Since the introduction of the Global, Intangible, Low-Taxed Inclusion (“GILTI”) in the 2017 Tax Cuts and Jobs Act (“TCJA”), taxpayers have eagerly awaited the Treasury’s position on whether the High Tax Exception Election (“HTE Election”) under IRC §954(b)(4) would apply. On July 23, 2020, the Treasury released final and proposed regulations providing taxpayers the option to affirmatively elect to apply the high tax exception to exempt both subpart F (under IRC §951) and GILTI inclusions (Under IRC §951A) from US federal income tax if the effective tax rate on that income stream was greater than 90% of the corporate income tax rate (90% of corporate tax rate is currently 18.9%). However, determining the effective tax rate is not as simple as it once was. It is important to determine the effective tax rate of Subpart F and GILTI separately as their eligibility for the HTE Election is determined using different accounting methods. Earnings and Profits (“E&P”) have been historical used for determining deemed dividends such as Subpart F and IRC §956 inclusions. However, GILTI introduced a new concept for CFCs referred to as “net CFC tested income” which largely mirrors US taxable income principles. This brings into play certain adjustments, such as officer’s compensation and §163(j) interest limitations, which previously were not necessary to consider. Therefore, it is possible to end up with a scenario where either Subpart F income or GILTI tested income qualifies for the HTE Election, but the other does not.
While electing the HTE Election and excluding income from the US tax net may seem to be a very simple decision, the complications in the GILTI regime make it far less clear cut than it seems on the surface. In this article, we will walk through some of the key benefits and pitfalls to consider in making the HTE Election.
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Bennett Thrasher’s Tax practice can help you navigate the complexities of the HTE Election and assist in the decision-making process. To learn more about the HTE Election and see whether it would benefit you, please contact Sam Heberton, Brian Sengson or Molly Johnson by calling 770.396.2200.