Question

Brannigan Company conducts its French manufacturing activities in a 100% owned CFC. None of the CFC’s income constitutes foreign base company income (subpart F). In 2018, the CFC generates gross income of $4,000,000 and incurs directly allocable expenses of $600,000. All of its previously earnings and profits and foreign tax credits were distributed out of the company via dividend distributions. In 2018, the CFC incurred $1,000,000 of French income taxes. The adjusted tax basis of the CFC’s assets is $2,600,000.

Explain briefly, the tax policy considerations that went into the enactment of the GILTI provisions.

Answer 1

Under Code §951A, a U.S. Shareholder of a C.F.C. must include in its gross income its G.I.L.T.I. inclusion in a manner similar to inclusions of Subpart F income. In broad terms, this means that a U.S. Shareholder must include in income the amount of income that would have been distributed with respect to the stock that it owned (within the meaning of Code §958(a)) in the C.F.C. if, on the last day in its tax year on which the corporation is a C.F.C., it had distributed pro rata to its shareholders an amount equal to the amount of its G.I.L.T.I. When a U.S. Shareholder is a corporation, several rules apply in addition to the income inclusion. First, a deemed-paid foreign tax credit is allowed under Code §960 for foreign income taxes allocable to G.I.L.T.I. at the level of the C.F.C. Second, the Code §951A inclusion includes a “gross-up” under Code §78 for the foreign income taxes claimed as a credit. Third, the U.S. corporation is entitled to a 50% deduction (reduced to 37.5% in later tax years) based on the G.I.L.T.I. included in income. As a result, a corporate U.S. Shareholder’s effective tax rate on G.I.L.T.I. plus the gross-up will be 10.5% (increased to 13.125% in later tax years).