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IRS To Provide GILTI Penalty Relief To Pass-Through Entities

by Mike Godfrey, Tax-News.com, Washington

30 August 2019


On August 22, 2019, a notice was published which announces the intention of the United States Treasury Department and the Internal Revenue Service to issue new regulations providing relief to domestic partnerships and S corporations attempting to comply with final global intangible low-taxed income (GILTI) regulations with respect to shareholdings in controlled foreign corporations (CFCs).

The GILTI rules were introduced by the 2017 Tax Cuts and Jobs Act are intended to discourage US corporations from shifting high-yielding intangible assets such as intellectual property rights to low-tax jurisdictions. GILTI is defined as the portion of the income of a controlled foreign corporation owned by US shareholders that exceeds a notional 10 percent return – a rate that is intended to reflect the normal rate of return on tangible assets. After a 50 percent deduction, GILTI is subject to an effective corporate tax rate of 10.5 percent.

In summary, the forthcoming regulations are intended to alleviate the compliance burden faced by domestic partnerships and S corporations that are shareholders in CFCs.

The final GILTI regulations, which were released on June 14, 2019, revised the domestic partnership provisions to adopt an aggregate approach for purposes of determining the amount of GILTI included in the gross income of a partnership's partners under Section 951A with respect to CFCs owned by the partnership. This differed from the text of the proposed regulations, issued in October 2018, which set out a hybrid approach to determining the GILTI inclusion.

According to Notice 2019-46, the forthcoming regulations will permit a domestic partnership or S corporation that is a US shareholder of a CFC to apply the proposed regulations (Section 1.951A-5) related to the treatment of these entities for determining the amount of the GILTI inclusion for taxable years ending before June 22, 2019.

The notice also addresses the applicability of penalties for a domestic partnership or S corporation that acted consistently with proposed Section 1.951A-5 on or before June 21, 2019, but files a tax return consistent with the final regulations under Section 1.951A-1(e).

In order to apply the rules in proposed Section 1.951A-5 or for penalties not to apply under the notice, a domestic partnership or S corporation must satisfy certain notification and reporting requirements described in the notice.

Prior to the issuance of the regulations described in the notice, domestic partnerships and S corporations may rely on the notice, provided they satisfy the requirements described therein.

TAGS: compliance | tax | mining | intellectual property | transfer pricing | United States | regulation | penalties | Tax | BEPS

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