TAX 9869 Lecture Notes - Lecture 60: De Minimis, Foreign Tax Credit, Investment

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11 Aug 2020
Class 11: July 15, 2020
Subpart F - Exceptions
Subpart F Full Inclusion Rule (954(b)(3)(B))
If foreign base company income and gross insurance income is greater than 70% of its gross
income for the taxable year, then 100% of the income will be considered Foreign base company
income and gross insurance income.
Subpart F Full Inclusion Rule and De Minimis exception
(Two Rules to KNOW…both on FINAL EXAM:)
1. Full Inclusion Rule
o If your foreign base company income and gross ins income is greater than 70% of GI
of taxable year then all of it is Sub F income
o If > 70% of GI is Sub F income of CFC, then all income is Sub F income
Subpart F Exceptions (Sec. 954(b)(3)(a))
De minimis Rule:
Foreign base company income and insurance income are less than the lesser of:
1)5% of gross income, or
If De minimis rule applies then no amount of the CFC’s income is treated as foreign
base company income or insurance income.
2. De Minimis Exception
o If Sub F income is less than the lesser of the 2:
o Test 2 things, test lesser of, if less than that, not sub F income
o 5% of GI or $1m
o If over $1m, not get to de minimis exception
o Lesser of that = more
o If $800,000 of Sub F income, less than $1m, if less than 5% of GI, then NONE = SUB
o Lesser of 5% or $1m
o Pick lesser!!! Then if lesser, none= Sub F= 4% of GI or $900,000= de min exception
“High Tax” Exception (Sec. 954(b)(4))
•Section 954(b)(4) allows a U.S. shareholder to elect to exclude from subpart F income an
“item” of foreign base company income (excluding oil-related) and insurance income subject to
a foreign effective income tax rate exceeding 90 percent of the maximum U.S. tax rate
> 18.9 percent for a corporation
> 33.3 percent for an individual
•The item’s ETR is computed as:
O 960 deemed paid credit
Net FBC income*
*Net FBC income is computed using U.S. tax accounting rules
HIGH TAX Exception
o Purpose of Sub F income- earned by CFC, USSH trying to push out of US into a low
tax income
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o It is an election
o Has to be elected by USSH
o Might not want to take exception if a lot of foreign taxes, use as foreign tax credit-
maybe he wants to pick up Sub F income b/c a lot of foreign taxes w /it, use taxes to
offset other Sub F income
o Know that this is an election that he has to make
o If income of CFC that would be Sub F, if taxed at ETR >90% OF HIGHEST US TAX
o High tax bucket for foreign tax credit purposes
o If CFC’s income taxed at ETR >90% OF HIGHEST US TAX RATE, ELECT TO
o Highest US corp tax rate= 21%, since it’s this, 21% * 90% = 18.9%
o If you have a country that taxes you at more than 18.9%, ETR= more than this tax
rate, can elect to exclude
o Proposed reg that GILTI has same high tax exception
o If GILTI taxed @18.9% ETR- still proposed for Sub F around 41
o Figure out your credit- tax related to Sub F income, over Sub F net income= ETR=
tax paid/income on which tax applied, add tax- tax/pretax income
Section 951A: Global Intangible Low-Taxed Income (“GILTI”)
Global Intangible Low Taxed Income- went into effect on January 1, 2018
GR: A CFC has generally used to be deferral of US taxation
o Foreign corp that earns money, USSH wasn’t taxed on earnings until time
earnings repatriated as dividend
o Backstop to deferral of US taxation used to be Sub F
o Now, with intro of GILTI, in a lot of situations, a CFC will have GILTI= USSH
will be subject to tax on income of CFC even if it is NOT Sub F income
o Sub F income still impt to know and calculate
o First thing to compute= Sub F income..GILTI does NOT include Sub F
- Anything else that remains= income could be GILTI income
What is GILTI income? How do you compute? Where is it applicable?
Formulas of GILTI:
o Numerical computation that has to be walked through
o Tax credits- indirect foreign tax credits
o Diff type of formula
•Starting in the 2018 tax year, new Section 951A imposes a minimum tax on 10% U.S.
shareholders (individuals, corporations, partnerships, trusts) of CFCs to the extent of such
CFCs’ global intangible low taxed income (“GILTI”)
•The inclusion of GILTI is generally treated in the same manner as traditional Subpart F
•The calculation of GILTI is based on a formula (provided on a later slide), that exempts from
inclusion a deemed return (10%) on the U.S. tax basis of tangible assets and deems the
residual income to be intangible income (whether or not that is actually the case) that is subject
to current U.S. tax
What is GILTI?
o GILTI= Section 951 A slide 1
o Slide 2: USSH of CFC, similar to Sub F if own direct/indirect interest, that USSH will
have to pick up his pro rata share of GILTI income CFC has
o Starting in 2018, any 10% owner of CFC has to pick up pro rata share of GILTI
o Works similarly to Sub F
o CFC earns GILTI- USSH has to pick up in income his share of GILTI
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