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IS THE TAX CUTS AND JOBS ACT GILTI OF ANTI-SIMPLIFICATION?

  I.  INTRODUCTION                                                 319
 II.  CORPORATE TAX LIABILITY AFTER THE TAX CUTS AND JOBS
      ACT                                                          321
      A. Gross Income                                              321
         1. Gross Income Determination For Cross-Border
            Corporations                                           323
            a. US Taxation Of Foreign Corporations With US
               Income                                              323
            i. Foreign Corporations That Do Not Operate
               A US TorB                                           324
            ii. Foreign Corporations That Operate A US
                TorB                                               325
          b. US Taxation Of Domestic Corporations With
             Foreighn Source Income                                327
              i. Subpart F Income                                  328
             ii. US Property                                       332
            iii. Global Intangible Low-Taxed Income                334
             iv. Section 78 Gross Up For Subpart F Income,
                 US Property And GILTI                             340
        2 Section 959 Previously Taxed Income                      341
      B. Deductions                                                343
        1. Deductions Applicable To Individuals And
        Corporations Unless Disallowed                             344
        2. Special Deductions Only Available To Corporation'       346
          a. Section 243 Deduction For Dividends Recevied
             From US Corporations                                  346
          b. Section 245 Deduction For The US Source
             Portion Of Dividends Received From Foreign
             Corporations                                          346
          c. Section 245 A Deduction For The Foreign Source
             Portion Of Dividends Recevied From Foreign            347
          d. Section 250 Deduction For Foreign-Derived
             Intangible Income And Global Intangible Low
             Taxed Income                                          348
          e. Limitations On Special Deductions For
             Corporations                                          350
      C. Taxable Income                                            351
      D. Corporate Income Tax                                      352
      E. Tax Credits                                               352
         1. Use Of Foreign Tax Credit By Domestic
            Corporations                                           352
          a. Classification Of Foreign v US Source Taxable
             Income                                                355
               i. Classify Gross Income As Foreign Source Or
                  US Source                                        355
              ii. Allocate And Attribute Deductions To Items
                  Of Gross Income                                  357
             iii. Calculate Foreign Source And US Source
                  Taxable Income                                   361
          b. Categorizing Items Into Four Baskets Of
             Income                                                361
          c. FTC And FTC Limitation Are Calculated
             Separately For Each Basket Of Income                  365
          2. Use Of Foreign Tax Credit By Foreign
             Corporations                                          366
      F. Base Erosion And Anti-Abuse Tax                           366
      G. Total Tax Liability                                       369
III.  APPLICATION OF THE CORPORATE INCOME TAX TO A
      HYPOTHETICAL CROSS BORDER CORPORATION                        369
      A. Step 1 [right arrow] Gross Income                         371
      B. Step 2 [right arrow] Deductions                           375
      C. Step 3 [right arrow] Taxable Income                       376
        1. New Section 163(J) Limit On Interest Deduction Will
           Not Cap PCorp's Interest Deduction                      376
        2. The Section 250 Deduction Limitation Is Not
           Triggered                                               377
        3. The Section 246 Limit Does Not Reduce The
           Aggregate Of Sections 243,245 And 250
           Deductions                                              377
        4. Deduction Limitation Provisions Need An Ordering
           Rule                                                    377
        5. Calculate Deductions And Taxable Income After
           Limitation On Deductions                                378
      D. Step 4 [right arrow] Corporate Income Tax                 378
      E. Step 5 [right arrow] Available Tax Credits                378
        1. Calculate Foreign Taxes Paid Or Deemed To Be Paid
           By PCorp                                                378
        2. Determine The Foreign Tax Credit Limitation             380
           a. Classification Of Foreign Source And US Sow
              Income                                               380
           b. Allocation And Apportionment Of Deductions To
              Gross Income                                         381
           c. Calculation Of Taxable Income                        384
           d. Categorizing Items Into Four Baskets Of
              Income                                               385
           e. FTC And FTC Limiation Are Calculated Separately
              For Each Basket Of Income                            387
      F. Step 6 [right arrow] Base Erosion And Anti-Abuse Tax      388
      G. Step 7 [right arrow] Total Tax Liability'                 388
 IV.  THE TCJA CREATES A MORE COMPLEX TAX SYSTEM IN THE
      PROCESS OF TRYING TO REDUCE TAX AVOIDANCE                    388
      A. TCJA Attempts To Reduce Incentives To Accumulate
         Foreign Earnings                                          389
      B. TJCA Creates A System Of Taxation Where A Territorial
         Tax/Exemption System Overlaps A Worldwide Income
         Taxation/Foreign Tax Credit System                        391
      C. The Post-TCJA Tax System Will Be Difficult To Administer
         Because Laws And Regulations Must Simultaneously
         Comply With Both The Worldwide And Territorial Tax
         System                                                    393
 V.   CONCLUSION                                                   395


I. INTRODUCTION (1)

A well-respected European university described the United States ("U.S.") tax system as follows: "The body of domestic and international tax law of the United States constitutes one of the most bewildering and complex tax systems in today's world." (2) This statement, which not only expresses the sentiment of European academics but likely that of many American tax scholars as well, is found in the course description of U.S. International Tax Law at Leiden University. (3) Notably, this description was written before (4) the United States enacted the act to "provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018," (5) which is commonly referred to as the "Tax Cuts and Jobs Act" ("TCJA"). For anyone who thought the tax code was challenging before, the TCJA amplifies the complexity.

During the ABA Section of Taxation 2018 Midyear Meeting, a former U.S. Department of the Treasury ("Treasury") official referred to the TCJA as the "massive tax complexification act." (6) In the area of international taxation, the TCJA complicates the tax laws by overlaying a "territorial tax system," which exempts certain foreign source income from taxation by the United States, on top of a "worldwide taxation system," which uses a foreign tax credit to relieve juridical double taxation. In addition, new taxes were added to protect the U.S. tax base and to generate more revenue. One of these new taxes--the tax on global intangible low-taxed income--is a new Subpart F inclusion, (7) which is not only difficult to calculate, but also impacts the analysis of a number of other taxes, deductions and credits. These factors make the determination of corporate tax liability and cross border investment planning for corporations much more difficult after the enactment of the TCJA than it was before.

This article examines the complexity of the Internal Revenue Code after the enactment of the TCJA, attempts to organize a portion of the corporation and international tax laws, and then examines the taxation of global intangible low-taxed income and its interaction with other sections of the tax code. (8) This paper is organized as follows: Part II summarizes income taxation of corporations after enactment of the TCJA and demonstrates how the international tax laws are intertwined with the domestic corporate income taxation system. (9) Part III presents a simplified hypothetical cross border corporation and demonstrates how its income is taxed under the TCJA, including calculation of global intangible low-taxed income. Part IV considers the effect of overlapping a territorial tax system and the global intangible low-taxed income on the United States' preexisting worldwide income tax system. Part V concludes.

II. CORPORATE TAX LIABILITY AFTER THE TAX CUTS AND JOBS ACT

This section outlines select provisions of the Internal Revenue Code (the "Code") as it applies to taxing the income of corporations, including foreign corporations with U.S. source income and U.S. corporations with foreign source income. The main purpose of this section is to demonstrate the relationship between the various subchapters, parts and sections of the Code after the changes made by the TCJA, and how these rules relate to calculating a corporation's overall income tax liability. The topics presented in this section are generally organized in order of appearance on the IRS Form 1120 U.S. Corporation Income Tax Return. (10) Gross income is calculated and then deductions removed to determine the taxable income. Total tax is determined based on the taxable income and then tax credits are applied to determine the tax liability due. (11) However, because the TCJA adds new taxes and applies different tax rates for different types of income, calculation of tax liability will require additional steps to incorporate these new taxes and to segregate income based on various deductions that establish different tax rates.

Accordingly, this part outlines the post-TCJA corporate tax liability calculation as follows:

STEP 1 [right arrow] Calculate Gross Income;

STEP 2 [right arrow] Calculate Deductions;

STEP 3 [right arrow] Calculate Taxable Income;

STEP 4 [right arrow] Calculate Corporate Income Tax;

STEP 5 [right arrow] Calculate Available Tax Credits;

STEP 6 [right arrow] Calculate Base Erosion and Anti-Abuse Tax; and

STEP 7 [right arrow] Calculate Total Tax Liability.

A. Gross Income

A corporation must pay a tax based on its taxable income, calculated as gross income less deductions. (12) Accordingly, gross income is the starting point for determining a corporation's income tax liability. Gross income is broadly defined and includes "all income from whatever source derived," (13) unless specifically excluded. (14) Accordingly, gross income includes, but is not limited to, compensation for services, business income, gains from "dealings in property," interest, rents, royalties, dividends, and discharge of indebtedness. (15) Gains from dealings in property include gains from the sale or exchange of tangible or intangible property. (16) In addition, gross income inclusions may exist in fact specific situations, (17) such as the gross up of income for deemed paid foreign tax credit. (18) So the definition of gross income is broadly inclusive, yet some limitations exist.

Gross income inclusions are limited by a number of provisions. Profits are excluded from gross income in certain fact specific situations. (19) For instance, gifts of property and most interest earned on state or local bonds are excluded from gross income. (20) In addition, taxpayers may realize gain that is not recognized and therefore not included in gross income. (21) For example, gain is not recognized in like-kind exchanges, (22) involuntary conversions, stock for stock exchange transactions, as well as parent subsidiary liquidations, and certain corporate divisions, reorganizations and stock for property transactions. (23) Still, additional inclusions may be required by the unique economic situation of cross-border corporations with business activities in the United States as well as a foreign jurisdiction ("CrossBorder Corporations").

1. Gross Income Determination For Cross-Border Corporations

Cross-Border Corporations generate profits from activities within and outside of the United States. (24) For purposes of determining the U.S. corporate income tax, cross-border corporations come in two varieties: (1) foreign corporations (25) with U.S. source income, and (2) U.S. corporations (26) with foreign source income. When determining tax liability of cross-border corporations, gross income is categorized as either income from U.S. sources ("U.S. Source Income") or income from foreign sources ("Foreign Source Income" or "FSI") based on a series of statutory and regulatory rules. (27) The distinction between U.S. and foreign source income is essential to the determination of corporate tax liability for cross border corporations because the United States taxes Foreign Source Income differently than U.S. source income.

a. U.S. Taxation Of Foreign Corporations With U.S. Income

The U.S. taxation of foreign corporations differs based on whether the foreign corporation operates a trade or business in the United States ("U.S. TorB"). (28) U.S. TorB is not fully defined by the Code or Treasury Regulations. (29) In general, U.S. TorB is a factual determination that exists when the taxpayer (or an agent of the taxpayer) engages in "regular, substantial, and continuous" "profit-oriented activities in the United States." (30) Whether a foreign corporation operates a U.S. TorB, or permanent establishment ("PE") if a tax treaty applies, (31) is critical to determining the foreign corporation's U.S. tax liability.

i. Foreign Corporations That Do Not Operate A U.S. TorB

Foreign corporations that do not operate a U.S. TorB need only pay a withholding tax on (a) gross income from certain U.S. sources that are not effectively connected with the conduct of a U.S. TorB ("Section 881 Withholding Tax"), (32) and (b) gain from the sale of a U.S. real property interest as if the gain were effectively connected with a U.S. TorB ("FIRPTA Withholding Tax"). (33) Income subject to the Section 881 Withholding Tax can be broadly categorized into (1) passive income, such as dividends, rents, premiums, annuities, and non-OID, non-portfolio interest (collectively "FDAP Income"), as well as OID that accrues while an obligation was held by a foreign corporation, (34) and (2) U.S. source gain from specific types of transactions involving natural resources or intangible property. (35) The withholding tax is 30% of the corporation's gross income subject to the tax, unless a lesser amount applies pursuant to one of the United States' bilateral tax treaties. (36) So the corporation's tax liability is determined by applying a fixed tax rate to gross income from U.S. sources. No further calculation or analysis is necessary.

Foreign corporations that do not operate a U.S. TorB will be deemed to have income effectively connected with a U.S. TorB when selling an interest in real property located in the United States. Under the Foreign Investors Real Property Tax Act ("FIRPTA"), foreign corporations that do not operate a U.S. TorB will still have effectively connected income with a U.S. TorB if they sell (1) an interest in real property located in the United States, or (2) an interest in a corporation if, at any time during the preceding 5 year period, the fair market value ("FMV") of the entity's real property located in the United States is greater than or equal to 50% of the FMV of all of its real property and TorB assets (collectively "U.S. Real Property Interest"). (37) Although exceptions apply, the buyer must collect the FIRPTA Withholding Tax based on the amount realized by the seller on the transaction. (38) However, ultimately the seller's income tax liability is determined by the tax laws that normally apply to corporations, where gain on the property transaction is deemed to be effectively connected with a U.S. TorB. (39) In this situation, the foreign corporation must file a tax return but will receive a credit for the previously paid FIRPTA Withholding Tax. (40)

ii. Foreign Corporations That Operate A U.S. TorB

In addition to complying with the Section 881 Withholding Tax and the FIRPTA Withholding Tax, a foreign corporation that operates a U.S. TorB must pay the regular income tax applicable to corporations, and, when applicable, any branch profits tax. In this case, the foreign corporation generally uses the same tax rules that apply to a domestic corporation, but only "income effectively connected with a U.S. trade or business" ("ECI with a U.S. TorB" or

"ECI") is included in the corporation's gross income. (41) All income, gain and loss from U.S. sources are considered ECI with a U.S. TorB except for income subject to the Section 881 Withholding Tax and capital gains/losses, which will only be considered ECI with a U.S. TorB when the facts demonstrate that either (a) U.S. TorB assets produce the income, gain or loss, or (b) U.S. TorB activity was a material factor in realizing the income, gain or loss. (42) In addition, gain or loss from the disposition of a U.S. Real Property Interest is ECI with U.S. TorB. (43) In contrast, gross income from foreign sources is rarely ECI with a U.S. TorB. (44) The corporation's ECI with a U.S. TorB is aggregated and this sum is used as the gross income for purposes of calculating the corporation's U.S. tax liability applying laws similar to those applicable to domestic corporations. (45)

Foreign corporations that operate a U.S. TorB as a branch (as opposed to through a subsidiary) must also pay a 30% tax on the gross amount of profits removed from the United States during each taxable year ("Branch Profits Tax"). (46) The Branch Profits Tax is 30% of the "dividend equivalent amount," which is the earnings and profits effectively connected to a U.S. TorB ("EC E&P") for a taxable year, reduced by any increase in U.S. net equity during that taxable year. (47) Because the U.S. net equity is the difference between assets and liabilities "connected" with a U.S. TorB, the Branch Profits Tax essentially taxes the foreign corporation's profits that are not reinvested in the U.S. TorB and are therefore removed from the United States and used by the foreign corporation for non-U.S. activities. (48) Since a foreign corporation's removal of EC E&P from a U.S. branch is viewed as parallel to the distribution of a dividend to a parent corporation, Congress instituted the Branch Profits Tax to subject the removed EC E&P to economic double taxation comparable to that imposed on dividends. These profits are already taxed as ECI, and the application of this second level of tax to these profits parallels the double tax on dividends distributed to a parent corporation from a subsidiary corporation. (49)

So a foreign corporation that operates a U.S. TorB must pay the Section 881 Withholding Tax, as well as the corporation income tax calculated using ECI in place of gross income for purposes of determining the amount of tax due. In addition, a foreign corporation must pay the Branch Profits Tax when it operates a U.S. TorB as a branch. Although determining gross income for foreign corporations with a U.S. TorB is complex, the calculation becomes more complicated for a U.S. corporation with foreign source income.

b. U.S. Taxation Of Domestic Corporations With Foreign Source Income

Although there was much fanfare when the United States enacted the TCJA and thereby adopted a "territorial tax system," which exempts foreign source income from U.S. taxation, the exemption is accomplished by means of a deduction. (50) As a result, U.S. corporations are still taxed on their worldwide income and therefore generally must include "all income from whatever source derived" in gross income. (51) So for the purpose of determining the gross income of a corporation, all income earned in the world is still included. Domestic corporations must include U.S. and foreign source income, and sometimes phantom income earned by foreign affiliates that has not yet been received by the parent. Thus, in addition to the inclusions applicable to all U.S. corporations set forth above (52) , certain shareholders must include the following in gross income even without a corresponding corporate distribution: (a) a pro rata share of Subpart F income, (b) a pro rata share of the U.S. property inclusion, (c) the shareholder's global intangible low-taxed income as required by section 951A ("GILTI"), and (d) any section 78 gross up for these Subpart F income, U.S. property and GILTI inclusions. (53) In addition, any U.S. person that owns shares in a passive foreign investment company ("PFIC"), that is not also a CFC, will have additional inclusions in gross income. (54)

When a domestic corporation is a "United States shareholder" ("U.S. Shareholder" or "USSH") of a "controlled foreign corporation" ("CFC") and directly or indirectly owns stock in the CFC on the last day of the CFC's taxable year, then the domestic corporation must also include in its gross income its pro rata share of the CFC's Subpart F income, its pro rata share of the CFC investment in U.S. property and its global intangible low-taxed income. (55) A U.S. Shareholder is a U.S. person (U.S. citizen, resident, corporation, partnership, estate or trust) that directly, indirectly or constructively owns 10% or more of a foreign corporation's stock measured by the "total combined voting power of all classes of stock entitled to vote" ("by vote"), or the "total value of shares of all classes of stock" ("by value"). (56) A CFC is a foreign corporation in which USSHs own (directly, indirectly or constructively) more than 50% of the CFC's stock by vote or by value on any day during the CFC's taxable year. (57) For purposes of determining this gross income inclusion, a corporation is a CFC if it satisfies the conditions for CFC status "at any time during any taxable year." (58) Accordingly, although direct, indirect and constructive ownership is used to determine USSH and CFC status, only direct and indirect ownership is used to determine if the USSH must include any Subpart F income, U.S. property investment or GILTI in gross income, as well as the amount of the USSH's pro rata share. (59) As a result, ownership interest based solely on attribution would not increase the Subpart F gross income inclusion.

The TCJA made a number of modifications to the Code, which increase the likelihood that a foreign corporation will be considered a CFC:

First, the ownership requirements for USSH status may now be satisfied by vote or by value. Prior to the TCJA, it was solely by voting power. (60)

Second, the TCJA repealed section 958(b)(4). This section historically prohibited the downward attribution of shares from a foreign partner, beneficiary or shareholder to its U.S. partnership, trust/estate, or corporation respectively. (61) As a result, the ownership criteria for USSH status is more easily satisfied by attribution.

Third, the TCJA removed the 30-day waiting period for CFC status. A corporation will now be classified as a CFC if it satisfies the conditions for CFC status "at any time during any taxable year." (62)

Although this impact will be tempered since constructive ownership does not affect the amount of Subpart F inclusion, these changes will cause more corporations to be categorized as USSHs and CFCs.

i. Subpart F Income

Subpart F income is passive or investment income that is not already taxed by the United States, income from services or sales transactions involving related parties, and foreign source income that the United States government discourages. (63) Specifically, Subpart F income consists of (a) foreign base company income ("FBCI"), collectively foreign personal holding company income ("FPHCI"), (64) foreign base company sales income ("FBC Sales Income"), (65) and foreign base company services income ("FBC Services Income"), (66) (b) insurance income, (c) a portion of income from countries on the U.S. international boycott list that is not subject to U.S. income tax,

(d) amounts of illegal bribes or kickbacks to a government agent, and

(e) income from business relationships with countries that do not have normal diplomatic relations with the United States or that repeatedly support international terrorism (collectively "Subpart F Income"). (67) However, a number of special rules can modify Subpart F Income.

In some cases, Subpart F Income is limited or expanded. When FBCI and gross insurance income collectively exceed 70% of gross income, then all of the income is considered Subpart F Income, although this income will still be subject to any applicable deductions and the exclusion for high foreign tax rate. (68) On the other hand, when FBCI and gross insurance income collectively are less than the lesser of 5% of gross income or $1 million, then none of the income is considered Subpart F Income. (69) Furthermore, any FBCI or insurance income that is subject to an effective foreign income tax rate greater than 18.9% (90% of the maximum section 11 corporation tax rate) is not included in Subpart F Income ("High-Tax Exception"). (70) Finally, FPHCI, FBC Sales Income and FBC Services Income must be reduced by "properly allocable" deductions prior to determining the USSH's pro rata share of Subpart F Income. (71)

The total amount of Subpart F Income is also limited. First, ECI with a U.S. TorB is categorically excluded from Subpart F Income unless it is not taxed or subject to reduced tax pursuant to a tax treaty. (72) In addition, Subpart F Income cannot exceed the CFC's earnings and profits ("E&P") for any taxable year, (73) although the amount of this limitation may be recaptured and therefore increase the amount of Subpart F Income in future tax years when E&P exceeds Subpart F Income. (74) These limits on the total amount of Subpart F Income apply at the level of the CFC. (75) At this point, the calculation of Subpart F Income at the CFC level is complete. The CFC's Subpart F Income is the lesser of the Subpart F Income after excluding ECI with a U.S. TorB, if any, or the CFC's current E&P, and this amount is allocated pro rata to the USSHs to be included in the shareholder's gross income.

Once a USSH is informed of its pro rata share of a CFC's Subpart F Income, one additional item may reduce this inclusion. Each USSH will receive a pro rata share of the CFC's qualified deficit, if any, which may offset some of the shareholder's Subpart F Income. (76) When a CFC has a deficit in E&P for any prior taxable year and the deficit is attributed to the same "qualified activity" (77) that generated Subpart F Income in the current taxable year, then the deficit will reduce the Subpart F Income generated by that specified qualified activity. (78) As a result, the USSH's pro rata share of Subpart F Income is reduced by its pro rata share of qualified deficit but only to the extent that the Subpart F Income is generated by the same qualified activity that generated the deficit. (79) Therefore, the USSH's gross income must include its pro rata share of the lesser of the CFC's Subpart F Income or the CFC's current E&P, less its pro rata share of the CFC's qualified deficit. This completes the determination of the USSH's gross income inclusion from Subpart F Income.

ii. U.S. Property

After determining a USSH's gross income inclusion from the CFC's Subpart F Income, the CFC must determine the shareholders' inclusion for investments in U.S. property, if any. (80) "U.S. property" is defined in section 956(c) as a broad inclusion of property with a long list of fact specific exclusions. (81) "U.S. property" includes (a) "tangible property located in the United States;" (b) stock of a U.S. corporation, (c) debt instrument of a U.S. citizen, resident, corporation, partnership, trust, or estate, and (d) the right to use a patent, copyright, invention, secret formula, or similar intangible in the United States that is "acquired or developed by the" CFC for use in the United States. (82) In addition, U.S. property includes "trade or service receivables" (83) directly or indirectly acquired by a related person when the "related person" and the obligor are U.S. individuals or entities. (84) Yet in certain fact-specific situations, property is excluded from the definition of "U.S. property." (85) For example, U.S. property does not include (a) U.S. bank deposits, (b) property purchased for export from the United States, and (c) U.S. corporate stock or bonds so long as the corporation is not a U.S. Shareholder and U.S. Shareholders in aggregate own (or are considered to own) less than 25% of the corporation's stock by voting power. (86) In this paper, the term "U.S. Property" will refer to the amount included in a USSH's gross income due to the CFC's investment in U.S. property.

Unlike Subpart F Income, which is calculated at the level of the CFC and then divided pro rata among the CFC's USSHs, the U.S. Property inclusion is determined by the CFC for each USSH. The inclusion is the USSH's pro rata share of the average adjusted basis of U.S. Property directly or indirectly held by the CFC at the "close of each quarter of" the taxable year, less any attributed section 959 previously taxed income, where the total inclusion is limited by E&P. (87) Since the U.S. Property inclusion is calculated for each USSH and includes an adjustment to account for previously taxed income, no further modifications are necessary and the U.S. Property inclusion is the full amount that must be added to the USSH's gross income to currently tax the CFC's investment in U.S. Property.

iii. Global Intangible Low-Taxed Income

In addition to the pro rata share of the CFC's Subpart F Income and the U.S. Property inclusion, the U.S. Shareholder must include its global intangible low-taxed income in its gross income for each taxable year. (88) The GILTI inclusion allows a current tax to be applied to a CFC's earnings that are deemed to be from low-taxed intangible income. This inclusion is based on section 951A, which is a new section added to the Code on December 22, 2017 by the TCJA. (89) GILTI is determined using the same definitions of USSH and CFC, the same conditions for pro rata shares, and the same standards for direct, indirect and constructive ownership of stock as that applicable to Subpart F Income. (90) In addition, as with Subpart F Income, GILTI's inclusion in a USSH's gross income only applies if the shareholder directly or indirectly owns stock in the CFC on the last day of the CFC's taxable year, where CFC is any foreign corporation that satisfies the conditions for CFC status "at any time during" any taxable year. (91) However, unlike the Subpart F Income and U.S. Property inclusions, which are calculated at the level of each CFC, GILTI is determined at the level of the USSH and includes income from all of the CFCs for which the corporation is a USSH. (92) As written, the TCJA does not provide a mechanism for calculating GILTI on a consolidated basis for an affiliated group. So, without additional regulatory guidance, GILTI must be calculated for every USSH within an affiliated group of corporations. (93)

The calculation of GILTI is complex and involves numerous steps. In general, GILTI is the USSH's net CFC tested income ("Net CFC Tested Income") less net deemed tangible income return ("Net Deemed Tangible Income Return"). (94) Net CFC Tested Income, which represents the CFC's FSI that the United States claims a right to tax, is calculated at the level of the USSH and includes income from multiple CFCs when the parent corporation is a USSH of multiple CFCs. (95) The Net CFC Tested Income equals the aggregate of the pro rata share of the tested income less the aggregate pro rata share of the tested loss for each CFC for which the corporation is a USSH. (96) The aggregate tested income/loss is calculated based on the USSH's taxable year and includes its pro rata share of tested income/loss for each CFC that "ends in or with" the USSH's taxable year. (97) Tested income is calculated for each CFC and includes the CFC's gross income (excluding ECI with a U.S. TorB, Subpart F Income (after adding back income excluded by the High-Tax Exception), (98) dividends from related persons, and "foreign oil and gas extraction income") less deductions (including taxes) "properly allocated" to the CFC's included gross income (collectively "Tested Income"). (99)

When a CFC's Tested Income calculation results in a negative number, which occurs when the amount of the CFC's gross income is less than the amount of properly allocated deductions, the result is called a "Tested Loss." (100) When a CFC incurs a Tested Loss, the CFC's E&P must be increased by the amount of this loss for purposes of determining the amount of Subpart F Income only. (101) This increases the E&P limit on the CFC's Subpart F Income, which prevents the USSH from receiving a double benefit from the loss - a lower GILTI inclusion and a lower Subpart F Income inclusion. Thus, when a CFC's Tested Loss lowers the amount of taxable GILTI and the Subpart F Income inclusion is limited by E&P, the reduction in GILTI is recaptured as Subpart F Income. The overall effect may be disadvantageous to the taxpayer since Subpart F Income is taxed at the normal corporate tax rate (21%) while GILTI receives a lower preferential tax rate.

Formulas needed to Calculate GILTI:
                                Net Deemed Tangible Income
GILTI =  Net CFC Tested Income  Return

                USSH's Aggregate Pro           USSH's Aggregate
Net CFC Tested  = Rata Share of CFC Tested  -  Pro Rata Share of
Income          Income                         CFC Tested Loss

CFC Tested  = Gross  - ECI w/ U.S. TorB
Income (*) Income
                     - Subpart F Income (after adding
                     - back income excluded by the
                     - High-Tax Exception)
                     - Dividends from Related Persons
                     - Foreign Oil and Gas Extraction
                     - Income
                     - Deductions/Taxes properly
                     allocated to the included gross
                     income.

(*) When this calculation results in a negative number, the result is a
"CFC Tested Loss."

                                          Interest Expense
                                          included in Net
                                          CFC Tested Income
Net Deemed Tangible  = 10% Aggregate Pro  when
Income Return        Rata Share of QBAI   Corresponding
                                          Income is Not
                                          Included


The Net Deemed Tangible Income Return is an estimate of the income generated by the CFC's tangible assets. Net Deemed Tangible Income Return ("NDTIR") is 10% of the aggregate pro rata share of the qualified business asset investment for each CFC for which the corporation is a USSH, calculated using the CFC's taxable year that "ends in or with" the USSH's taxable year, less any interest expense included in the Net CFC Tested Income when the corresponding interest income is not so included. (102) Qualified business asset investment ("QBAI") is the average value of the aggregate adjusted bases of depreciable TorB property used to produce tested income ("specified tangible property") calculated as of the end of each quarter during the CFC's taxable year. (103) When property is used to produce non-tested income as well as tested income, then the specified tangible property is the amount of the property multiplied by the ratio of the Tested Income produced by the property divided by the total gross income produced by the property. (104) In addition, when a CFC produces a Tested Loss, none of its property contributes to Tested Income and therefore none of its property is included in the QBAI or NDTIR, which will increase GILTI and potentially the USSH's inclusion in gross income. (105) This effect will be especially significant if the CFC with a Tested Loss owns a large amount of depreciable tangible property that qualifies as specified tangible property. (106) Moreover, notice that including interest expense income in the calculation of NDTIR is a significant disadvantage since only 10% of the value of tangible assets serves to reduce the amount of GILTI, but the interest expense potentially provides a dollar for dollar increase in the amount of GILTI. Thus, for every dollar of interest expense incurred by a CFC without a corresponding interest income inclusion, the NDTIR will be reduced by one dollar, which would increase GILTI by one dollar assuming that the Net CFC Tested Income equals or exceeds the NDTIR.

As stated above, GILTI is the USSH's Net CFC Tested Income less the USSH's Net Deemed Tangible Income Return. (107) Net CFC Tested Income is a measure of the CFC's FSI that has not been subject to and is not exempt from U.S. income tax. Net Deemed Tangible Income Return estimates an amount of income generated by the CFC's specified tangible property and is a surrogate for the taxable return on these assets. By subtracting Net Deemed Tangible Income Return from Net CFC Tested Income, the estimated return from specified tangible property is excluded from GILTI. Therefore, GILTI represents the USSH's pro rata share of all of its CFCs' net gross income from intangible assets ("intangible income") that is untaxed, but not exempt from tax, by the United States and over which the U.S. claims the jurisdiction to tax.

GILTI is determined by a formula. The formula assumes that the United States has the right to tax all gross income of CFCs and then excludes items already subject to or exempt from U.S. income tax (such as income that qualified for the High-Tax Exception), as well as an estimate of the CFCs' income from tangible assets. The result is deemed to be the USSH's pro rata share of all of its CFCs low-taxed, intangible income. However, this is a calculated quantity that is based on surrogate values and therefore may vary widely from the USSH's or CFC's actual economic position. In addition, removing income that qualifies for the High-Tax Exception and the surrogate measure for a return on tangible assets are the only methods by which high foreign tax income and income from tangible assets are excluded from GILTI. (108) As a result, even a corporation with no intangible income and only high taxed income may be subject to GILTI, which is included in the USSH's gross income and subjected to taxation whether distributed to the USSH or not.

Since GILTI is included in income by Subpart F, GILTI is a Subpart F Inclusion, but it is not Subpart F Income. Subpart F Income, U.S. Property and GILTI are each separate categories of income that must be included in a USSH's gross income as required by Subpart F of the Code. (109) However, GILTI is treated as if it were Subpart F Income in a number of situations. (110) When GILTI must be treated as

Subpart F Income and it is necessary to determine the amount of GILTI that the USSH is deemed to have received from each CFC, then the amount of GILTI from a CFC (1) is zero when the CFC had no tested income, and (2) is equal to GILTI multiplied by the ratio of USSH's pro rata share of the CFC's Tested Income to USSH's aggregate pro rata share of Tested Income from all of the shareholder's CFCs. (111)

iv. Section 78 Gross Up For Subpart F Income, U.S. Property And GILTI

When a corporation elects to utilize the foreign tax credit ("FTC"), foreign taxes deemed to have been paid by the corporation must be included in gross income (the "[section]78 gross up" or "[section]78 inclusion"). (112) The rationale behind the [section]78 inclusion is that a taxpayer can only use the FTC if it pays foreign taxes on FSI. Since no taxes are paid on Subpart F inclusions (i.e. Subpart F Income, U.S. Property and GILTI), taxpayers must be deemed to have paid taxes on the Subpart F inclusion, which is accomplished by section 960. However, a taxpayer can only pay these deemed taxes using its gross income, so the amount of the deemed paid taxes must be included in gross income, which is accomplished by section 78. As a result, when Subpart F Income, U.S. Property and/or GILTI are included in gross income and the corporation elects to utilize the FTC, the corporation is deemed to have paid foreign income taxes "properly attributable" to the Subpart F inclusion and this amount is included in the corporation's gross income. (113)

The "properly attributable" foreign income taxes vary with the type of the Subpart F inclusion. Since Subpart F Income and U.S. Property are calculated based on a CFC's specific items of income, and foreign taxes can be directly traced to these items, the [section]78 gross up is the taxes "properly attributable" to this income. (114) However, since GILTI is derived by formula, its [section]78 gross up is also derived by formula. The [section]78 inclusion is equal to the "Inclusion Percentage" multiplied by the aggregate foreign income taxes paid or accrued by the USSH's CFCs that are "properly attributable" to Tested Income and taken into account in the GILTI inclusion ("Aggregate Tested FIT"), (115) where the "Inclusion Percentage" is the USSH's GILTI divided by the aggregate pro rata share of the tested income (but not the tested loss) for each CFC for which the corporation is a U.S. Shareholder. (116) The [section]78 gross up is represented by the following formula: (117)

[section]78 Gross Up = Inclusion Percentage * Aggregate Tested FIT = GILTI/* Aggregate Tested FIT

(Aggregate Pro Rata Share of Tested Income)

Tested loss affects this formula in three ways, each of which functions to decrease the [section]78 inclusion. First, tested loss directly reduces GILTI. Second, tested loss is excluded from the aggregate pro rata share of tested income, which increases the denominator of and decreases the value of the Inclusion Percentage. Finally, since the Aggregate Tested FIT only includes taxes "properly attributable" to Tested Income, no taxes paid by a CFC with a Tested Loss will be included in the [section]78 gross up. Each of these effects functions to decrease the value of the [section]78 gross up, and thus the deemed paid taxes attributed to GILTI as well as its FTC limitation.

2. Section 959 Previously Taxed Income

Section 959 previously taxed income ("Previously Taxed Income" or

"PTI") attempts to ensure that once a U.S. Shareholder pays tax on its pro rata share of Subpart F Income, the shareholder will not be taxed again when the amounts are actually distributed to the shareholder or when the CFC invests in U.S. property. (118) PTI analysis would seem unimportant after implementation of a territorial tax (exemption) system since dividend distributions from a CFC to its USSH would not be taxed even without PTI. (119) However, PTI analysis remains important after the TCJA because it is used to determine (a) basis adjustments needed to calculate gain upon the disposition of a CFC's stock, (b) foreign currency gains or loss when the exchange rate fluctuates between the time of Subpart F inclusion and the actual income distribution from the CFC to its USSH, and (c) the availability of the FTC to prevent juridical double taxation. (11)

PTI is generated by, and is the CFC's E&P attributable to, items previously included in the USSH's gross income as Subpart F Income, GILTI or U.S. property investment. (121) PTI analysis is triggered any time a CFC pays a dividend to a USSH or makes an investment in U.S. property that requires the USSH to include in gross income a portion of the dividend or investment. In these situations, gross income inclusion is not required to the extent of any PTI. (122)

Once a CFC's E&P are designated as "PTI," its distribution is governed by the section 959 PTI system rather than the section 316 corporate tax system. (123) As a result, distributions (or U.S. Property investments) are made first from PTI generated by U.S. Property inclusions, second from PTI generated by Subpart F Income or GILTI, and third from non-PTI E&P. (124) Distributions of PTI are not considered dividends except for the purpose of decreasing E&P. (125) Because of this, distributions of PTI do not qualify for the section 245A deduction and double taxation is relieved by the FTC system rather than the exemption system." Section 961 works in conjunction with section 959 to ensure that a U.S. Shareholder is not taxed again on PTI upon disposition of the CFC stock prior to utilizing the PTI. (127) In this regard, a USSH's basis in CFC stock is increased by the amount of PTI generated by a Subpart F inclusion and decreased by the amount of any distribution to a USSH that is not included in gross income because of PTI. (128)

Sections 959 and 961 apply to the GILTI inclusion. (129) At this point, the only information regarding how section 959 applies to GILTI appears in the statute itself, which states "any global intangible low-taxed income included in gross income... shall be treated in the same manner as an amount included" as Subpart F Income "for purposes of applying sections..." 959 and 961. (130) Until guidance is issued by the Treasury, the only option is to follow the letter of the statute and its underlying regulations. Thus, GILTI must be included in the section 959 previously taxed E&P analysis as if it were Subpart F Income, which will be increased by the amount of USSH's GILTI attributed to the CFC. GILTI from a CFC is determined as follows: (131)

GILTI from [CFC.sub.X] = USSH's GILTI

USSH's Pro Rata Share of [CFC.sub.x]s Tested Income/*USSH's Aggregate Pro Rata Share of All CFC's Tested Income

This formula allocates GILTI to each of the USSH's CFCs when determining the amount of the CFCs previously taxed E&P.

Because GILTI is an aggregate inclusion, and not calculated for each CFC as is Subpart F Income, treating GILTI as Subpart F Income for purposes of determining PTI creates a number of complications. First, the formulaic allocation of GILTI to each of the USSH's CFC may not accurately reflect the impact of the inclusion on each CFC's E&P. Second, distortions may develop from the integration of the E&P based Subpart F Income and tested income based GILTI, especially since GILTI is not limited by E&P and may generate PTI in excess of the CFC's E&P. Third, the section 250 deduction may alter GILTI's effect on E&P, which may require adjustments to the PTI analysis. A more in depth analysis of PTI issues created by GILTI is beyond the scope of this article. PTI analysis completes the calculation of gross income for a cross border corporation.

B. Deductions

As stated above, removing deductions from gross income determines the corporation's taxable income. To determine taxable income, corporations may use any applicable deduction. (133) Some deductions apply to individuals and corporations, while others apply only to corporations.

1. Deductions Applicable To Individuals And Corporations Unless Disallowed

Some deductions apply to individuals and/or corporations, and are available unless otherwise disallowed." These deductions include the deduction for the ordinary and necessary trade or business expenses, interest expenses, (134) taxes, uncompensated losses (including capital losses and worthless securities), (135) bad debts, amortization and depreciation allowances, charitable contributions, net operating loss ("NOL"), (136) amortization for research and experimental expenses of a TorB, and amortization of goodwill, going concern value, and other intangibles acquired by the taxpayer "in connection with the conduct of a TorB. (137) With a few exceptions, a detailed discussion of these deductions is beyond the scope of this paper.

The TCJA limited the deduction for interest expenses. (138) Section 163 allows a deduction for interest paid or accrued on a debt ("interest expense"), but not to exceed the sum of "business interest income," 30% of adjusted taxable income, and interest paid on secured debt used to buy motor vehicle inventory held for sale or lease, (139) where "business interest income" is the interest included in gross income that is properly allocable to a TorB excluding the business of providing employee services and certain real property, farming, energy, water and sewage businesses ("Section 163(j) TorB"). (140) For purposes of section 163(j) only, "adjusted taxable income" is taxable income excluding business interest expense, (141) business interest income, NOL deductions, section 199A qualified business income deduction (non-corporations only), depreciation, amortization and depletion deductions (for tax years starting before January 1, 2022 only), and items not properly allocable to Section 163(j) TorB activities. (142) When an affiliated group exists, the section 163(j) limit on interest expense deduction applies at the level of the consolidated group. (143) Any business interest that cannot be claimed because it exceeds this limit may be carried forward indefinitely to a subsequent taxable year. (144)

Some items are not deductible even when they otherwise satisfy the conditions for a deduction." A taxpayer may not deduct personal expenses, capital expenditures (such as improvements, betterments and restoration of property), direct and indirect costs of real or tangible personal property produced by the taxpayer or acquired for resale, (146) tax exempt interest, "loss from the sale or exchange of property" between related parties, certain interest or royalty payments between related parties when one of the parties is a hybrid entity or the agreement is a hybrid transaction, (147) and foreign taxes that receive the benefit of the FTC, among other more specific exclusions. (148)

2. Special Deductions Only Available To Corporations

Special deductions are only available to corporations. (149) These deductions include the section 243 deduction for dividends received from U.S. corporations ("Section 243 DRD"), section 245 deduction for the U.S. source portion of dividends received from certain foreign corporations ("Section 245 DRD"), section 245A deduction for the foreign source portion of dividends received from certain foreign corporations ("Section 245A DRD"), and section 250 deduction for foreign-derived intangible income and global intangible low-taxed income. (150)

a. Section 243 Deduction For Dividends Recevied From U.S.

Corporations

Section 243 provides a deduction for dividends received from U.S. corporations." Section 243 allows a corporation to take a deduction in the amount of 50% of the dividend received from another domestic corporation," but this percentage is increased to 65% when the recipient corporation owns 20% or more of the distributing corporation's shares by vote and by value ("20% Owned Corporations"), (153) and this percentage is increased to 100% when the dividend is distributed between members of an affiliated group. (154) For purposes of determining the dividend received deduction, "affiliated group" is more broadly defined than the definition applied in the consolidated return legislation. (155)

b. Section 245 Deduction For The U.S. Source Portion Of Dividends

Received From Foreign Corporations

A corporate taxpayer may take a deduction in the amount of 50% of the U.S. source portion of a dividend from U.S. source earnings when the distributing corporation is a qualified 10-percent owned foreign corporation ("QTFC"), where QTFC is any foreign corporation, other than a PFIC. when the corporate taxpayer owns 10% or more of the foreign corporation's shares by vote and by value. When a corporation receives a dividend from a QTFC, the recipient corporation cannot claim the FTC for the U.S. source portion of the dividend. (157) In addition, 100% of a dividend is deductible when (a) the dividends are paid from the foreign corporation's E&P for a taxable year, (b) the recipient corporation is a domestic corporation that directly or indirectly owns 100% of the foreign distributing corporation's outstanding shares during that taxable year, and (c) all of the foreign corporation's gross income during that taxable year is from ECI with a U.S. TorB. (158) In this case, there is no need to determine the U.S. source portion of the dividend because all of the foreign corporation's gross income is from ECI with a U.S. TorB and therefore all of the dividends are from U.S. sources.

c. Section 245A Deduction For The Foreign Source Portion Of Dividends Recevied From Foreign Corporations

Section 245A provides domestic corporations with a deduction equal to the foreign-source portion of any dividend received from a specified 10-percent owned foreign corporation ("STFC") when the domestic corporation is a U.S. Shareholder of the STFC. (159) A "STFC" is any foreign corporation (other than a PFIC) with a domestic corporation as a USSH. (160) As a result, all CFCs with a corporate USSH are also STFCs. The foreign source portion of a dividend equals the dividend multiplied by the ratio of the STFC's undistributed foreign earnings to the STFC's total undistributed earnings, (161) where "undistributed earnings" are the STFCs E&P determined at the close of its taxable year with no reduction for dividends distributed during the taxable year, (162) and "undistributed foreign earnings" is the portion of the undistributed earnings that is not attributable to ECI with a U.S. TorB or "Dividends from an 80% Owned U.S. Subsidiary." (163) The foreign source portion of a dividend is represented by the following formula:

Foreign Source Portion of a Dividend = Dividend *

STFC's Undistributed Foreign Earnings/STFC's Total Undistributed Earnings

Thus, the Section 245A DRD allows a domestic corporation to take a full deduction for the foreign source portion of a dividend from a STFC and thereby provides a full exemption of these dividends from U.S. income tax. As a result, USSHs that claim the benefits of Section 245 A DRD cannot also claim the benefit of the foreign tax credit or foreign tax deduction. (164)

The Section 245A DRD is not available for all dividends from a STFC to its corporate USSH. Dividends from a PFIC that is not also a CFC, including any dividends from a PFIC with a qualified electing fund ("QEF") election, are not deductible under section 245A. (165) In addition, hybrid dividends paid from a CFC to a USSH do not qualify for the Section 245A DRD. (166)

d. Section 250 Deduction For Foreign-Derived Intangible Income And Globed Intangible Low-Taxed Income

Section 250 is a new deduction for global intangible low-taxed income and foreign-derived intangible income ("FDII") (167) that was implemented by the Tax Cuts and Jobs Act. (168) This deduction is only available to U.S. corporations. (169) The statute provides a deduction in the amount of 37.5% of FDI1 plus 50% of any GILTL (170) included in a corporate USSH's gross income by section 951 A, including any associated [section]78 gross up for deemed paid FTC. (171) In contrast to GILTI, which is included in a USSH's gross income, FDII is merely a portion of the domestic corporation's worldwide gross income that is estimated to be foreign source intangible income and that is used to determine the section 250 deduction. There is no gross income inclusion for FDII. Notably, the section 250 deduction is limited when the sum of FDII and GILTI exceeds the corporation's taxable income determined without applying the section 250 deduction: (172)

The effect of the section 250 deduction is to reduce the effective tax rate of GILTI without imposing a different tax rate on this income under section 11. Section 11 applies a tax rate of 21% on all taxable income of a corporation. (173) However, because the section 250 deduction reduces GILTI by 50%, the effective tax rate on GILTI is reduced from 21% to 10.5% (not including the effect of the FTC). Thus Congress was able to provide a preferential tax rate on GILTI (and FDII) without altering the uniform tax rate applied to all corporate income. Unfortunately, this mechanism raises a number of issues when calculating the tax liability for a corporation with GILTI.

e. Limitations On Special Deductions For Corporations

There are a few limits on the special deductions for corporations." As noted above, the section 250 deduction is limited by the USSH's adjusted taxable income. In addition, the aggregate of sections 243, 245 and 250 are limited to a percentage of the corporation's taxable income. Furthermore, the dividend received deductions are only available when the shareholder owns the distributing corporation's stock for a minimum time period.

The aggregate of the Section 243 DRD (excluding dividends received by small business investment companies and dividends between members of an affiliated group), Section 245 DRD and section 250 deduction (collectively the "Aggregate of Sections 243,245 and 250 Deductions") must not exceed 65% of taxable income when applied to 20% Owned Corporations, and 50% of taxable income when applied to all other corporations. (175) For purposes of determining this deduction limitation, "taxable income" excludes any section 172 NOL deduction, Aggregate of Sections 243, 245 and 250 Deductions, section 1059 adjustment for extraordinary dividends, and section 1212(a)(1) capital loss carryback." In addition, solely with respect to the limitation on non-20% Owned Corporations, taxable income must be reduced by the aggregated dividends from the 20% Owned Corporations. (177) This limitation does not apply to any tax year for which the corporation has an NOL. (178)

In addition, none of the dividend received deductions (sections 243,245 and 245A deductions) are allowed unless the shareholder holds the distributing corporation's stock for a minimum number of days during a specified time period. For example, the dividend received deductions are not allowed if the shareholder owns the distributing corporation's stock for less than 45 days during the 91 -day period starting 45 days before the ex-dividend date, or if the shareholder is obligated "to make related payments with respect to positions in substantially similar or related property." (179) This threshold is changed to 90 days during the 181 -day period starting 90 days before the exdividend date for dividends on preferred stock, (180) and 365 days during the 731-day period starting 365 days before the ex-dividend date for the foreign source portion of dividends from STFC that potentially qualifies for the Section 245A DRD. (181) For purposes of determining the deductibility of the Section 245A DRD, ownership is established only if the subsidiary is a STFC and the parent is a U.S. Shareholder of the STFC at all times during the holding period. (182)

After determining the limitations on deductions, the corporation must apply these limits and recalculate its overall deductions. The deductions are then used to determine taxable income, which is used to determine the U.S. corporate income tax. These steps are addressed in the following sections.

C. Taxable Income

Taxable income is gross income less deductions." Although a cross border corporation will have gross income from both U.S. and foreign sources, deductions need only be allocated and apportioned between U.S. and foreign source income (a) to calculate the U.S. tax liability of a foreign corporation with ECI from a U.S. TorB, (184) and/or (b) to calculate the FTC limitation when a cross border corporation utilizes the foreign tax credit to eliminate juridical double taxation." In these situations, deductions must be allocated and apportioned between U.S. Source Income and Foreign Source Income, including a ratable share of expenses and deductions that cannot otherwise be allocated. (186)

D. Corporate Income Tax

The corporation's income tax is calculated based on the corporation's taxable income." In general, a corporation must pay income tax in the amount of 21 % of its taxable income."" The only exception is for foreign corporations with U.S. Source Income that is not ECI with a U.S. TorB. In this case, assuming a tax treaty does not apply, the foreign corporation merely pays a 30% withholding tax on the gross amount of the U.S. Source Income." After determining its income tax liability, the corporation must ascertain whether it may apply any available tax credits.

E. Tax Credits

Tax credits may be taken against total tax, which will reduce the amount of tax owed to the federal government (or increase the amount of the overpayment to be refunded to the taxpayer). Tax credits are generally fact specific determinations. (190) They include business related, research, investment and work opportunity credits, (191) which are creditable against taxes based on section 38. (192) In addition,one of the most important tax credits for cross border corporations is the foreign tax credit. (193)

1. Use Of Foreign Tax Credit By Domestic Corporations

Generally, domestic corporations may receive a credit for taxes imposed by foreign countries and U.S. possessions. In addition, the United States allows a credit for the amount of foreign taxes that the corporation is deemed to have paid when it receives a Subpart F Income, U.S. Property or GILTI inclusion from a CFC ("Deemed Paid FTC")." Creditable taxes include "income, war profits, and excess profits taxes." (195)

Foreign Tax Credit -> lesser of (a) Foreign Income Taxes ("FIT") Paid, and

Deemed Paid Taxes ("DPT") on Subpart F Income, U.S. Property and G/LT/; or (b) FTC Limitation.

Deemed Paid Taxes on Subpart F Income (or US Property)

= CFC's FIT attributed to the Subpart F Income (or US Property) Inclusion.

Deemed Paid Taxes on GILTI

= 80%(lnclusion Percentage)(CFC s Aggregated Tested FIT).

Inclusion Percentage

USSH's GILTI

Aggregate Pro Rata Share of Tested Income (but not Tested Loss)

Tested FIT = CFC's FIT Properly Attributable to USSH's Pro Rata Share of CFC's Tested Income.

FTC Limitation = US Income Tax on Total Taxable Income

Foreign Source Taxable Income

*/Total Taxable Income

However, taxes are creditable only if the income upon which the tax is imposed is included in the corporation's income tax calculation. When a taxpayer pays foreign tax on income ("Related Income") but the Related Income is "taken into account" for federal income tax purposes by a related person ("covered person"), (196) the foreign tax may not be included in the taxpayer's FTC calculation (or otherwise used to determine its federal income tax) before the taxable year in which the Related Income is "taken into account" by the taxpayer." In addition, when the taxpayer is a STFC, the foreign tax may not be used to determine the Deemed Paid FTC or E&P before the Related Income is included in the STFC's or its USSH's U.S. income tax calculation. (198)

When a USSH must include Subpart F Income and/or U.S. Property in its gross income, the USSH is deemed to have paid the CFC's foreign income taxes attributed to this inclusion. (199) The deemed paid taxes are treated as a dividend and included in the USSH's gross income. (200) These deemed paid taxes are creditable by the FTC. (201) Even if a portion of the Subpart F inclusion was excluded by PTI, the USSH is deemed to have paid the foreign taxes properly attributed to the excluded income so long as the taxes were not deemed to have been paid by the USSH in the current or a previous tax year. (202)

If the Subpart F inclusion is GILTI, then the USSH is deemed to have paid the CFC's foreign income taxes attributed to this inclusion, which is equal to 80% of the [section]78 gross up, or 80% of the Inclusion Percentage multiplied by the CFC's Aggregate Tested FIT. So the deemed FTC resulting from the GILTI inclusion equals 80% of GILTI multiplied by CFC's foreign income taxes attributed to the USSH's pro rata share of the CFC's Tested Income divided by USSH's aggregate pro rata share of the Tested Income (but not Tested Loss), (204) which is essentially 80% of the CFC's foreign taxes attributable to GILTI. Thus, although a USSH must include 100% of its DPT for GILTI in gross income, only 80% of this amount is creditable for purposes of the foreign tax credit. (205)

Regardless of the actual and deemed foreign taxes incurred, the FTC cannot exceed an amount equal to the pre-credit U.S. tax (206) multiplied by the ratio of foreign source taxable income over the corporation's total taxable income," which limits the FTC to the amount of federal income tax that the United States would have received from the FSI. (207) However, this limit on FTC (including calculating foreign taxable income and total taxable income for the purposes of determining the FTC limitation and Deemed Paid FTC) applies separately to passive income excluding high taxed income and export financing interest ("passive category income"), section 951A GILTI inclusion excluding any passive category income ("GILTI category income"), foreign branch income excluding passive category income ("foreign branch category income"), and all other income ("general category income"), where the general category income is a residual group that includes all income except that included in the preceding three categories. (206) The baskets containing passive, GILTI, foreign branch and general category income will be referred to herein as the "Passive Basket," "GILTI Basket," "Foreign Branch Basket," and "General Basket" respectively.

In sum, determining the FTC limitation requires classifying income as either U.S. or foreign source taxable income and then allocating it between each of the 4 categories or "baskets" of income. These values are then used to calculate a separate FTC limitation in each income category.

a. Classification Of Foreign v. U.S. Source Taxable Income

Prior to categorizing income into baskets, all items must be segregated into U.S. source and foreign source taxable income. To do so, items are first segregated based on source, and then deductions are allocated and apportioned between U.S. and foreign source gross income (including a ratable share of expenses and deductions that cannot otherwise be allocated) according to the source and deduction allocation rules set forth in sections 861-865 and their underlying regulations. (210) Finally, taxable income is calculated by reducing the items of gross income by their respective deductions.

i. Classify Gross Income As Foreign Source Or U.S. Source

The TCJA made a limited number of modifications with respect to the source rules. The TCJA (a) changed the rule to determine source of inventory which is now solely based on production activities, (b) added a provision to treat gain/loss on the sale of certain foreign owned partnership interest as ECI with a U.S. TorB, (c) mandated that allocation and apportionment of interest expense be based on adjusted bases of assets, instead of allowing the entity to use FMV or adjusted basis, and (d) made conforming changes, such as modifying certain percentages to conform to changes in the sections 243 and 245 deductions." With the exception of eliminating the ability to apportion interest based on the FMV of assets and requiring that the source of inventory income be based on production activity alone, the TCJA made insignificant modifications to the source rules with respect to corporations. Therefore, it is reasonable to continue to apply the guidance on source rules set forth in the Treasury Regulations with the exception of those related to the above listed changes." (211)

Source of income is determined based on the source rules. (213) For example, except in certain situations when a nonresident alien provides services while temporarily located in the United States, compensation for personal services provided in the United States is U.S. source income, while that performed outside the United States is foreign source income. (214) However, the Code modifies some of the source rules when determining the FTC limitation."

First, the amount of foreign source and total taxable income does not include any foreign source income exempt from taxation by the Section 245A DRD. (216) Deductions "properly allocable and apportioned to" the STFC's stock (or income with reference to this stock) are also excluded, except to the extent that the deduction is allocated to Subpart F Income, U.S. Property or GILTI or stock producing this income. (217) Thus Subpart F Income, U.S. Property and GILTI are still considered when calculating the FTC limitation.

Second, certain FSI of U.S.-owned foreign corporations is treated as U.S. source income. (218) For example, Subpart F Income, GILTI (219) and U.S. Property inclusions in gross income, as well as interest and dividends, are+ treated as U.S. source income of the U.S.-owned foreign corporations when the following additional conditions are satisfied:" (220)

1. For Subpart F Income, GILTI and U.S. Property, only to the extent the revenue is attributable to the foreign corporation's U.S. source income;" (1)

2. For interest, the interest is paid/accrued by the foreign corporation to a USSH (or a related person to the USSH), and is "properly allocable" to the foreign corporation's U.S. source income, except when less than 10% of the foreign corporation's total E&P for the taxable year (including E&P allocated to the interest payment) is attributable to U.S. source income; (222) and

3. For dividends, the dividend paid by the foreign corporation multiplied by the foreign corporation's "United States source ratio," which is U.S. source E&P divided by total E&P, except when less than 10% of the foreign corporation's total E&P for the taxable year is attributable to U.S. source income. (223)

Third, special source rules apply when a corporation sustains an overall foreign loss or an overall domestic loss.-' After sustaining an overall foreign loss, subsequent foreign source income equal to the lesser of the amount of the loss or 50% of the corporation's foreign source taxable income is recharacterized as U.S. Source Income.--" Similarly after sustaining an overall domestic loss, subsequent U.S. Source Income equal to the lesser of the amount of the loss or 50% of the corporation's U.S. source taxable income is recharacterized as FSI. (256)

ii. Allocate And Attribute Deductions To Items Of Gross Income

Once categorized as U.S. or foreign source, deductions must be allocated and removed from items of gross income to calculate taxable income. U.S. source taxable income ("USTI") is gross income from U.S. sources less its properly allocated and apportioned deductions ("Definitely Related Deductions") including a ratable share of deductions that cannot be "definitely" allocated to an "item or class of gross income" (collectively

"Non-Allocable Deductions"). (227) Similarly, foreign source taxable income ("FSTI") is gross income from foreign sources less Definitely Related Deductions and a ratable share of its Non-Allocable Deductions. (228)

Deductions are "definitely related" to gross income when there is a "factual relationship" between the deduction and gross incomes which exists when a deduction is "incurred as a result of, or incident to, an activity or in connection with property from which such class of gross income is derived.""" This factual relationship defines the classes of gross income. A "class" of income is the gross income to which a deduction definitely relates, and may be based on the income categories listed in section 61(a)."

Definitely Related Deductions are allocated to the "class" of income to which they are "definitely related." (232) Allocations are made to the income class regardless of the "taxpayable" year in which the related income is actually or expected to be received, even when deductions exceed gross income in the class." When supportive expenses (such as overhead, supervision and general and administrative expenses) are related to other deductions, they may be allocated with these related deductions, or they may be directly allocated to an activity or property based on another reasonable method, which is normally an allocation to all (or a broad category of) gross income. (234) Finally, unless a specific allocation and apportionment provision applies, a deduction will be allocated to all gross income when it is not definitely related to any class less than all of the gross income. (235)

When the expenses are related to all income in a class, then no further apportionment is necessary. (236) However, when deductions are only related to some of the income in a class, then the expenses must be apportioned. (237) This is accomplished by dividing gross income into categories based on a specific source or activity ("statutory groupings"), and then allocating all remaining income into a "residual grouping." (238) The deductions are then apportioned between the statutory and residual groups. (239) For purposes of determining the FTC limitation, the statutory groupings are the 4 baskets of income, and the residual grouping is U.S. source income and any remaining foreign source income not contained within the statutory groupings." (240) The same method of apportionment must be used for each separate limitation category. (241)

Apportionment attributes the deduction to gross income in the statutory and residual groups within a class." In some cases, such as interest, research and development and stewardship expenses, a specific apportionment provision applies. In all other cases, apportionment must use a method that "reflects to a reasonably close extent the factual relationship between the deduction and the grouping of gross income." (244) The apportionment may be accomplished based on units sold, gross sales/receipts, cost of goods sold, profit contribution, expense incurred, salaries paid, assets, space or time utilized, or gross income, among any other reasonable method. (245) In addition, deductions that are not definitely related to any gross income are ratably apportioned to all gross income. (246) In this case, a portion of the deduction is attributed to the statutory grouping and the residual grouping accordingly to the following formula: (247)

Deduction Allocated to Statutory Group, = Deduction *Gross Income in Statutory [Group.sub.A/]Total Gross Income

Deduction Allocated to Residual Group = Deduction *Gross Income in Residual Group/Total Gross Income

Interest expenses are deductions that are not definitely related to any gross income. (248) wever, the TCJA now mandates that interest expense deductions are allocated and apportioned based on the adjusted basis of assets. (249) en applying the asset method to determine the FTC limitation, stock owned by a corporation is considered an asset. (250)

Since interest is fungible, interest expense is attributable to all of the corporation's activities and assets. Accordingly, interest is allocated to all gross income produced by the corporation's assets." The asset method apportions interest expense based on the "average total value of assets within" each statutory group using specified asset valuation and characterization rules.- The TCJA now requires assets to be valued using adjusted basis for purposes of allocating and apportioning interest. (253) Interest expense may not be apportioned based on gross income or FMV. (254) Thus, interest must be ratably apportioned based on the ratio of the adjusted basis of assets used to generate statutory group income to the adjusted basis of all assets used to generate income. (255)

Finally, when deductions are definitely related to a class of income, (256) but the income is exempt or excluded from taxation, then (a) exempt income will be included when allocating deductions to a classes of gross income, but (b) exempt income will not be used to apportion deductions. (257) Exempt income" is defined as "any income that is, in whole or in part, exempt, excluded, or eliminated for federal income tax purposes," while an "exempt asset" is any asset that produces income "which is, in whole or in part, exempt, excluded, or eliminated for federal tax purposes." (257) The portion of a dividend that receives a section 243 or 245 deduction is considered exempt income, and the same proportion of the distributing subsidiary's stock is considered an exempt asset. (259) One would expect similar treatment will apply to the dividends that qualify for the Section 245A DRD and the 50% of GILTI deductible by section 250. (260)

In fact, Congress specifically excludes the foreign sourced portion of dividends that qualify for the section 245A deduction from the determination of taxable income when calculating the FTC limitation, as well as any deductions properly allocable or apportioned to this exempt income or the stock generating this income. (261) Thus, unlike the general mechanism to allocate expenses to exempt income, the method used to allocate expenses to dividends exempt by section 245A does not reallocate deductions to nonexempt income. (262) Notwithstanding the foregoing, Subpart F Income and GILTI inclusions, and deductions properly allocable or apportioned to the CFC stock generating these inclusions must still be considered when determining the FTC limitation. (263)

iii. Calculate Foreign Source And U.S. Source Taxable Income

After allocating and apportioning deductions to gross income, taxable income is determined for each item of income. The items of taxable income are then segregated by source. Finally, FSTI and USTI are determined by tallying all items of foreign source and U.S. source taxable income respectively.

b. Categorizing Items Into Four Baskets Of Income

After determining U.S. and foreign source taxable income, these items must be categorized into four baskets of income - GILTI, foreign branch, passive and general income. Passive income is categorized first since all other baskets exclude passive category income. (264) Passive category income is the type included in FPHCI and/or PFIC QEF gross income, although a number of exceptions apply. (265) For purposes of determining the FTC limitation, high taxed income, export financing income and financial services income are not considered passive category income. (266) However, because financial services income is expressly categorized as general category income while the G1LTI and foreign branch baskets only exclude Passive Basket items, it is not clear whether financial services income is considered general category income only when not otherwise included in the GILTI or foreign branch baskets. (267)

GILTI and foreign branch income are categorized next since they are mutually exclusive. All amounts included by section 951A (except passive income) are placed in the GILTI Basket. (268) Alternatively, a U.S. person's, including a domestic corporation's, business profits attributable to a "qualified business unit" located in a foreign country are placed in the Foreign Branch Basket. (269) A qualified business unit ("QBU") is "any separate and clearly identified unit" of a TorB that "maintains separate books and records." (270) Since a U.S. person's business profits can never be earned by a foreign corporation and since a CFC's GILTI can never be generated by a U.S. person, classification into the GILTI and foreign branch income baskets are mutually exclusive. Finally, all residual income remaining after the above categorization are included in the General Income basket. (271) Figure 1 summarizes the categorization of items into four baskets for purposes of determining the FTC limitation, although look thru rules may change the categorization of income.

"Look thru" rules may alter the income categorization. Look thru rules exist for CFCs" and noncontrolled 10-percent owned foreign corporations, which are STFCs and certain PFICs that are not CFCs ("NCTFC").- (274) In general, look thru rules characterize the USSH's income from its subsidiary as passive based on the character of the income to the subsidiary. The CFC look thru rules treat U.S. Property as a dividend, and the Subpart F Income [section]78 gross up as Subpart F Income." In addition, dividends, interest, rent and royalties distributed from a CFC to its USSH are generally excluded from passive income, (276) except (a) dividends paid to a USSH from a CFC's E&P are considered passive income to the extent of the dividend payment, multiplied by the ratio of CFC's E&P from passive income divided by the CFCs total E&P, and (b) interest, rents, royalties and Subpart F Income inclusions from a CFC to a USSH are treated as passive income to the extent they are properly allocable to the CFCs passive income. (278) Furthermore, FBCI or insurance income (excluding financial services income) that satisfy the de minimis exception for Subpart F income is not considered passive income." (259)

Critically, the CFC look thru rules do not treat all [section]78 gross up income the same. As stated above, the CFC look thru rules treat Subpart F Income [section]78 inclusions as Subpart F Income, (280) so the Subpart F Income and its [section]78 inclusion will be in the same basket of income. In contrast, the GILTI income is included in the GILTI Basket, while its associated [section]78 inclusion is placed in a separate basket. (1) GILTI is not treated as Subpart F Income for purposes of FTC basket categorization. (282) Section 78 explicitly states that the deemed paid taxes associated with the GILTI inclusion is "treated for purposes of this title (other than sections 245 and 245A) as a dividend. (283) As a result, except for the proportion designated from passive E&P, the [section]78 gross up is excluded from passive income." The GILTI [section]78 gross up is (a) not included in the GILTI Basket since it is not a section 951A inclusion, (285) and (b) not included in the Foreign Branch Basket since it is not derived from a U.S. person's foreign profit. Accordingly, except for any portion allocated to the Passive Basket, the GILTI [section]78 gross up is included in the General Basket. (286) So GILTI and its [section]78 inclusion are not placed in the same basket of income for purposes of calculating the FTC limitation.

Notwithstanding the foregoing, Internal Revenue Service ("Service") counsel indicated that evidence suggests Congress intended to include GILTI's [section]78 inclusion in the GILTI Basket. Counsel also indicated that the Service intended to provide guidance that would place this inclusion in the GILTI Basket if it has authority to do so. (286) In fact, the Proposed FTC Regs place the [section]78 gross up for GILTI in the GILTI Basket. (289)

Look thru rules also exist for NCTFCs. (290) Although certain PFICs are NCTFCs, it is easiest to understand NCTFCs as STFCs (or foreign corporations with USSHs) that are not CFCs. Any dividend from a NCTFC is apportioned among the 4 baskets of income (GILTI, foreign branch. passive and general), where the amount allocated to each basket equals the dividend multiplied by the ratio of E&P from the category of income in the basket over total E&P. (291)

NCTFC Dividend in Specif ied Basket = Dividends * E&P from Specified Category of IncomeTotal E&P in All Baskets

However, if the allocation of dividends among the 4 baskets of income is not sufficiently substantiated, the dividend will be allocated to the GILTI category. (292)

c. FTC And FTC Limitation Are Calculated Separately For Each Basket Of Income

After categorizing the corporation's income into the four categories as described above, the FTC and FTC limitation are separately calculated for each category.-' The amount of the FTC creditable for each category of income is the lesser of the sum of the FIT and DPT, or the maximum allowed FTC ("FTC limitation") in that category." The separate categories of FTC limitation ensure that excess foreign taxes paid in one category cannot be used to reduce the U.S. tax on other categories of income." (295) Unused FTC can be carried backwards one year or forward 10 years, except that unused FTC in the GILTI Basket cannot be used in any other tax year. (296)

In general, the United States allows a FTC to offset foreign taxes paid on income that is otherwise taxed by the United States. As a result, when income is not taxable by the United States, the FTC is not allowed. For example, no FTC is allowed to offset foreign taxes paid on dividends that claim the section 245A deduction. (297) In addition, a corporation cannot claim the FTC for the U.S. source portion of the dividend when it receives a dividend from a QTFC. (295) However, in some cases FTC is not permitted even when the Section 245A DRD is denied. Hybrid dividends and the Subpart F inclusion resulting from hybrid dividends among tiered CFCs do not qualify for the FTC even though they are also denied the Section 245A DRD. 2. Use Of Foreign Tax Credit By Foreign Corporations

A foreign corporation can claim the FTC but only to the extent of ECI with a U.S. TorB, and even then only if it files a U.S. tax return. (299) Accordingly, foreign taxes paid may not be used to offset the Section 881 Withholding Tax or the Branch Profits Tax because the taxed income is not ECI with a U.S. TorB. (301) In addition, foreign taxes imposed on a corporation's U.S. Source Income solely as a result of the foreign country's residence based taxation system are not creditable. (302) Finally, the FTC limitation is determined only using foreign source and total taxable income that is ECI with a U.S. TorB. (303)

Other than these modifications, the FTC and FTC limitation are calculated as described above for U.S. corporations. (304) The foreign corporation must categorize its ECI into Foreign Source Income and U.S. Source Income, and then segregate the items into the GILTI, foreign branch, passive and general income baskets. The FTC is the lesser of the sum of the actual and deemed paid foreign income taxes or FTC limitation calculated for each category of income, which can be used to reduce the foreign corporation's U.S. tax liability.

F. Base Erosion And Anti-Abuse Tax

In addition to the section 11 corporation tax, some corporations must pay the base erosion and anti-abuse tax ("BEAT")."" BEAT applies to all corporations (except for RICs, REITs or S corporations) with average annual gross receipts of at least $500M.....and a base erosion percentage of at least

3%. (307) The "base erosion percentage" is determined by dividing the corporation's aggregate base erosion tax benefits by the sum of its aggregate deductions with some exclusions (308) (collectively the "BEAT Aggregate Deductions"), plus the "Reinsurance BE Payment" and "Inversion BE Payment," if any." What constitutes a base erosion tax benefit depends on the type of base erosion payment.

BEAT applies to corporations with (1) Gross Receipts > $500M, and (2) Base Erosion Percentage > 3%.

Base Erosion Percentage

Aggregate Base Erosion Tax Benefits

= BEAT Aggregate Deductions + Reinsurance BE Payment

+lnversion BE Payment

BEAT = 10% (Modified Taxable Income)

--Regular Tax Liability (less Limited Tax Credits)

Generally, a base erosion payment ("BE Payment") is a payment from a corporation to a foreign related party ("RP") when the corporation receives a tax benefit as part of the transaction. (310) The tax benefit may be in the form of deductions ("General BE Payment"), the receipt of depreciable or amortizable property (the "Depreciation BE Payment"), the expense of reinsurance premiums ("Reinsurance BE Payment"), or the reduction of gross receipts resulting from an inversion transaction ("Inversion BE Payment). (311) Each of these base erosion payments has a corresponding base erosion tax benefit. For a General BE Payment, the corresponding base erosion tax benefit is the deduction. (312) Similarly, for the Depreciation, Reinsurance and Inversion BE Payments, the corresponding base erosion tax benefits are the depreciation/amortization deduction, reduced insurance premiums, and reduction of payer's gross receipts respectively. (313)

The BEAT equals the "base erosion minimum tax amount," which is 10%" of "Modified Taxable Income," less an amount equal to the regular tax liability used to determine tax credits ("Regular Tax Liability"), (315) which cannot be reduced below zero, minus certain tax credits ("Limited Tax Credits"). (316) "Modified Taxable Income" is the corporation's taxable income excluding (a) any "base erosion tax benefit with respect to any base erosion payment" and (b) the base erosion percentage of any NOL deduction." Accordingly, BEAT equals 10% of the Modified Taxable Income less the corporation's Regular Tax Liability determined without any tax credits except the section 41(a) research credit and the Maximum Section 38 Credit. (318) Notice that including the research credit and Maximum Section 38 Credit may lower the corporation's BEAT liability, but this benefit will only be available until December 31, 2025."
Base Erosion Payment requires (1) corporation pays a foreign RP, and
(2) corporation receives a tax benefit.

Tvpe of BE Payment       Base Erosion Tax Benefit

General BE Payment       Deduction
Depreciation BE Payment  Depreciable or Amortizable Deduction
Reinsurance BE Payment   Reduced Insurance Premium
Inversion BE Payment     Reduction of Payer's Gross Receipts


G. Total Tax Liability

The corporation's total tax liability is the section 11 corporate income tax plus the BEAT and any other income taxes imposed less any applicable tax credits. (320) This completes the calculation of the corporation income tax.

III. APPLICATION OF THE CORPORATE INCOME TAX TO A HYPOTHETICAL CROSS BORDER CORPORATION

U.S. corporation, PCorp, is a USSH that owns 100% of the voting stock of three foreign corporations (CFC A, CFC Bl and CFC B2). CFC A is incorporated in Country A, which has a tax rate of 10%, while CFC Bl and CFC B2 are incorporated in Country B, which has a tax rate of 15%. Countries A and B establish residency by place of incorporation. All corporations are in the business of providing services and, with the exception of dividend payments between these related parties, none of the corporations receive passive income from any source.

This corporate ownership structure has been stable for many years, and PCorp's average annual gross receipts during the previous 3 years exceeded $500M. All corporations use the calendar year as their taxable year, and none of the corporations have previously taxed income. Each corporation maintains a single set of accounting books and records for its business operations, and, with the exception of the corporate entities themselves, none of the corporations function through a branch located in another country. The United States does not have a tax treaty with either Country A or Country B, so the withholding tax rate is 30%.

PCorp received $300M U.S. Source Income (with $200M in associated business expense deductions) for services provided in the United States, and $200M FSI (with $100M associated business expense deductions and $10M foreign taxes paid to Country A) for services provided in Country A. In addition, PCorp received the following income: $10M dividend from CFC A and $25M dividend from CFC B2, $50M FBCI from CFC Bl and $50M FBCI from CFC B2. None of the Subpart F Income qualifies for the High Foreign Tax Exception. PCorp paid $100M interest to an unrelated 3* party on a loan used in PCorp's U.S. TorB. PCorp has no overall foreign loss, overall domestic loss or separate limitation loss. Assume that Subpart F Income does not generate current year PTI and no FDII exists.

Finally, the adjusted basis of assets owned by PCorp is $1B, $800M of which is used to generate U.S. source income and $200M of which is used to generate FSI. In addition, PCorp's adjusted basis of common stock in CFC A, CFC B1 and CFC B2 are $300M, $200M and $500M respectively.

CFC A received $500M FSI (with $300M in associated business expense deductions) from services provided in Country A. As stated above, CFC A distributed $10M in dividends to PCorp. In addition, CFC A paid $20M in taxes to Country A on its foreign source income.

CFC Bl received $200M FSI (with $300M in associated business expense deductions) from services provided in Country B, and $55M FBCI (with $5M in properly allocated deductions). CFCB1 has no current or accumulated E&P. CFC B1 did not pay any taxes to Country B.

CFC B2 received $500M FSI (with $100M in associated business expense deductions) from services provided in Country B and $55M FBCI (with $5M in properly allocated deductions). As stated above, CFC B2 distributed $25M in dividends to PCorp. In addition, CFC B2 paid $67.5M in taxes to Country B ($60M on FSI and $7.5M on FBCI).

For purposes of this hypothetical, all of the CFCs' depreciable TorB property is used to produce the CFCs FSI from services. Furthermore, CFC A, CFC Bl and CFC B2 have an average aggregate adjusted bases of depreciable TorB property used to produce gross income ("Average Aggregate Adjusted Bases of Depreciable TorB Property") equal to $100M, $100M and $200M respectively, and these values are stable during the tax year. All of the CFCs E&P is from foreign sources, and, except for CFC B1, none of the CFCs activities are limited by E&P. Finally, none of the dividends are hybrid dividends and none of the CFCs have ECI with a U.S. TorB.

A. Step 1 [right arrow] Gross Income

PCorp is a U.S. corporation and therefore is taxed on its worldwide income. As a result, PCorp's gross income must contain "all income from whatever source derived," (321) which includes its $300M U.S. Source Income, $200M FSI, and $10M plus $25M Dividends. In addition, since it is a U.S. Shareholder of CFC A, CFC B1 and CFC B2, PCorp's gross income must also include its Subpart F inclusions as well as any associated [section] 78 gross up. (322) In this case, none of the CFCs have U.S. Property, so only the Subpart F Income and GILTI inclusions, and their associated [section]78 inclusion, must be determined.

Since PCorp owns 100% of each CFC, its pro rata share will be the full amount of Subpart F Income determined for each CFC. CFC B1 and CFC B2 each have $50M in foreign base company income after reduction by $5M in deductions properly allocated to this income. (323) PCorp's pro rata share of CFC B2's Subpart F Income = 100%($50M) = $50M. However, although CFC Bl's FBCI is $50M, CFC Bl's Subpart F Income cannot exceed its current E&P ($0). (324) As a result, CFC B1 's Subpart F Income = 100%($0) = $0. Therefore, PCorp will only include $50M of Subpart F Income in its gross income. In addition, since CFC B2 paid $7.5M in taxes to Country B on the Subpart F Income, PCorp will be deemed to have paid $7.5M in foreign taxes to Country B and this amount must be included in PCorp's gross income as required by section 78. (325) Section 78 does not apply to the Subpart F Income from CFC Bl since CFC Bl did not pay any foreign taxes and therefore cannot claim any FTC for this revenue.

Since PCorp is a U.S. Shareholder of each CFC, and directly owns stock in each CFC on the last day of the taxable year, PCorp must include its GILTI in its gross income. GILTI is calculated based on the aggregate income of all CFCs of the U.S. Shareholder. (326) GILTI is the USSH's Net CFC Tested Income less Net Deemed Tangible Income Return. The Net CFC Tested Income equals the aggregate of the pro rata share of the tested income less the aggregate of the pro rata share of the tested loss for each of the USSH's CFCs." Since PCorp is the sole owner of each CFC, all of each CFCs tested income or tested loss will be included in the GILTI calculation.

Tested Income calculation requires determination of each CFCs gross income, excluding ECL Subpart F Income, RP Dividend, FOGEI, and properly allocated deductions and taxes. CFC A's only gross income is the $500M FSI, to which all $300M of deductions and $20M foreign taxes are allocated. CFC Bl's gross income includes the $200M FSI and $55M FBCI to which $300M and $5M deductions are allocated respectively and no foreign income taxes are paid. CFC B2's gross income includes the $500M FSI and $55M FBCI to which $100M and $5M deductions and $60M and $7.5M foreign taxes are allocated respectively. Thus, CFC A, Bl and B2's Tested Income are:
                         CFC A  CFCB1          CFC B2

CFCs Gross Income        $500M   $200M + $55M  $500M + $55M
LESS EC I                  $0      $0            $0
LESS Subpart F Income      $0     $50M          $50M
LESS RP Dividend           $0      $0            $0
LESS FOGEI                 $0      $0            %0
less Properly Allocated  $300M   $300M + $5M   $100M + $5M
Deductions
LESS Properly Allocated   $20M     $0           $60M
Taxes
CFCs Tested Income       $180M  ($100M)        $340M


Net CFC Tested Income is the aggregate of the pro rata share of the tested income less the aggregate of the pro rata share of the tested loss for each of the USSH's CFCs. So:

Net CFC Tested Income = 100%($180M) - 100%($100M) + 100%($340M) = $420M

In this case, CFC Bl incurred a Tested Loss, which was incorporated into the Net CFC Tested Income. When a CFC has a Tested Loss, the CFC's E&P must be increased by the amount of the loss for purposes of determining the E&P limit on Subpart F Income. (330) Accordingly, CFC B1 's E&P of $0 is increased by Tested Loss of $100M, for a new E&P = $100M. As a result, CFC B1 's Subpart F Income is no longer limited by the E&P. Instead, all of CFC Bl's $50M Subpart F Income is included in PCorp's gross income. PCorp's gross income inclusion of Subpart F Income will be $50M from CFC B2 plus $50M from CFC Bl that is allowed by the increase in E&P in the amount of CFC Bl's Tested Loss, for a total of $100M Subpart F Income. (311)

Net Deemed Tangible Income Return is 10% of the aggregate pro rata share of the QBAI for each CFC for which the corporation is a USSH less any interest expense included in the Net CFC Tested Income when the corresponding interest income is not so included. (332) Since all depreciable TorB property is used to generate the CFC's FSI from services and since the property's average aggregate adjusted bases is stable throughout the taxable year, the Average Aggregate Adjusted Bases of Depreciable TorB Property equals the QBAI so long as the CFC produces Tested Income. In this case, CFC A and CFC B2 produce Tested Income, therefore their QBAI is $100 and $200, respectively. However, CFC B1 produces a Tested Loss, therefore its QBAI is zero. None of the CFCs incur an interest expense. So PCorp's Net Deemed Tangible Income Return and GILTI are:

Net Deemed Tangible Income Return

= 10%[100%($100M) + 100%($0) + 100%($200M)]- $0

= $30M.

GILTI = Net CFC Tested Income ($420M)-

Net Deemed Tangible Income Return ($30M) = $390M.

GILTI is an additional Subpart F inclusion in PCorp's gross income. In addition, since PCorp receives a FTC for the GILTI inclusion, PCorp will be deemed to have paid foreign taxes on this revenue and this amount must be included in PCorp's gross income by section 78. (333) The [section]78 inclusion is equal to the Inclusion Percentage multiplied by the Aggregate Tested FIT. (334) The Inclusion Percentage equals GILTI ($390M) divided by PCorp's Pro Rata Share of Tested Income, but not Tested Loss ($180M + $340M), or 75%. Tested foreign income taxes are the CFC's foreign income taxes "properly attributable" to the USSH's pro rata share of the CFC's Tested Income, which is $20M for CFC A and $60M for CFC B2. (335) So the Aggregate Tested FIT = $20M + $60M = $80M. Therefore, PCorp's [section]78 gross up is equal to (Inclusion Percentage)(Aggregate Tested FIT) = (75%)($80M)= $60M. In this case, there is no PTI, so the calculation of GILTI and its [section]78 gross up completes the determination of PCorp's gross income. Accordingly, PCorp's gross income is:

U.S. Source Income = $300M

Foreign Source Income = $200M

Dividends = $35M

Subpart F Income = $ 100M

[section]78 Gross Up (for Subpart F Income) = $7.5M

GILTI = S390M

[section]78 Gross Up (for GILTI) = $60M

PCorp's Gross Income = $1,092.5M

In this case, PCorp does not have any PTI and further analysis is not necessary. However, when GILTI must be allocated among the USSH's CFCs, then the amount of GILTI from a CFC is determined as follows:""

GILTI from [CFC.sub.X] = USSH's GILTI

USSH's Pro Rata Share of CFCxs Tested Income*/USSH's Aggregate Pro Rata Share of All CFC's Tested Income

In this case:

[mathematical expression not reproducible]

In summary, GILTI attributed to CFC A is $135M, CFC B1 is $0, and CFC B2 is $255M.

B. Step 2 [right arrow] Deductions

PCorp's only potential deductions are the section 162 TorB expenses ($300M), section 163 interest ($100M), and the Section 245A DRD and section 250 deduction. Although PCorp's $10M in FIT are potentially deductible under section 164, in this hypothetical PCorp utilizes the FTC in lieu of this deduction. In addition, the section 246 special corporate deduction potentially applies.

Section 250 provides a deduction for GILTI and FDII. The section 250 deduction is 50% of the GILTI inclusion plus any associated [section]78 gross up as a result of GILTI, and 37.5% of FDII. This problem assumes no FDII exists, so the section 250 deduction for GILTI is 50%($390M + $60M) = 50%($450M) = $225M.

Special deductions may also apply to dividends paid from certain subsidiaries to their parent corporation. In this case, dividends are paid to a USSH from a CFC with no U.S. source income, so the only potentially applicable dividend received deduction is the Section 245A DRD. Section 245A provides USSHs with a deduction equal to the foreign-source portion of any dividend received from a STFC. (338) Since PCorp is a USSH to all of the CFCs, all three CFCs are STFC. Therefore, the foreign source portion of any dividend distributed from CFC A, CFC Bl and CFC B2 to PCorp will receive the Section 245A DRD.

The foreign source portion of a dividend equals the dividend multiplied by the ratio of the STFC's undistributed foreign earnings to the STFC's total undistributed earnings, (339) where "undistributed earnings" are the STFC's E&P determined at the close of its taxable year with no reduction for dividends distributed during the taxable year," (340) and "undistributed foreign earnings" is the portion of the undistributed earnings that is not attributable to ECI with a U.S. TorB or Dividends from an 80% Owned U.S. Subsidiary. (341)

In this case, none of PCorp's CFC have ECI with a U.S. TorB and none own a subsidiary. Therefore, all of the CFCs E&P are from undistributed foreign earnings and 100% of the dividends qualify for the Section 245A DRD. Accordingly, the Section 245A DRD for CFC A's Dividends = $10M and the Section 245 DRD for CFC B2's Dividends = $25M.

In summary, PCorp's available deductions are:

[section] 162 Deductions = S200M (allocated to U.S. Source Income) and S100M (allocated to FSI)

= $300M

[section] 163 Interest Deduction = $100M

[section] 245A DRD (from CFC A) = $10M.

[section] 245A DRD (from CFC B2) = $25M.

[section] 250 Deduction = $225M ($195M from G1LT1 and $30M from GlLTI's [section]78 Gross Up)

DEDUCTIONS (PRIOR TO ANY DEDUCTION LIMITATIONS) = $660M

However, the section 163 interest and section 250 deductions are potentially limited based on the amount of taxable income. These deductions must be further analyzed after determining taxable income.

C. Step 3 [right arrow] Taxable Income

Taxable income ("TI") is gross income less deductions." Thus, PCorp's Taxable Income is gross income ($1,092.5M) less deductions ($660M), which equals $432.5M. However, this amount may be modified to the extent that the sections 163(j), 246(b) or 250 limitation applies.

1. New Section 163(J) Limit On Interest Deduction Will Not Cap PCorp's Interest Deduction

PCorp incurred $100M interest expense on a third party loan. Section 163 allows a deduction for interest expenses, but not to exceed the limit set forth in section 163(j). (342) When an affiliated group exists, the section 163(j) limit on interest expense deduction applies at the level of the consolidated group." In this case, PCorp and its CFCs are not an affiliated group since foreign corporations cannot be included in a consolidated return." As a result, the section I63(j) limitation must be calculated for PCorp alone.

Since PCorp does not have any business interest income or a loan related to motor vehicle inventory, PCorp's interest deduction is limited to 30% of its adjusted taxable income. For purposes of this deduction only, "adjusted taxable income" is taxable income ($432.5M) excluding business interest expense deduction ($100M), business interest income ($0), NOL deductions ($0), depreciation, amortization and depletion deductions ($0), and items not properly allocable to a Section 163(j) TorB($0), (346) which equals its taxable income ($432.5M) plus business interest deduction ($100M), or $532.5M. Therefore, the section 163(j) limitation is 30%($532.5M) = $159.75M. Since the interest deduction ($I00M) is less than the section 163(j) limit, all of the interest is deductible and no adjustment is needed.

2. The Section 250 Deduction Limitation Is Not Triggered

PCorp's section 250 deduction will be limited to the extent that GILTI and FDH exceed the corporation's taxable income prior to application of the section 250 deduction." In this case, PCorp's taxable income is $432.50M. Removing the section 250 deduction of $225M, the taxable income would be $432.5M plus $225M, or $657.5M. Since the sum of FDII ($0) and GILTI ($390M) with or without the [section]78 gross up ($60M) is less than the taxable income without the section 250 deduction, the full deduction is allowed, and no further adjustments are necessary to calculate taxable income.

3. The Section 246 Limit Does Not Reduce The Aggregate Of Sections 243,245 And 250 Deductions

Recall that the Aggregate of Sections 243,245 and 250 Deductions must not exceed 65% of taxable income when applied to 20% Owned Corporations, and 50% of taxable income for all other corporations, where taxable income is calculated excluding any section 172 NOL deductions, Aggregate of Sections 243, 245 and 250 Deductions, section 1059 adjustment for extraordinary dividends, and section 1212(a)(1) capital loss carryback. - In this case, the 20% Owned Corporation standard applies since PCorp owns 100% of each distributing corporation (CFC A and CFC B2) by vote and by value. (349) As a result, the Aggregate of Sections 243, 245 and 250 Deductions ($0 + $0 + $225M) must be less than 65% of PCorp's taxable income ($432.5M) excluding the Aggregate of Sections 243, 245 and 250 Deductions ($225M), which equals 65%($657.5M) or $427.38M. Since $225M is less than $427.38, the full deduction is allowed.

4. Deduction Limitation Provisions Need An Ordering Rule

In this case, neither the section 163(j) interest expense limitations, nor the section 246(b) cap on Aggregate of Sections 243, 245 and 250 Deductions nor the section 250 deduction ceiling applied. However, all of these limitations are determined based on taxable income, but in each case the taxable income is modified in different ways.

Because of these varying definitions of taxable income, a limit on any of these deductions will increase PCorp's taxable income and thereby raise the limit on the other deductions. Therefore, the order that these limitations apply will affect the value of the other deductions. With the exception the section 246(b) limitation, which can be determined without the section 250 deduction, Congress does not specify ordering rules for these deductions. (350) To avoid application of simultaneous equations, additional guidance is needed to clarify the order of application for these limitations. (351)

5. Calculate Deductions And Taxable Income After Limitation On Deductions

After the limitations on deductions are determined, the deductions are adjusted and finalized, and taxable income is recalculated. In this case, no adjustment is needed so Taxable Income remains $432.5M.

D. Step 4 [right arrow] Corporate Income Tax

PCorp must pay a corporation tax in the amount of 21% of its taxable income. (352) So PCorp's Corporate Income Tax = 21%($432.5M) = $90.825M = $90,825,000.

E. Step 5 [right arrow] Available Tax Credits

In this case, the only potential credit available to PCorp is the FTC.

1. Calculate Foreign Taxes Paid Or Deemed To Be Paid By PCorp

Domestic corporations may receive the FTC for taxes imposed by foreign countries including a credit for the amount of foreign taxes that the corporation is deemed to have paid when it receives a Subpart F inclusion from a CFC pursuant to section 960."' Recall that PCorp paid $10M in taxes to Country A on its FSI. In addition, PCorp received $7.5M deemed paid foreign taxes with the Subpart F Income from CFC B2, which is the amount of foreign taxes that the subsidiary paid on this income. Although PCorp received a similar Subpart F inclusion from CFC Bl, CFC Bl did not pay any foreign taxes on this income and therefore PCorp did not receive any deemed paid taxes with this inclusion. While PCorp received dividend distributions from CFC A and CFC B2, these distributions utilized the Section 245A DRD and, therefore, do not qualify for the FTC." Finally, PCorp receives DPTs from its GILTI inclusion.

PCorp is deemed to have paid 80% of the CFCs' foreign income taxes attributed to its GILTI inclusion, which equals 80% of the Inclusion Percentage multiplied by Aggregate Tested FIT." The tested foreign income taxes are the CFC's foreign income taxes "properly attributable" to the USSH's pro rata share ("PRS") of the CFC's Tested Income. Since CFC A paid $20M FIT to Country A and CFC B2 paid $60M FIT to Country B on FSI that was not excluded from tested income, PCorp's Aggregate Tested FIT = $20M + $60M = $80M. (356) In this case, PCorp's GILTI is $390M, and the Tested Income for CFC A and CFC B2 is $180M and $340M respectively, while CFC Bl's Tested Loss is $100M. So PCorp's DPT is determined as follows:

Inclusion Percentage

= GILTI ($390M)/75%

PCorp's PRS of Tested Income (But Not Tested Loss)($180M + $340M)

DPT on GILTI = 80%(Inclusion Percentage){Aggregate Tested FIT) = 80%(75%)($80M) = $48M

Thus, PCorp paid or is deemed to have paid the following amounts of foreign taxes:

FIT on Foreign Source Income = $10M.

DPT on Subpart F Income = $7.5M.

DPT on GILTI = $48M.

Total Foreign Taxes Paid or Deemed Paid = $65.5M

However, the FTC cannot exceed the FTC limitation."

2. Determine The Foreign Tax Credit Limitation

The FTC cannot exceed an amount equal to the precredit U.S. tax on total taxable income multiplied by the ratio of foreign source taxable income over the corporation's total taxable income.""

FTC Limitation = (US Income Tax on Total Taxable Income)

Foreign Source Taxable Income*/Total Taxable Income

However, this FTC limit (including calculating FSTI) applies separately to passive income, GILTI, foreign branch income and general income. (359) As a result, deductions must be allocated and apportioned between U.S. and foreign source income, and the FSTI and FTC limitation determined for each basket of income. The FTC is the lesser of the sum of the actual and deemed paid foreign income taxes, or the FTC limitation separately calculated for each category of income. (360)

a. Classification Of Foreign Source And U.S. Source Income

The FTC limit is determined based on taxable income." (1) In general, Taxable Income from U.S. Sources = Gross Income from U.S. Sources less Deductions Allocable to U.S. Source Income. Similarly, Taxable Income from Foreign Sources = Gross Income from Foreign Sources less Deductions Allocable to Foreign Source Income." Recall that PCorp's gross income and deductions are:

PCorp's Gross Income

U.S. Source Income = $30()M

Foreign Source Income = S200M

Dividends = $35M

Subpart F Income = $I00M

[section]78 Gross Up (for Subpart F Income) = $7.5M

GILTI = S390M

[section]78 Gross Up (for GILTI) = $60M

Gross Income = $1,092.5M

PCorp's Deductions

[section] 162 Deductions (USSI) = $200M

[section] 162 Deductions (FSI) = $100M

[section] 163 Interest Deduction = $100M

[section] 245A DRD (from CFC A) = $10M

[section] 245A DRD (from CFC B2) = $25M.

[section] 250 Deduction (GILT1) = $195M

[section] 250 Deduction ([section]78 Gross Up) = $30M

Deductions = $660M

The first step in determining the FTC limitation is to establish the source of each item of gross income. PCorp's income from services performed in the United States is U.S. source income, while that performed outside the United States is foreign source income. (363) In addition, Subpart F Income, GILTI and dividends (including the [section]78 gross ups for Subpart F Income and GILTI, which are treated as dividends) are all FSI because none of the CFCs generate U.S. source income. (364) This results from special source rules that apply to U.S. owned foreign corporations for purposes of calculating the FTC limitation. (365)

Each CFC is a U.S. owned foreign corporation because domestic PCorp directly owns 50% or more of each CFC. (366) As a result, the CFCs foreign source Subpart F Income and GILTI are treated as U.S. Source Income to the extent its revenue is attributed to U.S. sources. (367) In this case all of the CFCs' income is from services provided outside the United States. Therefore, all of the Subpart F Income and GILTI are FSI. Similarly, for dividends paid by U.S. owned foreign corporations, the dividend (which includes the [section]78 gross ups) multiplied by the ratio of the U.S. source E&P divided by total E&P is treated as derived from U.S. Source Income." Since none of the CFCs have E&P from U.S. sources, the numerator of this ratio is zero, and none of the [section]78 inclusions will be treated as U.S. Source Income. Therefore, all of the $7.5M of the deemed paid taxes from the Subpart F Income, and the $30M of the deemed paid taxes from the GILTI inclusion is considered FSI.

b. Allocation And Apportionment Of Deductions To Gross Income

Next, the deductions must be allocated to gross income. Deductions are allocated in whole to the class of income to which they definitely relate."" In this case, all of the deductions definitely relate to specific classes of income, except the interest deduction.

The facts provide that $200M and $100M business expenses are attributed to PCorp's U.S. and foreign source income respectively. In addition, the $10M and $25M of section 245A deductions are related to the $10M and $25M dividends from CFC A and CFC B2 respectively. Finally, the $195M and $30M of section 250 deductions are related to $390M GILTI and its $60M [section]78 gross up respectively. In each of these cases, no further apportionment is needed because the deduction relates to all assets in the class.

However, since PCorp is a U.S. Shareholder that receives a dividend from a CFC, which is also a STFC, the foreign source portion of dividends and "any deductions properly allocable or apportioned to" income paid with respect to the STFC's stock (or allocable or apportioned to the STFC's stock itself) are disregarded for purposes of determining the taxable income used to calculate the FTC limitation."" The only exceptions exist for (and thus deductions may be allocated and apportioned to) Subpart F Income, GILTI, and the portion of the STFC's stock that produces Subpart F Income and GILTI. Thus, the dividends from CFC A and CFC B2, as well as deductions allocable or apportioned to this income or the stock generating this income, are disregarded when determining the FTC limitation.

The only remaining deduction is the $100M of interest expenses. Interest is fungible. (372) Therefore, interest expense must be allocated to all of the PCorp's activities and assets. It is then apportioned by applying the asset method based on the adjusted basis of assets used to produce the corporation's income. (373)

In this case, the adjusted basis of PCorp's worldwide assets is $2B ($800M for assets used to produce U.S. source income, $200M for assets used to produce FSI, and $300M, $200M and $500M for CFC A, CFC Bl and CFC B2 common stock, respectively). As described above, any interest expense deduction allocable or apportioned to section 245A exempt dividends or the stock generating these dividends are disregarded pursuant to section 904(b)(4). However, this regime will not apply to income exempt by other statutes, such as income exempt by the section 250 deduction. (375) Instead the pre-TCJA regime will likely apply to this income.

The pre-TCJA regime considers assets that generate exempt income only when allocating but not when apportioning expenses. (375) In this regard, the apportionment calculation does not consider the portion of a stock's value equal to the percentage of dividends deductible under the Section 243 DRD or Section 245 DRD. Although neither of these deductions apply in this hypothetical, it seems likely that a similar approach would apply to the new section 250 deduction, which provides a 50% deduction for the GILTI inclusion. (378)

The net effect of these different allocation methods is that interest expenses allocated to the section 250 exempt GILTI will be allocated to other non-exempt income, but interest expenses allocated to section 245A exempt dividends will not be reallocated. (379) To prevent the reallocation of these deductions, interest expense must be apportioned to the assets producing 245A exempt dividends. Then such apportioned expenses must be excluded from the FTC limitation.

For purposes of this hypothetical, assume that 50% of each CFC's assets produce tax exempt dividends, 50% of CFC A's and 40% of CFC Bl and B2's assets produce GILTI (of which 50% are exempt by section 250), and 10% of CFCB1 and B2's assets produce taxable Subpart F Income. Applying these percentages to the adjusted basis of PCorp's assets yields the values set forth in the following table.
PCORP    Adjusted  Assets Produce   Assets       Assets Produce
Assets   Basis     GILTI            Produce      Dividends with
                   (50% of CFC A    Subpart F    [section]245A DRD
                   STOCK)           Income (10%  (50% of CFC
                   (40% OF CFCBI    OF CFC B1&   STOCK)
                   & B2 stock)      B2 stock)    "Excluded from
                   **50% of These                FTC Limitation
                   Assets Produce                Calculation**
                   [section]250
                   Tax Exempt
                   Income**

Produce  800M      N/A              N/A          N/A
USSI
Produce  200M      N/A              N/A          N/A
FSI
CFC A    300M      150M = 75MTE +   N/A          150M (tax exempt)
Stock              75M taxable
CFCBI    200M      80M=40MTE +      20M taxable  I00M (tax exempt)
Stock              40M taxable
CFCB2    500M      200M= 100MTE                  250M (tax exempt)
Stock              + 100M taxable   50M taxable
All CFC  IM        430M = 215MTE                 50OM (tax exempt)
Stock              + 215M taxable   70M taxable


Thus, PCorp's adjusted basis of worldwide assets that are considered when apportioning interest expense (i.e. all assets except those that produce section 250 exempt GILTI) is $800M + $200M + $215M + $70M + $500M = $1,785M. Interest expense is apportioned to each category of income according to the following formula:

Interest Expense Allocated to Category

= (Total Interest Expense) *Adjusted Basis of Category/Adjusted Basis of Worldwide Assets

where Total Interest Expense is $100M, the adjusted basis of worldwide taxable assets (excluding assets producing section 250 exempt income) is $1,785M, and the adjusted basis of U.S. source income, FSI, taxable GILTI, Subpart F Income and tax-exempt dividends are $800M, $200M, $215M, $70M and $500M respectively. Thus, interest expense is apportioned to PCorp's income as follows:

[mathematical expression not reproducible]

In this case, PCorp does not operate a branch and does not produce passive income, so no deductions are apportioned to these types of income.

c. Calculation Of Taxable Income

The following table summarizes the gross income, class and source of income from the previous section and calculates the taxable income for each class of income for purposes of determining the FTC limitation only. Notice that the difference between the $460.52M taxable income for purposes of calculating the FTC limitation and the $432.50M used to determine U.S. coiporate income tax is the $28.01M interest expense allocated to exempt dividends, which are not considered when determining the FTC limitation.
PCORP'S
Gross    Class of       Source       Deduction           Deduction
Income   Income                      Allocated           Allocated
         U.S. Source                 $200M Business      $200M Business
$300M    Income         U.S.         Expenses            Expenses
         from services               $44.82M Interest    $44.82M
                                                         Interest
                                     Expense             Expense
                                     $100M Business      $100M Business
         FSI from                    Expenses            Expenses
$200M    services       Foreign      $11.20M Interest    $11.20M
                                                         Interest
                                     Expense             Expense
                                     $35M [section]245A  $35M
                                                         [section]245A
         Dividends
$35M     from CFC A     Foreign      Deduction           Deduction
         andB2                       $28.01M
                                     Interest Expense    $28.01M
                                                         Interest
                                                         Expense
         [section]78
         Gross Up
$7.5M    (Subpart F     Foreign      $0                  $0
         Income)
         [section]78
         Gross Up                    $30M [section]250   $30M
                                                         [section]250
$60M     (GILTI)        Foreign      Deduction           Deduction


S100M    Subpart F      Foreign      $3.92M Interest     $3.92M Interest
         Income                      Expense             Expense
                                     $195M
                                     [section]250        $195M
                                                         [section]250
                                     Deduction           Deduction
$390M    GILTI          Foreign      $12.04M Interest    S12.04M
                                                         Interest
                                     Expense             Expense
         TotalT         AXABLEINCOM  E                   E


The classification of PCorp's $460.52M total taxable income as U.S. or foreign source income is summarized as follows:
VS. SOURCE INCOME                 FOREIGN SOURCE INCOME

$55.18M from services in United    $88.80M from services in Country A
States
                                   $96.08M Subpart F Income
                                    $7.5M [section]78 Gross Up (Subpart
                                  F Income)
                                  $182.96M GILTI
                                  $30M [section]78 Gross Up (GILTI)
$55.18M Total U.S. Source Income  $405.34M Total Foreign Source Income


d. Categorizing Items Into Four Baskets Of Income

After segregating foreign and U.S. source income, these items must be categorized into the four baskets of income - GILTI, foreign branch, passive and general income. In this case, no items are allocated to the Passive Basket because neither PCorp nor any of the CFCs receive passive category income.

After determining amounts in the Passive Basket ($0), all amounts included in a USSH's gross income by section 951A are placed in the GILTI Basket ($182.96M). (380) No income is allocated to the Foreign Branch Basket since PCorp does not operate as a branch. Any remaining uncategorized income is placed in the General Basket." Since they do not fit into any other category, U.S. and foreign source income from services and Subpart F Income are allocated to the General Basket.

In addition, look thru rules determine how to categorize income. (382) In this case, the subsidiaries are CFCs so the CFC look thru rules apply. The CFC look thru rules treat Subpart F Income [section]78 inclusions as Subpart F Income, so the Subpart F Income and its [section]78 inclusion will be in the same basket of income.- Thus, the [section]78 gross up for Subpart F Income is included in the General Basket with the Subpart F Income. However, currently no rule places GILTI and its [section]78 inclusion in the same basket." Instead, the [section]78 gross up for GILTI is placed in the general income basket since it is treated as a dividend and, for the same reasons as the Subpart F Income, is not included in any other basket. In summary, PCorp's incom following baskets of income:
PASSIVE INCOME  GILTI             FOREIGN BRANCH     GENERAL INCOME

None            $182.96M (GILTI)  None               $30M (GILTI
                                                     [section]78
                                                     Gross Up)
                                                     $55.18M (U.S.
                                                     Source
                                                     Income)
                                                     $88.80M (Foreign
                                                     Source Income)
                                                     $96.08M (Subpart F
                                                     Income)
                                                     $7.5M (Subpart F
                                                     Income $78 Gross
                                                     Up)
Total           Total GILTI =
                $182.96M          Total Branch = $0  Total General =
Passive =                                            $277.56M
$0
FS Passive      FS GILTI =
                $182.96M          FS Branch = $0     FS General =
                                                     S222.38M
= $0
U.S.            U.S.GILTI = $0    U.S. Branch = $0   U.S. General
                                                     =$55.18M
Passive =
$0


Once income is classified as U.S. or foreign source and allocated to each of the 4 categories or baskets, then these values are used to calculate a separate FTC limitation for each category.

e. FTC And FTC Limiation Are Calculated Separately For Each Basket Of Income

After placing income into the four baskets, the FTC and FTC limitation are separately calculated for each category.- The FTC for each category of income is the lesser of the sum of the FIT actually or deemed paid or the FTC limitation in each category. (386)

FTC limitation = (US Income Tax on Total Taxable Income)

Foreign Source Taxable Income/Total Taxable Income

For purposes of this calculation. Total Taxable Income = $460.52M and U.S. Income Tax = $90.825M.

The GILTI Basket has Total GILTITI = FS GILTI TI = $ 182.96M, and DPT on GILTI = $48M. The FTC limitation for GILTI is:

[mathematical expression not reproducible]

So the FTC for the GILTI Basket is the lesser of $48M DPT on GILTI or the $36.08M FTC limitation for the GILTI Basket. Therefore, the GILTI FTC is limited to $36.08M and the remaining $ 11.92M DPT is not creditable. Since no carry forward or back is allowed for unused GILTI foreign taxes, the $11.92M in unused DPT are lost.

The General Basket contains General FSTI = $222.38M, and General Basket Taxes = FIT on FSI + DPT on Subpart F Income = $10M + $7.5M = $17.5M. The FTC limitation for the General Basket is:

FTC Limitation (General Basket)

= (US Tax on Total Taxable Income)

FS General Taxable Income/Total Taxable Income

[mathematical expression not reproducible]

So the FTC for the General Basket is the lesser of the $17.5M FIT or S43.86M FTC limitation. Accordingly, the General Income FTC is the full $17.5M in FIT paid. In summary, PCorp's FTC is $17.5M (General Basket FTC) + $36.08M (GILTI Basket FTC) = $53.58M, which may be credited against its corporate tax liability.

F. Step 6 [right arrow] Base Erosion And Anti-Abuse Tax

In general, BEAT applies to large corporations that make payments to a foreign related party and that receive a tax benefit from those payments, when the benefits from these related party transactions exceed a certain threshold. BEAT applies to corporations with average annual gross receipts of at least $500M and a base erosion percentage of at least 3%. (387) this case, PCorp does not make any payments to a foreign related party. As a result, PCorp makes no base erosion payments and receives no base erosion tax benefits. Since the base erosion tax benefit is zero, the base erosion percentage is also zero, and BEAT does not apply to PCorp. Therefore, PCorp has no BEAT liability.

G. Step 7 [right arrow] Total Tax Liability

The corporation's total tax liability is the section 11 corporate income tax plus the BEAT less any applicable tax credits. (388) this case, PCorp's corporation income tax liability is $90.825M plus $0 since PCorp has no BEAT liability less the available FTC of $53.58M. Therefore, PCorp's total income tax liability is $90.825M + $0 - $53.58M = $37.25M. This completes the calculation of PCorp's corporate income tax.

IV. THE TCJA CREATES A MORE COMPLEX TAX SYSTEM IN THE PROCESS OF TRYING TO REDUCE TAX AVOIDANCE

The TCJA attempts to decrease profit shifting incentives for crossborder corporations, but in the process exacerbates the complexity of the United States' domestic and international corporate tax law by layering a territorial tax system on top of an existing worldwide income tax system. The need to simultaneously comply with both of these systems will make administering and complying with the tax laws substantially more difficult after the TCJA than before.

A. TCJA Attempts To Reduce Incentives To Accumulate Foreign Earnings

The GILTI inclusion, the section 245A deduction and the reduced corporate income tax rate encourage the distribution of FSI as dividends to USSHs and reduce the incentive to generate and accumulate foreign earnings. Prior to the TCJA, the United States did not tax the income of foreign corporations until profits were distributed to a U.S. parent corporation in the form of a dividend. The ability to defer tax until income was distributed to a U.S. shareholder had been part of the U.S. income tax code from its inception." As a result, a foreign corporation paid foreign tax on its foreign source profits, but its U.S. shareholder was not taxed on this income until it received a distribution as dividends, a process commonly called "repatriation."

This system provided the mechanism for deferral of tax on income generated by a foreign subsidiary. (391) a U.S. multinational corporation ("MNE") chose to hold profits at the level of the foreign subsidiary and not distribute income as dividends, the MNE could avoid paying federal income tax on its profits until it decided to repatriate income to the U.S. parent in the form of a dividend. (392) ere were a few exceptions to this deferral privilege where income was taxed currently, specifically the Subpart F and PFIC provisions,' which generally limited current taxation to earnings from passive activities and related party transactions. As a result, a foreign corporation's active business income normally was not subject to current taxation by the United States. Current taxation of GILTI, implemented by the TCJA, changed this longstanding policy.

The GILTI inclusion currently taxes a portion the CFC's active business income and, therefore, stops the benefit of deferral. GILTI incorporates a portion of all of the CFC's gross income," including foreign profits from active business operations. (395) a result, Section 951A operates to currently tax a portion of the CFC's profits from active business operations regardless of whether the CFC distributes these earnings to its shareholders. By this mechanism, the GILTI tax effectively eliminates the deferral benefit since MNEs cannot avoid U.S. income taxation by leaving undistributed profits in its subsidiaries' accounts.+

Theoretically, there is a small group of corporations that continue to enjoy the benefit of deferral after enactment of the TCJA. Domestic parent corporations of non-CFC foreign subsidiaries are not subject to Subpart F provisions and, therefore, would not be subject to GILTI. As a result, the parent corporations would not be taxed on its non-CFC subsidiaries' earnings unless repatriated in the form of a dividend. However, in light of the expanded criteria for CFC and USSH status adopted by the TCJA", it will be challenging to maintain the status of a non-CFC subsidiary of a U.S. cross border corporation. By effectively ending the benefit of deferral for MNEs, GILTI reduces a corporation's incentive to accumulate earnings outside the United States.

Furthermore, the section 245A deduction removes the tax disincentive of CFCs to distribute its earnings as dividends to USSHs. Section 245A exempts the foreign source portion of a dividend from U.S. corporate income tax by providing the recipient USSH with a 100% dividend received deduction. (397) a result, the foreign source portion of a dividend will not be taxable to the USSH. This removes a major tax barrier that prevented corporations from repatriating their earnings to the United States prior to enactment of the TCJA.

Finally, the new 21% corporate income tax rate narrows or eliminates the gap between the U.S.'s and foreign country's tax rate, which reduces the benefit of earning income in a foreign country. A corporation that paid $35 of tax on $ 100 of taxable income prior to the TCJA would now only pay $21 in tax. Prior to the TCJA, a domestic corporation would be highly motivated to establish residency in a foreign country with a 20% tax rate since it would save $15 in taxes compared to the U.S. tax on every $100 of taxable income. After the TCJA, the corporation's incentive would be reduced since the tax savings would be only $1 on $100 of taxable income. Thus, corporations will have less motivation to earn foreign source income since the tax savings will be less than that imposed under the pre-TCJA tax system.

In summary, the GILTI inclusion, section 245A deduction, and reduced corporate tax rate encourage CFCs to pay dividends to its shareholders instead of accumulate earnings outside of the United States. The 21% corporate income tax rate reduces the benefit of earning FSI. In addition, the section 245A deduction and GILTI inclusion encourage CFCs to distribute (rather than accumulate) earnings. Thus, the GILTI inclusion, section 245A deduction, and 21% tax rate work together to lower the likelihood that CFCs will retain excessive profits overseas that are not taxed by the United States. Unfortunately, in the process of combatting the ability of MNEs to avoid paying U.S. income tax, the TCJA exacerbated the complexity of an already complicated tax system.

B. TJCA Creates A System Of Taxation Where A Territorial Tax/Exemption System Overlaps A Worldwide Income Taxation/Foreign Tax Credit System

The summary of the corporate income tax system set forth in Part II and the hypothetical set forth in Part III demonstrate that the TCJA creates a far more complicated system of corporate taxation for cross border corporations than the United States' preexisting tax system. Prior to the TCJA, the United States taxed all of its domestic and resident corporations on their worldwide income, and only taxed foreign corporations, including subsidiaries of domestic corporations, on U.S. Source Income or ECI with a U.S. TorB. (399) To avoid double taxation, corporations could claim a FTC for foreign taxes paid (or deemed paid) on FSI. (400)

After enactment of the TCJA, the situation is far more complex. Congress implemented a deduction for the foreign source portion of any dividend received by a corporate USSH from a STFC (which includes CFCs). (401) As a result, MNEs must now use both the foreign tax credit and the dividend exemption systems to calculate their corporate income tax. When dividends are distributed and/or GILTI inclusions are generated from foreign active business earnings, generally these earnings have been subject to tax by a foreign jurisdiction. In this case, juridical double taxation potentially results from two mechanisms. First, the dividend itself is included in the USSH's gross income. Second, the earnings used to pay the dividend are included in the USSH's GILTI inclusion. Thus, two methods are required to protect a U.S. Shareholder from juridical double taxation: the section 245A deduction must exempt dividends directly included in the USSH's gross income, and the FTC must credit the foreign income tax paid on earnings included as GILTI.' (1) ' Whereas the FTC eliminated juridical double taxation in a single step prior to the enactment of the TCJA, two separate legal analyses (FTC and section 245A exemption) are required to accomplish this goal after the TCJA. Thus, the TCJA creates a system of taxation where a territorial taxation (exemption) system overlaps a worldwide income tax (foreign tax credit) system, which is much more complex and cumbersome than the preexisting system that solely used worldwide taxation with FTC to eliminate double taxation.

Although the U.S. international tax system is commonly described as a hybrid of a worldwide (residence-based) tax system and a territorial (exemption) tax system, it is less clear whether the predominant system is residence based or exemption. (403) This ambiguity exists because the boundary between the territorial and worldwide tax systems is difficult to appreciate, and somewhat fluid. However, as described below, because there are so many limitations on the section 245A deduction, and because taxpayers may only utilize the section 245A exemption when income is not otherwise taxed by the worldwide tax system, the U.S. international tax regime is better characterized as a worldwide tax system with features of territorial taxation.

The TCJA was publicized as the United States' move to a territorial tax system. However, the dividend exemption is severely limited. The section 245A deduction is only available for the foreign source portion of dividends paid by a STFC to a corporate USSH, and only when the distribution is not a hybrid dividend or a dividend from a PFIC that is not also a CFC. (404) In addition. Subpart F Income, U.S. Property and GILTI inclusions, and any distributions of PTI are not dividends and, therefore, cannot claim the section 245A deduction. (405) Although [section]78 gross ups are considered dividends for all purposes in the Code, the sections 245 and 245A deductions are specifically excluded. (406) Furthermore, a U.S. cross border corporation that earns FSI through its own operations or the operations of a branch are taxed on their worldwide income, receiving a FTC to eliminate any double taxation. Thus, the worldwide tax system applies to most types of income, including Subpart F Income, U.S. Property, GILTI, [section]78 inclusions, distributions of PTI, dividends from PFICs, hybrid dividends, distributions to a non-USSH, distributions from foreign subsidiaries that are not CFCs or STFCs, and FSI earned by a domestic corporation's own operations as well as the operations of its foreign branches. The new section 245A deduction, and therefore the territorial tax system, only applies to FSI distributed as dividends from a STFC to a USSH and is not otherwise taxed as part of the worldwide tax system.

Notwithstanding the limited scope of the section 245 A deduction, at first glance the U.S. international tax system still appears to be a territorial tax system with features of worldwide taxation since a MNE can use the section 245A deduction to distribute FSI without incurring U.S. income tax. In reality, the section 245A deduction is not the primary defense against economic double taxation. Rather it is the PTI system that prevents this double taxation. Distributions from a CFC to a USSH are not taxed to the extent of PTI, and only distributions of E&P in excess of PTI are dividends that may utilize the section 245A deduction." (1)
Territorial Tax (Exemption) System        Worldwide Tax (FTC) System

                                          Subpart F Income or [section]
                                          956 U.S.
                                          Property inclusion
                                          GILTI Inclusion
FSI Earned by CFC or STFC, but only if:   Section 78 Gross Up
* Distributed to a U.S. Shareholder as a  Distributions of PTI
dividend (i.e. to the extent of E&P);     Distributions from a PFIC
                                          (that is not a
* FSI is not Subpart F lneome,
[section956 U.S.                          CFC)
Property or GILTI;                        Distributions from a Non-STFC
* Distribution is not from PTI;           Distributions to a Non-U.S.
* STFC is not a PFIC; and                 Shareholder
* Distribution is not a Hybrid Dividend.  FSI Earned Directly by U.S.
                                          Corporation
                                          FSI Earned by Foreign Branch
                                          Hybrid Dividends (FTC not
                                          allowed)


Thus, the key determinate of whether a distribution is taxed as part of the worldwide tax system or the territorial tax system is PTI, which is generated by GILTI and other Subpart F inclusions. Reducing GILTI, such as by increasing the QBAI or deductions allocated to tested income, will generate less PTI and allow more E&P to be distributed as exempt dividends. Increasing GILTI, such as by legislatively reducing the section 250 deduction, will generate more PTI and, therefore, reduce the amount of exempt dividends. Thus, the boundary between the worldwide tax system and the territorial tax system is clearly defined by PTI, which establishes the income that is taxed by the worldwide tax regime. Only E&P that is not taxed by the worldwide tax system may be distributed as dividends exempt from taxation by section 245A. For these reasons, the U.S. international tax system is better characterized as a worldwide tax system, with some features of territorial taxation.

C. The Post-TCJA Tax System Will Be Difficult To Administer Because Laws And Regulations Must Simultaneously Comply With Both The Worldwide And Territorial Tax System

This new tax structure, which is a chimera of a worldwide and territorial tax systems, creates a complicated structure that is difficult to administer and to comply with since any law, regulation or decision must simultaneously consider the effects on both a credit and an exemption system. Allocation of interest expenses serves as just one example of this challenge. Interest is allocated to all of a corporation's activities and assets, and apportioned based on the adjusted basis of assets used to produce the corporation's income. (408) Allocating and apportioning interest expense deductions was complicated prior to the TCJA when only one system of taxation applied. Interest expenses were allocated to all assets, but were only apportioned to nonexempt assets. Assets producing exempt income were determined by multiplying the percentage of dividends excluded from taxation by the total amount of assets. All remaining assets represented those producing taxable income. (109) Although this method of distinguishing exempt and nonexempt assets was arguably reasonable when corporations were taxed using a single tax regime, this analysis breaks down when income and assets can be taxed by multiple tax systems.

If the pre-TCJA analysis were applied to the new section 245A deduction, no interest expense would be apportioned to distributions from CFCs. Since the deduction exempts all foreign source dividends distributed from CFCs to their U.S. Shareholders, 100% of the adjusted basis of CFC stock would be classified as assets producing exempt income and would not be considered when apportioning interest expense. Although this may be justified in the case of tax-exempt dividend distributions, it would not be justified for taxable income, such as Subpart F Income or GILTI inclusions. Thus, the existence of two overlapping tax systems complicates the allocation of deductions.

Allocation of deductions will only yield reasonable results if the territorial tax system's income and assets are segregated from that taxed by the worldwide tax system. This is accomplished by section 904(b)(4), which effectively segregates the territorial tax system by excluding all dividends exempt from tax by section 245A, as well as all deductions properly allocable or apportioned to these dividends or the stock generating these dividends. (412) All other income, such as income exempt by the section 250 deduction, is taxed by the worldwide tax system and must be analyzed separately. Thus, because of the existence of the overlapping worldwide and territorial tax systems, two different mechanisms must be used to allocate deductions to exempt income. Unfortunately, disparate analyses must now be applied depending on whether exempt income is included in the worldwide or territorial tax system.

Since section 245A fully relieves juridical double taxation by exemption, the FTC is not needed. Thus, all of the income, assets and deductions allocated to the territorial tax system are disregarded for purposes of calculating the FTC limitation and none of the expenses are reallocated to non-exempt assets. On the other hand, deductions do not serve the purpose of preventing juridical double taxation in the worldwide tax system. In the case of section 250, the deduction provides a preferential tax rate and does not reduce the foreign income taxes paid on GILTI. Since the full amount of the GILTI inclusion is used to determine the DPT and the FTC, interest expenses allocated to all GILTI should be used to calculate the FTC limitation. This is accomplished by considering exempt assets when allocating but not when apportioning interest expense, which has the effect of reallocating the interest from exempt to non-exempt assets when determining the FTC limitation.

Thus, two different deductions have completely different analyses because one is included in the territorial tax system and the other is included in the worldwide tax system. Although international tax professionals will adjust to these technicalities with time, these subtle distinctions and resulting complexities will likely cause confusion and compliance difficulties for many taxpayers, including sophisticated business persons.

V. CONCLUSION

The Tax Cuts and Jobs Act has dramatically increased the complexity of the international and corporation tax provisions of the Internal Revenue Code, and the GILTI tax is one of the most complicated provisions. This summary of corporate income tax law after enactment of the TCJA demonstrates how intertwined the GILTI provisions are with corporate and international tax law. GILTI affects the calculation of corporate tax at almost every level, including determining gross income, deductions, taxable income, tax credits and BEAT. In addition, GILTI affects the allocation and apportionment of deductions to U.S. and foreign source income, as well as the Subpart F and FTC analysis. The hypothetical set forth in Part III of this article demonstrates the difficulty of calculating a cross border corporation's tax liability even in a simplified scenario with a basic corporate structure. Finally, Part IV describes how the TCJA overlays an exemption based, territorial tax system on top of an existing credit based, worldwide income tax system. Without more this tax system is complex enough, but the new GILTI tax proceeds to simultaneously interact with and affect provisions in both of these systems, as demonstrated by the allocation of deductions and taxation of dividends. For these reasons, the TCJA and GILTI have significantly complicated the analysis of corporate and international tax law, and the determination of cross border corporate tax liability.

GILTI is the embodiment of "anti-simplification." Yet, all of the issues set forth in this article arise from a very basic corporate structure. The U.S. parent corporation owns only CFCs that generate foreign source income and all of the deductions and taxes are attributed to those profits. Previously taxed income analysis is not required. With the exception of interest expenses, there is no need to apportion expenses between foreign and U.S. source earnings.

In addition, none of the CFCs owned corporations so there is no need to consider how GILTI applies to multiple tiers of corporations or a consolidated group. Finally, the corporate structure was stable for many years and there was no need to consider the effect of mergers and acquisitions or other business transactions on GILTI.

The complexity of the U.S. corporate income tax system will increase exponentially as GILTI is applied to these common, real world business scenarios. Although the recently released and upcoming proposed regulations will attempt to provide guidance and clarity on the application of GILTI and the TCJA to common business practices, in the process they will highlight additional difficulties that are likely to occur when implementing these laws. If this scenario is not daunting enough, other countries are starting to consider implementing their own versions of GILTI. The OECD's global anti-base-erosion ("GLOBE") proposal, commonly referred to as "BEPS 2.0," would tax digital economy income using a minimum tax similar to GILTI. (411) In light of these developments, there will likely be a lot more antisimplification to come.

Christine A. Davis, M.D., Esq.(*)

(*) Christine Ann Davis, M.D., Esq., Doctor of Juridical Science (S.J.D.) in Taxation Candidate, May 2020, University of Florida Levin College of Law, Gainesville, Florida, USA (cadavis9@ufl.edu). The author would like to thank Yariv Brauner, Mindy Herzfeld, Lawrence Lokken, and Charlene Luke for the helpful comments, advice and support regarding this article.

(1) In this article, all references to the Internal Revenue Code are to Subtitle A (Income Taxes), Chapter 1 (Normal Taxes and Surtaxes) unless stated otherwise.

(2) International Tax Center ITC Leiden, Master of Advanced Studies in International Tax Law, Course Information, ITC LEIDEN, available at http://www.itcleiden.nl/en/amp-l-2-course-information (last updated February 13, 2018) (statement from the course description for US International Tax Law).

(3) Id.

(4) e-Prospectus, Course Description, US International Tax Law, 2007-2008, UNIVERSITEIT LEIDEN, available at https://studiegids.leidenuniv.nl/en/courses/slunv/11942/us-international-tax-lawit (statement from the 2007-2008 course description for US International Tax Law).

(5) Tax Cuts and Jobs Act of 2017, Pub. L. No. 115-97, 131 Stat. 2054 (codified as amended in scattered sections of 26 U.S.C.) [hereinafter TCJA of 2017].

(6) MollyMoLaw360, Twitter (Feb. 9, 2018, 9:51 AM), https://twitter.com/MollyMoLaw360/status/962021079353999360.

(7) I.R.C. [section]951A.

(8) Treasury is currently in the process of drafting and releasing regulations for the TCJA. On September 13, 2018, Treasury released the first of a series of proposed regulations that provides guidance for the global intangible low-taxed income. Guidance Related to Section 951A (Global Intangible Low-Taxed Income), 83 Fed. Reg. 51072 (proposed Oct. 10, 2018) [hereinafter Proposed GILTI Regs (Part 1)] (to be codified at 26 C.F.R. pt. 1). Proposed regulations can be used as guidance but are not entitled to deference. BORIS I BITTKER & LAWRENCE LOKKEN, FEDERAL TAXATION OF INCOME, ESTATES AND GIFTS [paragraph] 110.5.3 (Thomson Reuters Tax & Accounting, 2018). As a result, and since Treasury may modify the proposed regulations in response to public comments, this paper generally will not analyze the rules set forth in any proposed regulation. However, occasionally the proposed regulations are referenced to clarify ambiguous provisions in the TCJA.

(9) This article analyzes the taxation of corporate income after December 31, 2017. For this reason, the section 965 transition tax on earnings accumulated prior to this date is not considered.

(10) IRS Form 1120 (2017), available at https://www.irs.gov/pub/irs-pdf/f1120.pdf.

(11) Id.

(12) I.R.C. [section] 63(a).

(13) I.R.C. [section] 61(a). Although section 61 and Part II of Subchapter B list specific inclusions in gross income, these are non-exclusive lists. I.R.C. [section][section] 61, 72-91.

(14) Specific exclusions from gross income are listed in Part III of Subchapter B, some of which apply only to individual taxpayers. I.R.C. [section][section] 101-40.

(15) I.R.C. [section]61 (a).

(16) I.R.C. [section] 61(a)(3); Treas. Reg. [section]1.61-6(a) (1960). Gain is the amount realized less adjusted basis, and any gain realized is also recognized and included in gross income unless otherwise provided in Subtitle A. I.R.C. [section] 1001(a), (c).

(17) I.R.C. [section][section]72-91.

(18) I.R.C. [section]78.

(19) I.R.C. [section][section]101-140.

(20) I.R.C. [section][section]102-103.

(21) I.R.C. [section][section] 332, 337, 351, 354, 355, 361, 368(a)(1), 1031-1045.

(22) The TCJA modified section 1031 to apply only to real property. In addition, foreign real property and U.S. real property are not "like kind." I.R.C. [section] 1031(a), (h). TCJA of 2017, supra note 5, [section] 13303.

(23) I.R.C. [section][section] 332(a)-(b), 336(d)(3), 337(a), 351(a), 354,355,361,368(a)(1), 1031,1032, 1033,1036.

(24) Cross-Border Corporations may directly conduct business in foreign jurisdictions, or may operate through a foreign subsidiary corporation or passthrough entity.

(25) A foreign corporation is any corporation that is not a U.S. domestic corporation. I.R.C. [section] 7701(a)(5).

(26) U.S. domestic corporations are corporations "created or organized" in the United States or by the laws of the United States, any U.S. state or the District of Columbia. I.R.C. [section] 7701(a)(4), (10).

(27) I.R.C. [section][section] 861(a), 862(a), 863, 865; Treas. Reg. [section][section] 1.861-1 to 1.863-3, 1.861-8T to 1.861-14T (as amended in 2019).

(28) I.R.C. [section][section] 881-82.

(29) BITTKER & LOKKEN, supra note 8, [paragraph] 67.6.2.

(30) Id.

(31) U.S. DEP'T OF THE TREASURY, UNITED STATES MODEL INCOME TAX CONVENTION art. 7(1), (2) (2016), available at https://www.treasury.gov/resource-center/taxpolicy/treaties/Documents/Treaty-US%20Model-2016.pdf [hereinafter U.S. MODEL TAX TREATY]; BITTKER & LOKKEN, supra note 8, II 67.6.9. When a tax treaty applies, only foreign corporations that operate a permanent establishment (I'E) within the United States will be subject to the section 11 corporate income tax. U.S. MODEL TAX TREATY, supra note 31, at 7(1); BITTKER & LOKKEN, supra note 8, [paragraph] 67.6.9. In this case, the corporate income tax will apply to "business profits" attributable to the PE. BITTKER & LOKKEN, supra note 8, [paragraph] 67.6.9. It is not clear the extent to which a PE's business profits would be treated as EC1 with a U.S. TorB when determining section 11 tax. Id. Further analysis of the treaty implications of taxing business profits is beyond the scope of this article.

(32) I.R.C. [section][section] 881(a), 1441(a), (b), (c)(1), 1442(a).

(33) I.R.C. [section][section] 897(a)(1), 882(a), 1445(a). "United States real property interest" is defined in section 897(c). I.R.C. [section] 897(c); BITTKER & LOKKEN, supra note 8, [paragraph] 65.1.3.

(34) I.RC [section][section] 881(a)(1), (a)(3), (c)(1), 1441(a), (b), (c)(9), 1442(a).

(35) I.RC [section][section] 881(a)(2), (4), 631(b)-(c).

(36) I.RC. [section][section] 881(a), 1441(a), (b), 1442(a); BITTKER & LOKKEN, supra note 8, [paragraph] 67.1.1.

(37) I.R.C. [section] 897(a)(1), (c)(1)-(2); BITTKER & LOKKEN, supra note 8, [paragraph] 65.1.3. The definition of U.S. Real Property Interest is qualified by a number of exceptions and adjustments. I.R.C. [section] 897(c).

(38) I.R.C. [section] 1445(a), (b).

(39) I.R.C. [section][section] 897(a)(1), 882(a)(1), (2). The corporation income tax is determined by sections 11 and 59A, as further described in Parts II.D, II.F and II.G below.

(40) I.R.C. [section]33.

(41) I.R.C. [section][section] 11(d), 882(a)(1), (2); BITTKKR & LOKKEN, supra note 8, [paragraph] 67.1.1. Corporation income tax is determined according to sections 11 and 59A as further described in Parts II.D, II.F and II.G below. I.R.C. [section][section] 11, 59A, 882(a)(1), (2).

(42) I.R.C. [section] 864(c)(2)-(3).

(43) I.R.C. [section] 897(a)(1).

(44) In general, Subpart F income is never ECI with a U.S. TorB, and dividends, interest or royalties are never ECI with a U.S. TorB when paid from a foreign corporation to its majority shareholder. I.R.C. [section] 864(c)(4)(D). Notwithstanding the foregoing, FSI is never ECI with a U.S. TorB, unless the income, gain or loss (1) is attributed to "an office or fixed place of business within the United States," and (2) consists of (a) rents or royalties from intangible property from the active conduct of U.S. TorB, (b) dividends, interests or payments for guarantees of indebtedness from the active conduct of banking, financing, or stock/securities trading business, or (c) income from the sale of inventory outside the United States (unless the inventory is sold for use outside the U.S. and taxpayer's foreign office materially participated in the sale). I.R.C. [section] 864(c)(4)(A)-(B).

(45) I.R.C. [section]882(a)(1)-(2).

(46) I.R.C. [section] 884(a), (b).

(47) I.R.C. [section] 884(a), (b), (d)(1).

(48) I.R.C. [section] 884(a), (b), (c).

(49) BITTKER & LOKKEN, supra note 8,11 67.1.1.

(50) See infra Part 0.

(51) I.R.C. [section] 61(a).

(52) Sec supra Part II.A.

(53) I.R.C. [section][section] 78, 951(a)(1)-(2), 951 A, 956(a).

(54) I.R.C. [section][section] 1291,1293(a), 1295, 1296(a); BITTKER& LOKKEN, supra note 8, [paragraph] 70.1.1. Further analysis of the PFIC regime is beyond the scope of this article.

(55) I.R.C. [section][section] 951(a)(1)-(2), 951A(a), (e)(1)-(2), 958(a). For purposes of determining Subpart F income, U.S. property and GILTI inclusions, "pro rata share" is defined in section 951(a)(2) and is based solely on direct and indirect ownership of CFC stock. I.R.C.[section][section] 951(a)(2), 951A(e)(1).

(56) I.R.C. [section][section] 951(b), 957(c), 958(a)-(b), 318(a), 7701(a)(30).

(57) I.R.C. [section][section] 957(a), 958(a)-(b), 318(a).

(58) I.R.C. [section] 951(a)(1). This is another change implemented by the TCJA. Prior to the TCJA, Subpart F inclusion was only required when a foreign corporation satisfied the conditions for CFC status "for an uninterrupted period of 30 days or more during any taxable year." I.R.C. [section] 951(a)(1) (2016).

(59) I.R.C. [section][section] 951(a)(1), (a)(2)(A), 951 A(e)(1), 958(a).

(60) TCJA of 2017, supra note 5, [section] 14214.

(61) TCJA of 2017, supra note 5, [section] 14213; I.R.C. [section][section] 318(a)(3)(A)-(C), 958(b)(4) (2016).

(62) TCJA of 2017, supra note 5, [section] 14215; I.R.C. [section][section] 951(a)(1), 951A(e)(3), 957(a). This revised standard will increase the number of foreign subsidiaries that will be considered CFCs, especially since CFC status is triggered if the requisite conditions are satisfied on any day during the CFCs taxable year. I.R.C. [section] 957(a).

(63) I.R.C. [section][section] 952(a), (b), 954(a), (c)-(c).

(64) I.R.C. [section] 954(a)(1), (c). FPHCI includes: (a) dividends (or payments in lieu of dividends), interest (or equivalent income), royalties, rents, and annuities, (b) gains from property transactions (excluding inventory transactions) that produce passive income or no income, or where the property is an interest in a trust, partnership or REMIC, (c) gains from certain commodities transactions, (d) foreign currency gains, (e) income from notional principal contracts, and (f) income from the performance or sale of certain personal services contracts, when a corporation is the contracting party to perform the personal services, a named individual is required to perform the services, and at least 25% of the corporation's outstanding stock is directly or indirectly owned by the named individual. I.R.C. [section] 954(c)(1).

(65) I.R.C. [section] 954(a)(2), (d). FBC Sales Income results when a CFC receives income from the sale of personal property that is neither produced nor used in the CFC's country of organization and the seller or the buyer in the transaction is a related person (or an agent of the related person). I.R.C. [section] 954(d)(1).

(66) I.R.C. [section] 954(a)(3), (e). FBC Services Income results when a CFC receives income from services performed for (or on behalf of) a related person outside the CFC's country of organization, where services are limited to "technical, managerial, engineering, architectural, scientific, skilled, industrial, commercial or like services." I.R.C. [section] 954(e)(1).

(67) I.R.C. [section][section] 901(j), 952(a)-(b), 953, 954.

(68) I.R.C. [section] 954(b)(3)(B).

(69) I.R.C. [section] 954(b)(3)(A).

(70) I.R.C. [section] 954(b)(4).

(71) I.R.C. [section] 954(b)(5). Properly allocable deductions are determined in accordance with the rules set forth in sections 861, 862, 863(a)-(b) and Treasury Regulation [section]1.861-8. Treas. Reg. [section]1.861-8(f)(1)(v) (as amended in 2013); BITTKER & LOKKEN, supra note 8, [paragraph][paragraph] 69.9, 73.10.1. See infra Part II.E.l.a(2) for additional information regarding the allocation of deductions to gross income.

(72) I.R.C. [section] 952(b).

(73) LRC[section] 952(c)(1)(A).

(74) I.R.C. [section] 952 (c)(2).

(75) I.R.C.[section] 952(b), (c)(1)(A).

(76) I.R.C. [section] 952 (c)(1)(B).

(77) Qualified activity is one that generates FBC Sales Income, FBC Services Income, FPHCI or insurance income for CFCs "predominately engaged in the active conduct of an insurance business," and FI'HCI for CFCs "predominately engaged in the active conduct of a banking, financing or similar business." I.R.C. [section] 952 (c)(1)(B)(iii), (v), (vi). In some cases, a CFC can elect to reduce its Subpart F Income by its subsidiary's deficit, which is attributable to a qualified activity. I.R.C. [section] 952(c)(1)(C).

(78) I.R.C. [section] 952 (c)(1)(B)(i)-(ii).

(79) I.R.C.[section]952(c)(1)(B)(i).

(80) I.R.C. [section][section] 951(a)(1), 956. On October 31, 2018, Treasury released proposed regulations that essentially exempt corporate U.S. Shareholders from the section 956 inclusion by allowing the U.S. Shareholder to reduce its section 956 inclusion from a CFC by an amount equivalent to the deduction that would have been allowed by section 245A if the inclusion had been distributed to the U.S. Shareholder as a dividend. Prop. Treas. Reg. [section] 1.956-l(a)(2)(i), 83 Fed. Reg. 55324, 55326, 55327-28 (Nov. 5, 2018); Mindy Herzfeld, Treasury Strikes a Bold Regulatory Path Post-TCJA, 92 TAX NOTES INT'L 679,679-680 (Nov. 12, 2018).

(81) I.R.C. [section] 956(c).

(82) I.R.C. [section] 956(c)(1).

(83) "Trade or service receivable" is any account receivable or other debt instrument resulting from the disposition of a capital asset or performance of a service by a related person. I.R.C. [section] 864(d)(3).

(84) l.R.C. [section][section] 864(d)(3)-(4), 956(c)(3), 7701(a)(1).

(85) I.R.C. [section] 956(c)(2)(A)-(L).

(86) I.R.C.[section]956(c)(2)(A)(i),(B)/(F).

(87) I.R.C. [section][section] 956(a)(1)-(2), (b)(1), 959(a), 316(a)(1)-(2); BITTKER & LOKKEN, supra note 8, [paragraph] 69.11.3.

(88) I.R.C. [section] 951A(a).

(89) I.R.C. [section] 951 A; TCJA of 2017, supra note 5.

(90) I.R.C. [section][section] 951(a), (b), 951A(e), 957(a), 958. Notice that the definitions of U.S. Shareholder and CFC set forth in sections 951(b) and 957 respectively apply for purposes of Title 26.1.R.C. [section][section] 951(b), 957.

(91) I.R.C. [section][section] 951(a)(1), 951A(e)(2)-(3), 958(a).

(92) I.R.C. [section]951 A(c)(1).

(93) The Proposed GILTI Regs (Part 1) present a mechanism for calculating GILTI for a consolidated group in new section 1.1502-51 and its conforming amendments. Prop. Treas. Reg. [section][section] 1.1502-51, -12(s), -13(f)(7)(Example 4), -32(b)(3)(ii)-(iii), 83 Fed. Reg. 51072, 51082-83, 51107-51111 (Oct. 10, 2018).

(94) I.R.C. [section]951A(b)(1).

(95) I.R.C. [section]951A(c)(1).

(96) Id.

(97) Id.

(98) The High-Tax Exception is set forth in section 954(b)(4) and excludes from Subpart F Income any FBCI and insurance income that is subject to a foreign tax greater than 90% of the maximum section 11 corporate tax rate. I.R.C. [section] 954(b)(4); Martin A. Sullivan, More GILTI Than You Thought, 158 TAX NOTES 845, 849 (Feb. 12, 2018). In calculating the CFCs tested income, section 951 A(c)(2)(A)(i)(Ill) disregards the High-Tax Exception and therefore includes this income in Subpart F Income. Then section 951A(c)(2)(A)(i)(II) excludes Subpart F Income, including the now incorporated high foreign taxed income, from "tested income." I.R.C. [section]951A(c)(2)(A)(i)(lI)-(llI). Some practitioners argue that this provision excludes (or should exclude) from tested income any income that is subject to high foreign income tax. Charles Rubin, High Tax Kickout from GILTI Inclusion for CFC's May Be Too Restrictive, JDSUPRA (Feb. 27, 2018), available at https://www.jdsupra.com/legalnews/high-tax-kickout-from-gilti-inclusion-97638/(admitting that the "better interpretation" limits the high tax exclusion to FBCI and insurance income, but arguing that this limitation is "nonsensical" and all high tax income should be excluded from GILTI). In the proposed regulations, the Treasury Department clarifies that only Subpart F Income excluded by the High-Tax Exception is disregarded when calculating Tested Income, and therefore not taxed as GILTI. Proposed GILTI Regs (Part 1), supra note 8, at 51075.

(99) I.R.C. [section] 951A(c)(2). Deductions properly allocable to the gross income included in Tested Income are determined using "rules similar to the rules of section 954(b)(5)." I.R.C. [section] 951 A(c)(2)(A)(ii). Thus, as for FBCI, properly allocable deductions are determined in accordance with the rules set forth in sections 861, 862, 863(a)-(b) and Treasury Regulation section 1.861-8. I.R.C. [section] 954(b)(5); Treas. Reg. [section] 1.861-8(f)(1)(v) (as amended in 2013); BITTKER & LOKKEN, supra note 8, 1 73.10.1. See infra Part II.E.l for additional information regarding the allocation of deductions to gross income.

(100) I.R.C. [section]951 A(c)(2)(B)(i).

(101) I.R.C. [section] 951A(c)(2)(B)(ii).

(102) I.R.C. [section] 951A(b)(2).

(103) I.R.C. [section] 951A(d)(1)-(2). The adjusted basis is calculated by allocating the depreciation deduction "ratably to each day" of the taxable year, using straight line depreciation as determined by section 168(g) alternative depreciation system. I.R.C. [section]951A(d)(3).

(104) I.R.C. [section]951A(d)(2)(B).

(105) I.R.C. [section] 951 A(d)(2)(A); Sullivan, supra, note 98, at 847.

(106) The recently proposed GILTI regulations include two antiabuse provisions directed at limiting the ability to manipulate QBAI for tax planning purposes. Prop. Treas. Reg. [section] 1.951A-3(h)(1)-(2), 83 Fed. Reg. 51072, 51077, 51099-51100 (Oct. 10, 2018); Andrew Velarde & Alexander Lewis, Practitioners Bristle at GILTI Antiabuse Provision, 91 TAX NOTES INT'L 1366 (Sept. 24, 2018).

(107) I.R.C. [section]951A(b)(1).

(108) OS I.R.C [section]951A(b), (c)(2)(A).

(109) I.R.C. [section][section] 951(a)(1)(A)-(B), 951A(a).

(110) I.R.C. [section] 951A(f)(1)(A). Specifically, GILTI is "treated in the same manner as" Subpart F Income "for purposes of applying sections 168(h)(2)(B) (determining tax exempt entities for accelerated cost recovery systems), 535(b)(10) (calculating the accumulated earnings tax), 851(b) (determining regulated investment company status), 904(h)(1) (applying a look-thru rule for FTC limitation), 959 (determining previously taxed E&P), 961 (adjusting the basis of CFC stock), 962 (allowing individuals to elect to be taxed at corporate tax rates), 993(a)(1)(E) (defining qualified export receipts for domestic international sales corporations), 996(f)(1) (determining E&P for a domestic international sales corporation), 1248(b)(1) (limiting tax of an individual upon the sale of foreign corporation stock), 1248(d)(1) (determining E&P of a foreign corporation), 6501(e)(1)(C) (determining the statute of limitations for omitting section 951(a) Subpart F inclusion from gross income), and 6654(d)(2)(D) and 6655(e)(4) (determining estimated income tax for an individual and a corporation respectively). I.R.C. [section][section] 168(h)(2)(B), 535(b)(10), 851(b), 904(h)(1), 951A(f)(1)(A), 959, 961, 962, 993(a)(1)(E), 996(f)(1), 1248(b)(1), (d)(1), 6501(e)(1)(C), 6654(d)(2)(D), 6655(e)(4) (explanatory parentheticals added). Except for discussion of section 959 in Part II.A.2 below and section 904(h)(1) in Part II.E.l.a, additional discussion of these sections is beyond the scope of this article.

(111) I.R.C. [section]951 A(f)(2).

(112) I.R.C. [section]78.

(113) I.R.C. [section] 960(a), (d).

(114) l.R.C. [section] 960(a).

(115) I.R.C. [section][section]78, 960(d)(1)-(3).

(116) I.R.C. [section] 960(d)(2).

(117) One would expect a circular analysis to result since the section 78 gross up for GILTI is included in gross income, which is needed to determine taxable income and calculate the FTC limit and FTC. However, in this case, the FTC is based on DPT from GILTI, which is ascertained based on a formula and all components required for this calculation are available at this point in the analysis. Therefore, no circular analysis exists.

(118) I.R.C. [section] 959(a).

(119) Report on Previously Taxed Earnings under Section 959, N.Y. ST. B. ASS'N TAX SEC, REP. NO. 1402, 8 (October 11, 2018) [hereinafter NYSBA PTI Report], available at https://www.nysba.org/Sections/Tax/Tax_Section_Reports/Tax_Reports_2018/Tax_Report_1402.html.

(120) Id. at 8-16.

(121) I.R.C. [section][section] 951(a), 951A(f)(1)(A), 959(a). PTI is also generated by the new section 965 transition tax system, which has some unique effects. NYSBA PTI Report, supra note 119, at 5-6. The PTI generated by section 965 is beyond the scope of this paper.

(122) I.R.C. [section] 959(a).

(123) I.R.C. [section] 959(c); NYSBA PTI Report, supra note 119, at 5.

(124) I.R.C. [section] 959(c); NYSBA PTI Report, supra note 119, at 5.

(125) I.R.C. [section] 959(d).

(126) I.R.C. [section]245A(a).

(127) NYSBA PTI Report, supra, note 119, at 4-5, 7.

(128) I.R.C. [section] 961(a), (b); NYSBA PTI Report, supra note 119, at 7.

(129) I.R.C. [section]951A(f)(1)(A).

(130) Id. The Treasury Department has provided notice of regulations that it plans to issue related to the interaction between PTI and the TCJA. I.R.S. Notice 2019-01, 2019-02 I.R.B. 275 (January 7, 2019).

(131) I.R.C. [section] 951A(f)(2).

(132) I.R.C. [section] 63(a). Deductions are set forth in Parts V through VIII of Chapter 1, Subchapter B. I.R.C. [section][section] 151-250. Many of the deductions for business activities are set forth in Parts VI and VIII. I.R.C. [section][section] 161-199A, 241-250. Part VI contains a collection of deductions, which apply to individuals, corporations or both, and which are available unless the deduction is disallowed by Part IX of Subchapter B ("Part IX"). I.R.C. [section][section] 161-199A,

261-280H. Part VIII contains special deductions that are only available to corporations. I.R.C. [section][section] 241-250.

(133) I.R.C. [section][section]161-199A, 261-280H.

(134) The interest expense deduction is set forth in section 163. I.R.C. [section] 163.

(135) I.R.C. [section][section] 165,1211. Loss from the sale or exchange of property is the adjusted basis LESS the amount realized for the property. I.R.C. [section] 1001(a). Corporations may only deduct capital losses to the extent of capital gains. I.R.C. [section][section] 165(f), 1211(a).

(136) The NOL deduction is the lesser of the (a) aggregate NOL carryovers and carrybacks, or (b) 80% of the taxable income calculated without the NOL deduction. I.R.C. [section] 172(a). Thus, the NOL deduction is limited to no more than 80% of the taxable income calculated without regard to the NOL deduction.

(137) I.R.C. [section][section] 162-168,170,172,174,197,1211-1212.

(138) TCJA of 2017, supra note 5, at [section] 13301.

(139) I.RC.[section] 163(a), (j)(1),(j)(9).

(140) I.R.C. [section] 163(j)(6)-(7).

(141) Business interest is interest paid or accrued on a debt that is properly allocable to a section 163(j) TorB. I.R.C. [section] 163(j)(5).

(142) I.R.C. [section] 163(j)(8). Adjusted taxable income cannot be less than zero. I.R.C. [section] 163(j)(1).

(143) I.R.S. Notice 2018-28, 2018-16 I.R.B. 492 (Apr. 16, 2018).

(144) I.R.C. [section] 163(j)(2).

(145) I.R.C. [section][section] 63, 161, 261. Part IX lists items that are not deductible even if they otherwise satisfy the conditions for a deduction allowed by Part VI. I.RC. [section][section] 161, 261-280H.

(146) I.R.C. [section]263A.

(147) I.RC. [section] 267A. A "hybrid transaction" is one where the payments are treated as interest or royalties by U.S. tax law, but not by the tax laws of the country where the recipient is subject to tax (the "Home Country"), and a "hybrid entity" is one that is fiscally transparent under U.S. tax law, but not by the Home Country's tax law, or fiscally transparent under the Home Country's tax law but not by U.S. tax law. I.R.C. [section][section] 267A(c), (d). On December 28, 2018, the Treasury Department released proposed regulations that provide guidance related to hybrid transactions and entities. Rules Regarding Certain Hybrid Arrangements, 83 Fed. Reg. 67612 (proposed Dec. 28, 2018) (to be codified at 26 C.F.R. pt. 1).

(148) I.RC. [section][section] 261-280H.

(149) l.R.C. [section][section] 241-250.

(150) I.R.C. [section][section] 243, 245, 245A, 250.

(151) I.R.C. [section]243.

(152) I.R.C. [section] 243(a)(1).

(153) I.R.C. [section] 243(c)(2).

(154) l.R.C. [section] 243(a)(3), (b).

(155) I.R.C. [section][section] 243(b)(2), 1504(a)-(c).

(156) I.R.C. [section] 245(a)(1)-(5). The U.S. source portion of dividends is defined in section 245(a)(3)-(5). l.R.C. [section][section] 245(a)(3)-(5), 312(k)(4), 964(a), 986.

(157) I.R.C. [section] 245(a)(8).

(158) I.R.C. [section] 245(b)(1), (2).

(159) I.R.C. [section] 245A(a).

(160) I.RC. [section]245A(b)(1)-(2).

(161) I.R.C. [section]245A(c)(1).

(162) I.RC. [section] 245A(c)(2).

(163) I.R.C. [section][section] 245A(c)(3), 245(a)(5). "Dividends from an 80% Owned U.S. Subsidiary" are dividends received directly from a U.S. subsidiary (or indirectly through a wholly owned foreign corporation) to a QTFC but only if the QTFC owns directly (or indirectly through a wholly owned foreign corporation) 80% or more of the U.S. subsidiary's stock by vote and by value. I.R.C. [section][section] 245A(c)(3)(B), 245(a)(5)(B), (a)(12).

(164) I.R.C. [section]245A(d)(1), (2).

(165) I.R.C. [section][section] 245A(b)(2), (f), 1291(d)(2)(B).

(166) I.R.C. [section] 245A(e). Hybrid dividends are distributions from a CFC where the USSH may claim the section 245A deduction, while the CFC qualifies for a deduction or other tax benefit from a foreign country for foreign taxes attributed to the same distribution. I.R.C. [section] 245A(e)(4). USSHs may not claim a foreign tax credit, foreign tax deduction or section 245A deduction for any hybrid dividend. I.R.C. [section] 245A(e)(1), (3). Therefore, hybrid dividends are subject to U.S. income tax at the full U.S. rate without any offset for foreign taxes paid.

(167) I.R.C. [section] 250(b). FDII is a parallel concept to GILTI, but FDII is the portion of a U.S. corporation's earnings that is deemed to be foreign source intangible income that is not earned through a branch or a CFC. Instead of "Tested Income," which is applied to determine GILTI, FDII uses the term "Deduction Eligible Income." Deduction Eligible Income is the domestic corporation's gross income (excluding any Subpart F Income, U.S. Property, GILTI, income from the active conduct of banking, insurance and financing businesses, dividends from a CFC, domestic oil and gas extraction income, and foreign branch income) LESS deductions (including taxes) "properly allocable" to the included gross income. I.R.C. [section] 250(b)(3). FDII is the portion of Deemed Intangible Income that is attributed to foreign sources. Specifically, FDII is the Deemed Intangible Income multiplied by the ratio of Foreign-Derived Deduction Eligible Income divided by the Deduction Eligible Income, where "Foreign Derived Deduction Eligible Income" is any Deduction Eligible Income derived from property sold (or leased, licensed, exchanged or otherwise disposed) to a foreign person for use outside the U.S., or from services provided to a foreign person or foreign property. I.R.C [section] 250(b)(1), (4), (5)(E). For purposes of determining FDII, "Deemed Intangible Income" is the Deduction Eligible Income less the Deemed Tangible Income Return, where "Deemed Tangible Income Return" is 10% of the Qualified Business Asset Investment determined by substituting Deduction Eligible Income for Tested Income. I.R.C. [section] 250(b)(2). In summary,

Foreign Derived Intangible Income

= Deemed Intangible Income *Foreign Derived Deduction Eligible Income/Deduction Eligible Income

Deemed Intangible Income

= Deduction Eligible Income--Deemed Tangible Income Return

I.R.C. [section]250(b)(1)-(2).

(168) I.R.C. [section] 250; TCJA of 2017, supra note 5, [section] 14202. On March 6, 2019, the Treasury Department released proposed regulations that provides guidance related to the section 250 deduction. Deduction for Foreign-Derived Intangible Income and Global Intangible Low-Taxed Income, 84 Fed. Reg. 8188 (proposed Mar. 6, 2019) [hereinafter Proposed Section 250 Regs] (to be codified at 26 C.F.R. pt. 1).

(169) I.R.C. [section] 250(a)(1).

(170) Id. These rates are reduced to 21.875% of FDII plus 37.5% of GILTI and its section 78 inclusion for tax years starting after December 31, 2025. I.R.C. [section] 250(a)(3).

(171) I.R.C. [section][section] 78, 250(a)(1).

(172) I.R.C. [section] 250(a)(2). When the sum of FDII and GILTI exceeds taxable income without the section 250 deduction, FDII and GILTI are reduced. I.R.C. [section] 250(a)(2)(A). FDII is reduced by an amount equal to FDII plus GILTI less taxable income (without the section 250 deduction) (the "Excess FDII and GILTI"), multiplied bY the ratio of FDII to the sum of GILTI plus FDII (collectively the "FDII Reduction"). I.R.C. [section] 250(a)(2)(B)(i). GILTI is reduced by an amount equal to the Excess FDII and GILTI LESS the FDII Reduction. I.R.C. [section] 250(a)(2)(B)(ii). The statutory language is ambiguous regarding whether this limitation applies to GILTI including its [section] 78 gross up or to the GILTI inclusion alone. Report on the GILTI Provisions of the Code, N.Y. ST. B. ASS'N TAX SEC, REP. NO. 1394, 59-60 (May 4, 2018) [hereinafter NYSBA GILTI Report], available at https://www.nysba.org/Sections/Tax/Tax_Section_Reports/Tax_Reports_2018/1394_ Report.html. This ambiguity is not addressed in the Proposed Section 250 Regs. The example applying the taxable income limit does not include the GILTI section 78 gross up in the computation, but also does not mention the section 78 inclusion. Proposed Section 250 Regs, supra note 168, at 8188-90, 8211-13.

(173) I.R.C. [section] 11(a), (b).

(174) I.R.C. [section][section]246, 246A.

(175) I.R.C. [section] 246(b)(1), (3). This limitation must be separately applied to 20% Owned Corporations and all other corporations. I.R.C. [section] 246(b)(3).

(176) I.RC. [section] 246(b)(1).

(177) I.RC. [section] 246(b)(3).

(178) I.RC. [section] 246(b)(2).

(179) I.R.C. [section] 246(c)(1).

(180) I.R.C. [section] 246(c)(2).

(181) I.R.C. [section] 246(c)(5)(A).

(182) I.RC. [section] 246(c)(5)(B).

(183) I.RC. [section] 63(a).

(184) The foreign corporation's taxable income will be its ECI with a U.S. TorB LESS deductions allocable to this income. I.R.C. [section][section] 11(d), 882(a)(1)-(2), (c)(1)(A); Treas. Reg. [section] 1.861-8(f)(1)(iv) (as amended in 2013).

(185) I.RC. [section][section] 861, 862, 863(a)-(b); Treas. Reg. [section] 1.861-8(f)(1) (as amended in 2013); BITTKKR & LOKKEN, supra note 8, 1 73.10.1. These allocation and apportionment rules are also used to determine a CFC's foreign base company income and Subpart F Income. Treas. Reg. [section] 1.861-8(f)(1)(v), (vi)(J) (as amended in 2013); BITTKER & LOKKEN, supra note 8,173.10.1.

(186) I.R.C. [section][section] 861(b), 862(b), 863(a)-(b). See infra Fart II.E.l.a for additional discussion of the allocation and apportionment of deductions.

(187) I.R.C. [section] 11(a).

(188) I.R.C. [section] 11(b).

(189) I.R.C. [section][section] 881(a), 1441(a), (b), (c)(1), 1442(a).

(190) l.R.C. [section][section] 21-53. Tax credits are set forth in Part IV of Subchapter A. Id.

(191) l.R.C. [section][section] 38-52. Subparts D, E and F contain the business related, investment and work opportunity credits, which are creditable against taxes based on section 38. Id.

(192) I.R.C. [section] 38(a), (b).

(193) l.R.C. [section][section]27, 901.

(194) I.R.C. [section][section] 901(a), (b)(1), 960.

(195) I.R.C. [section]901 (a), (b)(1).

(196) "Covered person" of the taxpayer is (1) an entity in which the taxpayer directly or indirectly holds a 10% or greater ownership interest by vote or value, (2) a person that directly or indirectly holds a 10% or greater ownership interest by vote or value in the taxpayer, or (3) a person that is a related to the taxpayer as defined by section 267(b) or section 707(b). I.R.C. [section] 909(d)(4).

(197) I.R.C. [section] 909(a), (d)(1)-(4).

(198) I.R.C. [section] 909(b).

(199) I.R.C. [section] 960(a).

(200) I.R.C. [section]78.

(201) See supra text accompanying note 194.1.R.C. [section][section]901 (a), (b)(1), 960(a).

(202) I.R.C. [section][section] 960(b)(1), 951A(f)(1)(A), 959(a).

(203) I.R.C. [section]960(d)(1)-(3).

(204) Id.

(205) I.R.C. [section][section]78, 960(d).

(206) "Pre-credit U.S. tax" is the U.S. income tax that would have been paid on the amount of the FSI without considering the effect of the FTC. BITTKER & LOKKKN, supra note 8, [paragraph][paragraph] 72.1, 72.6.1.

(207) I.R.C. [section] 904(a).

(208) BITTKER & LOKKEN, supra note 8, [paragraph] 72.6.1.

(209) I.RC. [section] 904(d)(1), (2)(A)-(B), (F), (C), (J).

(210) I.R.C. [section][section] 861(b), 862(b), 863(a)-(b).

(211) TCJA of 2017, supra note 5, [section][section] 13002(e), 13501,14303(a), 14502.

(212) On November 28, 2018, the Treasury Department released proposed regulations that provide guidance related to the FTC, which generally follows the pre-TCJA expense allocation approach. Guidance Related to the Foreign Tax Credit, Including Guidance Implementing Changes Made by the Tax Cuts and Jobs Act, 83 Fed. Reg. 63200, 63201 (Dec. 7, 2018) [hereinafter Proposed FTC Regs] (to be codified at 26 C.F.R. pt. 1); Alexander Lewis and Ryan Finley, FTC Regs Provide Minimal Relief on Expense Allocation, 92 TAX NOTES INT'L 960, 961 (Dec. 3, 2018).

(213) The source rules are set forth in sections 861-865 and their underlying regulations. I.R.C. [section][section] 861-865; Treas. Reg. [section][section] 1.861-1 to -7, -16, 1.862-1, 1.863-1, -2 (as amended in 2008).

(214) 1.R.C [section][section] 861(a)(3), 862(a)(3).

(215) See section 904(b) for required adjustments when determining foreign source and total taxable income. I.R.C. [section] 904(b). In addition, the U.S. source portion of a dividend paid by a QTFC to a corporation is considered U.S. source income for purposes of determining the FTC limitation. I.R.C. [section] 245(a)(9).

(216) I.R.C. [section] 904(b)(4).

(217) Id.

(218) I.R.C. [section] 904(h). The rules set forth in section 904(h) apply before the overall foreign loss recapture rules set forth in section 904(f). I.R.C. [section] 904(h)(8). A "U.S.owned foreign corporation" is a foreign corporation when U.S. persons (U.S. citizen, resident, corporation, partnership, estate or trust) directly or indirectly own 50% or more of the corporation's stock by vote or by value. Indirect ownership is limited to applying section 958(a)(2)-(3) and attribution of options under section 318(a)(4). I.R.C. [section][section] 318(a)(4), 904(h)(6), 958(a), 7701(a)(30). Although the definition of Unowned foreign corporation is similar to that for CFC, the definition is both more inclusive and more restrictive than the definition of CFC. For example, U.S.-owned foreign corporation is more inclusive than CFC because (a) its ownership threshold is slightly lower applying a 50% or more rather than more than 50% criteria, (b) all shareholders are counted toward U.S. ownership and not just those owning 10% or more of the corporation's stock, and (c) indirect ownership may be established by options. However, U.S.-owned foreign corporation is less inclusive in that it does not allow constructive ownership of shares to satisfy the ownership criteria. I.R.C. [section][section] 318(a), 904(h)(6), 951(b), 957, 958.

(219) GILTI is treated as Subpart F Income "for purposes of applying" section 904(h)(1). I.R.C. [section] 951 A(f)(1)(A).

(220) I.R.C. [section][section] 904(h)(1), (7), 951A(f)(1)(A).

(221) I.R.C. [section] 904(h)(1), (2).

(222) l.R.C. [section] 904(h)(1), (3), (5).

(223) I.R.C. [section] 904(h)(1), (4), (5).

(224) l.R.C.[section] 904(f), (g).

(225) I.R.C. [section] 904(f)(1).

(226) I.R.C.[section] 904(g)(1).

(227) l.R.C. [section][section] 861(b), 863(a)-(b).

(228) l.R.C. [section][section] 862(b), 863(b).

(229) Treas. Reg. [section] 1.861-8(a)(2), (b)(1) (as amended in 2013).

(230) Treas. Reg. [section] 1.861-8(b)(2) (as amended in 2013).

(231) l.R.C. [section] 61(a); Treas. Reg. [section] 1.861-8(a)(3), (b)(1) (as amended in 2013).

(232) Treas. Reg. [section] 1.861-8(b)(1) (as amended in 2013).

(233) Treas. Reg. [section] 1.861-8(b)(1)-(2), (d)(1) (as amended in 2013).

(234) Treas. Reg. [section] 1.861-8(b)(3) (as amended in 2013).

(235) Treas. Reg. [section] 1.861-8(b)(5) (as amended in 2013). Specific allocation provisions are described in sections 1.861-8(e) and -8T(e), which includes provisions for allocation and apportionment interest, research and development, stewardship, legal and accounting, income taxes, losses on disposition of property, NOLs, expenses "not definitely related to any gross income," and charitable contributions. Treas. Reg. [section] 1.861-8(e) (as amended in 2013). With the exception of the interest deduction and deductions "not definitely related to any gross income," further analysis of these provisions is beyond the scope of this article.

(236) Treas. Reg. [section] 1.861-8T(c)(1) (as amended in 2009).

(237) Id.

(238) Treas. Reg. [section] 1.861-8(a)(4) (as amended in 2013).

(239) Treas. Reg. [section] 1.861-8T(c)(1) (as amended in 2009).

(240) Treas. Reg. [section][section] 1.861-8(a)(4), -8T(c)(1), (f)(1)(H) (as amended in 2013).

(241) Treas. Reg. [section] 1.861-8T(c)(1) (as amended in 2009).

(242) Id.

(243) Treas. Reg. [section] 1.861-8(b)(5), (e) (as amended in 2013).

(244) Treas. Reg. [section] 1.861-8T(c)(1) (as amended in 2009).

(245) Treas. Reg. [section] 1.861-8T(c)(1)(i)-(vi) (as amended in 2009).

(246) Treas. Reg. [section][section] 1.861-8(b)(1), (5), (c)(3), (e)(9), -8T(c)(1) (as amended in 2013).

(247) Treas. Reg. [section] 1.861-8(c)(3) (as amended in 2013).

(248) Treas. Reg. [section] 1.861-8(e)(9)(i) (as amended in 2013).

(249) I.R.C. [section] 864(e)(2); TCJA of 2017, supra note 5, [section] 14502.

(250) Treas. Reg. [section] 1.861-12T(c)(1) (as amended in 2009).

(251) Treas. Reg. [section] 1.861-9T(a) (as amended in 2019).

(252) Treas. Reg. [section] 1.861-9T(g)(1)(i) (as amended in 2019). The asset valuation rules are set forth in subsection (g)(1) and (2), while the characterization rules are set forth in (g)(3). Treas. Reg. [section] 1.861-9T(g)(1)-(3) (as amended in 2019).

(253) I.R.C. [section] 864(e)(2).

(254) I.R.C. [section] 864(e)(2).

(255) Treas. Reg. [section] 1.861-9T(g)(1)(v)(Example 1) (as amended in 2019).

(256) With a few exceptions where interest is directly allocated to specific property, interest expense is considered definitely related to all gross income. Treas. Reg. [section] 1.861-8T(g)(Example 24)(ii)(B) (as amended in 2009); Treas. Reg. [section] 1.861-9T(g)(1)(v)(Example 1) (ii) (as amended in 2019); Treas. Reg. [section] 1.861-10T (as amended in 2009).

(257) Treas. Reg. [section] 1.861-8T(d)(2)(i), (g)(Example 24)(ii) (as amended in 2009).

(258) Treas. Reg. [section] 1.861-8T(d)(2)(ii)(A) (as amended in 2009). In addition to providing additional guidance on determining exempt assets and income with respect to GILTI and FDI1, the Proposed FTC Regs modifies the definition of "exempt income" to "any gross income to the extent that it is exempt, excluded, or eliminated for Federal income tax purposes," and "exempt asset" to "any asset to the extent income from the asset is... exempt, excluded, or eliminated for Federal income tax purposes." Prop. Treas. Reg. [section] 1.861-8(d)(2)(ii)(A), 83 Fed. Reg. 63200, 63228 (Dec. 7, 2018).

(259) I.R.C. [section] 864(e)(3); Treas. Reg. [section] 1.861-8T(d)(2)(ii)(B), (g)(Example 24)(ii) (as amended in 2009).

(260) Under the Proposed FTC Regs, GILTI excluded by the section 250 deduction is considered exempt income, and the assets producing this income are partially exempt assets. Prop. Treas. Reg. [section] 1.861-8(d)(2)(ii)(C)(1), (C)(2)(ii), 83 Fed. Reg. 63200, 63202, 63229 (Dec. 7, 2018); Lewis & Finley, supra note 212, at 961.

(261) l.R.C. [section] 904(b)(4).

(262) I.R.C. [section][section] 864(e)(3), 904(b)(4); NYSBA GILTI Report, supra note 172, at 75.

(263) See NYSBA GILTI Report, supra note 170, at 75.

(264) I.R.C. [section] 904(d)(1)(A), (d)(2)(A)(ii), (d)(2)(J)(ii).

(265) I.R.C. [section] 904(d)(2)(B), (3), (4).

(266) I.R.C. [section] 904(d)(2)(B)(iii). High-taxed income exists when the aggregate of foreign income taxes paid and deemed paid on income that would otherwise be considered passive (including any section 78 inclusion) exceeds 21% of the amount of this income. I.R.C. [section] 904(d)(2)(F). Export financing interest is interest from financing the sale of exports produced in the U.S. by the taxpayer or a related person, when no more than 50% FMV of the property is attributed to imported products. I.R.C. [section] 904(d)(2)(G). Financial services income is generated by taxpayers that are "predominately engaged in the active conduct of a banking, insurance, financing, or similar business." I.R.C. [section] 904(d)(2)(C), (D).

(267) I.R.C. [section] 904(d)(1)(A), (2)(C)(i), (2)(J)(ii); see also 83 Fed. Reg. 63200, 63209 (Dec. 7, 2018); Mindy Herzfeld, Three Attempts to Fix GILTI, 162 TAX NOTES266, 267 (Jan. 21, 2019).

(268) I.R.C. [section] 904(d)(1)(A).

(269) I.R.C. [section]904(d)(1)(B),(2)G)(i). In addition, any income that is taxed by a foreign country but not recognized as income by the U.S. is placed in the Foreign Branch Basket. I.R.C. [section] 904(d)(2)(H)(i).

(270) I.R.C. [section] 989(a).

(271) I.R.C. [section] 904(d)(2)(A)(ii).

(272) I.R.C. [section] 904(d)(3), (4).

(273) I.R.C. [section] 904(d)(3). In general, the CFC look thru rules receive priority over the general categorizing rules set forth in section 904(d)(2). I.R.C. [section] 904(d)(3)(F)(ii).

(274) I.R.C. [section] 904(d)(2)(E), (d)(4).

(275) I.R.C. [section] 904(d)(3)(G).

(276) I.R.C. [section] 904(d)(3)(A).

(277) I.R.C. [section] 904(d)(3)(D).

(278) I.R.C. [section] 904(d)(3)(B), (C).

(279) I.R.C. [section] 904(d)(3)(E). According to the de minimus exception, when the sum of FBCI and insurance income is "less than the lesser of" 5% gross income or $1M, then none of the income is Subpart F Income. I.R.C. [section] 954(b)(3)(A) (emphasis added).

(280) I.R.C. [section] 904(d)(3)(G).

(281) Elizabeth J. Stevens & H. David Rosenbloom, GILTI Pleasures, 89 TAX NOTES INT'I.615, 616 (Feb. 12,2018).

(282) I.R.C. [section]951A(f)(1)(A).

(281) I.R.C. [section]78.

(284) I.R.C. [section] 904(d)(3)(A), (D).

(285) I.R.C. [section] 904(d)(1)(A).

(286) I.RC. [section] 904(d)(2)(J).

(287) I.RC. [section] 904(d)(2)(A)(ii); Mindy Herzfeld, Tax Cuts Chaos, 159 TAX NOTES 155, 158 (Apr. 9, 2018).

(288) Herzfeld, supra note 287, at 158; Ryan Finley, IRS Trying to Limit TCjA's Damage to Foreign Tax Credit, 89 TAX NOTES INT'L 1332, 1332-33 (Mar. 26, 2018); Ryan Finley, Treasury Promises Guidance on TCJA's International Provisions, 90 TAX NOTES INT'L 692, 693 (Apr. 30, 2018); Lee A Sheppard, GILTI Gross-Up in the Basket, 159 TAX NOTES 711, 712 (Apr. 30, 2018).

(289) Prop. Treas. Reg. [section] 1.904-4(o), 83 Fed. Reg. 63200, 63248, 63252 (Dec. 7, 2018). However, since proposed regulations are not entitled to deference, this article assumes that the section 78 gross up is placed in the General Basket.

(290) I.RC [section] 904(d)(4).

(291) I.R.C. [section] 904(d)(4)(A).

(292) I.R.C. [section] 904(d)(4)(C)(ii).

(293) I.R.C. [section] 904(d)(1).

(294) I.R.C. [section]901(a)-(b).

(295) I.R.C. [section] 904(d)(1).

(296) I.R.C. [section] 904(c).

(297) I.R.C. [section] 245A(d)(1). In addition, the corporation cannot claim a foreign tax deduction for these taxes. I.R.C. [section] 245A(d)(2).

(298) I.RC. [section] 245(a)(8).

(299) I.R.C. [section]245A(e)(1), (3).

(301) I.R.C. [section][section] 882(c)(2)-(3), 906.

(301) I.R.C. [section] 906(b)(3), (6).

(302) I.R.C. [section] 906(b)(1).

(303) I.R.C. [section] 906(b)(2).

(304) See supra Part II.E.l.

(305) I.R.C. [section] 59A(a). On December 21, 2018, the Treasury Department released proposed regulations that provides guidance related to the BEAT. Base Erosion and Anti-Abuse Tax, 83 Fed. Reg. 65956 (proposed Dec. 21, 2018) (to be codified at 26 C.F.R. pt. 1).

(306) Thg average annual gross receipts are calculated for the three taxable year period ending with the corporation's preceding taxable year. I.R.C. [section] 59A(e)(1)(B). For foreign corporations, only the gross receipts used to determine ECI with a U.S. TorB are considered. I.R.C. [section] 59A(e)(2)(A).

(307) I.R.C. [section] 59A(e)(1)(C). For banks and registered securities dealers, a 2% threshold is applied. Id

(308) The following deductions are excluded from the calculation of the base erosion percentage: section 172 NOL, section 245A DRD, section 250 deduction, SCM Deduction, and deduction for a qualified derivative payment that is not treated as a base erosion payment. l.R.C. [section] 59A(c)(4)(A)-(B); see infra note 311 for definition of SCM Deduction. A qualified derivative payment is a payment required by a derivative under which the corporation (a) recognizes a gain/loss as if the derivative were sold at fair market value on the last business day of the taxable year and treats such gain/loss as ordinary income, and (b) treats all gain, loss, deductions and income from derivative payments as ordinary income. I.R.C. [section] 59A(h)(2)(A). With a few exceptions, qualified derivative payments are not treated as a base erosion payment for purposes of determining BEAT. I.R.C. [section] 59A(h)(1), (3).

(309) I.R.C. [section]59A(c)(4). See infra text accompanying note 311 for definitions of Reinsurance BE Payment and Inversion BE Payment.

(310) I.R.C. [section] 59A(d), (g).

(311) I.R.C. [section][section] 59A(d)(1)-(4), 7874(a)(2)(B), (b), (c)(1). However, the General BE Payment does not apply if the corporation pays arm's length compensation (i.e. the payment "constitutes the total services cost with no markup component") to the foreign related party for services, and the services are eligible to use the "services cost method under section 482" when the "requirement that the services not contribute significantly to fundamental risks of business success or failure" is ignored. l.R.C. [section] 59A(d)(5). Any deduction for services resulting from this exception shall be referred to as the "SCM Deduction."

(312) I.R.C.[section]59A(c)(2)(A)(i).

(313) l.R.C. [section] 59A(c)(2)(A)(ii)-(iv).

(314) I.R.C. [section] 59A(b)(1). This percentage is 5% for any tax year beginning in calendar year 2018, and 12.5% for tax years beginning after calendar year 2025. l.R.C. [section] 59A(b)(1)(A), (2)(A). In addition, the percentage for banks and securities dealers is 1% greater than that otherwise applied by section 59A. l.R.C. [section] 59A(b)(3).

(315) A corporation's regular tax liability is the section 11 corporate income tax and all taxes imposed by Chapter 1, except for those set forth in a long list of specific taxes and penalties, which includes the BEAT, section 531 accumulated earnings tax, section 541 personal holding company tax, section 881 Withholding Tax, and Branch Profits Tax. I.R.C. [section] 26(b).

(316) I.R.C. [section] 59A(b)(1). "Limited Tax Credits" are the corporation's tax credits allowed to be taken against the Regular Tax Liability (excluding the section 41(a) research credit, and the Maximum Section 38 Credit). "Maximum Section 38 Credit" is the section 38 credit properly allocable to section 42(a) low income housing credit, section 45(a) renewable electricity production credit, and section 46 investment credit that is allocable to the section 48 energy credit, up to a maximum of 80% of the lesser of these properly allocable section 38 credits or the BEAT calculated without these properly allocable section 38 credits. l.R.C. [section] 59A(b)(1)(B)(ii), (b)(4). Starting January 1, 2026, Limited Tax Credits will be the corporation's tax credits allowed to be taken against the regular tax liability. I.R.C. [section] 59A(b)(2)(B).

(317) I.R.C. [section] 59A(c)(1). For purposes of determining the Modified Taxable Income, when interest expense deduction is limited by section 163(j), the reduction in the amount of interest deduction is allocated first to the interest paid to unrelated parties and then to interest paid to related parties. l.R.C. [section] 59A(c)(3). This increases the interest deduction allocated to related parties, a base erosion tax benefit, which increases the overall BEAT.

(318) I.R.C. [section] 59A(b)(1); sec supra note 316 for definition of Maximum Section 38 Credit.

(319) I.R.C. [section] 59A(b)(2).

(320) I.R.C. [section][section] 11, 27-53, 59A.

(321) I.R.C.[section] 61(a).

(322) I.R.C. [section][section] 78, 951(a)(1), 951A(a).

(323) I.R.C. [section] 954(a), (b)(5).

(324) I.R.C.[section] 952(c)(1)(A).

(325) l.R.C. [section][section] 78, 960(a).

(326) l.R.C. [section] 951 A(c); see supra Part II.A.l.b(3).

(327) I.R.C. [section]951A(b)(1).

(328) I.R.C. [section]951A(c)(1).

(329) Since the $7.5M in foreign taxes are allocated to the excluded Subpart F Income, it is also excluded from the CFC B2's Tested Income.

(330) I.R.C. [section] 951A(c)(2)(B)(ii). Although this seems to create a circular analysis since the tested loss increases the E&P, which increases the Subpart F Income, which is incorporated into the tested loss and therefore the GILTI Net CFC Tested Income computation, a circular analysis does not occur since the Subpart F Income (and its associated deductions) net to zero in the calculation.

(331) Note that this $30M would have been included in GILTI if the CFC Bl's E&P had not been increased by the amount of the tested loss. Because of the amplified E&P, the $30M is included in Subpart F Income, which will be taxed at 21% instead of the preferential tax rate applicable to GILTI.

(332) I.R.C. [section] 951A(b)(2).

(333) I.R.C. [section][section] 78, 960(d).

(334) I.R.C. [section] 960(d)(2).

(335) I.R.C. [section] 960(d)(3).

(336) I.R.C. [section]951A(f)(2).

(337) I.R.C. [section]245A.

(338) 1.R.C [section] 245A(a).

(339) I.R.C. [section]245A(c)(1).

(340) I.R.C. [section] 245A(c)(2).

(341) l.R.C. [section][section] 245(a)(5), 245A(c)(3).

(342) I.R.C. [section] 63(a).

(343) I.R.C.[section] 163(a), (j)(1).

(344) I.R.S. Notice 2018-28, 2018-16 I.R.B. 492.

(345) I.RC. [section] 1504(a)(1), (b)(3).

(346) I.R.C. [section] 163(j)(8).

(347) I.R.C. [section] 250(a)(2).

(348) I.R.C. [section] 246(b).

(349) I.R.C. [section][section] 243(c)(2), 246(b)(3)(A).

(350) Libin Zhang, Simultaneous Equations for Simpler Tax Analysis, 161 TAX NOTES 571, 573-76 (Oct. 29, 2018).

(351) Id. The Treasury Department acknowledges the need for and solicited comments on ordering rules, but did not define ordering rules in the proposed regulations. Limitation on Deduction for Business Interest Expense, 83 Fed. Reg. 67490, 67493 (proposed Dec. 28, 2018) [hereinafter Proposed Interest Regs] (to be codified at 26 C.F.R. pt. 1). Proposed Section 250 Regs provide an ordering rule for calculating the limitation on section 250 deductions, which generally states that the section 250 deduction taxable income limit "is determined after all of the corporation's other deductions are taken into account." Proposed Section 250 Regs, supra note 168, at

8189-90,8211,8212-13.

(352) I.R.C. [section] 11(a), (b).

(353) I.R.C. [section][section] 901(a), (b)(1), 960(a), (d).

(354) I.R.C. [section]245A(d)(1.

(355) I.R.C. [section]960(d)(1-(3).

(356) Because it is attributed to Subpart F Income, which is excluded from the calculation of Tested Income, CFC B2's 7.5M in foreign taxes is not included in the Aggregate Tested FIT.

(357) I.R.C. [section] 904(a).

(358) Id.

(359) I.R.C. [section] 904(d)(1).

(3611) I.R.C. [section][section] 901(a), 904(a), (d)(1).

(361) I.R.C. [section] 904(a), (b).

(362) I.R.C. [section][section] 861(b), 862(b), 863(a)-(b).

(363) I.R.C. [section][section] 861(a)(3), 862(a)(3).

(364) I.R.C. [section][section] 78, 904(h)(1), (2), (4), (5), 951A(f)(1)(A).

(365) I.R.C.[section] 904(b), (f),(g),(h).

(366) I.R.C. [section][section] 904(h)(6), 958(a), 7701(a)(30).

(367) I.R.C. [section][section] 904(h)(1), (2), 951A(f)(1)(A). GILTI is treated as a Subpart F Income for purposes of this section 904(h) analysis. I.R.C. [section]951(f)(1)(A).

(368) I.R.C. [section] 904(h)(1), (4).

(369) Treas. Reg. [section] 1.861-8(a)(2), (3), (b)(1) (as amended in 2013).

(370) I.R.C. [section] 904(b)(4).

(371) I.R.C. [section] 904(b)(4)(B).

(172) See supra Part ILEA.a{2).

(373) l.R.C. [section] 864(e)(2); Treas. Reg. [section] 1.861-8(e)(9)(i) (as amended in 2013); Treas. Reg. [section] 1.861-8T(c)(2), (e)(2) (as amended in 2009); Treas. Reg. [section] 1.861-9T(0(1) (as amended in 2019); BITTKER & LOKKEN, supra note 8,1 73.10.2.

(374) See supra notes 261-262 and accompanying text.

(373) l.R.C. [section] 904(b)(4)(B).

(376) Treas. Reg. [section] 1.861-8T(d)(2)(i), (g)(Example 24)(ii) (as amended in 2009).

(377) Treas. Reg. [section] 1.861-8T(d)(2)(ii), (g)(Example 24)(ii)(C) (as amended in 2009).

(378) I.R.C [section] 250(a)(1).

(379) I.R.C. [section][section] 864(e)(3), 904(b)(4); Treas. Reg. [section] 1.861-8T(d)(2)(i), (g)(Example 24)(ii) (as amended in 2009); NYSBA GILTI Report, supra note 172, at 75.

(380) I.R.C. [section] 904(d)(1)(A).

(381) 1.R.Q [section] 904(d)(2)(A)(ii).

(382) I.R.C. [section] 904(d)(3), (4).

(383) I.R.C. [section] 904(d)(3)(G).

(384) See supra Part 0 and accompanying text for the analysis of why GILTI and its associated [section] 78 gross up are placed in separate baskets for purposes of calculating the FTC limitation. Note that the Proposed FTC Regs, if finalized as currently drafted, will place the [section]78 inclusion for GILTI in the same basket as the GILTI inclusion. Prop. Treas. Reg. [section] 1.904-4(o), 83 Fed. Reg. 63200, 63248, 63252 (Dec. 7, 2018).

(385) I.R.C. [section] 904(d)(1).

(386) I.R.C. [section] 901(a).

(387) I.R.C. [section] 59A(e)(1).

(388) I.R.C. [section][section] 11(a), (b), 27-53, 59A(a).

(389) Office of Tax Policy, Dep't of the Treasury, The Deferral of Income Earned Through U.S. Controlled Foreign Corporations: A Policy Study 4 (2000) [hereinafter Deferral Policy Study].

(390) Id. at 2.

(391) Mat 1-3.

(392) Mat3.

(393) BITTKER & LOKKEN, supra note 8, If 69.1, 70.1.1.

(394) I.R.C. [section] 951A(b)-(d); see supra Part II.A.l.b(3) and III.A.

(395) Lee A. Sheppard, International Clawbacks and Minimum Taxes in Tax Reform, 158 TAX NOTES 9,14 (Jan. 1, 2018).

(396) See supra Part ll.AA.b.

(397) See supra Part II.B.2.C.

(389) Richard Rubin, U.S. Tax Revamp Weakens Case for Companies to Shift Profits Overseas, WALL ST. J. (Apr. 29, 2018), https://www.wsj.com/articles/u-s-tax-revampweakens-case-for-companies-to-shift-profit-overseas-1525024961 ?redirect=amp#click= hrtps://t.co/P5i7sFwlkX.

(399) I.R.C. [section][section] 61, 881, 882; DEFERRAL POLICY STUDY, supra note 389, at 2-3.

(400) BlTTKER & LOKKEN, supra note 8,1 72.1.

(401) I.R.C. [section] 245A(a); see supra Part II.B.2.C.

(402) Because the DPT for purposes of determining GILTI's FTC is limited to 80% of its DPT included in gross income by section 78, GILTI does not receive full relief from juridical double taxation.

(403) J. Clifton Fleming Jr., Robert J. Peroni, and Stephen E. Shay, Expanded Worldwde Versus Territorial Taxation After the TC]A, 161 TAX NOTES 1173,1174 (Dec. 3, 2018).

(404) I.R.C. [section] 245A(a), (b)(2), (e), (f).

(405) I.R.C. [section] 959(d); see supra notes 125-126 and accompanying text; Report on Section 245A, N.Y. ST. B. ASS'N TAX SEC, REP. NO. 1404, 7 (October 25, 2018) [hereinafter NYSBA Section 245A Report], available at http://www.nysba.org/Sections/Tax/Tax_Section_Reports/Tax_Reports_2018/1404_Report.html.

(406) I.RC. [section]78.

(407) I.R.C. [section] 959(a); see supra Part II.A.2.

(408) See supra notes 251-255 and accompanying text.

(409) Treas. Reg. [section] 1.861-8T(d)(2)(i), (g)(Example 24) (as amended in 2009).

(410) I.R.C.[section] 904(b)(4).

(411) Stephanie Soong Johnston, Germany, France Explore GLOBE Proposal to Tax Digital Economy, 92 TAX NOTES INT'L 782, 782-83 (Nov. 19, 2018); Stephanie Soong Johnston, Digital Tax Debate May Pave Way for 'BEPS 2.0,' Saint-Amans Says, 92 TAX NOTES INT'L 818 (Nov. 19, 2018).
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Title Annotation:global intangible low taxed income
Author:Davis, Christine A.
Publication:Virginia Tax Review
Date:Mar 22, 2019
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