How The IRS Taxes The Earnings Of Offshore Controlled Corporations

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The Global Intangible Low-taxed Income, also known as GILTI has some newly proposed regulations from the IRS.  Thetaxadviser.com helps break down the new proposed regulations and what that might mean for you. 

U.S. shareholders of CFC’s, which are also known as controlled foreign corporations now have to include GILTI into their gross income for that tax year. This is for all tax years of foreign corporations after December 31,2017 and tax years for all U.S. shareholders that fall within the foreign corporations’ year-end for tax purposes. 

  1. A certain formula is used to figure out how much U.S. tax should be charged on intangible income that is earned by a CFC.
  2. Specified tangible properties such as QBAI or qualified business asset investments are usually given a 10% return and any dollar amount above that among is considered intangible income. 
  3. The IRS tried to explain that this amount, though it’s treated like a Subpart F income inclusion is actually determined in a totally different manner and includes amounts of all CFC’s that the U.S. shareholder owns. 
  4. They take an aggregate amount for all of them to include on taxes.

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  5. In inclusion amount for GILTI is calculated using things like QUAI, tested losses, or tested incomes for all of the different CFC’s that the shareholder owns. 
  6. Then, just like a pro rata share of Subpart F, the shareholder figures out the pro rata share of each of these CFC-level items. 
  7. The way it differs from Subpart F though is that the shareholder calculates their gross income on an aggregate basis and then calculates the GILTI amount included to figure out their pro rata shares. 
  8. Then the share holder takes these amounts and multiplies or nets them, and then takes the pro rata share of each item to come up with their single shareholder-level amount. 

So basically you can look at it like this, the net CFC tested income will be the aggregate tested income minus the aggregate tangible income return.  A deemed tangible income return is the QBAI multiplied by 10%.  But the shareholder does not stop there with their calculation.  The GILTI inclusion amount is then calculated by subtracting one aggregate shareholder-level amount for another.  Then the net DTIR, which is the net deemed tangible income-return is the excess of deemed tangible income return divided by certain interest expense that will finally give you the end GILTI inclusion amount with is the excess of it’s net CFC tested income divided by its net DTIR. 

Sec. 951A covered a whole slew of regulations that will help shed more clarity on this matter.  Some of the things covered here are general definitions and rules that apply, the treatment of the GILTI inclusion amount, the calculation of tested income and loss, what is included in specified interest expense, the rules regarding QBAI, the treatment of domestic partnerships and their partners, clarity regarding specified tangible property, and the adjustments to earnings and profits and basis.  That’s a lot of cover, but Sec. 951A covered it all. 

There is also a part that addresses some of the structures people are using to avoid paying taxes to the IRS that the IRS has become aware of.  It also aims to update and modify existing regulations and modify reporting requirements.  These proposed regulations become effective the day they are published in the Federal Register, but the IRS is open and willing to listen to comments and opinions regarding the new proposed regulations. 

Contact us for information about the GILTI and how will affect you. 

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Fulton Abraham Sanchez, CPA

Fulton Abraham Sánchez, CPA I am Certified Public Accountant, specialized in Tax Planning & Offshore Strategies for Real Estate, Hedge/Equity Funds, Fintech, Crypto, Expats, IRS Debt Resolution. You can email me fa@fascpaconsultants.com and follow us on Facebook : FAS CPA & Consultants.

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