Source: http://fixthetaxtreaty.org/2018/12/05/explaining-gilti-individual-impact/?shared=email&msg=fail
Timestamp: 2019-04-25 18:43:46+00:00

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Explaining GILTI – Individual Impact – Let's Fix the Australia/US Tax Treaty!
It is important to remember that corporations are taxed separately from their shareholders – they are separate taxable entities. This means that, absent a provision such as GILTI (or subpart F), shareholders do not pay tax on corporate income. If/when the corporation determines that it has excess cash to distribute, it will declare a dividend, which will be taxed to the shareholder.
A domestic corporation that is a US Shareholder in a CFC is deemed to have paid the foreign taxes paid by the CFC that apply to any subpart F income (broadly defined to include GILTI and the transition tax).
An individual that is a US Shareholder in a CFC can elect (annually) to pay the corporate tax rate on all subpart F income (broadly defined to include GILTI and the transition tax) and use the corporate shareholder rules to receive FTC for taxes actually paid by the CFC. This is called a §962 election. We will discuss this election in detail later.
If an individual shareholder does not make the 962 election, GILTI will result in double taxation. This is because the foreign tax credit computation for GILTI is quarantined from foreign taxes paid on all other types of income. The only foreign tax that can possibly offset GILTI is the tax paid by the CFC – and without a §962 election an individual shareholder cannot use the tax paid by the CFC as a foreign tax credit.
To recap, under the normal rules an individual US Shareholder of a CFC will include in their taxable income 100% of GILTI (computed the same way that a corporate shareholder computes GILTI), and will pay US tax on the entire amount of GILTI at their marginal tax rate, up to 37%, with no credit for foreign taxes paid. This is the situation that was mentioned in the public comment made on behalf of the Israeli Ministry of Finance that I discussed in my first post.
In order to reduce or eliminate double taxation, we need to understand how a §962 election works. In a nutshell, the election allows individual US Shareholders of CFCs to compute their foreign tax credit as if they were a domestic corporation and use the corporate tax rate. The cost of this election is potentially higher US tax when dividends are paid.
Making the §962 election means that the individual shareholder can look into the CFC and treat foreign taxes paid by the corporation as if the shareholder had paid those taxes directly. To understand what this means, consider a case where a CFC has $7 of GILTI that the shareholder must include in income and the CFC has already paid $3 of foreign tax on that income. The $7 of GILTI is computed after deducting the $3 of foreign tax, so in order to use that foreign tax as a credit, it must be added back to taxable income to get the $10 of pre-tax income that became GILTI. Adding the foreign tax back is required under §78 of the tax code.
If this were a normal subpart F inclusion (remember, that’s generally passive income earned inside the CFC), then the entire $3 of foreign tax would be available as a credit against US tax on the $10. But, since the GILTI provisions limit the foreign tax credit to 80% of foreign tax paid, only $2.40 is available to offset US tax on the $10. To add to the confusion, note that the entire amount of the foreign tax is used for the §78 “add-back”, but only 80% for the foreign tax credit.
The §962 election sounds like it might allow an individual US Shareholder to compute the tax on GILTI as if they were a corporation. That’s not quite correct. The election allows the shareholder to compute the tax credit like a corporation, and to use a flat 21% tax rate, but it does not allow the shareholder to use any deductions against the GILTI inclusion. That’s why the 50% deduction allowed to corporations under §250 cannot be used by an individual US Shareholder, even if a §962 election is made. In the simplified example above, the $10 of GILTI would be taxed at 21% for a tax of $2.10. This would be fully offset by the foreign tax credit of $2.40. Note that the extra $0.30 is lost (as is the difference between actual foreign tax and the 80% allowed as a credit). The carry-forward rules for foreign tax credits do not apply to foreign tax credits on GILTI.
The loss of the 50% deduction means that, for individual US Shareholders, GILTI is essentially a minimum tax of 26.25% – a rate that is higher than the US domestic corporate tax rate!
The §962 election allows an individual US Shareholder to compute the tax on GILTI as if they were a corporation. On 4 March 2019, the US Treasury issued proposed regulations in which they changed their position on the availability of the 50% deduction to individuals making an election under §962. In spite of the fact that §962 does not allow deductions, the preamble to the proposed regulations argues that Congressional intent in enacting §962 was that individual US Shareholders were to be treated no worse than if they had made their foreign investment via a domestic corporation rather than direct ownership in a CFC. To ensure that this intent is respected, individuals making a §962 election will be allowed to take the 50% deduction allowed by §250. The Technical Appendix to this blog post has been updated to take the proposed regulations into account. With the §962 election, an individual US Shareholder owning a CFC that pays more than 13.125% of tax locally will end up in exactly the same position as under prior law – they will have no current US tax on their active business income, and no Previously Taxed Earnings and Profits (PTEP).
What happens when the CFC pays a dividend?
Under the basic rules (without the election), any dividend paid out of earnings that have been previously taxed (including GILTI) are not included in US taxable income. Of course, the shareholder will probably pay tax where they live, but there will be no additional US income tax. The story is a bit different if the §962 election was made to reduce tax payable on GILTI. The cost of the election is that the shareholder only gets to treat an amount equal to the actual US tax paid (after FTC) as previously taxed, so most of the dividend will be taxable. This may not make much of a difference, however, as any tax paid where the shareholder lives will be available as a credit to offset US tax on the dividend.
In sum, the GILTI rules were written with large multinational corporate structures in mind. The rules for corporate US shareholders provide for LOWER US tax rates on non-US income than on US income. These corporate rules generally work as advertised to provide a minimum tax rate of 13.125% on CFC income classified as GILTI. However, individual US shareholders cannot take advantage of the provisions that reduce the US tax rate on GILTI below the corporate tax rate. For individual US Shareholders, the effective total tax rate on GILTI will be either their marginal US tax rate (if no §962 election is made), or the greater of 26.25% or their local (foreign to the US) tax rate (with a §962 election). This will be in addition to any tax paid on subsequent dividend distributions.
John Richardson and I have done a series of three videos on GILTI. The third is based on this post.
 See the technical appendix for a complete numerical example.
 Net Investment Income Tax (NIIT) may apply at a rate of 3.8%.
Thank you for this excellent post which provides a road map for individuals impacted by this insanity!
MOST tax professionals actually try to look out for their clients and try to maximize what that individual tax payer gets to KEEP, not pay in taxes. That was a direct and unnecessary insult to an industry that is straddled with having to walk that fine line of tax compliance to keep their client out of trouble while doing EVERYTHING they can to HELP their client MINIMIZE as much as they can in tax obligations. As you are now well aware, it’s not for the faint of heart, especially when trying to keep up with the US tax code that is off the charts!
No one is required to use a tax professional and if that’s how they are viewed in general, then by all means, go it alone, no skin off the tax preparer’s back, it’s not like they receive a bonus from uncle sam any differently.
I would agree with you that most tax professionals are trying to help their clients. But, when the rules get complex (and nowhere are they more complex than in the area of CFCs), tax professionals tend to become risk averse and are more likely to choose the path that is more conservative rather than taking a defensible position that is untested.

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