By Anthony Diosdi
The IRS Form 8892 is used to calculate a controlled foreign corporation (“CFC”) global intangible low-taxed income” or GILTI. Form 8892 consists of Parts I and II. A U.S. shareholder that owns, within the meaning of Section 958(a), stock in one or more CFCs must attach a Form 8892 to a Form 5471. This article will go line by line through the Form 8992 to determine how a GILTI inclusion is determined. This article is based on the Internal Revenue Service (“IRS”) instructions to Form 8992. CFC shareholders are also required to attach either separate Schedule A or separate Schedule B, depending upon whether the shareholder of the CFC is a member of a U.S. consolidated group.
Part 1. Net Controlled Foreign Corporation (CFC) Tested Income
If the CFC shareholder is not a member of a U.S. consolidated group, to determine the amounts on lines 1 and 2, the CFC shareholder must complete Schedule A (Schedule A is a separate schedule) to report its pro rata share of GILTI. Schedule A is completed by CFC shareholders that are not members of a consolidated group. Below is a breakdown of Schedule A. The schedule consists of columns A through I.
Column (a)
For column (a), the preparer must enter the name of each CFC for which it is a shareholder under Section 958 of the Internal Revenue Code. The return preparer should keep in mind that a U.S. person can be a CFC shareholder if it owns at least 10 percent of the value or voting rights (either directly, indirectly, or constructively) in the foreign corporation.
Column (b)
For column (b), the preparer should enter the reference ID number of each CFC.
Column (c)
For column (c), the preparer must enter the U.S. dollar amount of the tested income, if any, from line 6 of Schedule I-1 from Form 5471 for each CFC.
Column (d)
For column (d), the preparer must enter the U.S. dollar amount of the tested loss, if any, from line 6 of Schedule I-1 from Form 5471 for each CFC.
Column (e)
For column (e), the preparer must enter the CFC shareholder’s pro rata share of the tested income listed on column (c).
Column (f)
For column (f), the preparer must enter the CFC shareholder’s pro rata share of tested loss stated on column (d).
Column (g)
For column (g), the preparer must enter the CFC shareholder’s pro rata share of the U.S. dollar amount of QBAI from line 8 of Schedule I-1 of Form 5471 for each CFC.
Column (h)
For column (h), the preparer must enter the CFC shareholder’s pro rata share of the tested loss QBAI amount of any tested CFC loss. The tested loss QBAI amount of a tested loss CFC is an amount equal to 10 percent of the QBAI from line 9 of Schedule I-1 of Form 5471.
Column (i)
For column (i), the preparer must enter the CFC shareholder’s pro rata share of the amount of tested interest income from line 9d of Schedule I-1 of Form 5471.
Column (k)
For column (k), the preparer must enter the CFC shareholder’s GILTI allocation. For each CFC with an amount in column (e), the amount in column (e) must be divided by the total on line 1, column (e). This amount should be entered under column (k) to four decimal places.
Column (i)
For column (i), the preparer must enter the CFC shareholder’s tested income. This requires the preparer to multiply Part II, line 5 by column (k) and enter the amount in dollars.
Line 1. Sum of Pro Rata Share of Net Tested Income
Line 1 asks the CFC shareholder to state the sum of its pro rata share of net tested income. Net tested income means gross income minus deductions and certain items of excludable income that are properly allocated to the gross income. Excludable items of income for this purpose includes, among other items, income that is already included in the CFC shareholder’s income that is effectively connected to a U.S. trade or business. This amount should be entered from Schedule A.
Line 2. Sum of Pro Rata Share of Tested Loss
Line 2 asks the preparer to state the sum of its pro rata loss of tested income. This amount should be entered from Schedule A.
Line 3. Net Tested Income
For line 3, the preparer must combine line 1 and line 2 of Part 1 to Form 8992. If the number is zero or negative, it is not necessary to complete Part II of Form 8992.
If the CFC shareholder is a member of a U.S. consolidated group, the CFC shareholder will need to complete Schedule B. A discussion regarding Schedule B is beyond the scope of this article.
Part II. Calculation of Global Intangible Low-Taxed Income
Line 1. Net CFC Tested Income
For line 1 of Part II, the CFC shareholder must enter the net CFC tested income. The tested income of a CFC is the excess (if any) of the gross income of the CFC determined without regard to certain items (listed above) over deductions (including taxes) properly allocable to that gross income.
Line 2. Deemed Tangible Income Return
Line 2 asks the CFC shareholder to state the net deemed tangible income return (“DTIR”). The DTIR with respect to a CFC shareholder is the excess (if any) of 10 percent of the shareholder’s pro rata share of the qualified business asset investment (“QBAI”) for each CFC. QBAI is defined as the average of such a corporation’s aggregate adjusted basis as of the close of each quarter of such a taxable year in tangible property. This applies to all assets used in a trade or business of the CFC and assets for which a deduction is permitted under Internal Revenue Code Section 167. Consequently, QBAI is any equipment used in a trade or business that is depreciable. The depreciation for purposes of calculating QBAI computed under Section 168(g).
Line 3a. Sum of Pro Rata Share of Tested Interest Expense
For line 3a, the CFC shareholder must enter the total from Schedule A, line 1, column (j).
Line 3b. Sum of Pro Rata Share of Tested Interest Income
For line 3b, the CFC shareholder must enter the total from Schedule A, line 1, column (i).
Line 3c. Specified Interest Expense
Line 3c asks the CFC shareholder to enter the specified interest expense. This is determined by subtracting line 3b of Part II from line 3a of Part II.
Line 4. Net Deemed Tangible Income Return
For line 4, the CFC shareholder must enter the net DTIR. This is determined by subtracting line 3 of Part II from line 2 of Part II.
Line 5. GILTI
For line 4, the CFC should enter the final GILTI computation. This is done by subtracting line 4 of Part II from line 1 of Part II. Expressed formulaically:
GILTI = Net CFC Tested Income – Net Deemed Tangible Income Return = [Tested Income – Tested Loss] – [10% of QBAI – Certain Interest Expense].
Computing GILTI on Form 8992
CFC shareholders should complete Schedule A before completing Form 8992. This is because Schedule A reports the CFC shareholder’s pro rata share amounts for each CFC from each CFC’s Form 5471, Schedule I-1 entitled “Information for Global Intangible Low-Taxed Income. This information is used to determine a CFC shareholder’s GILTI. After entering the amounts from all CFCs onto Schedule A, the CFC shareholder should do the following steps:
Calculate the Schedule A amounts that do not come directly from Forms 5471 (e.g., pro rata share of QBAI multiplied by 10% (column g); Specified Interest Expense (column i), and GILTI Allocation Ration (column j).
Sum up all the Schedule A amounts, and enter them on Schedule A, Line 1 (totals).
Enter the following from Line 1 of Schedule A onto Part 1: Pro Rata Share of Tested Income (column e); Pro Rata Share of Tested Loss (column f).
Determine in Part 1 whether the U.S. shareholder has net CFC Tested Income or, instead net CFC Tested Loss.
If there is net income, complete Part II. If there is net loss, do not complete Part II.
Complete Part II by determining the GILTI inclusion amount as follows: determining net DIR by subtracting the Specified Interest Expense (Schedule A, column i) from the pro rata share of QBAI multiplied by 10% (Schedule A, column g), and then subtracting that net amount from the net CFC Tested Income (Part 1, Line 3).
Enter the GILTI inclusion amount (Part II, Line 3) in the following places. For corporate shareholders, enter this amount on Form 1120, Schedule C, line 17, or on the comparable line of other corporate returns. For noncorporate shareholders, enter the amount on Schedule 1 (Form 1040), line 21 (Other Income). See IRS issues form for calculating global intangible low-taxed income, Thomson Reuters Tax & Accounting (January 11, 23019). It should be noted that the 50 percent deduction on GILTI inclusions is not computed on Schedule 8992. Instead, the Section 250 deduction is computed on Schedule 8993.
Conclusion
The IRS Form 5471 is an incredibly complicated return. Each year an international tax attorney should review direct, indirect, and constructive ownership of the reporting CFC to determine the impact of any changes in percentages, filer categories, and CFC status. Workpapers should also be prepared and maintained for each U.S. GAAP adjustment and foreign exchange. In addition, an accounting should be made for adjustments to prior and current year previously taxed E&P that become PTEPs on Schedule J, E-1, and P.
It is extremely important to work with an international tax specialist to ensure accurate preparation of your Form 5471. Having the wrong professional complete your Form 5471 can result in significant penalties. The Internal Revenue Code authorizes the IRS to impose a $10,000 penalty for failure to file substantially complete and accurate Form 5471 returns on time. An additional $10,000 continuation penalty may be assessed for each 30 day period that noncompliance continues up to $60,000 per return, per tax year. In addition, the IRS can assess a 40 percent accuracy penalty on incorrectly reported income and reduction of foreign tax credits by 10 percent.
Anthony Diosdi is one of several tax attorneys and international tax attorneys at Diosdi Ching & Liu, LLP. Anthony focuses his practice on domestic and international tax planning for multinational companies, closely held businesses, and individuals. Anthony has written numerous articles on international tax planning and frequently provides continuing educational programs to other tax professionals.
He has assisted companies with a number of international tax issues, including Subpart F, GILTI, and FDII planning, foreign tax credit planning, and tax-efficient cash repatriation strategies. Anthony also regularly advises foreign individuals on tax efficient mechanisms for doing business in the United States, investing in U.S. real estate, and pre-immigration planning. Anthony is a member of the California and Florida bars. He can be reached at 415-318-3990 or adiosdi@sftaxcounsel.com.
This article is not legal or tax advice. If you are in need of legal or tax advice, you should immediately consult a licensed attorney.