Part II: GILTI, FDII, and FTC Guidance and International Tax Planning
How to decipher this complex stew, replete with interesting ingredients

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Prior to tax reform, multinational businesses often had similar strategies with respect to outbound international tax planning. Given the high U.S. corporate tax rates and worldwide system of taxation, many businesses sought to earn and keep profits offshore to defer U.S. tax. When it was important to repatriate profits, foreign tax credit planning could be helpful, while some turned to other creative approaches. Subpart F income was generally avoided.

Tax reform has required tax executives to reprogram their tax planning instincts. For outbound businesses, the need for a shift in thinking has been driven in significant part by the new global intangible low-taxed income (GILTI) and foreign-derived intangible income (FDII) rules, along with the redesigned foreign tax credit.

The proposed GILTI and foreign tax credit regulations provided critical guidance for tax executives adjusting to the new U.S. international tax paradigm.1 Several aspects of the proposed regulations are generally helpful, such as the approach to expense allocation, foreign tax credit transition rules, guidance on the gross-up for taxes attributable to GILTI, and answers to numerous computational questions. Other aspects may be less welcome, such as the complexity of the regulations and the GILTI anti-abuse rules.

Because the new regime is still evolving, it is too early to formulate firm new outbound planning heuristics (and, given the complexity of the new rules, it will likely be more difficult to do so). Still, there are several emerging key issues and strategies for tax executives to consider. This article focuses on five key issues and strategies relating to GILTI, FDII, and the foreign tax credit and proposed regulatory guidance on these rules issued to date.


The GILTI rules, contained in new Section 951A, essentially subject ten-percent U.S. shareholders of controlled foreign corporations (CFCs) to current U.S. tax on certain CFC income exceeding a deemed routine return on the adjusted U.S. tax basis in tangible foreign business assets. The name “GILTI” is somewhat of a misnomer—GILTI can arise from income with little or no relation to intangibles where a CFC has few tangible assets with significant U.S. tax basis. A U.S. corporate shareholder is generally permitted a fifty percent GILTI deduction (reduced to 37.5 percent in 2026) under Section 250, resulting in a U.S. federal income tax rate on GILTI of 10.5 percent (in the absence of a foreign tax credit).

GILTI is calculated at the U.S. shareholder level as “net CFC tested income” over “net deemed tangible income return.” Net CFC tested income is the excess of the U.S. shareholder’s aggregate pro rata share of CFC tested income over CFC tested loss. Tested income is a CFC’s gross income excluding several categories of income, including income already subject to U.S. tax under Subpart F or as effectively connected income, dividends received from a related person, foreign oil and gas extraction income, and income excluded from Subpart F because the high tax exception has been elected, over deductions allocable to such gross income. “Net deemed tangible income return” is essentially a deemed routine return on tangible assets, calculated as ten percent of the shareholder’s pro rata share of the qualified business asset investment (QBAI) of each CFC with respect to which it is a U.S. shareholder, over certain interest expense. QBAI is determined as the average of the adjusted U.S. tax basis (determined at the end of each quarter of a tax year) in “specified tangible property” that is used in the CFC’s trade or business and subject to U.S. tax depreciation.

In light of the new participation exemption in Section 245A, tax reform eliminated the Section 902 indirect foreign tax credit and the pooling mechanism. Certain indirect foreign tax credits are still permitted, including where foreign taxes are imposed on income subject to U.S. tax under Subpart F or the GILTI rules. Under Section 960(d), the GILTI foreign tax credit is limited to eighty percent of the foreign taxes “properly attributable” to CFC tested income, multiplied by an “inclusion percentage” equal to GILTI divided by aggregate CFC tested income. There is a new GILTI foreign tax credit basket, and there is no carryover for taxes in the GILTI basket. A new foreign branch basket was also created in tax reform.

The FDII rules provide a reduced rate of U.S. tax on a portion of a U.S. corporation’s intangible income derived from serving foreign markets. Through 2025, a U.S. corporation is generally allowed a deduction equal to 37.5 percent of its FDII, resulting in a U.S. federal income tax rate on FDII of 13.125 percent. For taxable years beginning after December 31, 2025, the deduction for FDII is reduced to 21.875 percent.

A U.S. corporation’s FDII is determined under a formula: deemed intangible income multiplied by foreign-derived deduction-eligible income (FDDEI) over deduction-eligible income (DEI). Deemed intangible income is essentially an amount of income deemed to arise from the U.S. corporation’s intangible assets. It is calculated as “deduction eligible income” minus ten percent of QBAI (which is calculated similarly to the GILTI QBAI calculation). “Deduction eligible income” is gross income, other than Subpart F income, GILTI, financial services income, dividends from CFCs, domestic oil and gas extraction income, and foreign branch income, minus deductions properly allocable to such gross income. “Foreign-derived” means from sales of property (including licenses and leases) to foreign persons for use outside the United States or the performance of services for foreign persons or with respect to property outside the United States. Special rules apply to transactions involving intermediaries or related parties.

Congress appears to have reasoned that, taken together, the GILTI and FDII rules would reduce incentives for U.S. corporations to earn intangible income from serving foreign markets through a CFC. (Some have described GILTI and FDII as a “carrot and stick” approach, with the FDII deduction as the “carrot” and the GILTI tax and deduction as the “stick.”) Legislative history states that such income earned through a CFC that is subject to a rate of foreign tax of 13.125 percent or higher results in no residual U.S. tax, because eighty percent of the foreign tax credits would be sufficient to offset a 10.5 percent tax on GILTI. (As discussed below, however, expense allocation can complicate this calculation.) If earned by a U.S. corporation, foreign intangible income should generally be subject to tax at a 13.125 percent rate due to the FDII rules. (Note that foreign intangible income earned through a CFC that is subject to no foreign tax would generally be subject to U.S. tax at only a 10.5 percent rate due to the GILTI deduction.)

On September 13, 2018, Treasury and the Internal Revenue Service released proposed regulations addressing the GILTI regime, providing guidance on numerous computational issues and ambiguities. On November 23, 2018, Treasury and the IRS released proposed regulations addressing the new FTC regime. As of the date of this writing, Treasury and the IRS have not yet released proposed regulations under Section 250 addressing FDII.

Focus on Foreign Tax Credit

Prior to tax reform, some believed, or hoped, that tax reform would kill the foreign tax credit—that the United States would adopt a territorial tax system that used exemption, rather than a credit, as the primary mechanism for reducing double taxation on foreign earnings. In some cases, businesses paid little attention to the foreign tax credit rules, as they kept significant amounts of income offshore and managed repatriations to bring back only high-taxed earnings.

The foreign tax credit not only survived tax reform but, in many cases, has become even more important and complex than before. This results in significant part from the potential for foreign tax credits to reduce or eliminate the GILTI tax. As a result, it is essential for businesses with GILTI tax exposure to review and manage their foreign tax credit position.

One of the most closely watched issues in tax reform guidance has been the extent to which Treasury and the IRS would require taxpayers to allocate expenses to the GILTI basket. Although GILTI is often described as a “minimum tax” under which CFC earnings will not be subject to U.S. tax if they are subject to a 13.125 percent foreign tax (due to the eighty percent credit haircut), the minimum tax label is not entirely correct due to the role of expense allocation in the foreign tax credit limitation. The expense allocation rules were important to the limitation calculation prior to tax reform and are even more critical now. Previously, many taxpayers were not significantly impacted by expense allocation, because the U.S. corporate tax rate was higher than the foreign effective tax rate. In addition, carryover rules allowed for some smoothing over years. Given the reduced corporate tax rate and the prohibition of carryovers in the GILTI basket, foreign taxes in the GILTI basket that may not be used in one year are lost completely.

The government took an intermediate approach in the proposed foreign tax credit regulations by treating the portion of GILTI that is reduced by the GILTI deduction as effectively tax-exempt income produced by tax-exempt assets. Under Section 864(e), expenses are not allocated to tax-exempt income and tax-exempt assets. Thus, under the approach taken in the proposed regulations, the amount of assets or income included in the computation to determine what portion of expenses must be allocated to the GILTI basket is reduced. Because the GILTI deduction is currently fifty percent, generally only half of the assets and income will be included for expense allocation purposes.

The proposed regulations also contain a rule to determine the percentage of income and assets of a CFC attributable to GILTI. The prior general rule provided that stock of a CFC is allocated across baskets based on the income and assets of the CFC. Because GILTI is a U.S.-shareholder-level, not CFC-level, calculation, the proposed regulations provide a special rule. First, income and assets are allocated to the general and passive income baskets. Then, the general basket amounts are further allocated between GILTI and non-GILTI (with the non-GILTI treated as general) using the “inclusion percentage” of Section 960(d), which limits the amount of foreign taxes deemed attributable to GILTI based on a percentage equal to GILTI divided by aggregate tested income. As a result of these new proposed rules, a U.S. shareholder of a CFC must allocate expenses to the CFC stock, then further apportion the CFC stock between the passive and general baskets, then further divide the general basket between GILTI and non-GILTI, and finally treat a portion of the assets and income allocated to GILTI as exempt based on the Section 250 deduction.

The proposed FTC regulations indicate that the gross-up is assigned to the same separate category as the deemed paid taxes so that such taxes are included in the GILTI basket.

For many businesses, the proposed approach to expense allocation with respect to GILTI is a welcome development, even if the proposed rules do not go as far as some had hoped. For businesses with significant FDII, there are still many open questions regarding expense allocation. The proposed foreign tax credit regulations indicate that exempt income and assets would also include a portion of FDII and assets that produce FDII as exempt assets but generally do not provide further guidance on FDII expense allocation.

Some businesses with expected excess GILTI basket taxes had hoped that regulatory guidance on the statutory “look-through” rules of Section 904(d)(3), which were not modified in tax reform, might mitigate the impact of expense allocation on their GILTI foreign tax credit limitation. Specifically, some argued that interest, rent, and royalty payments made to U.S. shareholders by CFCs that reduce tested income under the GILTI rules should be considered GILTI basket income, which would have increased the GILTI basket foreign tax credit limitation. Treasury and the IRS did not adopt a look-through rule for such payments in the proposed regulations.

Foreign taxes arising from foreign branches should also be a new area of focus, given the new foreign branch income basket. The proposed FTC regulations generally define foreign branch by reference to the Section 989 regulations, including providing that a foreign branch must carry on a trade or business outside the United States and maintain a separate set of books and records. The proposed regulations also provide complex rules that address when payments and transactions are regarded or disregarded for purposes of determining the income of a foreign branch and how foreign taxes related to disregarded payments are allocated and apportioned.

Taxpayers with pre-tax-reform FTC attributes, including carryovers and overall foreign loss, overall domestic loss, and separate limitation loss accounts, should analyze whether they could use an election provided in the proposed regulations allowing taxpayers to treat a portion of their pre-2018 general category tax carryforwards as foreign branch taxes to the extent the taxes would have been foreign branch taxes had they arisen post-2017. If the election is made, the reallocation rule would also apply to other attributes in the pre-2018 general category.

Consider Subpart F Planning

Prior to tax reform, taxpayers generally sought to avoid creating Subpart F income. After tax reform, Subpart F income is more attractive. Converting an item of income to Subpart F income removes it from GILTI and the associated limits of the GILTI foreign tax credit basket, thus potentially giving rise to taxes on income in the general basket that can be cross-credited against other income in that basket and that can be carried forward up to ten years.

In certain cases, it may be possible to generate the best type of Subpart F income—income that the taxpayer elects to exclude from Subpart F income by reason of the high tax exception of Section 954(b)(4). Given the reduction in the U.S. corporate tax rate, the exception now can apply where income is subject to an effective foreign tax rate of greater than 18.9 percent (ninety percent of the U.S. corporate tax rate). Such income is not subject to current tax under Subpart F, nor is it GILTI. Further, it will be eligible for the participation exemption under Section 245A. In addition, even where the foreign tax rate is high enough to theoretically completely offset the U.S. tax on GILTI, using the high-tax exception can relieve any negative effects of expense allocation on the foreign tax credit limitation as well as potentially negative BEAT (base erosion and anti-abuse tax) consequences resulting from foreign tax credits (which do not offset the BEAT tax).

The limits of this planning technique should be noted, however—the proposed GILTI regulations indicate that the GILTI exclusion applies only to the extent the income would be Section 954(b) foreign base company income or Section 953 insurance income if it were not high-taxed. In other words, active foreign income that is subject to tax above 18.9 percent can still be subject to U.S. tax under GILTI (subject to the GILTI foreign tax credit rules).

Cautiously Study Reorienting Activities, Including to the United States

Current structures and transaction flows designed to take into account the old paradigm should be reexamined in light of tax reform. Taxpayers should consider restructuring, but with some caution, given the uncertainty about how the new regime will be fleshed out.

For example, the FDII rules may give taxpayers a reason to carry out certain activities directed toward foreign markets from the United States rather than abroad. However, there is some uncertainty about the permanency of the rules, given that some foreign governments have stated publicly that they are evaluating whether FDII is consistent with the United States’ World Trade Organization (WTO) obligations. Further, where intangibles are currently held in foreign corporations, it is necessary to consider the tax cost of moving them to the United States.

In addition, as of the date of this writing, there are a number of ambiguities in the statutory provisions governing FDII, some of which should be addressed in proposed regulations, and how the government resolves these ambiguities could have a significant impact on the desirability of planning. For example, there are uncertainties regarding how a taxpayer determines deductions “properly allocable” to DEI and FDDEI, the scope of the “foreign use” requirement and the necessary proof, and the contours of the domestic intermediary rule.

Consider New Tools to Deal With Complexity

Tax reform did little to reduce complexity for most multinational businesses. In many ways, the rules are more complex and require tax departments to invest in new modeling, systems, processes, and documentation.

Tax executives should keep in mind, however, that tax models are only as good as the underlying assumptions and data. Determining the proper assumptions and data requires applying the relevant law, such as with respect to categories and income groups and allocable deductions. Where the results of a tax model inform a significant business decision, such as whether to undertake a restructuring, it is often helpful to have an independent party review the mechanics and assumptions of the model.

The proposed rules for determining whether foreign taxes paid by the CFC are “properly attributable” to the income are an example of increased complexity and the need for systems changes. The proposed regulations would establish a complex six-step process for calculating deemed paid taxes. Very generally, starting with the lowest-tier CFC, the taxpayer must first assign a CFC’s income for the year to certain categories and income groups. Next, the taxpayer must reduce the CFC’s income in each group by deductions. Third, the taxpayer must determine the taxes that are properly attributable to Subpart F income and to tested income under the GILTI rules. Fourth, the taxpayer must track previously taxed earnings and profits from Subpart F and GILTI inclusions within certain groups and accounts. Fifth, the taxpayer must repeat the first four steps for higher-tier CFCs. Sixth, when a CFC distributes previously taxed earnings and profits to a U.S. corporation, the U.S. corporation is deemed to have paid the CFC foreign taxes properly attributable to the distribution with respect to that particular group and which have not previously been deemed paid, applying the properly attributable rules used in step 3.

The proposed GILTI regulations provide other examples of a potential need to enhance systems for tracking attributes of CFCs. For example, the regulations provide complicated rules to address the government’s concern about double benefits arising from the use of tested losses in computing GILTI. Under the GILTI rules, the tested loss of one CFC can offset the tested income of another CFC, thus reducing net tested income and GILTI. There are no statutory rules for adjustments to basis or earnings and profits. The preamble to the proposed GILTI regulations states that the lack of adjustments can lead to inappropriate results by allowing a single loss to reduce both GILTI and either increase a loss or reduce gain upon the disposition of the CFC with the tested loss. The proposed GILTI regulations provide that, in the case of a corporate U.S. shareholder, for purposes of determining the gain, loss, or income of the direct or indirect disposition of stock of a CFC, basis is reduced by the amount of tested loss that has been used to offset tested income in calculating net CFC tested income of the U.S. shareholder. Thus, if the proposed regulations are finalized, at the time of the “disposition” of a CFC, a taxpayer must review the tested income and tested loss history of that CFC, as well as the GILTI computation history at the U.S.-shareholder-level to determine the required basis adjustment.

Businesses that expect to take advantage of the FDII deduction will also likely need to consider systems or documentation changes. For example, depending on the regulatory requirements, changes may be required to support that there is a “foreign use” of property.

Look Out for Surprises in Guidance

Many key areas addressed in guidance thus far had been identified by taxpayers and practitioners or previewed by the government. For example, an ambiguity regarding the treatment of the Section 78 gross-up for foreign taxes attributable to GILTI was identified quickly after tax reform passed, leading to uncertainty about whether the deemed dividend under Section 78 of foreign taxes properly attributable to tested income is included in the GILTI basket. The proposed FTC regulations indicate that the gross-up is assigned to the same separate category as the deemed paid taxes so that such taxes are included in the GILTI basket.

Treasury and the IRS’ approach to Section 956 surprised many taxpayers. Section 956 was retained in the Code despite the new dividend-exemption system under which actual repatriations of offshore cash will in many cases not be subject to U.S. tax. On October 31, 2018, Treasury and the IRS issued proposed regulations that would limit the circumstances in which Section 956 applies to U.S. corporations.2 The proposed rules provide that the amount otherwise determined under Section 956 with respect to a U.S. shareholder for a taxable year of a CFC is reduced to the extent that the U.S. shareholder would be allowed a deduction under Section 245A if the U.S. shareholder had received an actual distribution from the CFC in an amount equal to the amount otherwise determined under Section 956. In other words, the government sought to create parity between actual dividends and deemed dividends. Treasury and the IRS further addressed Section 956 in the proposed foreign tax credit regulations, providing that foreign taxes, as a general matter, would not be deemed to have been paid as a result of Section 956 inclusions.

Although not stated in the preamble to either set of proposed regulations, it is likely that the proposed rules were driven in part by a concern that taxpayers could use Section 956 inclusions in connection with foreign tax credit planning, as some taxpayers and practitioners had noted the potential for Section 956 inclusions to bring up high-taxed foreign earnings to shelter low-taxed income in the general basket with a 100 percent foreign tax credit and a ten-year carryforward. Thus, although minimizing the impact of Section 956 is helpful to some taxpayers and may reduce financing “traps for the unwary,” the government’s approach is an unwelcome surprise to taxpayers who have considered engaging in Section 956 planning.

The proposed GILTI regulations also contained several rules that caught some taxpayers off guard and could, when finalized, apply to transactions already completed. Specifically, the proposed GILTI regulations contain several anti-abuse provisions, some of which target specific categories of transactions identified in legislative history.

One such transaction involves a taxable transfer of property from one CFC to another to increase basis (and thus potentially increase QBAI and reduce tested income due to increased depreciation or amortization deductions), after the measurement date of post-1986 earnings and profits under the Section 965 transition tax but before the first taxable year for which the GILTI rules are effective for a fiscal-year taxpayer. The proposed regulations disregard certain “deductions or losses” for purposes of determining tested income and loss where the deduction or loss is attributable to basis in specified property (a concept broader than specified tangible property that gives rise to QBAI) resulting from transfers between January 1, 2018, and the close of the taxpayer’s last year before the GILTI regime applies. Another rule disregards certain basis relating to such transfers for purposes of determining QBAI.

The proposed GILTI regulations also provide that basis is disregarded if a tested income CFC acquires property whose principal purpose is to reduce a shareholder’s GILTI inclusion and the property is held temporarily but at least over one quarter-end. In addition, a new anti-abuse rule in proposed Section 951 regulations disregards “any transaction or arrangement that is part of a plan a principal purpose of which is the avoidance of Federal income taxation” for purposes of determining a U.S. shareholder’s pro rata share of Subpart F income as well as for applying the GILTI rules that require a U.S. shareholder to determine its pro rata share of CFC income and attributes, including QBAI.

There are steps that tax directors can take to minimize unwelcome surprises in guidance. First, businesses should keep their ears to the ground with respect to potential tax policy developments, either directly or through advisors. Although the GILTI anti-abuse rules are very broad, aspects of them were not unexpected, given the specific identification of the need for some anti-abuse rules in legislative history. Second, when considering significant planning, especially planning that may be engaged in by numerous taxpayers, it is helpful to seek additional views on the technical positions as well as potential regulatory responses.

When unwelcome surprises do arise, it may be possible to minimize damage. For example, there may be opportunities to influence the final rules or future guidance. Alternatively, or in addition, certain modified planning may be possible. In some cases, it may be possible to rescind transactions.


Tax reform has upset many businesses’ prior outbound international tax planning paradigms. The proposed GILTI and foreign tax credit regulations, along with the proposed Section 956 regulations, are helpful inputs for tax executives reprogramming their tax-planning instincts. Although the new regime is still evolving, tax executives should consider focusing on the foreign tax credit, Subpart F planning, and reorienting activities. In addition, new tools to deal with complexity may be helpful. Finally, tax directors should look out for, and take steps to minimize damage from, unwelcome surprises in guidance.

Amanda Varma is a partner at Steptoe & Johnson LLP.


  1. 83 Fed. Reg. 63200 (Dec. 7, 2018) (proposed GILTI regulations); 83 Fed. Reg. 51072 (Oct. 10, 2018) (proposed foreign tax credit regulations).
  2. 83 Fed. Reg. 55324 (Nov. 5, 2018).

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