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July 20, 2020

BREAKING TAX NEWS | Final regulations implement high-tax exclusion to GILTI, proposed regulations would conform high-tax exception to subpart F income

Today, July 20, 2020, the Treasury Department released final regulations under IRC Section 951A (TD 9902) permitting a taxpayer to elect to exclude from its inclusion of global intangible low-taxed income (GILTI) items of income subject to a high effective rate of foreign tax. The final regulations adopt the threshold rate of foreign tax of 18.9% to determine whether an item is subject to "high tax" and the consistency requirement that the election applies to all "related" CFCs.

The final regulations apply the exclusion on the basis of newly-defined "tested units" of a foreign corporation. This standard is intended to more accurately match foreign taxes to items of income and minimize inappropriate blending of items of income subject to different rates of foreign tax.

With the final regulations, proposed regulations were released under IRC Section 954(b)(4) (REG-127732-19) that would conform the subpart F income "high-tax exception" to the finalized GILTI high-tax exclusion. Applying that exception on a tested-unit basis would similarly minimize blending of items of income subject to different rates of foreign tax and more generally result in greater subpart F income inclusions. When finalized, a unitary election would apply for purposes of both the GILTI high-tax exclusion and the subpart F income high-tax exception.

An EY First Impressions Alert on the regulations will be published Tuesday, July 21. A more detailed Tax Alert on the regulations is forthcoming.