By Anthony Diosdi
Introduction
Under the 2017 Tax Cuts and Jobs Act, new rules were enacted which required the inclusion of global intangible low-taxed income (“GILTI”) generated by a controlled foreign corporation (“CFC”). Internal Revenue Code Section 951A governs GILTI. The purpose of GILTI is to tax U.S. shareholders on their allocable share of earnings from a CFC to the extent that the earnings exceed a ten percent return on tangible assets allocable to a CFC shareholder. GILTI is determined by subtracting net deemed tangible income return from net CFC tested income. A CFC shareholder must calculate its GILTI inclusion on Internal Revenue Service (“IRS”) Form 8992. 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.
Part 1. Net Controlled Foreign Corporation (CFC) Tested Income
Line 1. Sum of Pro Rata Share of Net Tested Income
Line 1 asks the preparer 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.
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.
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.
Part II. Calculation of Global Intangible Low-Taxed Income
Line 1. Net CFC Tested Income
For line 1 of Part II, the preparer 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 preparer 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 corporation’s aggregate adjusted bases as of the close of each quarter of such 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 preparer 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 preparer must enter the total from Schedule A, line 1, column (i).
Line 3c. Specified Interest Expense
Line 3c asks the preparer 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 preparer 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 preparer 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].
Schedule A
Schedule A of Form 8992 is used to report a CFC shareholder’s pro rata share amounts for each foreign corporation to determine its GILTI inclusion.
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 1-1 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.
Conclusion
Calculating a GILTI inclusion for a CFC shareholder is extraordinarily complex. If you are a CFC shareholder, chances are that you will have a GILTI income. CFC shareholders should consult with an attorney or tax professional well versed in international tax planning and compliance. We provide international compliance assistance and international tax planning services to domestic corporations. We also assist other tax professionals who need guidance regarding international tax compliance matters.
Anthony Diosdi is a partner and attorney at Diosdi Ching & Liu, LLP, located in San Francisco, California. Diosdi Ching & Liu, LLP also has offices in Pleasanton, California and Fort Lauderdale, Florida. Anthony Diosdi advises clients in tax matters domestically and internationally throughout the United States, Asia, Europe, Australia, Canada, and South America. Anthony Diosdi may be reached at (415) 318-3990 or by email: 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.