§951A Comment

At Le Tax Law, PLLC, we pride ourselves on our integrity, and we believe the tax code should embodied the ideal of Fairness. Thus, at the request of the Department of the Treasury (“Treasury”) and Internal Revenue Service (the “IRS” or “Service”) in the Notice of Proposed Rulemaking (REG-104390-18], RIN 1545-BO54) issued on October 1, 2018 (the “Proposed Regulations”), Le Tax Law, PLLC submitted our comment to request that the code does not exclude non-ten percent partners (smaller partners) from the same benefit the Code provides to larger partners.

Below is our response.


These Comments are provided in response to Treasury’s and the IRS’s requests for comments on the Proposed Regulations concerning U.S. shareholders determination of the amount of GILTI to include in gross income (“GILTI inclusion amount”) under section 951A. As part of the Tax Cuts and Jobs Act (“TCJA”), Code Section 951A requires a United States shareholder (“U.S. shareholder”) of any controlled foreign corporation (“CFC”) for any taxable year to include in gross income the shareholder’s global intangible low-taxed income (“GILTI”) for such taxable year. Section 14201(d) of the Act provides that Code Section 951A applies to taxable years of foreign corporations beginning after December 31, 2017, and to taxable years of U.S. shareholders in which or with which such taxable years of foreign corporations end.

In response to the requests from Treasury and the IRS, I respectfully offer the comments and suggestions described below.

II. Election to be treated as a 10% partner

The Treasury Department and the IRS requested comments as to whether any other approach to the treatment of domestic partnerships and their partners for purposes of section 951A, including a pure entity approach or a pure aggregate approach, would more appropriately harmonize the provisions of the GILTI regime than the approach of the Proposed Regulations, particularly in light of the administrative and compliance burdens associated with any other approach and the approach of the proposed regulations. In the interest of fairness, I believe the aggregate approach should be applicable to both types of U.S. partners.

I believe both types of domestic partners, whether or not the domestic partner is considered a U.S. shareholder of a Partnership CFC on a standalone basis, should qualify for the aggregate approach.

Section 951A(a) requires each person who is a U.S. shareholder of any CFC to include in gross income such shareholder’s GILTI. In the case of a partnership that is a U.S. shareholder, this would require the partnership to pick up the income under GILTI and allocate proportionate share of the GILTI income to each partner. This would appear to conflict with the legislative intent to allow U.S. shareholders the ability to offset their tested income and tested loss, where a partner may hold interest in multiple partnerships or through other form of ownerships (e.g. direct ownership of a CFC). Thus, Proposed Regulation Section 1.951A-5 attempts to rectify this situation by treating a U.S. partnership as if it were a foreign partnership with respect to stand alone U.S. shareholder partners, thereby allowing elements of the CFC GILTI calculation to pass directly to such partners. However, this means that only stand alone U.S. shareholder partners can benefit from the individual element treatment (the aggregate approach), while non-stand alone U.S. shareholder partners, the small interest partners, would still pick up their share of GILTI through the partnership (the entity approach). This then allows the stand-alone partners to receive a different and potentially more favorable tax treatment—the ability to net or offset non-Partnership CFC tested losses against tested income of a Partnership CFC (or vice versa).

I believe that the non-stand alone partners should have the ability to obtain the same netting benefits and propose for allowing the partnership to make an election to treat its non-stand alone partners on an aggregate basis, too.

A challenge with implementing the aggregate approach to smaller interest partners is the potential administrative burden associated with separately allocating the CFC’s tested income, tested loss, QBAI, and other GILTI items to more partners, rather than simply allocating the calculated GILTI amount of the partnership. It is because of this potential additional administrative burden as to why I have proposed for the partnership to be able to make an election to treat all partners on an aggregate basis. This way the partnership can determine if it its willing to undertake this potential additional administrative burden. Ultimately, the non stand alone partners will still be subjected GILTI while also ensuring that a non stand alone partner is able to appropriately net all of its GILTI income and losses.

III. Participation Exemption Should Apply to CFCs

The Treasury Department and the IRS requested comments on the application of the rules under Proposed Regulation Section 1.952–2 for purposes of determining subpart F income, tested income, and tested loss. In particular, comments were requested as to whether these rules should allow a CFC a deduction, or require a CFC to take into account income that is expressly limited to domestic corporations under the Code. For example, questions exist as to whether a CFC could be entitled to a dividends received deduction (“DRD”) under Code Section 245A, even though Code Section 245A applies only to dividends received by a domestic corporation.

Accordingly, I recommend Treasury allow CFCs a deduction for the purposes of computing the participation exemption under Code Section 245A. I believe this is consistent with the policy of excluding foreign-source corporate income from U.S. taxation.

Code Section 245A establishes a participation exemption system for the taxation of foreign corporate income that replaces the prior system of taxing U.S. corporations on the foreign earnings of their foreign subsidiaries when the earnings are distributed. The exemption, which is provided in the form of a participation DRD, is intended to encourage U.S. companies to repatriate their accumulated foreign earnings and invest them in the United States.

GILTI Exemption:

Pursuant to Code Section 951A(c)(2)(A)(IV), tested income does not include dividends received from a related person as defined in Code Section 954(d)(3). Thus, a dividend received by a CFC from a related person, entities with more than 50% of common ownership by value or vote, under Code Section 954(d)(3) would already be excluded from the calculation of GILTI under Code Section 951A. However, this exemption does not apply to dividends received from non-“related persons” , entities with 50% or less common ownership.

Subpart F Income:

Pursuant to Code Section 954(c)(6), dividends by an upper-tier CFC from a lower-tier CFC are not treated as foreign personal holding company income to the extent the attributable income is neither subpart F income nor income treated as effectively connected with conduct of U.S. trade or business to the lower-tier CFC. This look-through rule is currently scheduled to expire for taxable years beginning on or after January 1, 2020. However, again this requires the upper-tier CFC to be a related person within the meaning of Code Section 954(d)(3).

Not a Related Person:

Where an exemption under Code Section 245A would be beneficial is where the upper-tier CFC is not a related person within the meaning of Code Section 954(d)(3) (or where the upper-tier CFC is a related person but when the look-through rule under Section 954(c)(6) expires). For example, USC is a U.S. corporation, which wholly owns CFC1, a foreign corporation in Country A. CFC1 owns 30% of CFC2, a foreign corporation in Country B. The other 70% is owned by 30% by X, an unrelated U.S. corporation, and 40% by Y, an unrelated foreign corporation. Neither CFC1 nor CFC2 has PTI under Code Section 959.

CFC2 manufactures widgets and sells them within Country B. In year 1, CFC2 earns $1,000 from its sales. The sales income from the operation is 10% of CFC2’s QBAI and is not classified as subpart F income nor GILTI. Additionally, CFC2 did not incur tax in Country B, and the whole $1,000 is included in CFC2’s E&P.

In year 2, CFC2 distributes the full $1,000 of a non-hybrid dividend to its shareholders, $300 to CFC1, $300 to X, and $400 to Y. Assume Country A does not tax the dividend. CFC 1 recognizes $300 of dividend income, and USC recognizes $300 of subpart F income. Code Section 954(c)(6) does not apply since CFC1 is not related to CFC2. Conversely, assuming the holding period requirements are satisfied, X’s dividend of $300 will be exempted under Code Section 245A.

Theoretically, USC and X are the same. They are both U.S. corporations that are participating in foreign source business activities in Country B through ownership of 30% of the stock of CFC2. The only difference between their participation is that X owns the stock of CFC2 directly whereas USC owns its interest indirectly through a foreign corporation (CFC1), yet USC will be subject to U.S. federal income tax on such foreign source earnings. Thus, if CFC1 is not allowed an exemption under Section 245A for this dividend, I believe that form (i.e., direct ownership) is being elevated over substance. Although this example deals with Subpart F income, I believe the same policy should apply to any possible GILTI inclusion from a similar structure. I believe this inequitable situation could be resolved if CFCs are allowed the participation deduction under Code Section 245A.

I appreciate the opportunity to provide these comments and suggestions on the Proposed Regulations. Thank you for your consideration.

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