By: Max Belsinger
In mid-summer of 2020, the Treasury Department issued final regulations on the treatment of the global intangible low-tax income (“GILTI”) high-tax exclusion (“HTE”). In short, the GILTI HTE allows taxpayers the opportunity to exclude GILTI tested income subject to a foreign tax rate in excess of 18.9% from its GILTI determination. See GILTI High-Tax Exclusion: What You Should Know - Hughes Pittman & Gupton, LLP (hpg.com) for further explanation. This can be a great benefit for federal tax purposes, limiting the negative tax impact of the GILTI regime. Another consideration when taking advantage of the HTE, however, is the state tax treatment of the inclusion.
Tax laws are constantly changing and can be very different at the state and federal levels. Some states conform to federal law and others do not, creating their own interpretation of how the law should be treated, thus creating state tax “adjustments” from the federal tax position. As a result, this can greatly affect how the HTE will benefit a taxpayer.
Many states, such as North Carolina, do not tax GILTI. Some, such as Maryland, tax a percentage of GILTI; and others still have no guidance on how to treat it. The states that do tax GILTI could then allow a subtraction for some or all of the income. Others provide guidance that the Company must add back previously deducted expenses related to the subtracted income. If the amount of GILTI income is reduced due to the HTE, the amount of related expense disallowance may be correspondingly reduced, or the income that is permitted to be disallowed might need to include pre-HTE income versus post-HTE income. It can be confusing to recite the different methodologies, and even more confusing to understand, in addition to being cumbersome to track.
If a taxpayer utilizes the HTE and the qualifying income is excluded from the US taxpayer’s income, then when the income is repatriated it does not become previously taxed earnings and profits at the federal level. Under Section 245A, it is likely that a post-2017 dividend would be subject to the 100 percent dividend received deduction (“DRD”) and be untaxed at the federal level if the proper precautions are taken. At the state level there many may be a different tax treatment for the DRD, which could require an addback, or allow a deduction for the DRD.
The state tax treatment of international regulations included in the Tax Cuts and Jobs Act are still being worked through by many state jurisdictions. As it is relatively new, there is very little guidance on how each state will treat the high-tax exclusion, or how the other conformities will affect it. As such, we recommend that you consult with your tax advisor when making decisions regarding taking the HTE, and modeling the different variables to better understand the tax implications.