or patterns of business activity 
affected by these provisions relative to the no-action baseline or 
other regulatory alternatives.
4. Profile of Affected Taxpayers
    The proposed regulations potentially affect those taxpayers that 
have at least one CFC with at least one tested unit (including, 
potentially, the CFC itself) that has high-taxed income. Taxpayers with 
CFCs that have only low-taxed income are not eligible to apply the 
high-tax exception and hence are unaffected by the proposed 
regulations.
    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 an effective foreign 
tax rate above 18.9 percent, the current high-tax statutory threshold. 
The Treasury Department and the IRS further estimate that, for the 
partnerships with at least one CFC that pays an effective foreign 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.\9\ The 4,000 business entities and the 
1,500 partners provide an estimate of the number of taxpayers that 
could potentially be affected by guidance governing the election into 
the high-tax exception. The figure is approximate because the tax rate 
at the CFC-level will not necessarily correspond to the tax rate at the 
tested unit-level if there are multiple tested units within a CFC.
---------------------------------------------------------------------------

    \9\ 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.
---------------------------------------------------------------------------

    The Treasury Department and the IRS do not have readily available 
data to determine how many of these taxpayers would elect the high-tax 
exception as provided in these proposed regulations. Under the proposed 
regulations, a taxpayer that has both high-taxed and low-taxed tested 
units will need to evaluate the benefit of eliminating any tax under 
section 951 and section 951A with respect to high-taxed income against 
the costs of forgoing the use of foreign tax credits and, with respect 
to section 951A, the use of tangible assets in the computation of 
qualified business asset investment (QBAI).
    Tabulations from the IRS Statistics of Income 2014 Form 5471 file 
\10\ further

[[Page 44636]]

indicate that approximately 85 percent of earnings and profits are 
reported by CFCs incorporated in jurisdictions where the average 
effective foreign tax rate is less than or equal to 18.9 percent. The 
data indicate several examples of jurisdictions where CFCs have average 
effective foreign tax rates above 18.9 percent, such as France, Italy, 
and Japan. However, information is not readily available to determine 
how many tested units are part of the same CFC and what the effective 
foreign tax rates are with respect to such tested units. Taxpayers 
potentially more likely to elect the high-tax exception are those 
taxpayers with CFCs that only operate in high-tax jurisdictions. Data 
on the number or types of CFCs that operate only in high-tax 
jurisdictions are not readily available.
---------------------------------------------------------------------------

    \10\ 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.
---------------------------------------------------------------------------

II. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) (``PRA'') 
generally requires that a federal agency obtain the approval of the OMB 
before collecting information from the public, whether such collection 
of information is mandatory, voluntary, or required to obtain or retain 
a benefit.
    The final regulations include collections of information in Sec.  
1.951A-2(c)(7)(viii)(A)(1) and (2), and Sec.  1.951A-2(c)(7)(viii)(C). 
The collection of information in Sec.  1.951A-2(c)(7)(viii)(A)(1) 
requires that each controlling domestic shareholder of a CFC file an 
election to exclude gross income of a CFC from tested income under the 
high-tax exception of section 954(b)(4), with a timely original federal 
income tax return or Form 1065, or, subject to certain time limitations 
and other requirements, with an amended federal income tax return, 
administrative adjustment request, or amended Form 1065, as applicable. 
This collection of information in the final regulations generally 
retains the collection of information in the proposed regulations. The 
final regulations clarify that a controlling domestic shareholder must 
make this election by filing the statement required under Sec.  1.964-
1(c)(3)(ii). The collection of information in Sec.  1.951A-
2(c)(7)(viii)(A)(1)(ii) requires that each controlling domestic 
shareholder of a CFC that files an election to exclude gross income of 
a CFC from tested income under the high-tax exception of section 
954(b)(4) provide any notices required under Sec.  1.964-1(c)(3)(iii). 
The collection of information in Sec.  1.951A-2(c)(7)(viii)(C) requires 
each controlling domestic shareholder that revokes an election on an 
amended return to provide the statement and notice described in Sec.  
1.951A-2(c)(7)(viii)(A)(1)(i) and (ii), respectively.
    As shown in Table 1, the Treasury Department and the IRS estimate 
that the number of persons potentially subject to the collections of 
information in Sec.  1.951A-2(c)(7)(viii)(A)(1)(i) and (ii), and Sec.  
1.951A-2(c)(7)(viii)(C) is between 25,000 and 35,000. The estimate in 
Table 1 is based on the number of taxpayers that filed a tax return 
that included a Form 5471, ``Information Return of U.S. Persons With 
Respect to Certain Foreign Corporations.'' The collections of 
information in Sec.  1.951A-2(c)(7)(viii)(A)(1)(i) and (ii), and Sec.  
1.951A-2(c)(7)(viii)(C) can only apply to taxpayers that are U.S. 
shareholders (as defined in section 951(b)) and U.S. shareholders are 
required to file a Form 5471.

                  Table 1--Table of Tax Forms Impacted
------------------------------------------------------------------------
                           Tax Forms Impacted
-------------------------------------------------------------------------
                                    Number of        Forms to which the
  Collections of information       respondents       information may be
                                   (estimated)            attached
------------------------------------------------------------------------
Sec.   1.951A-                      25,000-35,000  Form 990 series, Form
 2(c)(7)(viii)(A)(1)(i) and                         1120 series, Form
 (ii), and Sec.   1.951A-                           1040 series, Form
 2(c)(7)(viii)(C).                                  1041 series, and
                                                    Form 1065 series
------------------------------------------------------------------------
Source: MeF, DCS, and IRS's Compliance Data Warehouse.

    The reporting burdens associated with the collections of 
information in Sec.  1.951A-2(c)(7)(viii)(A)(1)(i) and (ii) and Sec.  
1.951A-2(c)(7)(viii)(C) will be reflected in the Form 14029, Paperwork 
Reduction Act Submission, that the Treasury Department and the IRS will 
submit to OMB for tax returns in the Form 990 series, Forms 1120, Forms 
1040, Forms 1041, and Forms 1065. In particular, the reporting burden 
associated with the information collection in Sec.  1.951A-
2(c)(7)(viii)(A)(1)(i) and (ii) and Sec.  1.951A-2(c)(7)(viii)(C) will 
be included in the burden estimates for OMB control numbers 1545-0123, 
1545-0074, 1545-0092, and 1545-0047. OMB control number 1545-0123 
represents a total estimated burden time for all forms and schedules 
for corporations of 3.344 billion hours and total estimated monetized 
costs of $61.558 billion ($2019). OMB control number 1545-0074 
represents a total estimated burden time, including all other related 
forms and schedules for individuals, of 1.717 billion hours and total 
estimated monetized costs of $33.267 billion ($2019). OMB control 
number 1545-0092 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). OMB control number 1545-0047 represents a total estimated 
burden time, including all other related forms and schedules for tax-
exempt organizations, of 52.450 million hours and total estimated 
monetized costs of $1,496,500,000 ($2020). Table 2 summarizes the 
status of the Paperwork Reduction Act submissions of the Treasury 
Department and the IRS related to forms in the Form 990 series, Forms 
1120, Forms 1040, Forms 1041, and Forms 1065.
    The overall burden estimates provided by the Treasury Department 
and the IRS to OMB in the Paperwork Reduction Act submissions for OMB 
control numbers 1545-0123, 1545-0074, 1545-0092, and 1545-0047 are 
aggregate amounts related to the U.S. Business Income Tax Return, the 
U.S. Individual Income Tax Return, and the U.S. Income Tax Return for 
Estates and Trusts, along with any associated forms. The burdens 
included in these Paperwork Reduction Act submissions, however, do not 
account for any burden imposed by Sec.  1.951A-2(c)(7)(viii)(A)(1)(i) 
and (ii) and Sec.  1.951A-2(c)(7)(viii)(C). The Treasury Department and 
the IRS have not

[[Page 44637]]

identified the estimated burdens for the collections of information in 
Sec.  1.951A-2(c)(7)(viii)(A)(1)(i) and (ii) and Sec.  1.951A-
2(c)(7)(viii)(C) because there are no burden estimates specific to 
Sec.  1.951A-2(c)(7)(viii)(A)(1)(i) and (ii) and Sec.  1.951A-
2(c)(7)(viii)(C) currently available. The burden estimates in the 
Paperwork Reduction Act submissions that the Treasury Department and 
the IRS will submit to the OMB will in the future include, but not 
isolate, the estimated burden related to the tax forms that will be 
revised for the collection of information in Sec.  1.951A-
2(c)(7)(viii)(A)(1) and (ii) and Sec.  1.951A-2(c)(7)(viii)(C).
    The Treasury Department and the IRS have included the burdens 
related to the Paperwork Reduction Act submissions for OMB control 
numbers 1545-0123, 1545-0074, 1545-0092, and 1545-0047 in the PRA 
analysis for other regulations issued by the Treasury Department and 
the IRS related to the taxation of cross-border income. The Treasury 
Department and the IRS encourage users of this information to take 
measures to avoid overestimating the burden that the collections of 
information in Sec.  1.951A-2(c)(7)(viii)(A)(1)(i) and (ii) and Sec.  
1.951A-2(c)(7)(viii)(C), together with other international tax 
provisions, impose. Moreover, the Treasury Department and the IRS also 
note that the Treasury Department and the IRS estimate PRA burdens on a 
taxpayer-type basis rather than a provision-specific basis because an 
estimate based on the taxpayer-type most accurately reflects taxpayers' 
interactions with the forms.
    The Treasury Department and the IRS request comments on all aspects 
of information collection burdens related to the final 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 
Sec.  1.951A-2(c)(7)(viii)(A)(1)(i) and (ii) and Sec.  1.951A-
2(c)(7)(viii)(C) will be made available for public comment at https://apps.irs.gov/app/picklist/list/draftTaxForms.html and will not be 
finalized until after these forms have been approved by OMB under the 
PRA.

  Table 2--Summary of Information Collection Request Submissions Related to Form 990 Series, Forms 1120, Forms
                                        1040, Forms 1041, and Forms 1065
----------------------------------------------------------------------------------------------------------------
                  Form                         Type of filer          OMB No.(s)               Status
----------------------------------------------------------------------------------------------------------------
Forms 990..............................  Tax exempt entities (NEW        1545-0047  Approved by OIRA 2/12/2020
                                          Model).                                    until 2/28/2021.
                                        ------------------------------------------------------------------------
                                         Link: https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=201912-1545-014 014.
----------------------------------------------------------------------------------------------------------------
Form 1040..............................  Individual (NEW Model)...       1545-0074  Approved by OIRA 1/30/2020
                                                                                     until 1/31/2021.
                                        ------------------------------------------------------------------------
                                         Link: https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=201909-1545-021 021.
----------------------------------------------------------------------------------------------------------------
Form 1041..............................  Trusts and estates.......       1545-0092  Approved by OIRA 5/08/2019
                                                                                     until 5/31/2022.
                                        ------------------------------------------------------------------------
                                         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 1/30/2020
                                                                                     until 1/31/2021.
                                        ------------------------------------------------------------------------
                                         Link: https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=201907-1545-001 001.
----------------------------------------------------------------------------------------------------------------

III. Regulatory Flexibility Act

    It is hereby certified that these final 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 burdens in Sec.  1.951A-2(c)(7)(viii)(A)(1)(i) and (ii) and 
Sec.  1.951A-2(c)(7)(viii)(C), affect 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, Sec.  1.951A-
2(c)(7)(viii)(A)(1)(i) and (ii) and Sec.  1.951A-2(c)(7)(viii)(C) 
generally only affect 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. The Small 
Business Administration's small business size standards (13 CFR part 
121) identify as small entities several industries with annual revenues 
above $25 million or because of the number of employees.

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                  2017     2018     2019     2020     2021     2022     2023     2024     2025     2026
--------------------------------------------------------------------------------------------------------------------------------------------------------
JCT tax revenue (billion $)...................................      7.7     12.5      9.6      9.5      9.3      9.0      9.2      9.3     15.1     21.2
                                                               -----------------------------------------------------------------------------------------

[[Page 44638]]

 
    Total gross receipts (billion $)..........................    30727    53870   566676    59644    62684    65865    69201    72710    76348    80094
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 Sec.  1.951A-2(c)(7)(viii)(A)(1)(i) and (ii) and Sec.  
1.951A-2(c)(7)(viii)(C) 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 
Sec.  1.951A-2(c)(7)(viii)(A)(1)(i) and (ii) and Sec.  1.951A-
2(c)(7)(viii)(C), the Treasury Department and the IRS have concluded 
that there is no significant economic impact on such entities as a 
result of Sec.  1.951A-2(c)(7)(viii)(A)(1)(i) and (ii) and Sec.  
1.951A-2(c)(7)(viii)(C). Furthermore, the requirements in Sec.  1.951A-
2(c)(7)(viii)(A)(1)(i) and (ii) and Sec.  1.951A-2(c)(7)(viii)(C) 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 Sec.  1.951A-2(c)(7)(viii)(A)(1)(i) and (ii) and Sec.  1.951A-
2(c)(7)(viii)(C) 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 Sec.  
1.951A-2(c)(7)(viii)(A)(1)(i) and (ii) and Sec.  1.951A-
2(c)(7)(viii)(C) 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 Sec.  1.951A-2(c)(7)(viii)(A)(1)(i) and 
(ii) and Sec.  1.951A-2(c)(7)(viii)(C) on small entities.

IV. Unfunded Mandates Reform Act

    Section 202 of the Unfunded Mandates Reform Act of 1995 (2 U.S.C. 
1532) 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. This rule does not include any federal mandate that may 
result in expenditures by state, local, or tribal governments, or by 
the private sector in excess of that threshold.

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. This final rule does not have 
federalism implications and does not impose substantial direct 
compliance costs on state and local governments or preempt state law 
within the meaning of the Executive Order.

VI. Congressional Review Act

    The Administrator of the Office of Information and Regulatory 
Affairs of the OMB has determined that this Treasury decision is a 
major rule for purposes of the Congressional Review Act (5 U.S.C. 801 
et seq.) (``CRA''). Under section 801(3) of the CRA, a major rule 
generally takes effect 60 days after the rule is published in the 
Federal Register. Accordingly, the Treasury Department and IRS are 
adopting these final regulations with the delayed effective date 
generally prescribed under the Congressional Review Act.

Drafting Information

    The principal authors of these regulations are Jorge M. Oben and 
Larry R. Pounders 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.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR part 1 is 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.


Sec.  1.951A-0   [Removed]

0
Par. 2. Section 1.951A-0 is removed.

0
Par. 3. Section 1.951A-2 is amended by revising paragraph (c)(1)(iii), 
redesignating the text of paragraph (c)(3) as paragraph (c)(3)(i), 
adding a subject heading to newly redesignated (c)(3)(i), and adding 
paragraph (c)(3)(ii), a reserved paragraph (c)(6), and paragraphs 
(c)(7) and (8) 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)(5), 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)(7) of this section,
* * * * *
    (3) * * *
    (i) In general. * * *
    (ii) Coordination with the high-tax exclusion--(A) In general. In 
the case of a taxpayer that has made an election under paragraph (c)(7) 
of this section, in allocating and apportioning deductions under this 
paragraph (c)(3), the taxpayer must apply the rules of sections 861 
through 865 and 904(d) (taking into account the rules of section 
954(b)(5) and Sec.  1.954-1(c)) in a manner that achieves results 
consistent with those under paragraph (c)(7) of this section.
    (B) Application of consistency rule to deductions allocated and 
apportioned to the residual grouping in applying the high-tax 
exclusion. Deductions that are allocated and apportioned to the 
residual income group under paragraph (c)(7)(iii)(A) of this section 
for purposes of applying the high-tax exclusion to a controlled foreign 
corporation's tentative gross tested income items are

[[Page 44639]]

allocated and apportioned for purposes of determining the controlled 
foreign corporation's net income in each relevant statutory grouping 
using a method that provides for a consistent allocation and 
apportionment of deductions to gross income in the relevant groupings. 
See Sec. Sec.  1.954-1(c) and 1.960-1(d)(3) for rules relating to the 
allocation and apportionment of expenses for purposes of determining 
subpart F income, which is included in the residual grouping for 
purposes of applying the high-tax exclusion of sections 
951A(c)(2)(A)(i)(III) and 954(b)(4) and paragraph (c)(7) of this 
section. Therefore, for example, interest expense that is apportioned 
under the modified gross income method to a tentative gross tested 
income item of a lower-tier corporation under paragraph 
(c)(7)(iii)(A)(1) of this section may be allocated and apportioned to 
the tested income of the upper-tier corporation or to the residual 
grouping, depending on whether the lower-tier corporation's tentative 
gross tested income item is an item of gross tested income or is 
excluded from gross tested income under the high-tax exclusion. See 
paragraph (c)(8)(iii)(C) (Example 3) of this section for an example 
illustrating the rules of this paragraph (c)(3).
* * * * *
    (6) [Reserved]
    (7) Election to apply high-tax exception of section 954(b)(4)--(i) 
In general. For purposes of section 951A(c)(2)(A)(i)(III) 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) only if--
    (A) An election made under paragraph (c)(7)(viii) of this section 
is effective with respect to the controlled foreign corporation for the 
CFC inclusion year; and
    (B) The tentative tested income item with respect to the tentative 
gross tested income item was subject to an effective rate of foreign 
tax, as determined under paragraph (c)(7)(vi) of this section, that is 
greater than 90 percent of the maximum rate of tax specified in section 
11.
    (ii) Calculation of tentative gross tested income item--(A) In 
general. A 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 of the controlled foreign 
corporation attributable to a tested unit (as defined in paragraph 
(c)(7)(iv) of this section) of the controlled foreign corporation in 
the CFC inclusion year that would be gross tested income without regard 
to this paragraph (c)(7) and would be in a single tested income group 
(as defined in Sec.  1.960-1(d)(2)(ii)(C)). A controlled foreign 
corporation may have multiple tentative gross tested income items. See 
paragraphs (c)(8)(iii)(A)(2)(i) (Example 1) and (c)(8)(iii)(B)(2)(i) 
(Example 2) of this section for illustrations of the application of the 
rule set forth in this paragraph (c)(7)(ii)(A).
    (B) Gross income attributable to a tested unit--(1) Items properly 
reflected on separate set of books and records. Items of gross income 
of a controlled foreign corporation are attributable to a tested unit 
of the controlled foreign corporation to the extent they are properly 
reflected on the separate set of books and records of the tested unit, 
as modified under paragraph (c)(7)(ii)(B)(2) of this section. Each item 
of gross income of a controlled foreign corporation is attributable to 
a tested unit (and not to more than one tested unit) of the controlled 
foreign corporation. See paragraphs (c)(8)(iii)(D)(2) and 
(c)(8)(iii)(D)(5) (Example 4) of this section for illustrations of the 
application of the rule set forth in this paragraph (c)(7)(ii)(B).
    (2) Gross income determined under federal income tax principles, as 
adjusted for disregarded payments. For purposes of paragraph 
(c)(7)(ii)(B)(1) of this section, gross income must be determined under 
federal income tax principles, except that the principles of Sec.  
1.904-4(f)(2)(vi) apply to adjust gross income of the tested unit, to 
the extent thereof, to reflect disregarded payments. For purposes of 
this paragraph (c)(7)(ii)(B)(2), the principles of Sec.  1.904-
4(f)(2)(vi) are applied taking into account the rules in paragraphs 
(c)(7)(ii)(B)(2)(i) through (v) of this section.
    (i) The controlled foreign corporation is treated as the foreign 
branch owner and any other tested units of the controlled foreign 
corporation are treated as foreign branches.
    (ii) The principles of the rules in Sec.  1.904-4(f)(2)(vi)(A) 
apply in the case of disregarded payments between a foreign branch and 
another foreign branch without regard to whether either foreign branch 
makes a disregarded payment to, or receives a disregarded payment from, 
the foreign branch owner.
    (iii) The exclusion for interest and interest equivalents described 
in Sec.  1.904-4(f)(2)(vi)(C)(1) does not apply to the extent of the 
amount of a disregarded payment that is deductible in the country of 
tax residence (or location, in the case of a branch) of the tested unit 
that is the payor.
    (iv) In the case of an amount described in paragraph 
(c)(7)(ii)(B)(2)(iii) of this section, the rules for determining how a 
disregarded payment is allocated to gross income of a foreign branch or 
foreign branch owner in Sec.  1.904-4(f)(2)(vi)(B) are applied by 
treating the disregarded payment as allocated and apportioned ratably 
to all of the gross income attributable to the tested unit that is 
making the disregarded payment. If a tested unit is both a payor and 
payee of an amount described in paragraph (c)(7)(ii)(B)(2)(iii) of this 
section, gross income to which the disregarded payments are allocable 
include gross income allocated to the payor tested unit as a result of 
the receipt of amounts described in paragraph (c)(7)(ii)(B)(2)(iii) of 
this section, to the extent thereof. If a tested unit makes and 
receives payments described in paragraph (c)(7)(ii)(B)(2)(iii) of this 
section to and from the same tested unit, the payments are netted so 
that paragraph (c)(7)(ii)(B)(2)(iii) of this section and the principles 
of Sec.  1.904-4(f)(2)(vi) apply only to the net amount of such 
payments between the two tested units.
    (v) In the case of multiple disregarded payments, in lieu of Sec.  
1.904-4(f)(2)(vi)(F), disregarded payments are taken into account under 
paragraph (c)(7)(ii)(B)(2) of this section and the principles of Sec.  
1.904-4(f)(2)(vi) under the rules provided in this paragraph 
(c)(7)(ii)(B)(2)(v). Adjustments are made with respect to a disregarded 
payment received by a tested unit before payments made by that tested 
unit. Except as provided in paragraph (c)(7)(ii)(B)(2)(iv) of this 
section, if a tested unit both makes and receives disregarded payments, 
adjustments are first made with respect to disregarded payments that 
would be definitely related to a single class of gross income under the 
principles of Sec.  1.861-8; second, adjustments are made with respect 
to disregarded payments that would be definitely related to multiple 
classes of gross income under the principles of Sec.  1.861-8, but that 
are not definitely related to all gross income of the tested unit; 
third, adjustments are made with respect to disregarded payments (other 
than interest described in paragraph (c)(7)(ii)(B)(2)(iii) of this 
section) that would be definitely related to all gross income under the 
principles of Sec.  1.861-8; and fourth, adjustments are made with 
respect to interest described in paragraph (c)(7)(ii)(B)(2)(iii) and 
disregarded payments that would not be

[[Page 44640]]

definitely related to any gross income under the principles of Sec.  
1.861-8.
    (iii) Calculation of tentative tested income item--(A) In general. 
A tentative tested income item with respect to the tentative gross 
tested income item described in paragraph (c)(7)(ii)(A) of this section 
is determined by allocating and apportioning deductions for the CFC 
inclusion year (including expense for current year taxes (as defined in 
Sec.  1.960-1(b)(4)), and not including any items described in Sec.  
1.951A-2(c)(5) or (c)(6)) to the tentative gross tested income item 
under the principles of Sec.  1.960-1(d)(3). For purposes of this 
paragraph (c)(7)(iii), each tentative gross tested income item (if any) 
is treated as assigned to a separate tested income group, as that term 
is described in Sec.  1.960-1(d)(2)(ii)(C), and all other income is 
treated as assigned to a residual income group. For purposes of 
applying Sec. Sec.  1.861-9 and 1.861-9T under the principles of Sec.  
1.960-1(d)(3), the amount of interest deductions that are allocated and 
apportioned to the assets (or gross income, in the case of a taxpayer 
that has elected the modified gross income method) of a lower-tier 
corporation, such as a corporation the stock of which is owned by the 
controlled foreign corporation indirectly through the tested unit, are 
allocated and apportioned to the residual income category and not to 
any tentative gross tested income item of the controlled foreign 
corporation. See paragraphs (c)(8)(iii)(A)(2)(iii) (Example 1), 
(c)(8)(iii)(B)(2)(iv) (Example 2), and (c)(8)(iii)(C)(2)(iv) (Example 
3) of this section for illustrations of the application of the rules 
set forth in this paragraph (c)(7)(iii)(A).
    (B) Allocation and apportionment of current year taxes imposed by 
reason of disregarded payments. The principles of Sec.  1.904-6(a)(2) 
apply to allocate and apportion the expense for current year taxes 
imposed by reason of disregarded payments to a tentative gross tested 
income item. For purposes of this paragraph (c)(7)(iii)(B), the 
principles of Sec.  1.904-6(a)(2) apply by--
    (1) Treating the CFC as the foreign branch owner and any other 
tested unit as a foreign branch;
    (2) In the case of payments to a tested unit that is treated as a 
foreign branch under paragraph (c)(7)(vi)(B)(1) of this section, 
applying the principles of Sec.  1.904-6(a)(2)(ii) and (iii) as if the 
tested unit receiving the payment were a foreign branch owner; and
    (3) Treating any portion of a disregarded payment between 
individual tested units that does not result in a reallocation of gross 
income under paragraph (c)(7)(ii)(B)(2) of this section (because the 
amount of the payment exceeds the gross income of the individual tested 
unit making the payment) as a payment that is described in Sec.  1.904-
4(f)(2)(vi)(C)(4) (to which Sec.  1.904-6(a)(2)(iii) applies). See 
paragraph (c)(8)(iii)(B)(2)(iii) (Example 2) of this section for 
illustrations of the application of the rules set forth in this 
paragraph (c)(7)(iii)(B).
    (C) Effect of potential and actual changes in taxes paid or 
accrued. Except as otherwise provided in this paragraph (c)(7)(iii)(C), 
the amount of current year taxes paid or accrued by a controlled 
foreign corporation for purposes of this paragraph (c)(7) does not take 
into account any potential reduction in foreign income taxes that may 
occur by reason of a future distribution to shareholders of all or part 
of such income. However, to the extent the foreign income taxes paid or 
accrued by the controlled foreign corporation are reasonably certain to 
be returned to a shareholder by the foreign country imposing such 
taxes, 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)(7). In addition, foreign income taxes that have not 
been paid or accrued because they are contingent on a future 
distribution of earnings (or other similar transaction, such as a loan 
to a shareholder) are not taken into account for purposes of this 
paragraph (c)(7). If, pursuant to section 905(c) and Sec.  1.905-3, a 
redetermination of U.S. tax liability is required to account for the 
effect of a foreign tax redetermination (as defined in Sec.  1.905-
3(a)), this paragraph (c)(7) is applied in the adjusted year taking 
into account the adjusted amount of the redetermined foreign tax.
    (iv) Tested unit rules--(A) In general. Subject to the combination 
rule in paragraph (c)(7)(iv)(C) of this section, the term tested unit 
means any corporation, interest, or branch described in paragraphs 
(c)(7)(iv)(A)(1) through (3) of this section. See paragraph 
(c)(8)(iii)(D) (Example 4) of this section for an example that 
illustrates the application of the tested unit rules set forth in this 
paragraph (c)(7)(iv).
    (1) A controlled foreign corporation (as defined in section 
957(a)).
    (2) An interest held directly or indirectly by a controlled foreign 
corporation in a pass-through entity that is--
    (i) A tax resident (as described in Sec.  1.267A-5(a)(23)(i)) of 
any foreign country; or
    (ii) Not treated as fiscally transparent (as determined under the 
principles of Sec.  1.267A-5(a)(8)) for purposes of the tax law of the 
foreign country of which the controlled foreign corporation is a tax 
resident or, in the case of an interest in a pass-through entity held 
by a controlled foreign corporation indirectly through one or more 
other tested units, for purposes of the tax law of the foreign country 
of which the tested unit that directly (or indirectly through the 
fewest number of transparent interests) owns the interest is a tax 
resident.
    (3) A branch (as described in Sec.  1.267A-5(a)(2)) the activities 
of which are carried on directly or indirectly (through one or more 
pass-through entities) by a controlled foreign corporation. However, in 
the case of a branch that does not give rise to a taxable presence 
under the tax law of the foreign country where the branch is located, 
the branch is a tested unit only if, under the tax law of the foreign 
country of which the controlled foreign corporation is a tax resident 
(or, if applicable, under the tax law of a foreign country of which the 
tested unit that directly (or indirectly, through the fewest number of 
transparent interests) carries on the activities of the branch is a tax 
resident), an exclusion, exemption, or other similar relief (such as a 
preferential rate) applies with respect to income attributable to the 
branch. For purposes of this paragraph (c)(7)(iv)(A)(3), similar relief 
does not include a credit (for example, a foreign tax credit) against 
the tax imposed under such tax law. If a controlled foreign corporation 
carries on directly or indirectly (through one or more pass-through 
entities) less than all of the activities of a branch (for example, if 
the activities are carried on indirectly through an interest in a 
partnership), then the rules in this paragraph apply separately with 
respect to the portion (or portions, if carried on indirectly through 
more than one chain of pass-through entities) of the activities carried 
on by the controlled foreign corporation. See paragraphs 
(c)(8)(iii)(D)(3) and (c)(8)(iii)(D)(4) (Example 4) of this section for 
illustrations of the application of the rules set forth in this 
paragraph (c)(7)(iv)(A)(3).
    (B) Items attributable to only one tested unit. For purposes of 
paragraph (c)(7) of this section, if an item is attributable to more 
than one tested unit in a tier of tested units, the item is considered 
attributable only to the lowest-tier tested unit. Thus, for example, if 
a controlled foreign

[[Page 44641]]

corporation directly owns a branch tested unit described in paragraph 
(c)(7)(iv)(A)(3) of this section, and an item of gross income is (under 
the rules of paragraph (c)(7)(ii)(B) of this section) attributable to 
both the branch tested unit and the controlled foreign corporation 
tested unit, then the item is considered attributable only to the 
branch tested unit.
    (C) Combination rule--(1) In general. Except as provided in 
paragraph (c)(7)(iv)(C)(2) of this section, tested units of a 
controlled foreign corporation (including the controlled foreign 
corporation tested unit) are treated as a single tested unit if the 
tested units are tax residents of, or located in (in the case of a 
tested unit that is a branch, or a portion of the activities of a 
branch, that gives rise to a taxable presence under the tax law of a 
foreign country), the same foreign country. For purposes of this 
paragraph (c)(7)(iv)(C)(1), in the case of a tested unit that is an 
interest in a pass-through entity or a portion of the activities of a 
branch, a reference to the tax residency or location of the tested unit 
means the tax residency of the entity the interest in which is the 
tested unit or the location of the branch, as applicable. See 
paragraphs (c)(8)(iii)(D)(2) and (c)(8)(iii)(D)(5) (Example 4) of this 
section for illustrations of the application of the rule set forth in 
this paragraph (c)(7)(iv)(C)(1).
    (2) Exception for nontaxed branches. The rule in paragraph 
(c)(7)(iv)(C)(1) of this section does not apply to a tested unit that 
is described in paragraph (c)(7)(iv)(A)(3) of this section if the 
branch described in paragraph (c)(7)(iv)(A)(3) of this section does not 
give rise to a taxable presence under the tax law of the foreign 
country where the branch is located. See paragraph (c)(8)(iii)(D)(4) 
(Example 4) of this section for an illustration of the application of 
the rule set forth in this paragraph (c)(7)(v)(C)(2).
    (3) Effect of combination rule. If, pursuant to paragraph 
(c)(7)(iv)(C)(1) of this section, tested units are treated as a single 
tested unit, then, solely for purposes of paragraph (c)(7) of this 
section, items of gross income attributable to such tested units, and 
items of deduction and foreign taxes allocated and apportioned to such 
gross income, are aggregated for purposes of determining the combined 
tested unit's tentative gross tested income item, tentative tested 
income item, and foreign income taxes paid or accrued with respect to 
such tentative tested income item.
    (v) Separate set of books and records--(A) In general. For purposes 
of this paragraph (c)(7), the term separate set of books and records 
has the meaning set forth in Sec.  1.989(a)-1(d). In addition, for 
purposes of this paragraph (c)(7), in the case of a tested unit or a 
transparent interest that is an interest in a pass-through entity or a 
portion of the activities of a branch, a reference to the separate set 
of books and records of the tested unit or the transparent interest 
means the separate set of books and records of the entity or the 
branch, as applicable.
    (B) Failure to maintain separate set of books and records. If a 
separate set of books and records is not maintained for a tested unit 
or transparent interest, the items of gross income, disregarded 
payments, and any other items required to apply paragraph (c)(7) of 
this section that would be reflected on a separate set of books and 
records of the tested unit or transparent interest must be determined. 
Such items are treated as properly reflected on the separate set of 
books and records of the tested unit or transparent interest for 
purposes of applying paragraph (c)(7) of this section.
    (C) Transparent interests. If a tested unit of a controlled foreign 
corporation or an entity an interest in which is a tested unit of a 
controlled foreign corporation holds a transparent interest, either 
directly or indirectly through one or more other transparent interests, 
then, for purposes of paragraph (c)(7) of this section (and subject to 
the rule of paragraph (c)(7)(iv)(C) of this section), items of the 
controlled foreign corporation properly reflected on the separate set 
of books and records of the transparent interest are treated as being 
properly reflected on the separate set of books and records of the 
tested unit, as modified under paragraph (c)(7)(ii)(B)(2) of this 
section. See paragraph (c)(8)(iii)(D)(6) (Example 4) of this section 
for an illustration of the application of the rule set forth in this 
paragraph (c)(7)(v)(C).
    (D) Items not taken into account for financial accounting purposes. 
For purposes of this paragraph (c)(7), an item of gross income in a CFC 
inclusion year that is not taken into account in such year for 
financial accounting purposes, and therefore not properly reflected on 
a separate set of books and records of a tested unit or a transparent 
interest, or an entity an interest in which is a tested unit or a 
transparent interest, is treated as properly reflected on a separate 
set of books and records to the extent it would have been so reflected 
if the item were taken into account for financial accounting purposes 
in such CFC inclusion year.
    (vi) Effective rate at which foreign taxes are imposed. For a CFC 
inclusion year of a controlled foreign corporation, the effective rate 
of foreign tax with respect to the tentative tested income items of the 
controlled foreign corporation is determined separately for each such 
item. See paragraphs (c)(8)(iii)(A)(2)(v) (Example 1), 
(c)(8)(iii)(B)(2)(vi) (Example 2), and (c)(8)(iii)(C)(2)(vi) (Example 
3) of this section for illustrations of the application of the rules 
set forth in this paragraph (c)(7)(vi). The effective rate at which 
foreign income taxes are imposed on a tentative tested income item is--
    (A) The U.S. dollar amount of foreign income taxes paid or accrued 
with respect to the tentative tested income item, determined by 
applying paragraph (c)(7)(vii) of this section; divided by
    (B) The U.S. dollar amount of the tentative tested income item, 
increased by the amount of foreign income taxes referred to in 
paragraph (c)(7)(vi)(A) of this section.
    (vii) Foreign income taxes paid or accrued with respect to a 
tentative 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 tested income item of the 
controlled foreign corporation for purposes of this paragraph (c)(7) 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 to the related tentative gross tested income item under the 
rules of paragraph (c)(7)(iii) of this section. See paragraphs 
(c)(8)(iii)(A)(2)(iv) (Example 1), (c)(8)(iii)(B)(2)(v) (Example 2), 
and (c)(8)(iii)(C)(2)(v) (Example 3) of this section for illustrations 
of the application of the rule set forth in this paragraph (c)(7)(vii).
    (viii) Rules regarding the high-tax election--(A) Manner--(1) An 
election is made under this paragraph (c)(7)(viii) by the controlling 
domestic shareholders (as defined in Sec.  1.964-1(c)(5)) with respect 
to a controlled foreign corporation for a CFC inclusion year (a high-
tax election) in accordance with the rules provided in forms or 
instructions and by--
    (i) Filing the statement required under Sec.  1.964-1(c)(3)(ii) 
with a timely filed original federal income tax return, or with an 
amended federal income tax return in accordance with paragraph 
(c)(7)(viii)(A)(2) of this section, for the U.S. shareholder inclusion 
year of each controlling domestic shareholder in which or with which 
such CFC inclusion year ends;
    (ii) Providing any notices required under Sec.  1.964-1(c)(3)(iii); 
and

[[Page 44642]]

    (iii) Providing any additional information required by applicable 
administrative pronouncements.
    (2) In the case of an election (or revocation) made with an amended 
federal income tax return--
    (i) The election (or revocation) must be made on an amended federal 
income tax return duly filed within 24 months of the unextended due 
date of the original federal income tax return for the U.S. shareholder 
inclusion year with or within which the CFC inclusion year ends;
    (ii) Each United States shareholder in the controlled foreign 
corporation as of the end of the CFC's taxable year to which the 
election relates must file amended federal income tax returns (or 
timely original federal income tax returns if a return has not yet been 
filed) reflecting the effect of such election (or revocation) for the 
U.S. shareholder inclusion year with or within which the CFC inclusion 
year ends as well as for any other taxable year in which the U.S. tax 
liability of the United States shareholder would be increased by reason 
of the election (or revocation) (or in the case of a partnership if any 
item reported by the partnership or any partnership-related item would 
change as a result of the election (or revocation)) within a single 
period no greater than six months within the 24-month period described 
in paragraph (c)(7)(viii)(A)(2)(i) of this section; and
    (iii) Each United States shareholder in the controlled foreign 
corporation as of the end of the controlled foreign corporation's 
taxable year to which the election relates must pay any tax due as a 
result of such adjustments within a single period no greater than six 
months within the 24-month period described in paragraph 
(c)(7)(viii)(A)(2)(i) of this section.
    (3) In the case of a United States shareholder that is a 
partnership, paragraphs (c)(7)(viii)(A)(1) and (2) and (c)(7)(viii)(C) 
of this section are applied by substituting ``Form 1065 (or successor 
form)'' for ``federal income tax return'' and by substituting ``amended 
Form 1065 (or successor form) or administrative adjustment request (as 
described in Sec.  301.6227-1), as applicable,'' for ``amended federal 
income tax return'', each place that it appears.
    (4) A United States shareholder that is a partner in a partnership 
that is also a United States shareholder in the controlled foreign 
corporation must generally file an amended return, as required under 
paragraph (c)(7)(viii)(B)(2) of this section, and must generally pay 
any additional tax owed as required under paragraph (c)(7)(viii)(B)(3). 
However, in the case of a United States shareholder that is a partner 
in a partnership that duly files an administrative adjustment request 
under paragraph (c)(7)(viii)(A)(2) of this section, the partner is 
treated as having satisfied the requirements of paragraphs 
(c)(7)(viii)(A)(2)(ii) and (iii) of this section with respect to the 
interest held through that partnership if:
    (i) The partnership timely files an administrative adjustment 
request described in paragraph (c)(7)(viii)(A)(1)(i) or (ii) of this 
section, as applicable; and,
    (ii) Both the partnership and its partners timely comply with the 
requirements of section 6227 with respect to the administrative 
adjustment request. See Sec. Sec.  301.6227-1 through -3 for rules 
relating to administrative adjustment requests.
    (B) Scope. A high-tax election 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) Revocation. A high-tax election may be revoked by the 
controlling domestic shareholders of the controlled foreign corporation 
in the same manner as prescribed for an election made on an amended 
return as described in paragraph (c)(7)(viii)(A) of this section.
    (D) Failure to satisfy election requirements. A high-tax election 
(or revocation) is valid only if all of the requirements in paragraph 
(c)(7)(viii)(A) of this section, including the requirement to provide 
notice under paragraph (c)(7)(viii)(A)(1)(ii) of this section, are 
satisfied.
    (E) Rules applicable to CFC groups--(1) In general. In the case of 
a controlled foreign corporation that is a member of a CFC group, a 
high-tax election is made under paragraph (c)(7)(viii)(A) of this 
section, or revoked under paragraph (c)(7)(viii)(C) of this section, 
with respect to all controlled foreign corporations that are members of 
the CFC group and the rules in paragraphs (c)(7)(viii)(A) through (D) 
of this section apply by reference to the CFC group.
    (2) Determination of the CFC group--(i) Definition. Subject to the 
rules in paragraphs (c)(7)(viii)(E)(2)(ii) and (iii) of this section, 
the term CFC group means an affiliated group as defined in section 
1504(a) without regard to section 1504(b)(1) through (6), except that 
section 1504(a) is applied by substituting ``more than 50 percent'' for 
``at least 80 percent'' each place it appears, and section 
1504(a)(2)(A) is applied by substituting ``or'' for ``and.'' For 
purposes of this paragraph (c)(7)(viii)(E)(2)(i), stock ownership is 
determined by applying the constructive ownership rules of section 
318(a), other than section 318(a)(3)(A) and (B), by applying section 
318(a)(4) only to options (as defined in Sec.  1.1504-4(d)) that are 
reasonably certain to be exercised as described in Sec.  1.1504-4(g), 
and by substituting in section 318(a)(2)(C) ``5 percent'' for ``50 
percent.
    (ii) Member of a CFC group. The determination of whether a 
controlled foreign corporation is included in a CFC group is made as of 
the close of the CFC inclusion year of the controlled foreign 
corporation that ends with or within the taxable years of the 
controlling domestic shareholders. One or more controlled foreign 
corporations are members of a CFC group if the requirements of 
paragraph (c)(7)(viii)(E)(2) of this section are satisfied as of the 
end of the CFC inclusion year of at least one of the controlled foreign 
corporations, even if the requirements are not satisfied as of the end 
of the CFC inclusion year of all controlled foreign corporations. If 
the controlling domestic shareholders do not have the same taxable 
year, the determination of whether a controlled foreign corporation is 
a member of a CFC group is made with respect to the CFC inclusion year 
that ends with or within the taxable year of the majority of the 
controlling domestic shareholders (determined based on voting power) 
or, if no such majority taxable year exists, the calendar year. See 
paragraph (c)(8)(iii)(E) (Example 5) of this section for an example 
that illustrates the application of the rule set forth in this 
paragraph (c)(7)(viii)(E)(2)(ii).
    (iii) Controlled foreign corporations included in only one CFC 
group. A controlled foreign corporation cannot be a member of more than 
one CFC group. If a controlled foreign corporation would be a member of 
more than one CFC group under paragraph (c)(7)(viii)(E)(2) of this 
section, then ownership of stock of the controlled foreign corporation 
is determined by applying paragraph (c)(7)(viii)(E)(2) of this section 
without regard to section 1504(a)(2)(B) or, if applicable, by reference 
to the ownership existing as of the end of the first CFC inclusion year 
of a controlled foreign corporations that would cause a CFC group to 
exist.
    (ix) Definitions. The following definitions apply for purposes of 
this paragraph (c)(7).
    (A) Indirectly. The term indirectly, when used in reference to 
ownership, means ownership through one or more pass-through entities.
    (B) Pass-through entity. The term pass-through entity means a 
partnership, a disregarded entity, or any

[[Page 44643]]

other person (whether domestic or foreign) other than a corporation to 
the extent that income, gain, deduction or loss of the person is taken 
into account in determining the income or loss of a controlled foreign 
corporation that owns, directly or indirectly, interests in the person.
    (C) Transparent interest. The term transparent interest means an 
interest in a pass-through entity (or the activities of a branch) that 
is not a tested unit.
    (8) Examples--(i) Scope. This paragraph (c)(8) provides examples 
illustrating the application of the rules in paragraph (c)(7) of this 
section.
    (ii) Presumed facts. For purposes of the examples in paragraph 
(c)(8)(iii) of this section, except as otherwise stated, the following 
facts are presumed:
    (A) USP is a domestic corporation.
    (B) CFC1X and CFC2X are controlled foreign corporations organized 
in, and tax residents of, Country X.
    (C) CFC3Z is a controlled foreign corporation organized in, and tax 
resident of, Country Z.
    (D) FDEX is a disregarded entity that is a tax resident of Country 
X.
    (E) FDE1Y and FDE2Y are disregarded entities that are tax residents 
of Country Y.
    (F) FPSY is an entity that is organized in, and a tax resident of, 
Country Y but is classified as a partnership for federal income tax 
purposes.
    (G) CFC1X, CFC2X, CFC3Z, and the interests in FDEX, FDE1Y, FDE2Y, 
and FPSY are tested units (the CFC1X tested unit, CFC2X tested unit, 
CFC3Z tested unit, FDEX tested unit, FDE1Y tested unit, FDE2Y tested 
unit, and FPSY tested unit, respectively).
    (H) CFC1X, CFC2X, CFC3Z, FDEX, FDE1Y, and FDE2Y conduct activities 
in the foreign country in which they are tax resident, and properly 
reflect items of income, gain, deduction, and loss on separate sets of 
books and records.
    (I) All entities have calendar taxable years (for both federal 
income tax purposes and for purposes of the relevant foreign country) 
and use the Euro ([euro]) as their functional currency. At all relevant 
times [euro]1 = $1.
    (J) The maximum rate of tax specified in section 11 for the CFC 
inclusion year is 21 percent.
    (K) Neither CFC1X, CFC2X, nor CFC3Z directly or indirectly earns 
income described in section 952(b), has any items of income, gain, 
deduction, or loss, or makes or receives disregarded payments. In 
addition, no tested unit of CFC1X, CFC2X, or CFC3Z makes or receives 
disregarded payments.
    (L) An election made under section 954(b)(4) and paragraph 
(c)(7)(viii) of this section is effective with respect to CFC1X and 
CFC2X, as applicable, for the CFC inclusion year.
    (iii) Examples--(A) Example 1: Effect of disregarded interest--(1) 
Facts--(i) Ownership. USP owns all of the stock of CFC1X, and CFC1X 
owns all of the interests of FDE1Y.
    (ii) Gross income and deductions (other than for foreign income 
taxes). In Year 1, CFC1X generates [euro]100x of gross income from 
services to unrelated parties that would be gross tested income without 
regard to paragraph (c)(7) of this section and that is properly 
reflected on the books and records of FDE1Y. The [euro]100x of services 
income is general category income under Sec.  1.904-4(d). In Year 1, 
FDE1Y accrues and pays [euro]20x of interest to CFC1X that is 
deductible for Country Y tax purposes but is disregarded for federal 
income tax purposes. The [euro]20x of disregarded interest income 
received by CFC1X from FDE1Y is properly reflected on CFC1X's books and 
records, and the [euro]20x of disregarded interest expense paid from 
FDE1Y to CFC1X is properly reflected on FDE1Y's books and records.
    (iii) Foreign income taxes. Country X imposes no tax on net income, 
and Country Y imposes a 25% tax on net income. For Country Y tax 
purposes, FDE1Y (which is not disregarded under Country Y tax law) has 
[euro]80x of taxable income ([euro]100x of services income from the 
unrelated parties, less a [euro]20x deduction for the interest paid to 
CFC1X). Accordingly, FDE1Y incurs a Country Y income tax liability with 
respect to Year 1 of [euro]20x ([euro]80x x 25%), the U.S. dollar 
amount of which is $20x.
    (2) Analysis--(i) Tentative gross tested income items. Under 
paragraph (c)(7)(ii)(A) of this section, the tentative gross tested 
income item with respect to each of the CFC1X tested unit and the FDE1Y 
tested unit is the aggregate of the gross income of CFC1X that is 
attributable to the tested unit, that would be gross tested income 
(without regard to this paragraph (c)(7)), and that would be in a 
single tested income group. Under paragraphs (c)(7)(ii)(B)(1) and (2) 
of this section, items of gross income of CFC1X are attributable to the 
CFC1X tested unit, or the FDE1Y tested unit, to the extent properly 
reflected on its separate set of books and records, as determined under 
federal income tax principles and adjusted to take into account 
disregarded payments. Without regard to the [euro]20x disregarded 
interest payment from FDE1Y to CFC1X, gross income attributable to the 
CFC1X tested unit would be [euro]0 (that is, the [euro]20x of interest 
income reflected on the books and records of CFC1X would be reduced by 
[euro]20x, the amount attributable to the payment that is disregarded 
for federal income tax purposes). Similarly, without regard to the 
[euro]20x disregarded interest payment from FDE1Y to CFC1X, gross 
income attributable to the FDE1Y tested unit would be [euro]100x (that 
is, [euro]100x of services income reflected on the books and records of 
FDE1Y, unreduced by the [euro]20x disregarded interest payment from 
FDE1Y to CFC1X). However, under paragraph (c)(7)(ii)(B)(2) of this 
section, the gross income attributable to each of the CFC1X tested unit 
and the FDE1Y tested unit is adjusted by [euro]20x, the amount of the 
disregarded interest payment from FDE1Y to CFC1X that is deductible for 
Country Y tax purposes. Accordingly, the tentative gross tested income 
item attributable to the CFC1X tested unit (the ``CFC1X tentative gross 
tested income item'') is [euro]20x ([euro]0 + [euro]20x), and the 
tentative gross tested income item attributable to the FDE1Y tested 
unit (the ``FDE1Y tentative gross tested income item'') is [euro]80x 
([euro]100x - [euro]20x).
    (ii) Foreign income tax deduction. Under paragraph (c)(7)(iii)(A) 
of this section, CFC1X's tentative tested income items are computed by 
treating the CFC1X tentative gross tested income item and the FDE1Y 
tentative gross tested income item each as income in a separate tested 
income group (the ``CFC1X income group'' and the ``FDE1Y income 
group'') and by allocating and apportioning CFC1X's deductions for 
current year taxes under the principles of Sec.  1.960-1(d)(3)(ii) 
(CFC1X has no other deductions to allocate and apportion). Under 
paragraph (c)(7)(iii)(A) of this section, the [euro]20x deduction for 
Country Y income taxes is allocated and apportioned solely to the FDE1Y 
income group (the ``FDE1Y group tax''). None of the Country Y taxes are 
allocated and apportioned to the CFC1X income group under paragraph 
(c)(7)(iii)(B) of this section and the principles of Sec.  1.904-
6(a)(2)(ii)(A), because none of the Country Y tax is imposed solely by 
reason of the disregarded interest payment.
    (iii) Tentative tested income items. Under paragraph (c)(7)(iii) of 
this section, the tentative tested income item with respect to the 
CFC1X income group (the ``CFC1X tentative tested item''), is [euro]20x. 
The tentative tested income item with respect to the FDE1Y income group 
(the ``CFC1X tentative tested item'') is [euro]60x (the FDE1Y tentative 
gross tested income item of [euro]80x, less the [euro]20x deduction for 
the FDE1Y group tax).
    (iv) Foreign income tax paid or accrued with respect to a tentative 
tested income item. Under paragraph (c)(7)(vii) of this section, the 
foreign income taxes paid or accrued with

[[Page 44644]]

respect to a tentative tested income item is the U.S. dollar amount of 
the current year taxes that are allocated and apportioned to the 
related tentative gross tested income item under the rules of paragraph 
(c)(7)(iii) of this section. Therefore, the foreign income taxes paid 
or accrued with respect to the FDE1Y tentative tested income item is 
$20x, the U.S. dollar amount of the FDE1Y group tax. The foreign income 
tax paid or accrued with respect to the CFC1X tentative tested income 
item is $0, the U.S. dollar amount of the foreign tax allocated and 
apportioned to the CFC1X tentative gross tested income item under 
paragraph (c)(7)(iii) of this section.
    (v) Effective foreign tax rate. The effective foreign tax rate is 
determined under paragraph (c)(7)(vi) of this section by dividing the 
U.S. dollar amount of foreign income taxes paid or accrued with respect 
to each respective tentative tested income item by the U.S. dollar 
amount of the tentative tested income item increased by the U.S. dollar 
amount of the relevant foreign income taxes. Therefore, the effective 
foreign tax rate with respect to the FDE1Y tentative tested income item 
is 25%, computed by dividing $20x (the U.S. dollar amount of the 
foreign income taxes paid or accrued with respect to the FDE1Y 
tentative tested income item under paragraph (c)(7)(vii) of this 
section) by $80x (the sum of $60x, the U.S. dollar amount of the FDE1Y 
tentative tested income item, and $20x, the U.S. dollar amount of the 
foreign income taxes paid or accrued with respect to the FDE1Y 
tentative tested income item). The CFC1X tentative tested income item 
is not subject to any foreign income tax, so is subject to an effective 
foreign tax rate of 0%, calculated as $0 (the U.S. dollar amount of the 
foreign income taxes paid or accrued with respect to the CFC1X 
tentative tested income item) divided by $20x (the U.S. dollar amount 
of the CFC1X tentative tested income item).
    (vi) Gross income items excluded under sections 954(b)(4) and 
951A(c)(2)(A)(i)(III). The FDE1Y tentative tested income item is 
subject to an effective foreign tax rate (25%) that is greater than 
18.9% (90% of the maximum rate of tax specified in section 11). 
Therefore, the requirement of paragraph (c)(7)(i)(B) of this section is 
satisfied, and the FDE1Y tentative gross tested income item qualifies 
under paragraph (c)(7)(i) of this section for the high-tax exception of 
section 954(b)(4) and is excluded from tested income under sections 
951A(c)(2)(A)(i)(III) and 954(b)(4) and paragraph (c)(1)(iii) of this 
section. The CFC1X tentative tested income item is subject to an 
effective foreign tax rate of 0%. Therefore, the CFC1X tentative tested 
income item does not satisfy the requirement of paragraph (c)(7)(i)(B) 
of this section, and the CFC1X tentative gross tested income item does 
not qualify under paragraph (c)(7)(i) of this section for the high-tax 
exception of section 954(b)(4) and is not excluded from tested income 
under sections 951A(c)(2)(A)(i)(III) and 954(b)(4) and paragraph 
(c)(1)(iii) of this section.
    (B) Example 2: Disregarded payment for services--(1) Facts--(i) 
Ownership. USP owns all of the stock of CFC1X. CFC1X owns all of the 
interests of FDE1Y. FDE1Y is a tax resident of Country Y, but is 
treated as fiscally transparent for Country X tax purposes, so that 
FDE1Y is subject to tax in Country Y and CFC1X is subject to tax in 
Country X with respect to FDE1Y's activities.
    (ii) Gross income, deductions (other than for foreign income 
taxes), and disregarded payments. In Year 1, CFC1X generates 
[euro]1,000x of gross income from services to unrelated parties that 
would be gross tested income without regard to paragraph (c)(7) of this 
section and that is properly reflected on the books and records of 
CFC1X. In Year 1, CFC1X accrues and pays [euro]480x of deductible 
expenses to unrelated parties, [euro]280x of which is properly 
reflected on CFC1X's books and records and is definitely related solely 
to CFC1X's gross income reflected on its books and records, and 
[euro]200x of which is properly reflected on FDE1Y's books and records 
and is definitely related solely to FDE1Y's gross income reflected on 
its books and records. Country X law does not provide rules for the 
allocation or apportionment of these deductions to particular items of 
gross income. In Year 1, CFC1X also accrues and pays [euro]325x to 
FDE1Y for support services performed by FDE1Y in Country Y; the payment 
is disregarded for federal income tax purposes. The [euro]325x of 
disregarded support services income received by FDE1Y from CFC1X is 
properly reflected on FDE1Y's books and records, and the [euro]325x of 
disregarded support services expense paid from CFC1X to FDE1Y is 
properly reflected on CFC1X's books and records.
    (iii) Foreign income taxes. Country X imposes a 10% tax on net 
income, and Country Y imposes a 16% tax on net income. Country X allows 
a deduction, but not a credit, for foreign income taxes paid or accrued 
to another country (such as Country Y). For Country Y tax purposes, 
FDE1Y (which is not disregarded under Country Y tax law) has [euro]125x 
of taxable income ([euro]325x of support services income received from 
CFC1X, less a [euro]200x deduction for expenses paid to unrelated 
parties). Accordingly, FDE1Y incurs a Country Y income tax liability 
with respect to Year 1 of [euro]20x ([euro]125x x 16%), the U.S. dollar 
amount of which is $20x. For Country X tax purposes, CFC1X has 
[euro]500x of taxable income ([euro]1,000x of gross income for 
services, less a [euro]480x deduction for expenses paid to unrelated 
parties by CFC1X and FDE1Y and a [euro]20x deduction for Country Y 
taxes; Country X does not allow CFC1X a deduction for the [euro]325x 
paid to FDE1Y for support services because the [euro]325x payment is 
disregarded for Country X tax purposes). Accordingly, CFC1X incurs a 
Country X income tax liability with respect to Year 1 of [euro]50x 
([euro]500x x 10%), the U.S. dollar amount of which is $50x.
    (2) Analysis--(i) Tentative gross tested income item. Under 
paragraph (c)(7)(ii) of this section, CFC1X has two tentative gross 
tested income items, one item with respect to CFC1X (the ``CFC1X 
tentative gross tested income item'') and one item with respect to 
CFC1X's interest in FDE1Y (the ``FDE1Y tentative gross tested income 
item''). The gross income attributable to each tested unit comprises 
the gross income properly reflected on the books and records of each 
tested unit under paragraph (c)(7)(ii)(B)(1) of this section, as 
adjusted under paragraph (c)(7)(ii)(B)(2) of this section. Without 
regard to the [euro]325x payment for support services from CFC1X to 
FDE1Y, the gross income attributable to the FDE1Y tested unit would be 
[euro]0 (that is, the [euro]325x of services income properly reflected 
on the books and records of FDE1Y, reduced by the [euro]325x payment 
from CFC1X to FDE1Y that is disregarded for federal income tax 
purposes). Similarly, without regard to the [euro]325x payment for 
support services from CFC1X to FDE1Y, the gross income attributable to 
the CFC1X tested unit would be [euro]1,000x (that is, [euro]1,000x of 
services income reflected on the books and records of CFC1X, unreduced 
by the [euro]325x disregarded payment). However, under paragraph 
(c)(7)(ii)(B)(2) of this section, the gross income attributable to each 
of the CFC1X tested unit and the FDE1Y tested unit is adjusted by 
[euro]325x, the amount of the disregarded services payment from CFC1X 
to FDE1Y. Accordingly, the FDE1Y tentative gross tested income item is 
[euro]325x ([euro]0 + [euro]325x), and the CFC1X tentative gross tested 
income item is [euro]675x ([euro]1,000x - [euro]325x).
    (ii) Deductions (other than for foreign income taxes). Under 
paragraph (c)(7)(iii) of this section, CFC1X's tentative tested income 
items are computed by applying the principles of Sec.  1.960-1(d)(3), 
treating the CFC1X

[[Page 44645]]

tentative gross tested income item and the FDE1Y tentative gross tested 
income item each as income in a separate tested income group (the 
``CFC1X income group'' and the ``FDE1Y income group'') and by 
allocating and apportioning CFC1X's deductions among the income groups 
under federal income tax principles. For Year 1, CFC1X has deductible 
expense (other than foreign income tax) of [euro]480x. This amount 
includes [euro]280x of deductible expense that is definitely related 
solely the services activity of the CFC1X tested unit, and another 
[euro]200x of deductible expense (other than foreign income tax) that 
is definitely related solely to the services provided by the FDE1Y 
tested unit. Therefore, [euro]280x of deductible expense (other than 
foreign income tax) is allocated and apportioned to the CFC1X income 
group, and [euro]200x of deductible expense (other than foreign income 
tax) is allocated and apportioned to the FDE1Y income group.
    (iii) Foreign income tax deduction. CFC1X accrues foreign income 
tax in Year 1 of [euro]70x ([euro]50x imposed by Country X and 
[euro]20x imposed by Country Y). Under paragraph (c)(7)(iii) of this 
section, the deductions for foreign income taxes are allocated and 
apportioned under the principles of Sec.  1.960-1(d)(3)(ii) to the 
FDE1Y income group and the CFC1X income group. Under paragraph 
(c)(7)(iii)(A) of this section and Sec.  1.960-1(d)(3)(ii), the 
principles of Sec.  1.904-6(a)(1) generally apply to determine the 
amount of the foreign income tax paid or accrued with respect to each 
income group. However, under paragraph (c)(7)(iii)(B) of this section, 
foreign income taxes imposed by reason of the receipt of a disregarded 
payment are allocated and apportioned under the principles of Sec.  
1.904-6(a)(2). The Country Y tax of [euro]20x is imposed solely by 
reason of FDE1Y's receipt of a [euro]325x disregarded payment. As a 
result, the entire [euro]20x of Country Y tax is allocated and 
apportioned to the FDE1Y income group under the principles of Sec.  
1.904-6(a)(2)(ii)(A). If Country X had allowed a deduction for the 
disregarded payment from CFC1X to FDE1Y and not otherwise imposed tax 
on CFC1X with respect to income of FDE1Y, the foreign tax imposed by 
Country X would relate only to the CFC1X tested income group, and no 
portion of it would be allocated and apportioned to the FDE1Y income 
group because the FDE1Y income would not be included in the Country X 
tax base. However, because gross income subject to tax in Country X 
includes gross income that for federal income tax purposes is 
attributable to both the FDE1Y tested unit and the CFC1X tested unit, 
the [euro]50x of foreign income tax imposed by Country X is related to 
both the FDE1Y income group and to the CFC1X income group and must be 
allocated and apportioned under the principles of Sec.  1.904-
6(a)(1)(i). Because Country X does not provide specific rules for the 
allocation or apportionment of the [euro]500x of deductible expenses, 
Sec.  1.904-6(a)(1)(ii) applies the principles of Sec. Sec.  1.861-8 
through 1.861-14T to determine the foreign law net income subject to 
Country X tax for purposes of apportioning the [euro]50x of Country X 
tax between the income groups. CFC1X has [euro]1,000x of gross income 
and [euro]500x of deductible expenses under the tax laws of Country X, 
resulting in [euro]500x of net foreign law income. Of the [euro]1,000x 
of foreign law gross income, [euro]325x corresponds to the gross income 
in the FDE1Y income group, and [euro]675x corresponds to the gross 
income in the CFC1X income group. Applying federal income tax 
principles to allocate and apportion the foreign law deductions to 
foreign law gross income, [euro]220x of the [euro]500x foreign law 
deductions is allocated and apportioned to the FDE1Y income group and 
[euro]280x is allocated and apportioned to the CFC1X income group. Of 
the total [euro]500x of net foreign law income, [euro]105x ([euro]325x 
Country X gross income corresponding to the FDE1Y income group, less 
[euro]220x allocable Country X expenses) corresponds to the FDE1Y 
income group and [euro]395x ([euro]675x Country X gross income 
corresponding to the CFC1X income group, less [euro]280x allocable 
Country X expenses) corresponds to the CFC1X income group. Therefore, 
[euro]10.5x ([euro]50x x [euro]105x/[euro]500x) of Country X tax is 
allocated and apportioned to the FDE1Y income group, and [euro]39.5x 
([euro]50x x [euro]395x/[euro]500x) is allocated and apportioned to the 
CFC1X income group. In total, [euro]30.5x of foreign tax ([euro]10.5x 
of Country X tax and [euro]20x of Country Y tax) is allocated and 
apportioned to the FDE1Y income group (the ``FDE1Y group tax''), and 
[euro]39.5x of foreign tax (all of which is Country X tax) is allocated 
and apportioned to the CFC1X tested income group (the ``CFC1X group 
tax'').
    (iv) Tentative tested income items. Under paragraph (c)(7)(iii) of 
this section, the tentative tested income item attributable to FDE1Y 
(the ``FDE1Y tentative tested income item'') is [euro]94.5x (the FDE1Y 
gross tested income item of [euro]325x, less the allocated and 
apportioned deductions of [euro]230.5x (the sum of deductions (other 
than for foreign income tax) of [euro]200x, Country Y tax of [euro]20x, 
and Country X tax of [euro]10.5x)). The tentative tested income item 
attributable to CFC1X (the ``CFC1X tentative tested income item'') is 
[euro]355.5x (the CFC1X gross tentative tested income item of 
[euro]675x, less the allocated and apportioned deductions of 
[euro]319.5x (the sum of deductions (other than for foreign income tax) 
of [euro]280x and Country X tax of [euro]39.5x)).
    (v) Foreign income taxes paid or accrued with respect to a 
tentative tested income item. Under paragraph (c)(7)(vii) of this 
section, the foreign income taxes paid or accrued with respect to a 
tentative tested income item is the U.S. dollar amount of the current 
year taxes that are allocated and apportioned to the related tentative 
gross tested income item under the rules of paragraph (c)(7)(iii) of 
this section. Therefore, the foreign income taxes paid or accrued with 
respect to the FDE1Y tentative tested income item is $30.5x, the U.S. 
dollar amount of the FDE1Y group tax, and the foreign income taxes paid 
or accrued with respect to the CFC1X tentative tested income item is 
$39.5x, the U.S. dollar amount of the CFC1X group tax.
    (vi) Effective foreign tax rate. The effective foreign tax rate is 
determined under paragraph (c)(7)(vi) of this section by dividing the 
U.S. dollar amount of foreign income taxes paid or accrued with respect 
to each respective tentative tested income item by the U.S. dollar 
amount of the tentative tested income item increased by the U.S. dollar 
amount of the relevant foreign income taxes. Therefore, the effective 
foreign tax rate for the FDE1Y tentative tested income item is 24.4%, 
computed by dividing $30.5x (the U.S. dollar amount of the foreign 
income taxes paid or accrued with respect to the FDE1Y tentative tested 
income item), by $125x (the sum of $94.5x, the U.S. dollar amount of 
the FDE1Y tentative tested income item, and $30.5x, the U.S. dollar 
amount of the foreign income taxes paid or accrued with respect to the 
FDE1Y tentative tested income item). Similarly, the effective foreign 
tax rate for the CFC1X tentative tested income item is 10%, computed by 
dividing $39.5x (the U.S. dollar amount of the foreign income taxes 
paid or accrued with respect to the CFC1X tentative tested income item) 
by $395x (the sum of $355.5x, the U.S. dollar amount of the CFC1X 
tentative tested income item, and $39.5x, the U.S. dollar amount of the 
foreign taxes paid or accrued with respect to the CFC1X tentative 
tested income item).
    (vii) Gross income items excluded under sections 954(b)(4) and

[[Page 44646]]

951A(c)(2)(A)(i)(III). The FDE1Y tentative tested income item has an 
effective foreign tax rate (24.4%) that is greater than 18.9% (90% of 
the maximum rate of tax specified in section 11). Therefore, the 
requirement of paragraph (c)(7)(i)(B) of this section is satisfied, and 
the FDE1Y tentative gross tested income item qualifies under paragraph 
(c)(7)(i) of this section for the high-tax exception of section 
954(b)(4) and is excluded from tested income under sections 
951A(c)(2)(A)(i)(III) and 954(b)(4) and paragraph (c)(1)(iii) of this 
section. The CFC1X tentative tested income item has an effective 
foreign tax rate (10%) that is not greater than 90% of the maximum rate 
of tax specified in section 11. Therefore, the CFC1X tentative gross 
tested income item does not qualify under paragraph (c)(7)(i) of this 
section for the high-tax exception of section 954(b)(4) and is not 
excluded from tested income under sections 951A(c)(2)(A)(i)(III) and 
954(b)(4) and paragraph (c)(1)(iii) of this section.
    (C) Example 3: Interest expense allocated and apportioned with 
respect to the income of a lower-tier CFC--(1) Facts--(i) Ownership. 
USP owns all of the stock of CFC1X. CFC1X directly owns all the 
interests of FDE1Y. FDE1Y owns all of the stock of CFC3Z. Pursuant to 
Sec.  1.861-9(j) and Sec.  1.861-9T(j), CFC1X uses the modified gross 
income method to allocate and apportion its interest expense.
    (ii) Gross income and deductions (including for foreign income 
taxes). During Year 1, CFC1X generates [euro]4,000x of gross income 
from services that would be gross tested income without regard to 
paragraph (c)(7) of this section, [euro]3,000x of which is properly 
reflected on the books and records of the CFC1X tested unit and 
[euro]1,000x of which is properly reflected on the books and records of 
the FDE1Y tested unit. CFC1X also accrues [euro]1,000x of interest 
expense to an unrelated person. Country X imposes [euro]200x of income 
taxes with respect to the [euro]3,000x of gross income properly 
reflected on the books and records of the CFC1X tested unit, and 
Country Y imposes [euro]200x of income taxes with respect to the 
[euro]1,000x of gross income properly reflected on the books and 
records of the FDE1Y tested unit. CFC3Z generates [euro]1,000x of gross 
income from services that would be gross tested income without regard 
to paragraph (c)(7) of this section, and such gross income is properly 
reflected on the books and records of the CFC3Z tested unit. CFC3Z 
accrues no expenses, and Country Z imposes [euro]100x of income taxes 
with respect to the [euro]1,000x of gross income generated by CFC3Z.
    (2) Analysis--(i) Tentative gross tested income items. Under 
paragraph (c)(7)(ii) of this section, the [euro]3,000x of gross income 
that is reflected on the books and records of the CFC1X tested unit, 
and the [euro]1,000x of gross income that is reflected on the books and 
records of the FDE1Y tested unit, are attributable to the CFC1X tested 
unit and the FDE1Y tested unit, respectively. Under paragraph 
(c)(7)(ii) of this section, each of these amounts is a separate 
tentative gross tested income item of CFC1X (the ``CFC1X tentative 
gross tested income item'' and the ``FDE1Y tentative gross tested 
income item,'' respectively). Under paragraph (c)(7)(ii) of this 
section, the [euro]1,000x item of tentative gross tested income that is 
properly reflected on the books and records of the CFC3Z tested unit is 
attributable to the CFC3Z tested unit. Under paragraph (c)(7)(ii) of 
this section, the amount attributable to the CFC3Z tested unit is a 
tentative gross tested income item of CFC3Z (the ``CFC3Z tentative 
gross tested income item'').
    (ii) Allocation and apportionment of interest expense. To compute 
CFC1X's tentative tested income items, the principles of Sec.  1.960-
1(d)(3) apply by treating each of CFC1X's tentative gross tested income 
items as income in a separate tested income group (the ``CFC1X income 
group'' and the ``FDE1Y income group'') and allocate and apportion its 
deductions among those income groups under federal income tax 
principles. Because CFC1X uses the modified gross income method under 
Sec.  1.861-9(j) and Sec.  1.861-9T(j) to allocate and apportion 
interest expense, it must allocate and apportion its interest expense 
between the CFC1X income group and the FDE1Y income group based on a 
combined gross income amount that includes both the gross income of 
CFC1X (including the gross income attributable to both the CFC1X tested 
unit and the FDE1Y tested unit) and the gross income of CFC3Z, adjusted 
as provided under Sec.  1.861-9(j) and Sec.  1.861-9T(j). Under Sec.  
1.861-9(j) and Sec.  1.861-9T(j), the adjusted combined gross income of 
CFC1X comprises the CFC1X tentative gross tested income item 
([euro]3,000x), or 60% of the combined adjusted gross income amount, 
the FDE1Y tentative gross tested income item ([euro]1,000x), or 20% of 
the combined adjusted gross income amount, and the CFC3Z gross 
tentative tested income item ([euro]1,000x), or 20% of the combined 
adjusted gross income amount. Under paragraph (c)(7)(iii) of this 
section, interest expense of CFC1X that is allocated and apportioned to 
the gross income of CFC3Z under Sec.  1.861-9(j) and Sec.  1.861-9T(j) 
is not allocated and apportioned to either the CFC1X income group or 
the FDE1Y income group. Therefore, [euro]600x of interest expense (60% 
of the [euro]1,000x of interest expense) is allocated and apportioned 
to the CFC1X income group, and [euro]200x of interest expense (20% of 
the [euro]1,000x of interest expense) is allocated and apportioned to 
the FDE1Y income group. The [euro]200x of interest expense that is 
allocated and apportioned to the [euro]1,000x of gross tentative tested 
income of CFC3Z is allocated and apportioned to the residual income 
group for purposes of paragraph (c)(7) of this section, but can still 
be allocated and apportioned to a statutory grouping of tested income 
of CFC1X for purposes of paragraph (c)(3) of this section. See 
paragraph (c)(7)(iii) of this section.
    (iii) Foreign income tax deduction. Under paragraph (c)(7)(iii) of 
this section, deductions for foreign income taxes paid or accrued by 
CFC1X are allocated and apportioned under the principles of Sec. Sec.  
1.960-1(d)(3)(ii) and Sec.  1.904-6(a)(1) to the CFC1X income group and 
the FDE1Y income group. Similarly, foreign income taxes paid or accrued 
by CFC3Z are allocated and apportioned under the principles of 
Sec. Sec.  1.960-1(d)(3)(ii) and 1.904-6(a)(1) to the tentative gross 
tested income item of CFC3Z (the ``CFC3Z income group''). Under these 
principles, the [euro]200x of Country X income taxes are allocated and 
apportioned to the CFC1X income group (the ``CFC1X group tax''), the 
[euro]200x of Country Y income taxes are allocated and apportioned to 
the FDE1Y income group (the ``FDE1Y group tax''), and the [euro]100x of 
Country Z income taxes are allocated and apportioned to the CFC3Z 
income group (the ``CFC3Z group tax'').
    (iv) Tentative tested income items. After the allocation and 
apportionment of deductions to reduce the tentative gross tested income 
in each income group, under paragraph (c)(7)(iii) of this section, 
CFC1X has a tentative tested income item with respect to the CFC1X 
tested unit of [euro]2,200x ([euro]3,000x, less [euro]600x of interest 
expense and [euro]200x of foreign income tax expense, the ``CFC1X 
tentative tested income item'') and a tentative tested income item with 
respect to the FDE1Y tested unit of [euro]600x ([euro]1,000x, less 
[euro]200x of interest expense and [euro]200x of foreign income tax 
expense, the ``FDE1Y tentative tested income item''). CFC3Z has a 
tentative tested income item of [euro]900x ([euro]1,000x, less 
[euro]100x of foreign income tax expense, the ``CFC3Z tentative tested 
income item'').
    (v) Foreign income taxes paid or accrued with respect to a 
tentative

[[Page 44647]]

tested income item. Under paragraph (c)(7)(vii) of this section, the 
foreign income taxes paid or accrued with respect to a tentative tested 
income item is the U.S. dollar amount of the current year taxes that 
are allocated and apportioned to the related tentative gross tested 
income item under the rules of paragraph (c)(7)(iii) of this section. 
Therefore, the foreign income tax paid or accrued with respect to the 
CFC1X tentative tested income item is $200x, the U.S. dollar amount of 
the CFC1X group tax. Similarly, the foreign income tax paid or accrued 
with respect to the FDE1Y tentative tested income item is $200x, the 
U.S. dollar amount of the FDE1Y group tax, and the foreign income tax 
paid or accrued with respect to the CFC3Z tentative tested income item 
is $100x, the U.S. dollar amount of the CFC3Z group tax.
    (vi) Effective foreign tax rate. The effective foreign tax rate is 
determined under paragraph (c)(7)(vi) of this section by dividing the 
U.S. dollar amount of foreign income taxes paid or accrued with respect 
to each respective tentative tested income item by the U.S. dollar 
amount of the tentative tested income item increased by the U.S. dollar 
amount of the relevant foreign income taxes. Therefore, the effective 
foreign tax rate for the CFC1X tentative tested income item is 8.3%, 
computed by dividing $200x (the U.S. dollar amount of the foreign 
income taxes paid or accrued with respect to the CFC1X tentative tested 
income item), by $2,400x (the sum of $2,200x, the U.S. dollar amount of 
the CFC1X tentative tested income item and $200x, the U.S. dollar 
amount of the foreign taxes paid or accrued with respect to the CFC1X 
tentative tested income item). The effective foreign tax rate for the 
FDE1Y tentative tested income item is 25%, computed by dividing $200x 
(the U.S. dollar amount of the foreign taxes paid or accrued with 
respect to the FDE1Y tentative tested income item) by $800x (the sum of 
$600x, the U.S. dollar amount of the FDE1Y tentative tested income 
item, and $200x, the U.S. dollar amount of the foreign taxes paid or 
accrued with respect to the FDE1Y tentative tested income item). The 
effective foreign tax rate for the CFC3Z tentative tested income item 
is 10%, computed by dividing $100x (the U.S. dollar amount of the 
foreign taxes paid or accrued with respect to the CFC3Z tentative 
tested income item) by $1,000x (the sum of $900x, the U.S. dollar 
amount of the CFC3Z tentative tested income item, and $100x, the U.S. 
dollar amount of the foreign taxes paid or accrued with respect to the 
CFC3Z tentative tested income item).
    (vii) Gross income items excluded under sections 954(b)(4) and 
951A(c)(2)(A)(i)(III). The FDE1Y tentative tested income item is 
subject to tax at an effective foreign tax rate (25%) that is greater 
than 18.9% (90% of the maximum rate of tax specified in section 11). 
Therefore, the requirement of paragraph (c)(7)(i)(B) of this section is 
satisfied, and the FDE1Y tentative gross tested income item qualifies 
under paragraph (c)(7)(i) of this section for the high-tax exception of 
section 954(b)(4) and is excluded from tested income under sections 
951A(c)(2)(A)(i)(III) and 954(b)(4) and paragraph (c)(1)(iii) of this 
section. In computing the tested income of CFC1X under paragraph (c)(3) 
of this section, the deductions of CFC1X that were allocated and 
apportioned to the FDE1Y tentative gross tested income item (that is, 
the [euro]200x of interest expense and the [euro]200x of FDE1Y group 
taxes) are allocated and apportioned to this item of tentative gross 
tested income. As a result, the [euro]1,000x of tentative gross tested 
income excluded from tested income under section 954(b)(4), as well as 
the [euro]200x of interest expense and [euro]200x of foreign tax 
expense allocable to that gross income, are allocated and apportioned 
to the residual category under paragraph (c)(3) of this section for 
purposes of determining the tested income of CFC1X. Under Sec.  1.960-
1(d)(3), the $200x of foreign income taxes allocated and apportioned to 
the excluded gross income would also be assigned to the residual income 
group for purposes of determining CFC1X's tested taxes for purposes of 
section 960(d). The CFC1X tentative tested income item and CFC3Z 
tentative tested income item each have effective foreign tax rates 
(8.3% and 10%, respectively) that are not greater than 90% of the 
maximum rate of tax specified in section 11. Therefore, the CFC1X 
tentative gross tested income item and the CFC3Z tentative gross tested 
income item do not qualify under paragraph (c)(7)(i) of this section 
for the high-tax exception of section 954(b)(4), and are not excluded 
from tested income under sections 951A(c)(2)(A)(i)(III) and 954(b)(4) 
and paragraph (c)(1)(i) of this section. Under paragraph (c)(3) of this 
section, the corresponding deductions are allocated and apportioned to 
that gross tested income in a manner that achieves a result that is 
consistent the result of the allocation and apportionment of those 
deductions under paragraph (c)(7) of this section. Accordingly, because 
CFC3Z's tentative gross tested income is not excluded from gross tested 
income under sections 951A(c)(2)(A)(i)(IIII) and 954(b)(4) and 
paragraph (c)(1)(i) of this section, under paragraph (c)(3) of this 
section the [euro]200x of CFC1X's interest expense that was apportioned 
to tentative gross tested income of CFC3Z under the modified gross 
income method in Sec.  1.861-9 is allocated and apportioned to gross 
tested income of CFC1X and therefore reduces CFC1X's tested income. In 
contrast, if the CFC3Z tentative gross tested item had been excluded 
from gross tested income under sections 951A(c)(2)(A)(i)(III) and 
954(b)(4) and paragraph (c)(1)(i) of this section, then the [euro]200x 
of CFC1X's interest expense that was allocated and apportioned to that 
income would be assigned to the residual category.
    (D) Example 4: Application of tested unit rules--(1) Facts--(i) 
Ownership. USP owns all of the stock of CFC1X. CFC1X directly owns all 
the interests of FDEX and FDE1Y. In addition, CFC1X directly carries on 
activities in Country Y that constitute a branch (as described in Sec.  
1.267A-5(a)(2)) and that give rise to a taxable presence under Country 
Y tax law and Country X tax law (such branch, ``FBY'').
    (ii) Items reflected on books and records. For the CFC inclusion 
year, CFC1X had a [euro]20x item of gross income (Item A), which is 
properly reflected on the books and records of FBY, and a [euro]30x 
item of gross income (Item B), which is properly reflected on the books 
and records of FDEX.
    (2) Analysis--(i) Identifying the tested units of CFC1X. Without 
regard to the combination rule of paragraph (c)(7)(iv)(C) of this 
section, CFC1X, CFC1X's interest in FDEX, CFC1X's interest in FDE1Y, 
and FBY would each be a tested unit of CFC1X. See paragraph 
(c)(7)(iv)(A) of this section. Pursuant to the combination rule, 
however, the FDE1Y tested unit is combined with the FBY tested unit and 
treated as a single tested unit because FDE1Y is a tax resident of 
Country Y, the same country in which FBY is located (the ``Country Y 
tested unit''). See paragraph (c)(7)(iv)(C)(1) of this section. The 
CFC1X tested unit (without regard to any items attributable to the 
FDEX, FDE1Y, or FBY tested units) is also combined with the FDEX tested 
unit and treated as a single tested unit because CFC1X and FDEX are 
both tax residents of County X (the ``Country X tested unit''). See 
paragraph (c)(7)(iv)(C)(1) of this section.
    (ii) Computing the items of CFC1X. Under paragraph (c)(7)(ii)(A) of 
this section, a tentative gross tested income item is determined with 
respect to each of the Country Y tested unit and the

[[Page 44648]]

Country X tested unit. To determine the tentative gross tested income 
item of each tested unit, the item of gross income that is attributable 
to the tested unit is determined under paragraph (c)(7)(ii)(B) of this 
section. Under paragraph (c)(7)(ii)(B) of this section, only Item A is 
attributable to the Country Y tested unit. Item A is not attributable 
to the Country X tested unit because it is not reflected on the 
separate set of books and records of the CFC1X tested unit or the FDEX 
tested unit, and an item of gross income is only attributable to one 
tested unit. See paragraph (c)(7)(ii)(B)(1) of this section. Under 
paragraph (c)(7)(ii)(B) of this section, only Item B is attributable to 
the Country X tested unit.
    (3) Alternative facts--branch does not give rise to a taxable 
presence in country where located--(i) Facts. The facts are the same as 
in paragraph (c)(8)(iii)(D)(1) of this section (the original facts in 
this Example 4), except that FBY does not give rise to a taxable 
presence under Country Y tax law; moreover, Country X tax law does not 
provide an exclusion, exemption, or other similar relief with respect 
to income attributable to FBY.
    (ii) Analysis. FBY is not a tested unit but is a transparent 
interest. See paragraphs (c)(7)(iv)(A)(3) and (c)(7)(ix)(C) of this 
section. CFC1X has a tested unit in Country X that includes the CFC1X 
tested unit (without regard to any items related to the interest in 
FDEX or FDE1Y, but that includes FBY since it is a transparent interest 
and not a tested unit) and the interest in FDEX. See paragraph 
(c)(7)(iv)(C) of this section. CFC1X has another tested unit in Country 
Y, the interest in FDE1Y.
    (4) Alternative facts--branch is a tested unit but is not 
combined--(i) Facts. The facts are the same as in paragraph 
(c)(8)(iii)(D)(1) of this section (the original facts in this Example 
4), except that FBY does not give rise to a taxable presence under 
Country Y tax law but Country X tax law provides an exclusion, 
exemption, or other similar relief (such as a preferential rate) with 
respect to income attributable to FBY.
    (ii) Analysis. FBY is a tested unit. See paragraph (c)(7)(iv)(A)(3) 
of this section. CFC1X has two tested units in Country Y, the interest 
in FDE1Y and FBY. The interest in FDE1Y and FBY tested units are not 
combined because FBY does not give rise to a taxable presence under the 
tax law of Country Y. See paragraph (c)(7)(iv)(C)(2) of this section. 
CFC1X also has a tested unit in Country X that includes the activities 
of CFC1X (without regard to any items related to the interest in FDEX, 
the interest in FDE1Y, or FBY) and the interest in FDEX.
    (5) Alternative facts--split ownership of tested unit--(i) Facts. 
The facts are the same as in paragraph (c)(8)(iii)(D)(1) of this 
section (the original facts in this Example 4), except that USP also 
owns CFC2X, CFC1X does not own FDE1Y, and CFC1X and CFC2X own 60% and 
40%, respectively, of the interests of FPSY.
    (ii) Analysis for CFC1X. Under paragraph (c)(7)(iv)(C)(1) of this 
section, FBY and CFC1X's 60% interest in FPSY are combined and treated 
as a single tested unit of CFC1X (``CFC1X's Country Y tested unit''), 
and CFC1X's interest in FDEX and CFC1X's other activities are combined 
and treated as a single tested unit of CFC1X (``CFC1X's Country X 
tested unit''). CFC1X's Country Y tested unit is attributed any item of 
CFC1X that is derived through its interest in FPSY to the extent the 
item is properly reflected on the books and records of FPSY. See 
paragraph (c)(7)(ii)(B)(1) of this section.
    (iii) Analysis for CFC2X. Under paragraphs (c)(7)(iv)(A)(1) and 
(c)(7)(iv)(A)(2)(i) of this section, CFC2X and CFC2X's 40% interest in 
FPSY are tested units of CFC2X. CFC2X's interest in FPSY is attributed 
any item of CFC2X that is derived through FPSY to the extent that it is 
properly reflected on the books and records of FPSY. See paragraph 
(c)(7)(ii)(B)(1) of this section.
    (iv) Analysis for not combining CFC1X and CFC2X tested units. None 
of the tested units of CFC1X are combined with the tested units of 
CFC2X under paragraph (c)(7)(iv)(C)(1) of this section because they are 
tested units of different controlled foreign corporations, and the 
combination rule only combines tested units of the same controlled 
foreign corporation.
    (6) Alternative facts--split ownership of transparent interest--(i) 
Facts. The facts are the same as in paragraph (c)(8)(iii)(D)(1) of this 
section (the original facts in this Example 4), except that USP also 
owns CFC2X, CFC1X does not own DE1Y, and CFC1X and CFC2X own 60% and 
40%, respectively, of the interests in FPSY, but FPSY is not a tax 
resident of any foreign country and is fiscally transparent for Country 
X tax law purposes.
    (ii) Analysis for CFC1X. CFC1X's interest in FPSY is not a tested 
unit but is a transparent interest. See paragraphs (c)(7)(iv)(A)(2) and 
(c)(7)(ix)(C) of this section. Under paragraph (c)(7)(v)(C) of this 
section, any item of CFC1X that is derived through its interest in FPSY 
and is properly reflected on the books and records of FPSY is treated 
as properly reflected on the books and records of CFC1X.
    (iii) Analysis for CFC2X. CFC2X's interest in FPSY is not a tested 
unit but is a transparent interest. See paragraphs (c)(7)(iv)(A)(2) and 
(c)(7)(ix)(C) of this section. Under paragraph (c)(7)(v)(C) of this 
section, any item of CFC2X that is derived through its interest in FPSY 
and is properly reflected on the books and records of FPSY is treated 
as properly reflected on the books and records of CFC1X.
    (E) Example 5: CFC group--Controlled foreign corporations with 
different taxable years--(1) Facts. USP owns all the stock of CFC1X and 
CFC2X. CFC2X has a taxable year ending November 30. On December 15, 
Year 1, USP sells all the stock of CFC2X to an unrelated party for 
cash.
    (2) Analysis. The determination of whether CFC1X and CFC2X are in a 
CFC group is made as of the close of their CFC inclusion years that end 
with or within the taxable year ending December 31, Year 1, the taxable 
year of USP, the controlling domestic shareholder. See paragraph 
(c)(7)(viii)(E)(2)(ii) of this section. Under paragraph 
(c)(7)(viii)(E)(2)(i) of this section, USP directly owns more than 50% 
of the stock of CFC1X as of December 31, Year 1, the end of CFC1X's CFC 
inclusion year. USP also directly owns more than 50% of the stock of 
CFC2X as of November 30, Year 1, the end of CFC2X's CFC inclusion year. 
Therefore, CFC1X and CFC2X are members of a CFC group, and USP must 
consistently make high-tax elections, or revocations, under paragraph 
(c)(7)(viii) of this section with respect to CFC1X's taxable year 
ending December 31, Year 1, and CFC2X's taxable year ending November 
30, Year 1. This is the case notwithstanding that USP does not directly 
own more than 50% of the stock of CFC2X as of December 31, Year 1, the 
end of CFC1X's CFC inclusion year. See paragraph (c)(7)(viii)(E)(2)(ii) 
of this section.

0
Par. 4. Section 1.951A-7 is amended by:
0
1. Designating the undesignated text as paragraph (a);
0
2. Adding a subject heading to newly designated paragraph (a);
0
3. Removing the word ``Sections'' and adding in its place ``Except as 
otherwise provided in this section, sections'' in newly designated 
paragraph (a); and
0
4. Adding paragraph (b).
    The additions read as follows:


Sec.  1.951A-7  Applicability dates.

    (a) In general. * * *
    (b) High-tax exception. Section 1.951A-2(c)(1)(iii), (c)(3)(ii), 
and (c)(7)

[[Page 44649]]

and (8) apply to taxable years of foreign corporations beginning on or 
after July 23, 2020, and to taxable years of United States shareholders 
in which or with which such taxable years of foreign corporations end. 
In addition, taxpayers may choose to apply the rules in Sec.  1.951A-
2(c)(1)(iii), (c)(3)(ii), and (c)(7) and (8) to taxable years of 
foreign corporations that begin after December 31, 2017, and before 
July 23, 2020, and to taxable years of U.S. shareholders in which or 
with which such taxable years of the foreign corporations end, provided 
that they consistently apply those rules and the rules in Sec.  1.954-
1(c)(1)(iii)(A)(3), Sec.  1.954-1(c)(1)(iv), and the first sentence of 
Sec.  1.954-1(d)(3)(i) to such taxable years.


Sec.  1.954-0  [Amended]

0
Par. 5. Section 1.954-0 is amended by removing and reserving paragraph 
(b).

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. In paragraph (d)(1) introductory text, removing the language 
``foreign base company oil related income, as defined in section 
954(g), or'' in the second sentence and adding a sentence after the 
fourth sentence;
0
5. Removing the language ``imposed by a foreign country or countries'' 
in paragraph (d)(1)(ii);
0
6. 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
7. Removing the language ``(or deemed paid or accrued)'' in paragraph 
(d)(2)(i);
0
8. Revising paragraph (d)(3)(i);
0
9. Removing and reserving paragraph (d)(3)(ii);
0
10. Removing paragraph (d)(7);
0
11. Revising paragraph (h)(1); and
0
12. Adding paragraph (h)(3).
    The additions and revisions read as follows:


Sec.  1.954-1  Foreign base company income.

* * * * *
    (c) * * *
    (1) * * *
    (iii) * * *
    (A) * * *
    (3) 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 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) 
or (c)(6) 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), (c)(3)(ii), 
and (c)(7) and (8). * * *
* * * * *
    (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.
* * * * *
    (h) * * *
    (1) Paragraph (d)(3) of this section for taxable years ending on or 
after December 4, 2018, and before July 23, 2020. For the application 
of paragraph (d)(3) of this section to taxable years of controlled 
foreign corporations ending on or after December 4, 2018, and before 
July 23, 2020, and to taxable years of United States shareholders in 
which or with which such taxable years of the controlled foreign 
corporations end, see Sec.  1.954-1, as contained in 26 CFR part 1 
revised as of April 1, 2020.
* * * * *
    (3) Paragraphs (c)(1)(iii)(A)(3), (c)(1)(iv), and (d)(3)(i) of this 
section for taxable years beginning on or after July 23, 2020. 
Paragraphs (c)(1)(iii)(A)(3), (c)(1)(iv), and (d)(3)(i) of this section 
apply to taxable years of a controlled foreign corporation beginning on 
or after July 23, 2020, and to taxable years of United States 
shareholders in which or with which such taxable years of foreign 
corporations end. In addition, taxpayers may choose to apply the rules 
in paragraphs (c)(1)(iii)(A)(3), (c)(1)(iv), and (d)(3)(i) of this 
section to taxable years of controlled foreign corporations that begin 
after December 31, 2017, and before July 23, 2020, and to taxable years 
of United States shareholders in which or with which such taxable years 
of the controlled foreign corporations end, provided that they 
consistently apply those rules and the rules in Sec.  1.951A-
2(c)(1)(iii), (c)(3)(ii), and (c)(7) and (8) to such taxable years.


Sec.  1.1502  [Amended]

0
Par. 7. Section 1.1502-51 is amended in paragraph (g)(1) by removing 
the language ``Sec.  1.951A-7'' and adding in its place ``Sec.  1.951A-
7(a)'' wherever it appears.

Sunita Lough,
Deputy Commissioner for Services and Enforcement.
    Approved: July 1, 2020.
David Kautter,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2020-15351 Filed 7-20-20; 4:15 pm]
BILLING CODE 4830-01-P