TAX 9869 Lecture Notes - Lecture 55: Tax Treaty, Qualified Dividend, Ordinary Income

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11 Aug 2020
Class 12: July 20, 2020
Treasury released final regs on GILTI high tax exception
- In conjunction with that, Treasury issued proposed regs on subpart f high tax exception
- Subpart f high tax exception: TP can elect to exclude from subpart f income any subpart
F inc that is high taxed; 90% of highest ETR which @21%=18.9% so if there is an item
of subpart f income and TP makes election if ETR is hightaxed or 18.9% they are able to
exclude that income from sub f income
- Works on an item by item basis
- TP can choose to apply the high tax exception for one item of sub f income and perhaps
not for other items
- Doesn’t necessarily go by CFC in its entirety; can look @ diff sub f items- this is high tax,
exclude it
- Difference we have w/ the GILTI high tax exception was...
- Prop. reg wanted to apply GILTI high tax exception based on a qualified biz unit:
every QBU (sep biz unit of CFC) apply separately the effective tax test to see if
specific income taxed at 18.9% or higher; if it was, then choose to exclude GILTI
from being GILTI
- Changed that into tested income
- Looking @ tested income of diff biz of CFC and then applying an ETR on that
- Important both for Sub F and GILTI to know that it is an ETR test
- Ex: UK has corp tax rate of 19% (higher than 18.9) or Netherlands/Luxembourg
~25% corp income TR
- Dont say for sure high taxed!
- Bc its an ETR test must look at ETR of the CFC to determine whether it is really
eligible for high tax exception!
- GILTI high tax exception probs used a lot
- Allow you to decide every year whether want to apply high tax exception to GILTI
or not (just like Sub F high tax exception)
- Good thing :)- choose year/year
- Somebody may not want to apply exception bc if apply HT exception, excluding
sub f income which goes in gen.basket and if exclude sub f income then exclude
taxes that come along w/ it (indirect ftc). May not want to elect high tax exception
- If you pick up sub f income (high tax) + a lot of taxes (FTC), those FTC
may be used as credit against other inc. in general basket (any Foreign
Source operational income that US corp has)
- Q: Is GILTI income for US corporations always 10.5%?
- If the US corp is profitable, meaning they’re in a net income position either way,
then they can take advantage of the full 50% deduction. So the maximum
amount of tax should be 10.5%, which is 21% * 50%
- If US corp has losses for this year from their operations (not including GILTI) or using
NOLs from the past that they are carrying back or NOL carrying forward must use NOL
dollar for dollar against GILTI income before you get 50% deduction (same w/ FDII ded)
both in S250, which have final regulations too
- Example: TP has zero income and all it has is 100 of GILTI; then take 50
- TP has 100 of income US corp and 100 of GILTI; since it has 100 of income
besides GILTI can take deduction
- 200 income (total) - 50 (50% deduction)=150 of income
- TP has 100 of loss and 100 of GILTI income; then you don’t get 50% ded. Must
use 100 of loss dollar for dollar against GILTI (100-100=0) can't create NOL!
- Having NOLS against GILTI, you are really using your NOL dollar for dollar so
ETR using NOL is 21%, not 10.5%, because using dollar for dollar- limitation
where you pay more
- FTCs wipe out GILTI anyway
- Hightax exception, you would be able to elect that as well
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Which basket does Sub f income go into? (two choices)
- Operation sub f income
- Foreign base comp sales or foreign base comp services income = general
limitation basket
- Included with any other FSI in that basket, apply formula along with any other
income in that basket
- Foreign personal holding comp income = passive
- div/interest/rents/royalties
- Apply limitation just on that passive basket
- FTC limitation on basket by basket calculation
- HW question: pre-tax income amount and then tells you how much tax paid
- Subpart F income- after tax-amount. Use taxes to offset your Sub F income when you’re
doing your calculation. Also when computed test income. FTC gross up
- Look @ETR- maybe TP will choose to take high tax exception
- Is this HT?
- Gave example of 2 CFCs- one of which gave situation. That CFC has Subpart F income,
which its income is not Sub F income, but if you think don’t have to pick up, GILTI
- Sub F income comes first- which income of CFC- 1, 2, some of it is not Sub F, can be
GILTI, think about all of that and then all inclusion, am I taking any FTC for that
- Important to understand: don’t avoid tax on CFC income, GILTI will almost always say
pick up inc
- Advisement targeted at limiting GILTI
- No FTC limitation anyway, pick up GILTI with FTC and then done with it
- Unless HT exception the maybe not
- Or situation where CFCs that have full inclusion if they have 70% sub f income (then all
treated as sub f) then all income may be Subpart F. GILTI would not be a problem in that
- People trying to plan to create HT sub f income so it's not in GILTI calculation (tested
income doesn’t include Sub F or Sub F that is high taxed) plan to have that and u can
make election to exclude; probs not necc. bc ur able to apply HT exception for GILTI
FINAL EXAM: FTC/Gross up some midterm overlap!
PFIC- passive foreign investment company (next topic)
Transactions/sales of CFCs
- Section 956 income (Less relevant)
- Is a section that is investment in US property
- What could happen is you could have CFC owned by US corp
- CFC is generating cash
- Now that there is GILTI; with GILTI + sub f ; any income of CFC taxed as GILTI
or Sub F would be subj to tax in US and if tax in US its automatically goes into
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