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Federal Register / Vol. 85, No. 142 / Thursday, July 23, 2020 / Rules and Regulations

DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9902]
RIN 1545–BP15

Guidance Under Sections 951A and
954 Regarding Income Subject to a
High Rate of Foreign Tax
Internal Revenue Service (IRS),
Treasury.
ACTION: Final regulations.
AGENCY:

This document contains final
regulations under the global intangible
low-taxed income and subpart F income
provisions of the Internal Revenue Code
regarding the treatment of income that
is subject to a high rate of foreign tax.
The final regulations affect United
States shareholders of foreign
corporations. This guidance relates to
changes made to the applicable law by
the Tax Cuts and Jobs Act, which was
enacted on December 22, 2017.
DATES:
Effective date: These regulations are
effective on September 21, 2020.
Applicability dates: For dates of
applicability, see §§ 1.951A–7(b) and
1.954–1(h)(1) and (3).
FOR FURTHER INFORMATION CONTACT:
Jorge M. Oben or Larry R. Pounders at
(202) 317–6934 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
SUMMARY:

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Background
Section 951A, which contains the
global intangible low-taxed income
(‘‘GILTI’’) rules, was added to the
Internal Revenue Code (the ‘‘Code’’) by
the Tax Cuts and Jobs Act, Public Law
115–97, 131 Stat. 2054, 2208 (December
22, 2017) (the ‘‘Act’’). On October 10,
2018, the Department of the Treasury
(‘‘Treasury Department’’) and the IRS
published proposed regulations (REG–
104390–18) under sections 951, 951A,
1502, and 6038 in the Federal Register
(83 FR 51072). On June 21, 2019, the
Treasury Department and the IRS
published final regulations (T.D. 9866)
in the Federal Register (84 FR 29288, as
corrected at 84 FR 44693) under
sections 951, 951A, 1502, and 6038, and
proposed regulations (REG–101828–19)
under sections 951, 951A, 954, 956, 958,
and 1502 in the Federal Register (84 FR
29114, as corrected at 84 FR 37807)
(‘‘2019 proposed regulations’’). Terms
used but not defined in this preamble
have the meaning provided in these
final regulations.
The Treasury Department and the IRS
received written comments with respect

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to the 2019 proposed regulations. A
public hearing on the 2019 proposed
regulations was not held because there
were no requests to speak.
This rulemaking finalizes the portion
of the 2019 proposed regulations under
sections 951A and 954 regarding the
treatment of income subject to a high
rate of foreign tax but does not finalize
the portions of the 2019 proposed
regulations under sections 951, 956,
958, and 1502 regarding the treatment of
domestic partnerships. The Treasury
Department and the IRS plan to finalize
those regulations separately.
Comments outside the scope of this
rulemaking are generally not addressed
but may be considered in connection
with future guidance projects. All
written comments received in response
to the 2019 proposed regulations are
available at www.regulations.gov or
upon request.
Summary of Comments and
Explanation of Revisions
I. Overview
The 2019 proposed regulations apply
the high-tax exclusion set forth in
section 951A(c)(2)(A)(i)(III) (the ‘‘GILTI
high-tax exclusion’’), on an elective
basis, to certain high-taxed income of a
controlled foreign corporation (as
defined in section 957) (‘‘CFC’’)
regardless of whether the income would
otherwise be foreign base company
income (as defined in section 954)
(‘‘FBCI’’) or insurance income (as
defined in section 953). See proposed
§ 1.951A–2(c)(6). The final regulations
retain the basic approach and structure
of the 2019 proposed regulations, with
certain revisions. This Summary of
Comments and Explanation of Revisions
discusses those revisions as well as
comments received.
As discussed in part IV of this
Summary of Comments and Explanation
of Revisions, numerous comments
recommended that the application of
the GILTI high-tax exclusion be
conformed with the high-tax exception
of section 954(b)(4) and § 1.954–1(d)(5)
(the ‘‘subpart F high-tax exception’’).
The Treasury Department and the IRS
agree that the GILTI high-tax exclusion
and the subpart F high-tax exception
should be conformed but have
determined that the rules implementing
the GILTI high-tax exclusion better
reflect the policies underlying section
954(b)(4) in light of the changes made
by the Act. As a result, a separate notice
of proposed rulemaking published in
the Proposed Rules section of this issue
of the Federal Register (REG–127732–
19) (the ‘‘2020 proposed regulations’’)
proposes to generally conform the rules

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implementing the subpart F high-tax
exception to the rules implementing the
GILTI high-tax exclusion set forth in
these final regulations, and provides for
a single election under section 954(b)(4)
for purposes of both subpart F income
and tested income.
II. Calculation of Effective Foreign Tax
Rate
A. QBU-by-QBU Determination
The 2019 proposed regulations apply
based on the effective foreign tax rate
imposed on the aggregate of all items of
tentative net tested income of a CFC
attributable to a single qualified
business unit (as defined in section
989(a)) (‘‘QBU’’) of the CFC that would
be in a single tested income group. See
proposed § 1.951A–2(c)(6)(i)(B) and
(c)(6)(ii)(A). The 2019 proposed
regulations apply on a QBU-by-QBU
basis to minimize the ‘‘blending’’ of
income subject to different foreign tax
rates and, as a result, more accurately
identify income subject to a high rate of
foreign tax such that low-taxed income
continues to be subject to the GILTI
regime in a manner consistent with its
underlying policies.
The Treasury Department and the IRS
received several comments regarding
the determination of the effective
foreign tax rate on a QBU-by-QBU basis.
One comment supported the QBU-byQBU determination. Other comments
requested that the effective foreign tax
rate test apply on a CFC-by-CFC basis
and asserted that this approach would
better align the GILTI high-tax exclusion
with the subpart F high-tax exception.
The comments also stated that a CFCby-CFC approach would be consistent
with the principles used to determine
foreign income taxes deemed paid
under proposed regulations under
section 960 and would reduce
complexity and compliance burdens.
One comment noted that taxpayers are
not required to conduct this type of
QBU-level analysis for any other U.S.
tax purpose and, thus, they may lack the
systems, data, or personnel to do so.
Other comments stated that
nonconformity with the subpart F hightax exception would encourage
taxpayers to structure into the subpart F
high-tax exception and questioned the
authority to adopt a QBU-by-QBU
approach given the general mechanics
of the GILTI regime, which compute
certain items at the CFC level before
aggregating such items at the United
States shareholder (as defined in section
951(b)) (‘‘U.S. shareholder’’) level.
Some comments suggested that there
is not a significant risk of blending
foreign income subject to different tax

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Federal Register / Vol. 85, No. 142 / Thursday, July 23, 2020 / Rules and Regulations
rates and asserted that such blending
should not give rise to policy concerns.
Other comments stated that applying
the effective foreign tax rate test on a
CFC-by-CFC basis would ameliorate
issues caused by differences between
U.S. and foreign tax accounting
methods.
Consistent with the rules set forth in
the 2019 proposed regulations, the
Treasury Department and the IRS have
determined that calculating the effective
foreign tax rate on a CFC-by-CFC basis
would inappropriately allow the
blending of high-taxed and low-taxed
income in a manner that is inconsistent
with the purpose of section 951A,
which is to limit potential base erosion
incentives created by a participation
exemption regime. Such blending
would allow low-taxed income, which
poses a significant base-erosion risk, to
be excluded from the GILTI regime.
While the legislative history indicates
that high-taxed income does not present
base erosion concerns, the policy
rationale underlying that view does not
extend to excluding low-taxed income
from GILTI merely because it may be
earned by an entity that also earns hightaxed income. See S. Comm. on the
Budget, Reconciliation
Recommendations Pursuant to H. Con.
Res. 71, S. Print. No. 115–20, at 371
(2017) (‘‘The Committee believes that
certain items of income earned by CFCs
should be excluded from the GILTI
[regime], either because they should be
exempt from U.S. tax—as they are
generally not the type of income that is
the source of the base erosion
concerns—or are already taxed currently
by the United States. Items of income
excluded from GILTI because they are
exempt from U.S. tax under the bill
include foreign oil and gas extraction
income (which is generally immobile)
and income subject to high levels of
foreign tax.’’).
The QBU-by-QBU approach is also
consistent with the legislative history to
section 954(b)(4), which directs the
Treasury Department and the IRS to
allow reasonable groupings of items of
income that are substantially taxed at
the same rate in a single country. See
H.R. Rep. No. 99–426, at 400–01 (1985)
(‘‘Although this rule applies separately
with respect to each ‘item of income’
received by a [CFC], the committee
expects that the Secretary will provide
rules permitting reasonable groupings of
items of income that bear substantially
equal effective rates of tax in a given
country. For example, all interest
income received by a [CFC] from
sources within its country of
incorporation may reasonably be treated
as a single item of income for purposes

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of this rule, if such interest is subject to
uniform taxing rules in that country.’’).
Therefore, consistent with this
legislative history, generally only hightaxed income, and not low- or zerotaxed income, should be excluded from
gross tested income. The GILTI high-tax
exclusion carries out this purpose by
determining the effective rate of tax on
an item of income at a granular enough
level to preclude inappropriate blending
without imposing undue compliance
burdens on taxpayers.
Although greater blending of income
subject to different rates of foreign tax
may be permitted within a separate
category under section 904, a section
904 separate category is not an
appropriate standard for determining an
item of income under section 954(b)(4)
because section 904 applies, by its
terms, to separate categories of income
while section 954(b)(4) applies to items
of income. Moreover, the purposes of
sections 951A and 954(b)(4), which are
primarily intended to address base
erosion concerns, differ from the
purposes of sections 901 and 904, which
are tailored to the avoidance of double
taxation of foreign source income. The
ability to credit foreign taxes against a
broader class of income at the U.S.
shareholder level does not compel a
CFC-by-CFC effective foreign tax rate
computation for purposes of the GILTI
high-tax exclusion. In addition,
determining whether an item of income
is high-taxed by grouping similar items
at a QBU level has historically been
required for certain passive income
under §§ 1.904–4(c) and 1.954–
1(c)(1)(iii)(B). Consistent with the 2019
proposed regulations, § 1.904–4(c)
groups passive income items for
purposes of determining whether they
are subject to a high rate of tax on a
QBU-by-QBU basis.
Finally, because the GILTI high-tax
exclusion applies on an elective basis,
taxpayers may choose not to make the
election if the compliance burdens of
the computation outweigh the benefits.
For these reasons, the final
regulations do not adopt a CFC-by-CFC
approach. However, the final
regulations replace the QBU-by-QBU
approach with a more targeted approach
based on ‘‘tested units’’ (as discussed in
part III.A of this Summary of Comments
and Explanation of Revisions), permit
some additional blending of income
under the tested unit combination rule
(as discussed in part III.B of this
Summary of Comments and Explanation
of Revisions), and allow taxpayers
additional flexibility by permitting the
GILTI high-tax exclusion election to be
made on an annual basis (as discussed
in part IV.C of this Summary of

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Comments and Explanation of
Revisions). Further, as noted in part I of
this Summary of Comments and
Explanation of Revisions, the separate
notice of proposed rulemaking
published concurrently with these final
regulations conforms the rules
implementing the subpart F high-tax
exception with the GILTI high-tax
exclusion, thereby eliminating the
disparity between the two elections and
the incentive for taxpayers to structure
into the subpart F high-tax exception.
B. CFC-Level Determination of Foreign
Taxes
For purposes of the subpart F high-tax
exception, the final regulations under
§ 1.954–1(d)(3) (before modification by
this Treasury decision) determined, for
each U.S. shareholder, the foreign
income taxes paid or accrued with
respect to an item of income based on
the amount of foreign income taxes that
would be deemed paid under section
960 if the item of income were included
in the gross income of the U.S.
shareholder under section 951(a)(1)(A).
The 2019 proposed regulations modify
this determination, for purposes of both
the subpart F high-tax exception and the
GILTI high-tax exclusion, by referencing
the amounts of income and taxes at the
CFC level, rather than the amount of
taxes that would be deemed paid at the
U.S. shareholder level. See proposed
§ 1.954–1(d)(3)(i) and proposed
§ 1.951A–2(c)(6)(iv). Specifically,
foreign income taxes of the CFC for the
current year are allocated and
apportioned to the CFC’s gross income
based on the rules under § 1.960–1(d),
which determine foreign income taxes
‘‘properly attributable’’ to income. The
2019 proposed regulations modify this
calculation because the determination of
income and taxes at the CFC level is
more consistent with the text of section
954(b)(4), which refers to items of
income (and tax imposed on such items)
of the CFC. In addition, deemed paid
credits for taxes properly attributable to
tested income under section 960(d) are
determined on an aggregate basis, which
does not provide an accurate basis to
determine the effective foreign tax rate
on particular items of income of a CFC
under the GILTI high-tax exclusion
provided under section 954(b)(4).
A comment requested that the
effective foreign tax rate test be based on
the shareholder’s deemed paid credit for
taxes properly attributable to tested
income, as defined in section 960(d),
over the shareholder’s net CFC tested
income, as defined in section 951A(c).
The comment asserted that such an
aggregate determination, which would
mirror the calculation of the GILTI

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inclusion, would be consistent with the
GILTI legislative history, would produce
more equitable results than those
provided under the 2019 proposed
regulations, and would significantly
reduce compliance and administrative
burdens for taxpayers and the
government.
The Treasury Department and the IRS
have concluded that this approach for
calculating the effective foreign tax rate
would be inconsistent with section
954(b)(4). Unlike a GILTI inclusion,
which is based on the aggregate
amounts of a U.S. shareholder’s pro rata
shares of certain items from all the CFCs
in which the shareholder is a U.S.
shareholder, section 954(b)(4) applies by
its terms to items of income of a single
CFC. That is, section 954(b)(4) applies
with respect to ‘‘any item of income
received by a CFC’’ that is subject to a
sufficiently high rate of foreign tax.
Moreover, section 951A(c)(2)(A)(i),
which provides exclusions from tested
income including the high-tax
exclusion, refers to ‘‘the gross income of
such corporation.’’ Nothing in section
954(b)(4), or section 951A(c)(2)(A)(i)(III),
suggests that the aggregate approach of
the GILTI regime should or could apply
for purposes of determining whether an
item of income received by a CFC is
subject to a sufficiently high level of
foreign tax under section 954(b)(4).
Thus, the final regulations do not adopt
this comment.

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C. Effective Foreign Tax Rate
1. Threshold Rate of Tax
Consistent with section 954(b)(4), the
2019 proposed regulations apply the
GILTI high-tax exclusion by comparing
the effective foreign tax rate with 90
percent of the rate that would apply if
the income were subject to the
maximum rate of tax specified in
section 11 (currently 18.9 percent, based
on a maximum rate of 21 percent). See
proposed § 1.951A–2(c)(6)(i)(B).
Several comments requested that the
GILTI high-tax exclusion instead be
applied if the effective foreign tax rate
is at least 13.125 percent. One comment
requested that it be based on a tax rate
of 13.125 percent for taxable years
beginning on or before December 31,
2025, and 16.406 percent for taxable
years beginning after such date. The
comments asserted that using a 13.125
percent rate would be consistent with
the legislative history indicating that no
residual tax should be due on GILTI
subject to an effective foreign tax rate in
excess of 13.125 percent, which takes
into account the 80 percent foreign tax
credit allowance in section 960(d) and
the 50 percent deduction under section

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250, and that the rate should be adjusted
for taxable years beginning after
December 31, 2025, to correspond to the
reduction in the amount of deduction
allowed with respect to GILTI as
provided in section 250(a)(3)(B).
The Treasury Department and the IRS
disagree with these comments. The
GILTI high-tax exclusion is based on
section 954(b)(4), which refers to a tax
rate that is greater than 90 percent of the
rate that would apply if the income
were subject to the maximum rate of tax
specified in section 11. The rate set
forth in section 954(b)(4) does not vary
depending on whether it applies for
purposes of determining FBCI,
insurance income, or tested income.
Furthermore, the legislative history
describing a 13.125 percent foreign tax
rate addresses situations in which
income is included in tested income
and, consequently, subject to GILTI and
the associated foreign tax credit rules
under section 960(d).1 Those rules do
not apply to income excluded from
tested income by reason of the GILTI
high-tax exclusion. Accordingly, the
final regulations do not adopt these
comments.
2. Safe Harbors
One comment asserted that the
‘‘mechanical snapshot’’ rule for
determining the effective foreign tax rate
under the 2019 proposed regulations
can produce results that are
unreasonable given timing differences
between the U.S. and foreign tax bases.
The comment stated that if an item is
accounted for in one period for U.S. tax
purposes, but in another period for
foreign tax purposes, the CFC may
appear to have a high effective foreign
tax rate in one period, and a low
effective foreign tax rate in the other
period, when in fact it is simply subject
to a rate of tax comparable to the U.S.
rate on its foreign tax base over both
periods. To address these timing
differences, the comment suggested that
the final regulations include two new
methods, in addition to the method set
forth in the 2019 proposed regulations,
for calculating the effective foreign tax
rate, each of which could be safe
harbors applied at the discretion of the
taxpayer.
Under the first suggested method, the
GILTI high-tax exclusion would apply if
the foreign statutory income tax rate to
which a QBU’s income is subject is
sufficiently high and there is no special
1 In addition, the assertion made by certain
commenters that the law categorically provides that
no residual U.S. tax is owed under GILTI at foreign
effective tax rates of 13.125% is incorrect. See Joint
Comm. on Tax’n, General Explanation of Public
Law 115–97, at 381 & n.1753.

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tax regime to which a material
percentage of the QBU’s income is
subject. In such a case, the safe harbor
would apply and all the income of the
QBU would be eligible for the GILTI
high-tax exclusion. The comment
indicated that the foreign statutory rate
could be determined by reference to
publications maintained by the OECD
and a special tax regime could be
determined in a manner consistent with
the 2016 U.S. Model Income Tax Treaty.
The second suggested method would
allow taxpayers to determine a QBU’s
effective foreign tax rate by reference to
the average effective foreign tax rate in
the current and preceding four taxable
years. The comment asserted that this
approach would smooth out timing
differences and more accurately
determine whether the QBU’s income
was in fact subject to relatively high
rates of tax. The comment also noted
that although the GILTI regime generally
operates on an annual basis, the
determination of whether the income of
a QBU is subject to a rate of foreign tax
comparable to the U.S. rate may be
better determined over a longer period
based on the facts and circumstances.
The Treasury Department and the IRS
have concluded that identifying special
tax regimes, or determining the extent to
which income would be subject to
special tax regimes, would give rise to
considerable complexity and
administrative and compliance burdens
for both taxpayers and the government.
Similarly, the Treasury Department and
the IRS have determined that using an
average effective foreign tax rate over
multiple taxable years would give rise to
additional complexity and increase the
burden on taxpayers and the
government due, for example, to foreign
tax redeterminations with respect to a
QBU’s income, such as an adjustment
for a loss carryback. Such adjustments
would not only affect the year of the
redetermination, but also every other
year that took the redetermination year
into account in calculating the average
effective foreign tax rate, potentially
resulting in multiple amended returns
attributable to a foreign tax
redetermination for a single taxable
year. A prior year averaging approach
would also lead to distortive results,
such as when the CFC had losses or
volatile earnings. Accordingly, the final
regulations do not adopt these safe
harbors. As described in Part III.B. of
this Summary of Comments, the tested
unit combination rule should ameliorate
some of the concerns raised by the
comment.

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D. Base and Timing Differences

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1. In General
The 2019 proposed regulations
generally provide that the effective rate
at which taxes are imposed for a taxable
year is the U.S. dollar amount of foreign
income taxes paid or accrued with
respect to a tentative net tested income
item,2 over the sum of the U.S. dollar
amount of the tentative net tested
income item and the amount of foreign
income taxes paid or accrued with
respect to the tentative net tested
income item. See proposed § 1.951A–
2(c)(6)(iii). A tentative net tested income
item is generally determined by taking
into account certain items of gross
income (determined under federal
income tax principles) attributable to a
QBU, less deductions (also determined
under federal income tax principles)
allocated and apportioned to such gross
income. See 1.951A–2(c)(6)(ii)(A) and
(B). Thus, the effective foreign tax rate
is based on the amount of foreign
income taxes paid or accrued on income
attributable to the QBU as determined
for federal income tax purposes, without
regard to how the income is determined
for foreign income tax purposes.
The preamble to the 2019 proposed
regulations requested comments on
whether additional rules are needed to
properly account for cases (other than
disregarded payments) in which the
income base upon which foreign tax is
imposed does not match the items of
income reflected on the books and
records of the QBU determined for
federal income tax purposes. The
preamble cites examples of possible
adjustments to address circumstances in
which QBUs are permitted to share
losses or determine tax liability based
on combined income for foreign tax
purposes.
2. Disregarded Payments
The proposed regulations generally
provide that gross income is attributable
to a QBU if it is properly reflected on
the books and records of the QBU,
determined under federal income tax
principles, except that such income is
adjusted to account for certain
disregarded payments. See proposed
§ 1.951A–2(c)(6)(ii)(A)(2). The
adjustments for disregarded payments
are made under the principles of
§ 1.904–4(f)(2)(vi) (rules attributing
gross income to a foreign branch),
without regard to the exclusion for
interest described in § 1.904–
4(f)(2)(vi)(C)(1). See id.
2 The final regulations adopt the term ‘‘tentative
tested income item,’’ instead of the term ‘‘tentative
net tested income item.’’ See § 1.951A–2(c)(7)(iii).

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One comment suggested that a
disregarded payment should not result
in the reallocation of income between
QBUs for purposes of computing the
GILTI high-tax exclusion. The Treasury
Department and IRS understand the
comment’s concern to be the potential
inability to claim the GILTI high-tax
exclusion in scenarios where a
disregarded payment was made from a
high-taxed CFC to a disregarded entity
that paid no tax.
The Treasury Department and the IRS
have determined that, if a tested unit 3
makes a disregarded payment to another
tested unit, gross income should be
reallocated among the tested units to
appropriately associate the income with
the tested unit in which it is subject to
tax. This reallocation promotes
conformity between the income
attributed to a tested unit and the
income of that tested unit that is subject
to tax in the foreign country, and,
therefore, this rule results in a more
accurate grouping of items of income
that are generally subject to the same or
similar rates of foreign tax. In addition,
treating disregarded payments in this
manner is consistent with the treatment
of regarded payments. For example, if a
tested unit of a CFC were to make a
regarded deductible payment that is
taken into account by another tested
unit of the CFC (such as a tested unit
that is an interest in a partnership), the
payment would be an item of gross
income of the payee tested unit that may
qualify for the GILTI high-tax exclusion
based on the foreign taxes attributable to
that tested unit. Moreover, the regarded
deduction would be reflected in a
reduced tentative net tested income
item (relative to the result in the
absence of adjustment for disregarded
payments)—and, consequently, the
denominator of the effective foreign tax
rate fraction—with respect to the payor
tested unit for purposes of assessing
whether its gross income is subject to a
high rate of foreign tax. For these
reasons, the comment is not adopted.
The final regulations provide
additional rules addressing disregarded
payments, including providing
additional detail on how the principles
of § 1.904–4(f)(2)(vi) should be applied.
See § 1.951A–2(c)(7)(ii)(B)(2). For
example, the final regulations provide
that a disregarded payment of interest is
allocated and apportioned ratably to all
of the gross income attributable to the
tested unit that is making the
disregarded payment. See § 1.951A–
3 As discussed in part III of this Summary of
Comments and Explanation of Revisions, the final
regulations adopt a ‘‘tested unit’’ standard that
replaces the QBU standard used in the 2019
proposed regulations.

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2(c)(7)(ii)(B)(2)(iv). The final regulations
also provide special ordering rules for
reallocations with respect to multiple
disregarded payments. See § 1.951A–
2(c)(7)(ii)(B)(2)(iv).
3. Foreign Net Operating Losses and
Other Timing Differences
Some comments requested that the
final regulations allow taxpayers to elect
to adjust either the numerator or
denominator of the effective foreign tax
rate fraction to take into account foreign
net operating loss (‘‘NOL’’)
carryforwards and other similar items.
One comment asserted that, while the
effective foreign tax rate calculation
generally serves as an appropriate test,
CFCs with a foreign NOL carryover may
fail the test even though the rate of tax
in the foreign country exceeds 18.9
percent. Another comment indicated
that a CFC could fail the mechanical test
in a single year although the same
income is subject to a foreign tax that is
substantially higher than the U.S.
corporate tax rate because of timing
differences (that is, differences in when
income or deductions are taken into
account for U.S. and foreign tax
purposes).
The Treasury Department and the IRS
have determined that adjusting the
numerator or denominator of the
effective foreign tax rate fraction for
foreign NOL carryforwards or other
timing differences would result in
considerable complexity and would
impose a significant burden on both
taxpayers and the government. It would
require the application of foreign tax
accounting rules, and complex
coordination rules to reconcile their
application with U.S. tax accounting
rules, both in the current taxable year
and other taxable years, to prevent an
item of income, gain, deduction, loss, or
credit from being duplicated or omitted.
Accordingly, this comment is not
adopted.
III. Adoption of Tested Unit Standard
A. In General
As discussed in part II.A of this
Summary of Comments and Explanation
of Revisions, the 2019 proposed
regulations propose a QBU-by-QBU
approach to identify the relevant items
of income that may be eligible for the
GILTI high-tax exclusion. For this
purpose, the proposed regulations
reference the definition of a QBU in
section 989(a), which provides that a
QBU is any separate and clearly
identifiable unit of a trade or business
of a taxpayer that maintains separate
books and records. See proposed
1.951A–2(c)(6)(ii)(A). Regulations under

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section 989(a) provide guidance as to
activities that constitute a trade or
business (based on a facts-andcircumstances analysis) and the
determination of separate books and
records. See § 1.989(a)–1(c) and (d). The
preamble to the 2019 proposed
regulations requested comments on
whether the definition of a QBU should
be modified for purposes of the GILTI
high-tax exclusion, including the
requirements to carry on activities that
constitute a trade or business and to
maintain books and records.
One comment asserted that it is
unclear whether certain activities
constitute a trade or business under the
facts-and-circumstances test set forth in
the regulations under section 989(a) and
that making such determinations would
frequently be administratively
burdensome. The comment indicated
that in other cases it is also difficult to
determine whether certain interrelated
activities constitute a single QBU or
multiple QBUs (for example, different
functions performed by separate
divisions operating within a single
CFC). In addition, the comment
suggested that taxpayers may engage in
affirmative tax planning to avoid the
QBU rule by, for example, breaking up
the operations of a single large QBU of
a CFC into smaller components that
would not constitute trades or
businesses, or by choosing to no longer
maintain books and records for such
sub-lines of business. Another comment
criticized the QBU approach because
some taxpayers may track business
activities differently than other
taxpayers, which may result in the
inconsistent application of the QBU
rules. Finally, a comment noted that not
all companies have sufficient systems in
place to accurately track items at the
QBU level.
The 2019 proposed regulations
propose the QBU standard as a proxy for
determining the type of entity, or level
of activities, that would likely be subject
to tax in a particular foreign country
either on an entity basis or as a taxable
presence, and, as a result, would likely
result in items of income attributable to
the QBU being subject to a different rate
of foreign tax than that imposed on
other income of the CFC. In response to
these comments, the Treasury
Department and the IRS have concluded
that a more targeted approach should be
applied for identifying income that is
likely to be subject to foreign tax rates
different from those imposed on other
income earned by the CFC. This
approach will generally limit the scope
of the factual analysis necessary to
apply these rules—for example, it does
not depend on whether activities

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constitute a trade or business, or
whether books and records are
maintained—and thereby addresses
many of the concerns raised in these
comments. Accordingly, in lieu of the
QBU standard in the 2019 proposed
regulations, the final regulations
generally apply the GILTI high-tax
exclusion based on the gross tested
income of a CFC that is attributable to
a ‘‘tested unit.’’ See § 1.951A–2(c)(7)(ii).
Unlike the QBU standard that serves as
a proxy for being subject to foreign tax,
the tested unit approach generally
applies to the extent an entity, or the
activities of an entity, are actually
subject to tax, as either a tax resident or
a permanent establishment (or similar
taxable presence), under the tax law of
a foreign country.
The final regulations provide three
categories of a tested unit. First, and
consistent with the 2019 proposed
regulations, a tested unit includes a
CFC. See § 1.951A–2(c)(7)(iv)(A)(1).
Thus, if a CFC, which itself is a tested
unit, has no other tested units, the GILTI
high-tax exclusion is applied with
respect to all the tentative gross tested
income items (determined under
§ 1.951A–2(c)(7)(ii)) of the CFC.
Second, and also consistent with the
2019 proposed regulations, a tested unit
generally includes an interest in a passthrough entity held, directly or
indirectly, by a CFC. See § 1.951A–
2(c)(7)(iv)(A)(2). For this purpose, a
pass-through entity is defined to
include, for example, a partnership or a
disregarded entity. See § 1.951A–
2(c)(7)(ix)(B).
More specifically, a CFC’s interest in
a pass-through entity is a tested unit if
the pass-through entity meets one of two
requirements. First, the CFC’s interest in
the pass-through entity is a tested unit
if the pass-through entity is a tax
resident of a foreign country because, in
these cases, income earned by the CFC
indirectly through the pass-through
entity may be subject to tax at a rate
different than the rate at which income
earned by the CFC directly is subject to
tax. See § 1.951A–2(c)(7)(iv)(A)(2)(i).
Second, the CFC’s interest in the passthrough entity is a tested unit if the
pass-through entity is not subject to tax
as a resident, but is treated as a
corporation (or as another entity that is
not fiscally transparent) for purposes of
the CFC’s tax law, because in these
cases income earned by the CFC
indirectly through the pass-through
entity may not be subject to tax in the
foreign country of which the CFC is a
tax resident; thus, for example, an
interest in a domestic limited liability
company that is a partnership for
federal income tax purposes would

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typically be a tested unit. See § 1.951A–
2(c)(7)(iv)(A)(2)(ii). A CFC’s interest in a
pass-through entity (or the activities of
a branch) that is not a tested unit is a
‘‘transparent interest.’’ See § 1.951A–
2(c)(7)(ix)(C); see also the discussion on
transparent interests in part III.C.3 of
this Summary of Comments and
Explanation of Revisions.
This treatment of interests in passthrough entities in the final regulations
is consistent with a comment suggesting
that a pass-through entity should be
treated as a tested unit if the entity is
treated as a separate entity for purposes
of a foreign tax law, but not if the entity
is fiscally transparent (and thus not a
tax resident) for purposes of the tax law
of a foreign country.
An interest in an entity, rather than
the entity itself, is treated as a tested
unit (or a transparent interest) because
the entity may have multiple owners
and the characterization of the interest
as a tested unit may depend on each
holder’s tax treatment with respect to
the interest. As a result, less than the
entire entity may be characterized as a
tested unit or a transparent interest. In
addition, different interests in an entity
held directly or indirectly by the same
CFC may be characterized differently.
The final regulations include an
example that illustrates the application
of this rule. See § 1.951A–2(c)(8)(iii)(D)
(Example 4).
Finally, a tested unit includes a
branch, or a portion of a branch, the
activities of which are carried on
directly or indirectly by a CFC, provided
that either (i) the branch gives rise to a
taxable presence in the country in
which the branch is located, or (ii) the
branch gives rise to a taxable presence
under the owner’s tax law, and the
owner’s tax law provides an exclusion,
exemption, or other similar relief (such
as a preferential rate) for income
attributable to the branch. See § 1.951A–
2(c)(7)(iv)(A)(3). In these cases, the
income indirectly earned by the owner
through the branch is likely subject to
tax at a rate different than the rate at
which income directly earned by the
owner is subject to tax. The Treasury
Department and the IRS have
determined that this branch tested unit
rule addresses blending concerns
related to an owner’s taxable presence
in another country in a more targeted
manner than the ‘‘activities’’ QBU
standard from the 2019 proposed
regulations. In addition, the Treasury
Department and the IRS have
determined that the branch tested unit
rule will likely reduce compliance
burdens, as compared to the QBU
standard from the 2019 proposed
regulations, because the tested unit rule

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depends on how activities are treated
under foreign tax law, an analysis of
which in most cases would be
conducted independently of the final
regulations (for example, to determine
whether a tax return must be filed
because activities in that country give
rise to a taxable presence).
For purposes of the tested unit rules,
references to the tax law of a foreign
country include statutes, regulations,
administrative or judicial rulings, and
treaties of the country. See § 1.951A–
2(c)(7)(iv)(A)(2) and (3) (crossreferencing definitions in regulations
under section 267A that incorporate the
definition of the tax law of a country in
§ 1.267A–5(a)(21)).
The final regulations make clear that
tested units are determined
independently of one another. For
example, even though a CFC is itself a
tested unit, the CFC may have other
tested units, such as a permanent
establishment or an interest in a
disregarded entity that, subject to the
application of the combination rule
discussed in part III.B of this Summary
of Comments and Explanation of
Revisions, must be treated separately for
purposes of the GILTI high-tax
exclusion. See § 1.951A–2(c)(8)(iii)(D)
(Example 4).
The final regulations also provide a
rule that addresses cases where the
same item is attributable to more than
one tested unit in a tier of tested units.
This may occur, for example, if an item
is properly reflected both on the
separate set of books and records of one
tested unit, and on the separate set of
books and records of a lower-tier tested
that is owned (directly or indirectly) by
the first tested unit, because the books
and records of the two tested units were
prepared under different accounting
standards. In such a case, the final
regulations provide that the item is
considered to be attributable only to the
lowest-tier tested unit. See § 1.951A–
2(c)(7)(iv)(B).
B. Combined Tested Units
The 2019 proposed regulations apply
separately to each QBU of a CFC. See
proposed § 1.951A–2(c)(6)(ii)(A)(1).
However, the preamble to the 2019
proposed regulations requested
comments as to whether all of a CFC’s
QBUs located within a single foreign
country should be combined.
Several comments recommended
combining ‘‘same-country’’ QBUs, on an
elective basis, noting it would reduce
complexity and compliance burdens.
Some comments asserted that a
combined same-country QBU approach
would be more consistent with
congressional intent for the GILTI

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regime to target income in low- and
zero-tax countries, would reduce certain
variances (for example, due to business
cycle fluctuations or differences
between the U.S. and foreign tax bases),
and would reduce incentives for taxmotivated restructuring. Another
comment recommended that the final
regulations include rules that would
allow taxpayers to take into account a
fiscal unity or similar grouping in
determining the effective foreign tax
rate.
The Treasury Department and the IRS
generally agree that a combination rule
would reduce compliance burdens and
would be consistent with the policies
underlying the GILTI high-tax
exclusion. Moreover, a combination rule
may minimize the effect of timing and
other differences between the U.S. and
foreign tax bases. Accordingly, the final
regulations generally provide that tested
units of a CFC (including the CFC tested
unit), other than certain nontaxed
branch tested units, are treated as a
single tested unit if the tested units are
tax residents of, or located in, the same
foreign country. See § 1.951A–
2(c)(7)(iv)(C)(1). In general, a nontaxed
branch tested unit is a branch tested
unit that does not give rise to a taxable
presence under the tax law of the
foreign country where the branch is
located, but gives rise to a taxable
presence under the tax law of the
foreign country where the home office
of the branch is a tax resident and such
tax law provides an exclusion,
exemption, or similar relief for purposes
of taxing income attributable to the
branch. See § 1.951A–2(c)(7)(iv)(A)(3).
The tested unit combination rule does
not apply to a nontaxed branch tested
unit because such a tested unit typically
would not be subject to tax (or to any
meaningful level of tax) in any foreign
country and thus combining it with
other tested units (the income of which
may be subject to a meaningful level of
tax) could give rise to inappropriate
blending. See § 1.951A–2(c)(7)(iv)(C)(2).
The combination rule applies without
regard to whether the tested units are
subject to the same foreign tax rate
because it would be inconsistent with
the purpose of the combination rule to
require taxpayers to determine the
effective foreign tax rate imposed on the
tested units separately, and simply
comparing the statutory foreign tax rates
may not be meaningful. In addition, the
combination rule is not conditioned on
the tested units having the same
functional currency because the
effective foreign tax rate is calculated in
U.S. dollars and any differences in
functional currency are unlikely to have
a material effect on whether income

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qualifies for the GILTI high-tax
exclusion. Finally, the combination rule
is mandatory, and not elective, because
providing an election would give rise to
additional complexity, and related
administrative and compliance burdens.
C. Books and Records
1. In General
Under the 2019 proposed regulations,
gross income is attributable to a QBU if
it is properly reflected on the books and
records of the QBU. See proposed
§ 1.951A–2(c)(6)(ii)(A)(2). For this
purpose, gross income is determined
under federal income tax principles
with certain adjustments to reflect
disregarded payments. Id.
As discussed in part III.A of this
Summary of Comments and Explanation
of Revisions, the final regulations adopt
a tested unit standard, rather than a
QBU standard, for purposes of
determining a tentative gross tested
income item. Nevertheless, the final
regulations retain the general approach
set forth under the 2019 proposed
regulations of relying on a separate set
of books and records (as modified to
apply to tested units, rather than QBUs)
as the starting point for determining
gross income attributable to a tested
unit. The Treasury Department and the
IRS have concluded that applying the
books-and-records approach for tested
units is appropriate because it serves as
a reasonable proxy for determining the
amount of gross income that the foreign
country of the tested unit is likely to
subject to tax. In addition, relying on a
separate set of books and records is
consistent with the approach taken
under other provisions and, therefore,
should promote administrability for
both taxpayers and the government. See,
for example, §§ 1.904–4(f) (foreign
branch category rules), 1.987–2(b) (rules
for determining items attributable to a
QBU branch), and 1.1503(d)–5(c) (dual
consolidated loss rules).
The final regulations generally
provide that items of gross income of a
CFC are attributable to a tested unit of
the CFC to the extent they are properly
reflected on the separate set of books
and records of the tested unit, or of the
entity an interest in which is a tested
unit (for example, in the case of certain
partnerships). See § 1.951A–
2(c)(7)(ii)(B). This rule starts with the
items of gross income of the CFC for
federal income tax purposes and then
attributes those items to the CFC’s tested
units to the extent the items are
properly reflected on the separate set of
books and records of the tested units
(with certain adjustments, such as to
account for disregarded payments). For

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example, if a CFC owns a partnership
interest that is a tested unit, the items
of gross income that the CFC derives
through the partnership interest are
attributed to the CFC’s interest in the
partnership to the extent that the items
are properly reflected on the separate set
of books and records of the partnership.
Thus, this approach first gives effect to
the rules that determine the items of
gross income of the CFC, such as the
rules under section 704 for purposes of
determining a CFC partner’s distributive
share of items of a partnership, and then
attributes those items to the tested units
of the CFC depending on whether the
items are properly reflected on the
separate set of books and records. The
final regulations include examples that
illustrates the application of this rule.
See § 1.951A–2(c)(8)(D) (Example 4).

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2. Separate Set of Books and Records
The Treasury Department and the IRS
have determined that a tested unit, or an
entity an interest in which is a tested
unit, generally will maintain a separate
set of books and records that would be
readily available for purposes of the
final regulations. This is expected to be
the case for a branch tested unit under
§ 1.951A–2(c)(7)(iv)(A)(3) (involving a
taxable presence), for example, because
a separate set of books and records
would ordinarily be required to
compute the foreign tax liability arising
in the taxing country (or for not taking
into account items attributable to the
taxable presence if determined only
under the owner’s tax law).
Accordingly, the final regulations retain
the general approach taken in the 2019
proposed regulations by defining a
‘‘separate set of books and records’’ by
reference to § 1.989(a)–1(d). See
§ 1.951A–2(c)(7)(v)(A).4
3. Booking Rule for Transparent
Interests
The final regulations provide a special
booking rule that applies to a
transparent interest, which, as noted in
part III.A of this Summary of Comments
and Explanation of Revisions, is an
interest in a pass-through entity (or the
activities of a branch) that is not a tested
unit. This rule, which is consistent with
the rule in § 1.1503(d)–5(c)(3)(ii)
(addressing similar interests for
purposes of the dual consolidated loss
rules), generally treats items properly
reflected on the separate set of books
and records of an entity an interest in
which is a transparent interest as being
4 The 2020 proposed regulations, however,
replace the reference to ‘‘books and records’’ with
a more specific standard based on items properly
reflected on an ‘‘applicable financial statement,’’
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properly reflected on the books and
records of a tested unit that holds
interests (directly or indirectly through
other transparent interests) in the entity.
See § 1.951A–2(c)(7)(v)(C). This
treatment is appropriate because income
earned by the tested unit directly, as
well as income earned by the tested unit
indirectly through the transparent
interest, is expected to be subject to
residence-based tax in only the tested
unit’s country of residence (or location)
and, as a result, it is unlikely that
blending of income subject to different
foreign tax rates would occur by reason
of the tested unit’s ownership of the
transparent interest.
4. Tested Units That Fail To Maintain a
Set of Books and Records
The final regulations include a rule
that applies if a separate set of books
and records is not prepared for a tested
unit or transparent interest. In such a
case, items required to apply the GILTI
high-tax exclusion that would be
reflected on a separate set of books and
records of the tested unit or transparent
interest must be determined and treated
as properly reflected on the separate set
of books and records. See § 1.951A–
2(c)(7)(v)(B). This rule is intended to
address cases where a separate set of
books and records is not maintained,
and to prevent the avoidance of the
rules by choosing to not maintain a
separate set of books and records.
5. Items of Gross Income Not Taken Into
Account for Financial Accounting
Purposes
In some cases, items of gross income
(determined under federal income tax
principles) may not be properly
reflected on a separate set of books and
records because they are not taken into
account for financial accounting
purposes. This may occur when items
are taken into account for federal
income tax purposes and financial
accounting purposes in different taxable
years, or when items are taken into
account for federal income tax purposes
but are not taken into account for
financial accounting purposes (for
example, due to the mark-to-market
method of accounting). To ensure that
these items of gross income are
attributable to a tested unit in a CFC
inclusion year, the final regulations
clarify that the items are treated as
properly reflected on a separate set of
books and records if they would be so
reflected if they were taken into account
for financial accounting purposes in the
CFC inclusion year in which they are
taken into account for federal income
tax purposes. See § 1.951A–2(c)(7)(v)(D).
No inference should be drawn from this

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clarification with respect to other
similar rules that attribute items based
on books and records, including under
§ 1.904–4(f), § 1.987–2(b), or
§ 1.1503(d)–5(c).
D. De Minimis Rules
A comment recommended that the
final regulations adopt two de minimis
rules to simplify the application of the
QBU-by-QBU approach. First, the
comment suggested that taxpayers
should be permitted to elect to treat all
CFCs with income below a specified
threshold as a single QBU. The Treasury
Department and the IRS have
determined that aggregating CFCs for
this purpose would be inconsistent with
section 954(b)(4), which applies with
respect to items of income of a single
CFC. Accordingly, this recommendation
is not adopted.
Second, the comment suggested that
taxpayers should be permitted to elect
to aggregate QBUs within the same CFC
that have a small amount of tested
income (measured either in absolute
terms or based on a percentage of the
CFC’s income). However, it is uncertain
whether aggregating QBUs with small
amounts of tested income will result in
a significant amount of simplification
because, for example, gross income
would still have to be attributed to each
QBU (taking into account disregarded
payments) to determine whether the de
minimis rule applies. The final
regulations do not adopt the
recommendation, but a de minimis rule
is included in the 2020 proposed
regulations to allow an opportunity for
additional notice and comment.
IV. Rules Regarding the Election
A. Consistency Requirement
The 2019 proposed regulations
generally provide that if a CFC is a
member of a controlling domestic
shareholder group (‘‘CFC group’’),5 a
GILTI high-tax exclusion election (or
revocation) is either made with respect
to each member of the CFC group or is
not made for any member of the CFC
group. See proposed § 1.951A–
2(c)(6)(v)(E)(1) and part IV.B of this
Summary of Comments and Explanation
of Revisions. The preamble to the 2019
proposed regulations requested
comments on whether the consistency
rule should be modified or removed, for
example, by allowing the election to be
made on an item-by-item or a CFC-byCFC basis.
5 The final regulations adopt the shorter and more
descriptive term ‘‘CFC group,’’ instead of the term
‘‘controlling domestic shareholder group.’’ See
§ 1.951A–2(c)(7)(viii)(E)(2).

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Several comments requested that the
final regulations eliminate the
consistency requirement such that the
GILTI high-tax exclusion election can be
made on a CFC-by-CFC basis, which
would conform the exclusion to the
subpart F high-tax exception. Some
comments asserted that the consistency
requirement is too restrictive because
the GILTI regime generally applies to
both low- and high-taxed income and
the consistency requirement has the
effect of applying the GILTI regime only
to low-taxed income since all high-taxed
income is excluded. Comments further
asserted that determining whether
making the election for all CFCs is
beneficial, especially when involving
multiple foreign countries, is a complex
and difficult task and would increase
taxpayers’ compliance burden. Some
comments stated that the elimination of
the consistency requirement would
enable taxpayers to minimize the
unfavorable interaction between the
GILTI regime and the rules for allocating
and apportioning deductions. Other
comments asserted that the consistency
requirement would encourage taxpayers
to implement structures that would
convert tested income into subpart F
income, which is contrary to one of the
purposes of the GILTI high-tax
exclusion. Finally, comments suggested
that if the consistency requirement is
included in the final regulations, it is
likely that many taxpayers will not
make the GILTI high-tax exclusion
election.
The Treasury Department and the IRS
have determined that the consistency
requirement is necessary due to the
collateral effect that the GILTI high-tax
exclusion has on the allocation and
apportionment of deductions.
Specifically, allowing CFC-by-CFC or
tested unit-by-tested unit elections
would encourage the selective use of the
GILTI high-tax exclusion to
inappropriately manipulate the section
904 foreign tax credit limitation. In this
regard, deductions allocated and
apportioned to income excluded under
section 954(b)(4) will be subject to
section 904(b)(4), as described in Part
V.A of this Summary of Comments and
Explanation of Revisions, and thereby
disregarded for purposes of determining
a taxpayer’s foreign tax credit limitation
under section 904. Without a
consistency requirement, taxpayers may
be able to include high-taxed income in
GILTI to claim foreign tax credits up to
the amount of their section 904
limitation, while electing to exclude the
remainder of such income under the
GILTI high-tax exclusion. Consequently,
the taxpayer’s section 904 limitation

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would not take into account all the
deductions attributable to investments
generating high-taxed income, resulting
in a distortive application of the foreign
tax credit limitation under section 904.
A consistency requirement prevents this
result by ensuring that a taxpayer that
seeks to cross-credit the foreign tax
imposed on high-taxed tentative tested
income against low-taxed tentative
tested income must take all of its hightaxed tentative tested income into
account along with all of the deductions
allocated and apportioned to that
category of income. This concern does
not arise with respect to other types of
income that are excluded from tested
income (for example, foreign oil and gas
extraction income) because such items
are always excluded (that is, there is no
electivity as to whether they are
included in tested income), and the
foreign taxes attributable to that income
can never be claimed as a credit against
the U.S. tax imposed on section 951A
inclusions.
The Treasury Department and the IRS
agree that the GILTI high-tax exclusion
election and the subpart F high-tax
exception election should apply
consistently and, as noted in part I of
this Summary of Comments and
Explanation of Revisions, have
determined that the subpart F high-tax
exception should be conformed to the
GILTI high-tax exclusion, as discussed
in the preamble to the 2020 proposed
regulations. This is appropriate, in part,
due to changes made by the Act. Before
the Act, a consistency requirement
would have had minimal effect because
post-1986 earnings and profits
(including income excluded from
subpart F income under section
954(b)(4)) could be distributed and
would be included in income of the U.S.
shareholder, and foreign taxes would be
deemed paid under section 902, subject
to the limitations imposed by section
904, which is a result consistent with a
subpart F inclusion. Further, before the
Act, an amount excluded under section
954(b)(4) largely resulted only in the
deferral of income and deemed paid
foreign taxes, rather than an exclusion
of those items from the U.S. tax base,
and deductions allocated and
apportioned to such income would limit
a taxpayer’s ability to claim foreign tax
credits in the future. After the Act, an
election under section 954(b)(4) will
result in a permanent change in the
treatment of high-taxed income and the
associated foreign taxes and deductions,
increasing the significance, from a
policy perspective, of inconsistent
treatment.
Thus, the Treasury Department and
the IRS have determined that the policy

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underlying section 954(b)(4) is best
furthered through a single election to
exclude all high-taxed income from
GILTI (and, subject to finalization of the
2020 proposed regulations, subpart F
income) because that income does not
pose a base erosion concern and is
therefore not the type of income that
Congress intended to include in tested
income. However, because the
application of section 954(b)(4), and the
additional administrative burden
associated with identifying high-taxed
items of income, has always been
elective, the Treasury Department and
the IRS have determined that the
exclusion of such income (and to the
extent possible any additional burden
associated with identifying such
income) should continue to be limited
to cases where a taxpayer elects the
application of section 954(b)(4).
The Treasury Department and the IRS
have determined that it would be
inappropriate to allow a taxpayer to
selectively exclude and include income,
once it makes an election under section
954(b)(4). Section 951A generally does
not permit electivity in the
determination of tested income. For
example, a taxpayer cannot choose to
include in tested income amounts that
would be subpart F income but for the
application of section 954(b)(4)
(regardless of whether the election is
made), nor may a taxpayer choose to
include foreign oil and gas extraction
income in tested income. Further,
contrary to some comments, the
Treasury Department and the IRS
anticipate that the additional electivity
is more likely to increase, rather than
reduce, compliance burden as a result of
the need for more numerous
calculations. As a result, the Treasury
Department and the IRS have concluded
that the consistency rule should be
retained; accordingly, this
recommendation is not adopted.
B. Definition of CFC Group
The 2019 proposed regulations define
a CFC group based on two tests. Under
the first test, a CFC group means two or
more CFCs if more than 50 percent of
the total combined voting power of the
stock of each CFC is owned (within the
meaning of section 958(a)) by the same
controlling domestic shareholder (as
defined in § 1.964–1(c)(5)). See
proposed § 1.951A–2(c)(6)(v)(E)(2). The
second test applies only if no single
controlling domestic shareholder
satisfies the first test. Under the second
test, the 2019 proposed regulations
provide that a CFC group means two or
more CFCs if more than 50 percent of
the total combined voting power of the
stock of each CFC is owned (within the

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meaning of section 958(a)) by the same
controlling domestic shareholders and
each such shareholder owns (within the
meaning of section 958(a)) the same
percentage of stock in each CFC. See id.
For purposes of both tests, a controlling
domestic corporate shareholder
includes a related person (within the
meaning of section 267(b) or 707(b)(1))
(the ‘‘related party rule’’). See id.
One comment raised several issues
with the definition of a CFC group. For
example, the comment stated that the
application of the related party rule is
circular because it requires the alreadydetermined existence of a controlling
domestic shareholder to apply the rule
that a controlling domestic shareholder
includes persons related to the
controlling domestic shareholder. In
addition, the comment requested
clarification as to whether, for purposes
of determining the CFC group, section
958(a) ownership is limited to
ownership by U.S. persons. The
comment also raised several issues
related to changes in ownership of
CFCs, including issues arising in
connection with simultaneous
acquisitions of CFCs and acquisitions of
controlling domestic shareholders.
In response to these comments, the
final regulations revise the definition of
a CFC group. Under the final
regulations, a CFC group is an affiliated
group, as defined in section 1504(a),
with certain modifications that broaden
the definition. See § 1.951A–
2(c)(7)(viii)(E)(2)(i). First, the affiliated
group rules in section 1504(a) apply
without regard to section 1504(b)(1)
through (6) (which exclude certain
corporations, such as foreign
corporations, from the definition of an
‘‘includible corporation’’). See id.
Second, for purposes of determining
whether a CFC is a member of a CFC
group, the final regulations incorporate
a ‘‘more than 50 percent’’ threshold
instead of the ‘‘at least 80 percent’’
threshold in section 1504(a). See id.
Stock ownership for this purpose is
determined by applying the constructive
ownership rules of section 318(a), with
certain modifications. See id. These
constructive ownership rules would, for
example, cause two corporations owned
directly by the same U.S. individual to
be part of a CFC group.
The final regulations provide that the
determination of whether a CFC is
included in a CFC group is made as of
the close of the CFC inclusion year of
the CFC that ends with or within the
taxable years of the controlling domestic
shareholders. See § 1.951A–
2(c)(7)(viii)(E)(2)(ii). This rule is
intended to address certain changes in
ownership of CFCs, such as acquisitions

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and dispositions. The final regulations
also provide that a CFC may be a
member of only one CFC group and
include a special tie-breaker rule for
situations in which a CFC would be a
member of more than one CFC group.
See § 1.951A–2(c)(7)(viii)(E)(2)(iii).
The final regulations also clarify that
if a CFC is not a member of a CFC group,
a high-tax election is made (or revoked)
only with respect to the CFC and the
rules regarding the election apply by
reference to the CFC. See § 1.951A–
2(c)(7)(viii)(A). If, however, a CFC is a
member of a CFC group, a high-tax
election is made (or revoked) with
respect to all members of the CFC group
and the rules regarding the election
apply by reference to the CFC group.
See § 1.951A–2(c)(7)(viii)(E)(1).
C. Duration of Election
The 2019 proposed regulations
generally provide that the GILTI hightax exclusion election is effective for the
CFC inclusion year for which it is made
and all subsequent CFC inclusion years,
unless the election is revoked. See
proposed § 1.951A–2(c)(6)(v)(C). The
2019 proposed regulations further
provide that, subject to a ‘‘change of
control’’ exception, if an election is
revoked, then the CFC cannot make a
new election for any CFC inclusion year
that begins within 60 months following
the close of the CFC inclusion year for
which the previous election was
revoked (‘‘60-month restriction’’). See
proposed § 1.951A–2(c)(6)(v)(D)(2). The
preamble to the 2019 proposed
regulations requested comments on
whether the 60-month restriction should
be modified or removed.
Several comments requested that the
60-month restriction be eliminated such
that taxpayers would be permitted to
make the GILTI high-tax exclusion
election on an annual basis. Some
comments reasoned that this change
would be consistent with the subpart F
high-tax exception, which is an annual
election. Another comment asserted that
taxpayers should be permitted to make
the election annually to take into
account significant fluctuations in
foreign income that taxpayers generate
from year to year, or the likely
possibility that taxpayers may be subject
to differing foreign tax rates from year
to year as a result of economic factors
and conditions beyond their control.
Finally, a comment stated that taxpayers
with a mix of high-taxed and low-taxed
income attributable to their QBUs must
evaluate various factors to determine
whether an election should be made
and, as those factors change from year
to year, the 60-month restriction may
force taxpayers to pay additional tax

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under the GILTI regime if future
projections are incorrect.
The Treasury Department and the IRS
agree with these comments and have
determined that, given that the final
regulations adopt a tested unit-by-tested
unit approach (in lieu of the QBU-byQBU approach) and retain the
consistency requirement set forth in the
2019 proposed regulations, the 60month restriction is not necessary to
prevent abuse. Accordingly, the final
regulations do not include the 60-month
restriction and, subject to the
consistency requirement, taxpayers may
elect the GILTI high-tax exclusion on an
annual basis.
Because the final regulations
eliminate the 60-month restriction,
comments requesting that the restriction
be clarified in certain respects are moot
and therefore not discussed.
D. Effect on Non-Controlling U.S.
Shareholders
One comment requested that the final
regulations include a notice of election
and revocation requirement, which
would require any U.S. shareholder that
makes or revokes an election to notify
the CFC of such action and require any
CFC that receives an election or
revocation notice from a U.S.
shareholder for a taxable year to notify
its other U.S. shareholders of the action
taken by the U.S. shareholder and its
ownership percentage.
The Treasury Department and the IRS
agree that U.S. shareholders that are not
controlling domestic shareholders of a
CFC should be informed by the
controlling domestic shareholders of the
CFC if they make (or revoke) a GILTI
high-tax exclusion election with respect
to the CFC. Therefore, the final
regulations clarify that the controlling
domestic shareholders must provide
notice of elections (or revocations), as
required by § 1.964–1(c)(3)(iii), to each
U.S. shareholder that is not a controlling
domestic shareholder. See § 1.951A–
2(c)(7)(viii)(A)(1)(ii), (C) and (D).
E. Treatment of Domestic Partnerships
as Controlling Domestic Shareholders
The proposed regulations under
section 958 in the 2019 proposed
regulations provide, as a general rule,
that for purposes of sections 951 and
951A (and certain related provisions) a
domestic partnership is not treated as
owning stock of a foreign corporation
within the meaning of section 958(a).
See proposed § 1.958–1(d)(1). Under an
exception to this general rule, a
domestic partnership is treated as
owning stock of a foreign corporation
within the meaning of section 958(a) for
purposes of determining whether any

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U.S. shareholder is a controlling
domestic shareholder. See proposed
§ 1.958–1(d)(2). The preamble to the
2019 proposed regulations requested
comments on this exception. The
Treasury Department and the IRS intend
to address comments received in
response to this request in connection
with finalizing the proposed regulations
under sections 951, 956, 958, and 1502.6
F. Elections Made or Revoked on
Amended Tax Returns

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The 2019 proposed regulations
generally allow a taxpayer to make (or
revoke) the GILTI high-tax exclusion
election with an amended income tax
return. See proposed § 1.951A–
2(c)(6)(v)(A)(1) and (c)(6)(v)(D)(1). One
comment indicated that it was unclear
how the binding effect of the election on
all U.S. shareholders of a CFC operates
when the controlling domestic
shareholder makes (or revokes) the
election on an amended return. In
particular, the comment stated that it
was unclear whether a U.S. shareholder,
other than a controlling domestic
shareholder, would be required to file
an amended return reflecting the
election (or revocation). The comment
further raised concerns about the
possibility that the assessment statute of
limitations may limit the government’s
ability to assess any additional tax due
as a result of such election (or
revocation). The comment
recommended that the final regulations
clarify whether U.S. shareholders are
required to file amended income tax
returns when an election is made (or
revoked) on an amended return.
In general, the Treasury Department
and the IRS agree with the comment
that allowing the controlling domestic
shareholders to make (or revoke) the
GILTI high-tax exclusion election on an
amended income tax return may change
the amount of U.S. tax due with respect
to U.S. shareholders other than the
controlling domestic shareholders.
Further, the election or revocation may
change the amount of U.S. tax due with
respect to all U.S. shareholders in
intervening tax years. If the election
were made (or revoked) on an amended
return after some or all of these taxable
years are no longer open for assessment
under section 6501, it may result in the
issuance of refunds for certain taxable
6 Under currently applicable § 1.951A–1(e)(2), a
domestic partnership can be a controlling domestic
shareholder—for example, for purposes of
determining which party elects the GILTI high-tax
exclusion under § 1.951A–7(c)(7)(viii)(A), including
potentially for taxable years beginning after
December 31, 2017, under § 1.951A–7(b), as
discussed in part VIII of this Summary of
Comments and Explanation of Revisions.

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years of shareholders when
corresponding deficiencies could not be
assessed or collected. As a result, the
final regulations provide that the
election may be made (or revoked) on an
amended federal income tax return only
if all U.S. shareholders of the CFC file
amended federal income tax returns
(unless an original return has not yet
been filed, in which case the original
federal income tax return may be filed
consistently with the election (or
revocation)) for the taxable year (and for
any other taxable year in which their
U.S. tax liabilities would be increased
by reason of that election (or
revocation)) (or in the case of a
partnership if any item reported by the
partnership or any partnership-related
item would change as a result of the
election (or revocation)), within 24
months of the unextended due date of
the original federal income tax return of
the controlling domestic shareholder’s
inclusion year with or within which the
CFC inclusion year, for which the
election is made (or revoked), ends. See
§ 1.951A–2(c)(7)(viii)(A)(2) and
(c)(7)(viii)(C). For administrative
purposes, the final regulations also
provide that amended federal income
tax returns for all U.S. shareholders of
the CFC for the CFC inclusion year must
be filed within a single 6-month period
(within the 24-month period). See
§ 1.951A–2(c)(7)(viii)(A)(2)(ii). The
requirement that all amended federal
income tax returns be filed within a 6month period is to allow the IRS to
timely evaluate refund claims or make
additional assessments.
The final regulations also clarify how
these rules operate in the case of a U.S.
shareholder that is a domestic
partnership. See § 1.951A–
2(c)(7)(viii)(A)(3) and (4). For example,
the final regulations provide that in the
case of a U.S. shareholder that is a
partnership, the election may be made
(or revoked) with an amended Form
1065 or an administrative adjustment
request (as described in § 301.6227–1),
as applicable. See § 1.951A–
2(c)(7)(viii)(A)(3). The final regulations
further provide that if a partnership files
an administrative adjustment request, a
partner that is a U.S. shareholder in the
CFC is treated as having complied with
these requirements (with respect to the
portion of the interest held through the
partnership) if the partner and the
partnership timely comply with their
obligations under section 6227 with
respect to that administrative
adjustment request. See § 1.951A–
2(c)(7)(viii)(A)(4).

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V. Foreign Tax Credit Rules
A. Allocation and Apportionment of
Deductions With Respect to CFC Stock
One comment requested that the final
regulations confirm that U.S.
shareholder deductions properly
allocated and apportioned to income
excluded under the GILTI high-tax
exclusion should not be taken into
account for purposes of section 904 per
the application of section 904(b)(4)(B).
Section 904(b)(4) applies with respect to
deductions properly allocated and
apportioned to income (other than
amounts includible under section
951(a)(1) or 951A(a)) with respect to
stock of a specified 10-percent owned
foreign corporation (as defined in
section 245A(b)) or to such stock to the
extent income with respect to such
stock is other than amounts includible
under section 951(a)(1) or 951A(a).
Accordingly, section 904(b)(4) applies to
any deduction allocated and
apportioned to dividend income for
which a deduction is allowed under
section 245A. See § 1.904(b)–3(a)(1)(ii).
Similarly, section 904(b)(4) applies to
any deduction allocated and
apportioned to stock of specified 10percent owned foreign corporations in
the section 245A subgroup. See
§ 1.904(b)–3(a)(1)(iii). For purposes of
characterizing stock of a CFC under
§ 1.861–13, income excluded under the
GILTI high-tax exclusion should be
treated as any other foreign or U.S.
source gross income described in
§ 1.861–13(a)(1)(i)(A)(9) and (10). The
portion of the value of the stock of the
CFC relating to such income will be
assigned to the section 245A subgroup
under § 1.861–13(a)(5)(ii) through (iv).
As a result, the Treasury Department
and the IRS have determined that the
regulations are clear regarding the
interaction of U.S. shareholder
deductions allocated and apportioned to
income excluded under the GILTI hightax exclusion and section 904(b)(4), and
no further rules are necessary.
Another comment suggested that the
final regulations turn off the application
of section 904(b)(4) for deductions
allocated and apportioned to income or
stock that relates to earnings and profits
arising from CFC income that is
excluded by reason of the GILTI hightax exclusion. This comment indicated
that allowing the application of section
904(b)(4) could incentivize taxpayers to
inappropriately locate deductions
related to high-taxed income in the
United States. The Treasury Department
and the IRS do not agree that taxpayers
will have a material incentive to
relocate deductions relating to hightaxed income to the United States as a

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result of the application of section
904(b)(4) because the foreign tax rates
required to qualify for the GILTI hightax exclusion must generally be
comparable to or higher than the U.S.
corporate tax rate, and, thus, taxpayers
will generally benefit from locating such
deductions in the foreign country. In
effect, the GILTI high-tax exclusion
reduces the effect of federal income
taxes on taxpayers’ locational decisions
with respect to investment and
deductions, thereby increasing the
likelihood that such decisions will be
based on non-tax business
considerations. Furthermore, section
904(b)(4) by its terms applies to income
that is not includible under section
951(a)(1) or section 951A(a), and income
excluded under the GILTI high-tax
exclusion is not includible under either
of those provisions. Accordingly, the
comment is not adopted.
B. Determination of Taxes Paid or
Accrued
One comment asserted that the 2019
proposed regulations are unclear as to
the determination of the foreign taxes
paid or accrued and requested that the
final regulations clarify that foreign
income taxes include taxes imposed by
a country (or countries) on the net item,
as provided under current § 1.954–
1(d)(3)(i). The comment specifically
notes, as an example, instances where
two foreign countries tax the same
income.
The rules provided in § 1.951A–
2(c)(7)(iii) and (vii) are comparable to
those provided in current § 1.954–
1(d)(3)(i); both sets of rules generally
apply § 1.904–6 to allocate and
apportion foreign taxes to income.
Although the GILTI high-tax exclusion
requires that foreign taxes be associated
with income on a narrower basis—the
tested unit rather than the CFC—taxes
imposed on the CFC that relate to
income of the tested unit will generally
be associated with the appropriate
income under the rules in § 1.904–6,
regardless of whether such tax is
imposed by one or more countries. The
2020 proposed regulations propose
further conformity of the rules
applicable for the computation of the
effective foreign tax rate for both subpart
F income and tested income.
Further, in response to this comment,
as well as similar comments received in
response to the 2019 proposed
regulations, the final regulations (T.D.
9882) relating to foreign tax credits
published in the Federal Register (84
FR 69022) (‘‘the 2019 Final FTC
Regulations’’) and these final
regulations clarify the rules for
associating foreign taxes with income.

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In particular, these final regulations
clarify that the amount of foreign
income taxes paid or accrued by a CFC
with respect to a tentative tested income
item is the U.S. dollar amount of the
controlled foreign corporation’s current
year taxes that are allocated and
apportioned to the related tentative
gross tested income. See § 1.951A–
2(c)(7)(vii). The final regulations
provide that the deductions for current
year taxes are allocated and apportioned
to a tentative gross tested income item
under the principles of § 1.960–1(d)(3),
by treating each tentative gross tested
income item as assigned to a separate
tested income group. See § 1.951A–
2(c)(7)(iii)(A). As a result, the principles
of § 1.904–6(a)(1) generally apply to
allocate and apportion foreign income
taxes to a tentative gross tested income
item. However, the principles of
§ 1.904–6(a)(2) are applied, in lieu of the
principles of § 1.904–6(a)(1), to associate
foreign taxes with income in the case of
disregarded payments between tested
units. See § 1.960–1(d)(3) and § 1.951A–
2(c)(7)(iii)(B). The final regulations
provide additional rules for how the
principles of § 1.904–6(a)(2) should be
applied for purposes of the high-tax
exception. See id. In addition, a new
example illustrates how foreign income
taxes are associated with income in the
case of disregarded payments. See
§ 1.951A–2(c)(8)(iii)(B) (Example 2). The
Treasury Department and the IRS also
published proposed regulations (REG–
105495–19) relating to foreign tax
credits in the Federal Register (84 FR
69124) that contain more detailed rules
for associating foreign taxes with
income, including in the case of
disregarded payments.
C. Annual Accounting Periods and
Foreign Tax Accruals
The proposed regulations generally
provide that the amount of foreign
income taxes paid or accrued with
respect to a tentative net tested income
item are the CFC’s current year taxes (as
defined in § 1.960–1(b)(4)) that would
be allocated and apportioned under the
principles of § 1.960–1(d)(3)(ii) to the
tentative net tested income item by
treating the item as in a separate tested
income group. See proposed § 1.951A–
2(c)(6)(iv). Taxes accrue, and are taken
into account in determining foreign
taxes deemed paid under section 960(d),
when all the events have occurred that
establish the fact of the liability and the
amount of the liability can be
determined with reasonable accuracy.
See § 1.960–1(b)(4). Therefore,
withholding taxes accrue when the
payment from which the tax is withheld
is made, and net basis taxes on income

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recognized during a taxable period
accrue on the last day of the taxable
period. Id.
Comments suggested that the final
regulations provide special rules to
address distortions that can arise from a
mismatch between the U.S. and foreign
taxable years. One comment
recommended a ‘‘closing of the books
election’’ whereby a taxpayer could
elect to allocate and apportion its
foreign taxes accrued in one U.S. taxable
year across multiple U.S. taxable years,
in proportion to the income accrued in
each U.S. taxable year. Other comments
recommended that taxpayers be
permitted to adopt various alternative
methods of accounting, including the
use of the foreign taxable year to
determine whether income is subject to
a high rate of tax, or methods of
accounting required under foreign law,
such as mark-to-market.
The Treasury Department and the IRS
have determined that foreign taxes
should be associated with U.S. income
consistently for all federal income tax
purposes, and that deviating from
established principles for determining
when income and foreign taxes are
taken into account for purposes of the
GILTI high-tax exclusion would be
inappropriate. Allowing foreign taxes to
be taken into account in applying the
GILTI high-tax exclusion in a different
year than the year in which the foreign
taxes accrue could lead to double
counting, or double-non-counting, of the
foreign taxes. This could occur, for
example, if a foreign tax that accrued in
one year both caused a prior year
tentative tested income item to be
excluded as high-taxed and was
creditable in the later year under section
960(d). While some comments also
recommended changes to how foreign
taxes are taken into account more
generally, changes to the foreign tax
credit regime are beyond the scope of
this rulemaking. In addition, the
Treasury Department and the IRS
responded to similar comments in Part
V of the Summary of Comments and
Explanation of Revisions in the
preamble to the 2019 Final FTC
Regulations.
Similar considerations would apply
with respect to the adoption of
alternative methods of accounting for
tentative tested income items, such as
the adoption of a foreign fiscal year as
the testing period or mark-to-market
accounting. The use of these methods
would lead to potential double counting
of items of income, gain, deduction, or
loss in different U.S. taxable years for
different purposes, or would require
complex coordination rules with
material changes to established rules

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relating to when such items accrue for
federal income tax purposes. Such
changes are beyond the scope of this
rulemaking and, accordingly, are not
adopted.

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VI. Removal of Examples in § 1.954–
1(d)(7)
Current § 1.954–1(d)(7) provides
examples that illustrate the application
of the rules set forth in § 1.954–1(c) and
(d). The Treasury Department and the
IRS have determined that these
examples need to be updated to
properly reflect changes to current
§ 1.954–1 made in the final regulations,
and to other provisions referenced in
the examples. Therefore, the final
regulations remove the examples in
current § 1.954–1(d)(7). No inference is
intended as to the removal of these
examples. Additional examples will be
considered in connection with the
Treasury decision adopting the 2020
proposed regulations as final regulations
in the Federal Register.
VII. Authority
The Treasury Department and the IRS
are aware that questions have been
raised regarding the statutory authority
for the GILTI high-tax exclusion. As
described in detail in the preamble to
the 2019 proposed regulations (see 84
FR 29114), the Treasury Department and
the IRS have determined that the GILTI
high-tax exclusion is a valid
interpretation of ambiguous statutory
text in section 951A(c)(2)(A)(i)(III) and,
after considering assertions to the
contrary, concluded that this rationale
provides authority to finalize the GILTI
high-tax exclusion. See Michigan v.
Environmental Protection Agency, 135
S.Ct. 2699, 2707 (2015) (observing that
a court must ‘‘accept an agency’s
reasonable resolution of an ambiguity in
a statute that the agency administers,’’
provided that such interpretation
‘‘operate[s] within the bounds of
reasonable interpretation.’’).
Specifically, the regulation interprets
the words ‘‘by reason of’’ in that
provision as denoting independently
sufficient causation. The assertion by
some commenters to the contrary that
the words ‘‘by reason of’’
unambiguously require ‘‘but for’’
causation is not supported by the case
law. Terms such as ‘‘by reason of’’ have
been equated with other causal terms,
such as ‘‘because of’’ or ‘‘as a result of,’’
and have been interpreted flexibly based
on the underlying context and purposes
of the applicable provision. Several
recent decisions have interpreted such
terms as encompassing independently
sufficient causation based on dicta in
the Supreme Court’s recent opinion in

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Burrage v. United States, 134 S.Ct. 881,
890 (2014). See, e.g., United States v.
Ewing, 749 Fed.Appx. 317, 327–28 (6th
Cir. 2018); United States v. Seals, 915
F.3d 1203, 1206–07 (8th Cir. 2019);
United States v. Feldman, 936 F.3d
1288, 1317–18 (11th Cir. 2019).
In addition, commenters have
suggested that, based on the statutory
structure of sections 954(b)(4) and
951A(c)(2)(A)(i)(III), the provisions can
only apply to income that would
otherwise qualify as FBCI or insurance
income. The Treasury Department and
the IRS disagree with this assertion
because it would require that income
both qualify as FBCI or insurance
income and be excluded from such
categories of income for purposes of the
same provision. Moreover, neither
section 954(b)(4) nor
951A(c)(2)(A)(i)(III) contains any
limitation on the category of income to
which the provisions can apply, instead
referring broadly to ‘‘any item of
income’’ and ‘‘any gross income,’’
respectively.
Accordingly, the GILTI high-tax
exclusion is a valid interpretation of
section 951A(c)(2)(A)(i)(III) based on the
statutory text and the legislative
purposes and history underlying section
951A, each of which is described in
detail in the preamble to the 2019
proposed regulations.
VIII. Applicability Dates
Consistent with the applicability date
in the 2019 proposed regulations, the
final regulations provide that the GILTI
high-tax exclusion applies to taxable
years of foreign corporations beginning
on or after July 23, 2020, and to taxable
years of U.S. shareholders in which or
with which such taxable years of foreign
corporations end. See § 1.951A–7(b).7
Several comments requested that
taxpayers be permitted to apply the
GILTI high-tax exclusion earlier than
the proposed regulations would have
7 Although this applicability date applies to
§ 1.954–1(c)(1)(iv) (clarifying the treatment of
deductions and loss attributable to disqualified
basis in determining a net item of foreign base
company income or insurance income), the rules in
§ 1.951A–2(c)(5) (requiring deductions or loss
attributable to disqualified basis to be allocated and
apportioned solely to residual gross income) apply
to taxable years of foreign corporations beginning
after December 31, 2017, and to taxable years of
U.S. shareholders in which or with which such
taxable years of foreign corporations end. See
§ 1.951A–7(a). See also proposed § 1.951A–2(c)(6)
(requiring deductions related to disqualified
payments to be allocated and apportioned solely to
residual CFC gross income), as proposed to be
amended at 85 FR 19858 (April 8, 2020), which
would apply to taxable years of foreign corporations
ending on or after April 7, 2020, and to taxable
years of U.S. shareholders in which or with which
such taxable years end. See proposed § 1.951A–
7(d).

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allowed (for example, to taxable years
beginning after December 31, 2017). In
response to the comments, the final
regulations permit taxpayers to choose
to apply the GILTI high-tax exclusion to
taxable years of foreign corporations
that begin after December 31, 2017, and
before July 23, 2020, and to taxable
years of U.S. shareholders in which or
with which such taxable years of the
foreign corporations end. See § 1.951A–
7(b). Any taxpayer that applies the
GILTI high-tax exclusion retroactively
must consistently apply the rules in this
Treasury decision to each taxable year
in which the taxpayer applies the GILTI
high-tax exclusion. See id.
Special Analyses
I. Regulatory Planning and Review—
Economic Analysis
Executive Orders 13771, 13563, and
12866 direct agencies to assess costs and
benefits of available regulatory
alternatives and, if regulation is
necessary, to select regulatory
approaches that maximize net benefits
(including potential economic,
environmental, public health and safety
effects, distributive impacts, and
equity). Executive Order 13563
emphasizes the importance of
quantifying both costs and benefits, of
reducing costs, of harmonizing rules,
and of promoting flexibility. For
purposes of Executive Order 13771, this
final rule is regulatory.
The Office of Management and
Budget’s Office of Information and
Regulatory Affairs (OIRA) has
designated these regulations as subject
to review under Executive Order 12866
pursuant to the Memorandum of
Agreement (April 11, 2018) between the
Treasury Department and the Office of
Management and Budget (OMB)
regarding review of tax regulations. The
Office of Information and Regulatory
Affairs (OIRA) has designated the final
rulemaking as significant under section
1(c) of the Memorandum of Agreement.
Accordingly, OMB has reviewed the
final regulations.
A. Background
The Tax Cuts and Jobs Act (the ‘‘Act’’)
established a system under which
certain earnings of a foreign corporation
can be repatriated to a corporate U.S.
shareholder without federal income tax.
However, Congress recognized that,
without any anti-base erosion measures,
this system could incentivize taxpayers
to allocate income—in particular,
mobile income from intangible property
that would otherwise be subject to U.S.
tax—to controlled foreign corporations
(‘‘CFCs’’) operating in low- or zero-tax

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jurisdictions. See Senate Committee on
the Budget, 115th Cong., Reconciliation
Recommendations Pursuant to H. Con.
Res. 71, at 365 (the ‘‘Senate
Explanation’’). Therefore, Congress
enacted section 951A in order to subject
intangible income earned by a CFC to
U.S. tax on a current basis, similar to the
treatment of a CFC’s subpart F income
under section 951(a)(1)(A). However, in
order to protect the competitive position
of U.S. corporations relative to their
foreign peers, the global intangible low
tax income (‘‘GILTI’’) of a corporate U.S.
shareholder is effectively taxed at a
reduced rate by reason of the deduction
under section 250 (with the resulting
federal income tax further reduced by a
portion of foreign tax credits under
section 960(d)). Id.
The Treasury Department and the IRS
previously issued final and proposed
regulations under section 951A on June
21, 2019 (‘‘2019 proposed regulations’’).
B. Need for Regulations
The final regulations are needed to
provide a framework for taxpayers to
elect to apply the statutory high-tax
exception of section 954(b)(4) and
exclude certain high-taxed income from
taxation under section 951A.

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C. Overview of Regulations
The final regulations provide that the
GILTI high-tax exclusion in section
951A(c)(2)(A)(i)(III) applies to hightaxed income of a CFC that is excluded
from foreign base company income
(‘‘FBCI’’) or insurance income under
section 954(b)(4) regardless if the
income would otherwise be FBCI or
insurance income.
The final regulations provide rules to
determine the effective rate of tax on
foreign items of income for the purposes
of applying the GILTI high-tax
exclusion. The final regulations provide
that the effective foreign tax rate is
determined on a tested unit basis. They
also provide rules to determine the net
amount of income (in other words, the
tentative tested income item) and the
foreign taxes paid or accrued with
respect to such net amount of income
that are used to compute the effective
rate of tax. In addition, the final
regulations indicate how to make a
GILTI high-tax exclusion election. The
final regulations provide that the
election, if made, must be made
consistently for certain related CFCs.
The final regulations also provide that
taxpayers can make the election
annually.

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D. Economic Analysis
1. Baseline
The Treasury Department and the IRS
have assessed the benefits and costs of
the final regulations relative to a noaction baseline reflecting anticipated
federal income tax-related behavior in
the absence of these regulations.
2. Summary of Economic Effects
The final regulations provide
certainty and clarity to taxpayers in
applying section 954(b)(4) to certain
high-tax income. In the absence of this
clarity, there is a higher likelihood that
taxpayers will interpret the rules
regarding the high-tax exclusion
differently. For example, when
taxpayers hold varying interpretations
of statutory language, one taxpayer may
undertake an investment in a particular
country while another taxpayer may
decline to make this investment with
this difference based solely on different
interpretations of how income from that
investment will be treated under section
951A and related provisions. If the
investment would have been more
productive if undertaken by the second
taxpayer, this difference in beliefs about
tax treatment is economically costly.
The final regulations help to minimize
this outcome. Clarity and certainty over
tax treatment also reduce compliance
costs and the costs of tax
administration.
The final regulations also work to
apply the GILTI high-tax exclusion in a
way that treats income similarly across
all international business activity and
without favoring one type of income
over another. In general, such equitable
treatment of income-generating
activities can be expected to improve
U.S. economic performance.
The Treasury Department and the IRS
project that the final regulations will
have annual economic effects greater
than $100 million ($2020). This
determination is based on the fact that
many of the taxpayers potentially
affected by these regulations are large
multinational enterprises. Because of
their substantial size, even modest
changes in the treatment of their
foreign-source income, relative to the
no-action baseline, can lead to changes
in patterns of economic activity that
amount to at least $100 million per year.
The Treasury Department and the IRS
project that the final regulations may
increase U.S. taxpayers’ foreign
investment in high-tax jurisdictions,
since the final regulations may decrease
the effective tax rate on high-tax foreignsource income for some U.S. taxpayers
relative to the no-action baseline. The
Treasury Department and the IRS have

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not undertaken more precise estimates
of the economic effects of the
regulations. We do not have readily
available data or models to predict with
reasonable precision the business
decisions that taxpayers would make
under the final regulations, such as the
amount and location of their foreign
business activities, versus alternative
regulatory approaches, including the noaction baseline.
In the absence of quantitative
estimates, the Treasury Department and
the IRS have undertaken a qualitative
analysis of the economic effects of the
final regulations relative to the noaction baseline and relative to
alternative regulatory approaches.
3. Economic Analysis of Specific
Provisions
a. Scope of the GILTI High-Tax
Exclusion
The GILTI high-tax exclusion in
section 951A permits U.S. shareholders
of CFCs to elect to exclude certain hightaxed income from gross tested income.
The final regulations provide guidance
on which types of high-taxed income
are eligible for the high-tax exclusion.
The Treasury Department and the IRS
considered a number of options for
defining income that is eligible for the
GILTI high-tax exclusion. The options
were (i) to exclude from gross tested
income only income that would be
subpart F income solely but for the
high-tax exception of section 954(b)(4)
applying to such income; (ii) in addition
to excluding the aforementioned
income, to exclude from gross tested
income on an elective basis an item of
gross income that is excluded by reason
of another exception to FBCI or
insurance income, if such income is
subject to an effective foreign tax rate
above the statutory threshold; 8 or (iii) to
exclude from gross tested income on an
elective basis any item of gross income
subject to an effective foreign tax rate
above the statutory threshold.
The first option excludes from gross
tested income only income that would
be FBCI or insurance income but for the
high-tax exception of section 954(b)(4),
which is the interpretation of the scope
of the GILTI high-tax exclusion in the
final 951A regulations. This approach is
consistent with current regulations
under section 954, which permit an
election under section 954(b)(4) only
with respect to income that is not
excluded from subpart F income by
reason of another exception (for
8 The statutory threshold is 90 percent of the
maximum U.S. corporate tax rate (18.9 percent
based on the current U.S. corporate tax rate of 21
percent).

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example, section 954(c)(6) or 954(h)).
However, under this approach,
taxpayers with high-taxed gross tested
income would have an incentive to
structure their foreign operations in
order to ensure that income that would
otherwise qualify as gross tested income
would instead qualify as subpart F
income, to a greater degree than other
regulatory approaches that provide a
broader GILTI high-tax exclusion, such
as the third option considered. For
instance, under this option, a taxpayer
could structure its operations to have a
CFC purchase personal property from,
or sell personal property to, a related
person in order to generate foreign base
company sales income described under
section 954(d) (assuming certain other
exceptions are not satisfied). The result
would be that the CFC’s income from
the disposition of the property meets the
definition of FBCI and hence is eligible
for the high-tax exception. Because
businesses are largely not currently
structured in this way, such an
organization would entail restructuring,
which would potentially be costly and
only available to certain taxpayers yet
would not provide any general
economic benefit. In other words, such
reorganization to realize a specific tax
treatment would suggest that tax instead
of business considerations are
determining business structures and
operations. This outcome may lead to
higher compliance costs and less
efficient patterns of business activity
relative to a regulatory approach that
provides a broader GILTI high-tax
exclusion.
The second option broadens the
application of the GILTI high-tax
exclusion, relative to the first option, to
allow taxpayers to elect to exclude items
of gross income that are subject to an
effective foreign tax rate above the
statutory threshold, if such income was
also excluded from FBCI or insurance
income by reason of another exception
to subpart F. Under this interpretation,
income such as active financing income
that is excluded from subpart F income
under section 954(h), active rents or
royalties that are excluded from subpart
F income under 954(c)(2)(A), and
related party payments that are
excluded from subpart F income under
section 954(c)(6) could also be excluded
from gross tested income under the
GILTI high-tax exclusion if such items
of income are high taxed within the
meaning of section 954(b)(4).
Under this approach, however,
taxpayers would have the ability to
exclude their CFCs’ high-taxed income
that would be subpart F income but for
an exception (for example, active
financing income), while they would

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not be able to exclude their CFCs’ hightaxed income that is not subpart F
income in the first instance (for
example, active business income). This
may result in differential treatment of
economically similar income, which
generally leads to economically
inefficient decision-making.
Furthermore, taxpayers with items of
high-taxed income that are not subpart
F income would still be incentivized to
restructure their foreign operations in
order to convert their high-taxed gross
tested income into subpart F income,
which poses the same compliance costs
and inefficiencies as the first option.
The third option, which was adopted
in the proposed regulations and which
these regulations finalize, provides an
election to broaden the scope of the
high-tax exception relative to the other
two options considered. Under this
option, the high-tax exception under
section 954(b)(4) for purposes of the
GILTI high-tax exclusion applies to any
item of income that is subject to an
effective foreign tax rate greater than 90
percent of the maximum corporate tax
rate (currently, 18.9 percent based on a
21 percent corporate rate). The final
regulations permit controlling domestic
shareholders of CFCs to elect to apply
the high-tax exception under section
954(b)(4) to items of gross income that
would not otherwise be FBCI or
insurance income. If this high-tax
exception is elected, the GILTI high-tax
exclusion will exclude the item of gross
income from gross tested income. Under
the election, an item of gross income is
subject to a high rate of foreign tax if,
after taking into account properly
allocable expenses, the net item of
income is subject to an effective foreign
tax rate above the statutory threshold.
Contrary to the first two options, this
approach permits similarly situated
taxpayers with CFCs subject to a high
rate of foreign tax to make the election
to exclude such income from gross
tested income and reduces the incentive
for taxpayers to restructure their
operations or structures to convert their
high-taxed gross tested income into
FBCI or insurance income for federal
income tax purposes.
For taxpayers that make the election,
this approach will lower U.S. tax on
certain foreign income by reducing U.S.
tax on a broader scope of the income of
high-taxed tested units compared to the
no-action baseline. If a taxpayer elects
the high-tax exclusion, U.S. tax on other
foreign income may increase due to
complex interactions with other
provisions in the corporate tax system,
such as the expense allocation and
foreign tax credit rules, although
taxpayers will generally only make the

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election if this increase in tax on other
foreign income is less than the decrease
in tax on high-taxed income. Thus, this
approach may reduce the taxpayers’ cost
of capital on high-taxed foreign
investment, and at the margin, the lower
cost of capital may increase foreign
investment in high-tax jurisdictions by
U.S.-parented firms relative to the
baseline.
The Treasury Department and the IRS
have not undertaken estimation of these
effects, relative to the no-action
baseline, because we do not have
readily available data or models to
estimate with any reasonable precision:
(i) The number and attributes of the
taxpayers that will find it advantageous
to make the election; (ii) the
relationship between the marginal
effective foreign tax rate at the tested
unit level and foreign investment by
U.S. taxpayers; and (iii) the range of
marginal effective foreign tax rates at the
tested unit level that taxpayers are likely
to have under the final regulations
versus the baseline or other regulatory
approaches.
b. Aggregation of Income for
Determination of the Effective Foreign
Tax Rate
The statute provides an exclusion
from tested income for high-taxed
income but does not provide sufficient
detail for determining how income
should be aggregated for determining
the effective foreign tax rate that applies
to that income, such that that income
would be excluded. The Treasury
Department and the IRS considered four
options to address this issue: (i) Apply
the determination of whether income is
high-taxed on an item-by-item basis; (ii)
apply the determination on a CFC-byCFC basis; (iii) apply the determination
on a qualified business unit (‘‘QBU’’)by-QBU basis; and (iv) apply the
determination on a tested unit-by-tested
unit basis.
The first option is to determine
whether income is high-taxed income
on an item-by-item basis, based on the
item-by-item determination that is
generally applicable under the current
regulations that implement the high-tax
exception of section 954(b)(4) for
purposes of subpart F income. However,
this would entail high compliance costs
for taxpayers and be difficult to
administer because it would require
taxpayers to analyze each item of
income to determine whether, under
federal tax principles, the item is subject
to a sufficiently high effective foreign
tax rate. The Treasury Department and
the IRS have not estimated the higher
compliance costs that might have been

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incurred under this regulatory option,
relative to the final regulations.
The second option, to apply the
determination based on all the items of
income of the CFC, would minimize
complexity and would be relatively easy
to administer. On the other hand, this
approach could permit inappropriate
tax planning, such as combining
operations subject to different rates of
tax into a single CFC. This would have
the effect of ‘‘blending’’ the rates of
foreign tax imposed on the income,
which could result in low- or non-taxed
income being excluded as high-taxed
income by being blended with much
higher-taxed income. The low-taxed
income in this scenario is precisely the
sort of base erosion-type income that the
legislative history describes section
951A as intending to tax, and such tax
motivated planning behavior is
economically inefficient.
The third option, which was proposed
in the proposed regulations, is to apply
the high-tax exception based on the
items of gross income of a QBU of the
CFC. Under this approach, the net
income that is taxed by the foreign
jurisdiction in each QBU must be
determined and the blending of
different tax rates within a CFC would
be minimized. While this approach
would more accurately separate hightaxed and low-taxed income, compared
to applying the high-tax exception on
the basis of a CFC, there were several
comments to the proposed regulations
that noted the difficulties in compliance
and administration that would arise if
the QBU standard were used, such as
the difficulty in determining whether a
set of activities constituted a trade or
business and hence a QBU.
The fourth option, which is adopted
in the final regulations, is to apply the
high-tax exception on the basis of the
items of gross income of a tested unit of
a CFC. The tested unit standard is a
more targeted measure than the QBU
standard and will be more easily
applied to the GILTI high-tax exclusion
than the QBU standard. Moreover, the
tested unit standard, similarly to the
QBU standard, will minimize the
blending of different tax rates within a
CFC. For example, if a CFC earned
$100x of tested income through a tested
unit in Country A and was taxed at a 30
percent rate and earned $100x of tested
income through another tested unit in
Country B and was taxed at 0 percent,
the blended rate of tax on all of the
CFC’s tested income is 15 percent.
However, if the high-tax exception
applies to each of a CFC’s tested units
based on the income earned by that
tested unit, then the two tax rates would
not be blended together. Although

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applying the high-tax exception on the
basis of a tested unit, rather than the
CFC as a whole, may be more complex
and administratively burdensome under
certain circumstances and may entail
somewhat higher compliance costs
(although most of the data the taxpayer
would use for this purpose will likely be
readily available to the taxpayer and
will often overlap with data necessary to
meet other compliance requirements), it
more accurately pinpoints income
subject to a high rate of foreign tax and
therefore continues to subject to tax the
low-taxed base erosion-type income that
the legislative history describes section
951A as intending to tax. Accordingly,
the final regulations apply the high-tax
exception of section 954(b)(4) based on
the items of net income of each tested
unit of the CFC.
The Treasury Department and the IRS
have not estimated these effects, relative
to the no-action baseline, because we do
not have readily available data or
models to estimate with any reasonable
precision the compliance costs or
restructuring costs affected by these
provisions relative to the no-action
baseline or other regulatory alternatives.
c. Grouping of Tested Units in Same
Country
The statute does not specify how
items of income in the same country
should be treated for the purpose of
applying the GILTI high-tax exclusion.
To address this issue, the final
regulations provide guidance on how a
CFC’s tested units in the same country
should be treated in order to determine
if income is high-taxed.
Under the proposed regulations,
effective foreign tax rates are
determined separately for each QBU,
even if other QBUs of the same CFC are
located in the same county. Testing each
QBU separately would limit the
blending of income taxed at different
rates and thus limit the likelihood that
that no-taxed or low-taxed income
would qualify for the high-tax exclusion
through aggregation with higher-taxed
income. This approach is consistent
with the intent to subject low-taxed base
erosion-type income to tax under
section 951A, as described in the
legislative history. However, comments
noted that separate testing for each QBU
would result in high compliance
burdens for taxpayers and could result
in tax rate calculations that do not
reflect the rate of foreign tax on QBU
income, especially in circumstances in
which separate QBUs are able to share
tax attributes through a fiscal unity,
consolidation or similar means. If tax
rate calculations do not properly reflect
the rate of foreign tax on QBU, taxpayers

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may undertake inefficient business
decisions when evaluated against the
intent and purpose of the statute.
In the final regulations, all tested
units of a CFC in the same country are
generally grouped together to determine
the effective foreign tax rate for the
purpose of applying the high-tax
exclusion. Under this approach, lowtaxed and high-taxed income are
unlikely to be blended, since tested
units in the same country are likely to
be subject to the same statutory tax rate.
Relative to the approach in the proposed
regulations, this approach will lower
compliance burdens for taxpayers
because taxpayers will less frequently
have to allocate and apportion taxes
paid by one tested unit to another tested
unit. In addition, this approach may
also reduce the effect of fluctuations in
effective foreign tax rates observed in
individual tested units relative to the
regulatory alternative in the proposed
regulations. Since multiple tested units
are grouped together, outlying effective
foreign tax rates due to timing and base
differences between the U.S. and foreign
tax rules will counterbalance each other.
Finally, this averaging of tax rates will
decrease the incentives taxpayers face to
undertake inefficient planning activities
to achieve certain tax rates in individual
tested units relative to a regulatory
approach in which effective foreign tax
rates were determined separately for
tested units in the same country.
The Treasury Department and the IRS
have not undertaken estimation of these
effects, relative to the no-action
baseline, because data or models are not
readily available to estimate with any
reasonable precision the compliance
costs or patterns of business activity
affected by these provisions relative to
the no-action baseline or other
regulatory alternatives.
d. Foreign Net Operating Losses
The statute provides an exclusion
from tested income for income that is
high-taxed but does not specify whether
or how foreign net operating loss
(‘‘NOL’’) carryovers should be
accounted for in the computation of the
effective foreign tax rate. To address this
issue, the final regulations provide rules
governing how foreign net operating
loss carryforwards should be accounted
for in the computation of the effective
foreign tax rate.
The proposed regulations generally
provided that the effective foreign tax
rate that determines whether a tested
unit’s income is considered high-taxed
is computed using the amount of
income as determined for federal
income tax purposes, without regard for
how the income is determined for

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foreign tax purposes. Thus, under this
approach, foreign NOL carryforwards do
not factor into the effective foreign tax
rate calculation, since foreign NOL
carryforwards are not accounted for in
the federal tax base under federal tax
accounting principles. Some comments
suggested that taxpayers should be able
to make adjustments to the effective
foreign tax rate calculation to account
for foreign NOL carryforwards. These
comments noted that NOLs carried
forward to subsequent profitable tax
years of a tested unit could lead to
income subject to a high statutory
foreign tax rate not being classified as
high-taxed for the purposes of the GILTI
high-tax exclusion. The effective foreign
tax rate—calculated using the federal
tax base—could be lower than the
statutory threshold, even if the smaller
foreign base is taxed at a higher rate.
The Treasury Department and the IRS
decided to maintain the approach of the
proposed regulations and to not provide
rules that account for the use of foreign
NOL carryforwards. The Treasury and
IRS determined that carried forward
NOLs are an example of timing
differences between foreign and federal
tax bases. Since there may be
differences between when certain items
are recognized for federal and foreign
tax purposes, the effective foreign tax
rate of a given tested unit calculated for
the purpose of applying the high-tax
exclusion may change from year to year
even if the tax rate on its foreign base
remains constant. Accounting for these
differences would require complex rules
akin to the deferred tax asset and tax
liability rules used in financial
accounting. Taxpayers would need to
apply rules that reconcile foreign and
federal tax accounting rules over
multiple years. The Treasury
Department and the IRS determined that
these rules would add undue
complexity and impose a substantial
compliance burden on taxpayers and
administrative burden on the
government relative to the regulatory
approach of the final regulations. The
Treasury Department and the IRS have
not attempted to estimate the
compliance burden under this
alternative regulatory approach relative
to the final regulations.
e. Election Period
The statute provides for an election to
exclude high-taxed income from gross
tested income but does not specify the
length of the election period. To address
this issue, proposed regulations
provided that the election into the hightax exclusion would be generally made
or revoked for a five-year period. The
five-year election period was intended

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to prevent taxpayers from manipulating
the timing of income, expenses, and
foreign income taxes in order to achieve
inappropriate results. As a simple
example, under a shorter election
period, a taxpayer could accelerate
certain expenses that are allocable to the
income of a high-taxed tested unit into
a year when the taxpayer elects into the
high-tax exclusion. The following year,
the taxpayer could revoke its election.
Thereby, in the second year, the
taxpayer would be able to use the
foreign income taxes paid by the hightaxed tested unit as creditable taxes
against income included under section
951A without the accelerated expenses
reducing the amount of the foreign tax
credit that could be claimed. In order to
achieve tax savings through this
manipulation, taxpayers would need to
manipulate a large number of items
annually, and the manipulation of these
items would be costly without any
corresponding increase in productive
economic activity.
Comments noted that the extended
election period would require taxpayers
to make five-year projections of a large
number of variables on a tested unit-bytested unit basis in order to determine
whether to elect into the high-tax
exclusion. The complexity of these
projections would result in a large
burden on taxpayers. Moreover, even
with a shorter election period, taxpayers
would likely face difficulty in engaging
in tax planning by changing their
election status. Existing rules limit
taxpayers’ discretion over the timing of
recognition of income and expenses.
The complexity of manipulating the
timing of different items across all of a
taxpayer’s tested units, which is
necessary under the final regulations
because the election into the high-tax
exclusion must be made for all related
CFCs, would also create obstacles to
using frequent changes in election status
as part of tax reduction strategies.
Therefore, the Treasury Department and
IRS determined that the reduction in
taxpayer compliance burdens
significantly outweighed concerns about
potential tax planning, and the Treasury
Department and IRS adopted a one-year
election period in the final regulations.
The Treasury Department and the IRS
have not undertaken estimation of these
effects, relative to the no-action
baseline, because data or models are not
readily available to estimate with any
reasonable precision the compliance
costs or patterns of business activity
affected by these provisions relative to
the no-action baseline or other
regulatory alternatives.

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4. Profile of Affected Taxpayers
The proposed regulations potentially
affect those taxpayers that have at least
one CFC with at least one tested unit
(including, potentially, the CFC itself)
that has high-taxed income. Taxpayers
with CFCs that have only low-taxed
income are not eligible to apply the
high-tax exception and hence are
unaffected by the proposed regulations.
The Treasury Department and the IRS
estimate that there are approximately
4,000 business entities (corporations, S
corporations, and partnerships) with at
least one CFC that pays an effective
foreign tax rate above 18.9 percent, the
current high-tax statutory threshold.
The Treasury Department and the IRS
further estimate that, for the
partnerships with at least one CFC that
pays an effective foreign tax rate greater
than 18.9 percent, there are
approximately 1,500 partners that have
a large enough share to potentially
qualify as a 10 percent U.S. shareholder
of the CFC.9 The 4,000 business entities
and the 1,500 partners provide an
estimate of the number of taxpayers that
could potentially be affected by
guidance governing the election into the
high-tax exception. The figure is
approximate because the tax rate at the
CFC-level will not necessarily
correspond to the tax rate at the tested
unit-level if there are multiple tested
units within a CFC.
The Treasury Department and the IRS
do not have readily available data to
determine how many of these taxpayers
would elect the high-tax exception as
provided in these proposed regulations.
Under the proposed regulations, a
taxpayer that has both high-taxed and
low-taxed tested units will need to
evaluate the benefit of eliminating any
tax under section 951 and section 951A
with respect to high-taxed income
against the costs of forgoing the use of
foreign tax credits and, with respect to
section 951A, the use of tangible assets
in the computation of qualified business
asset investment (QBAI).
Tabulations from the IRS Statistics of
Income 2014 Form 5471 file 10 further
9 Data are from IRS’s Research, Applied
Analytics, and Statistics division based on E-file
data available in the Compliance Data Warehouse
for tax years 2015 and 2016. The counts include
Category 4 and Category 5 IRS Form 5471 filers.
Category 4 filers are U.S. persons who had control
of a foreign corporation during the annual
accounting period of the foreign corporation.
Category 5 filers are U.S. shareholders who own
stock in a foreign corporation that is a CFC and who
owned that stock on the last day in the tax year of
the foreign corporation in that year in which it was
a CFC. For full definitions, see https://www.irs.gov/
pub/irs-pdf/i5471.pdf.
10 The IRS Statistics of Income Tax Stats report
on Controlled Foreign Corporations can be accessed

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indicate that approximately 85 percent
of earnings and profits are reported by
CFCs incorporated in jurisdictions
where the average effective foreign tax
rate is less than or equal to 18.9 percent.
The data indicate several examples of
jurisdictions where CFCs have average
effective foreign tax rates above 18.9
percent, such as France, Italy, and
Japan. However, information is not
readily available to determine how
many tested units are part of the same
CFC and what the effective foreign tax
rates are with respect to such tested
units. Taxpayers potentially more likely
to elect the high-tax exception are those
taxpayers with CFCs that only operate
in high-tax jurisdictions. Data on the
number or types of CFCs that operate
only in high-tax jurisdictions are not
readily available.

The final regulations include
collections of information in § 1.951A–
2(c)(7)(viii)(A)(1) and (2), and § 1.951A–
2(c)(7)(viii)(C). The collection of
information in § 1.951A–
2(c)(7)(viii)(A)(1) requires that each
controlling domestic shareholder of a
CFC file an election to exclude gross
income of a CFC from tested income
under the high-tax exception of section
954(b)(4), with a timely original federal
income tax return or Form 1065, or,
subject to certain time limitations and
other requirements, with an amended
federal income tax return,
administrative adjustment request, or
amended Form 1065, as applicable. This
collection of information in the final
regulations generally retains the
collection of information in the
proposed regulations. The final
regulations clarify that a controlling
domestic shareholder must make this
election by filing the statement required
under § 1.964–1(c)(3)(ii). The collection
of information in § 1.951A–
2(c)(7)(viii)(A)(1)(ii) requires that each
controlling domestic shareholder of a
CFC that files an election to exclude
gross income of a CFC from tested

II. Paperwork Reduction Act
The Paperwork Reduction Act of 1995
(44 U.S.C. 3501–3520) (‘‘PRA’’)
generally requires that a federal agency
obtain the approval of the OMB before
collecting information from the public,
whether such collection of information
is mandatory, voluntary, or required to
obtain or retain a benefit.

income under the high-tax exception of
section 954(b)(4) provide any notices
required under § 1.964–1(c)(3)(iii). The
collection of information in § 1.951A–
2(c)(7)(viii)(C) requires each controlling
domestic shareholder that revokes an
election on an amended return to
provide the statement and notice
described in § 1.951A–
2(c)(7)(viii)(A)(1)(i) and (ii),
respectively.
As shown in Table 1, the Treasury
Department and the IRS estimate that
the number of persons potentially
subject to the collections of information
in § 1.951A–2(c)(7)(viii)(A)(1)(i) and (ii),
and § 1.951A–2(c)(7)(viii)(C) is between
25,000 and 35,000. The estimate in
Table 1 is based on the number of
taxpayers that filed a tax return that
included a Form 5471, ‘‘Information
Return of U.S. Persons With Respect to
Certain Foreign Corporations.’’ The
collections of information in § 1.951A–
2(c)(7)(viii)(A)(1)(i) and (ii), and
§ 1.951A–2(c)(7)(viii)(C) can only apply
to taxpayers that are U.S. shareholders
(as defined in section 951(b)) and U.S.
shareholders are required to file a Form
5471.

TABLE 1—TABLE OF TAX FORMS IMPACTED
Tax Forms Impacted
Number of
respondents
(estimated)

Collections of information
§ 1.951A–2(c)(7)(viii)(A)(1)(i)
2(c)(7)(viii)(C).

and

(ii),

and

§ 1.951A–

25,000–35,000

Forms to which the
information may be attached
Form 990 series, Form 1120 series, Form 1040 series,
Form 1041 series, and Form 1065 series

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Source: MeF, DCS, and IRS’s Compliance Data Warehouse.

The reporting burdens associated with
the collections of information in
§ 1.951A–2(c)(7)(viii)(A)(1)(i) and (ii)
and § 1.951A–2(c)(7)(viii)(C) will be
reflected in the Form 14029, Paperwork
Reduction Act Submission, that the
Treasury Department and the IRS will
submit to OMB for tax returns in the
Form 990 series, Forms 1120, Forms
1040, Forms 1041, and Forms 1065. In
particular, the reporting burden
associated with the information
collection in § 1.951A–
2(c)(7)(viii)(A)(1)(i) and (ii) and
§ 1.951A–2(c)(7)(viii)(C) will be
included in the burden estimates for
OMB control numbers 1545–0123,
1545–0074, 1545–0092, and 1545–0047.
OMB control number 1545–0123
represents a total estimated burden time
for all forms and schedules for
corporations of 3.344 billion hours and

total estimated monetized costs of
$61.558 billion ($2019). OMB control
number 1545–0074 represents a total
estimated burden time, including all
other related forms and schedules for
individuals, of 1.717 billion hours and
total estimated monetized costs of
$33.267 billion ($2019). OMB control
number 1545–0092 represents a total
estimated burden time, including all
other related forms and schedules for
trusts and estates, of 307,844,800 hours
and total estimated monetized costs of
$9.950 billion ($2016). OMB control
number 1545–0047 represents a total
estimated burden time, including all
other related forms and schedules for
tax-exempt organizations, of 52.450
million hours and total estimated
monetized costs of $1,496,500,000
($2020). Table 2 summarizes the status
of the Paperwork Reduction Act

submissions of the Treasury Department
and the IRS related to forms in the Form
990 series, Forms 1120, Forms 1040,
Forms 1041, and Forms 1065.
The overall burden estimates
provided by the Treasury Department
and the IRS to OMB in the Paperwork
Reduction Act submissions for OMB
control numbers 1545–0123, 1545–0074,
1545–0092, and 1545–0047 are
aggregate amounts related to the U.S.
Business Income Tax Return, the U.S.
Individual Income Tax Return, and the
U.S. Income Tax Return for Estates and
Trusts, along with any associated forms.
The burdens included in these
Paperwork Reduction Act submissions,
however, do not account for any burden
imposed by § 1.951A–
2(c)(7)(viii)(A)(1)(i) and (ii) and
§ 1.951A–2(c)(7)(viii)(C). The Treasury
Department and the IRS have not

here: https://www.irs.gov/statistics/soi-tax-statscontrolled-foreign-corporations.
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Federal Register / Vol. 85, No. 142 / Thursday, July 23, 2020 / Rules and Regulations
identified the estimated burdens for the
collections of information in § 1.951A–
2(c)(7)(viii)(A)(1)(i) and (ii) and
§ 1.951A–2(c)(7)(viii)(C) because there
are no burden estimates specific to
§ 1.951A–2(c)(7)(viii)(A)(1)(i) and (ii)
and § 1.951A–2(c)(7)(viii)(C) currently
available. The burden estimates in the
Paperwork Reduction Act submissions
that the Treasury Department and the
IRS will submit to the OMB will in the
future include, but not isolate, the
estimated burden related to the tax
forms that will be revised for the
collection of information in § 1.951A–
2(c)(7)(viii)(A)(1) and (ii) and § 1.951A–
2(c)(7)(viii)(C).
The Treasury Department and the IRS
have included the burdens related to the
Paperwork Reduction Act submissions
for OMB control numbers 1545–0123,

1545–0074, 1545–0092, and 1545–0047
in the PRA analysis for other regulations
issued by the Treasury Department and
the IRS related to the taxation of crossborder income. The Treasury
Department and the IRS encourage users
of this information to take measures to
avoid overestimating the burden that the
collections of information in § 1.951A–
2(c)(7)(viii)(A)(1)(i) and (ii) and
§ 1.951A–2(c)(7)(viii)(C), together with
other international tax provisions,
impose. Moreover, the Treasury
Department and the IRS also note that
the Treasury Department and the IRS
estimate PRA burdens on a taxpayertype basis rather than a provisionspecific basis because an estimate based
on the taxpayer-type most accurately
reflects taxpayers’ interactions with the
forms.

The Treasury Department and the IRS
request comments on all aspects of
information collection burdens related
to the final regulations, including
estimates for how much time it would
take to comply with the paperwork
burdens described above for each
relevant form and ways for the IRS to
minimize the paperwork burden.
Proposed revisions (if any) to these
forms that reflect the information
collections contained in § 1.951A–
2(c)(7)(viii)(A)(1)(i) and (ii) and
§ 1.951A–2(c)(7)(viii)(C) will be made
available for public comment at https://
apps.irs.gov/app/picklist/list/
draftTaxForms.html and will not be
finalized until after these forms have
been approved by OMB under the PRA.

TABLE 2—SUMMARY OF INFORMATION COLLECTION REQUEST SUBMISSIONS RELATED TO FORM 990 SERIES, FORMS
1120, FORMS 1040, FORMS 1041, AND FORMS 1065
Form

Type of filer

Forms 990 .....................

OMB No.(s)

Tax exempt entities (NEW Model)

Status

1545–0047

Approved by OIRA 2/12/2020 until 2/28/2021.

Link: https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=201912-1545-014.
Form 1040 .....................

Individual (NEW Model) .................

1545–0074

Approved by OIRA 1/30/2020 until 1/31/2021.

Link: https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=201909-1545-021.
Form 1041 .....................

Trusts and estates .........................

1545–0092

Approved by OIRA 5/08/2019 until 5/31/2022.

Link: https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=201806-1545-014.
Form 1065 and 1120 ....

Business (NEW Model) ..................

1545–0123

Approved by OIRA 1/30/2020 until 1/31/2021.

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Link: https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=201907-1545-001.

III. Regulatory Flexibility Act
It is hereby certified that these final
regulations will not have a significant
economic impact on a substantial
number of small entities within the
meaning of section 601(6) of the
Regulatory Flexibility Act (5 U.S.C.
chapter 6).
Section 951A generally affects U.S.
shareholders of CFCs. The reporting
burdens in § 1.951A–2(c)(7)(viii)(A)(1)(i)
and (ii) and § 1.951A–2(c)(7)(viii)(C),
affect controlling domestic shareholders
of a CFC that elect to apply the high-tax
exception of section 954(b)(4) to gross
income of a CFC. Controlling domestic
shareholders are generally U.S.
shareholders who, in the aggregate, own
more than 50 percent of the total
combined voting power of all classes of
stock of the foreign corporation entitled

to vote. As an initial matter, foreign
corporations are not considered small
entities. Nor are U.S. taxpayers
considered small entities to the extent
the taxpayers are natural persons or
entities other than small entities. Thus,
§ 1.951A–2(c)(7)(viii)(A)(1)(i) and (ii)
and § 1.951A–2(c)(7)(viii)(C) generally
only affect small entities if a U.S.
taxpayer that is a U.S. shareholder of a
CFC is a small entity.
Examining the gross receipts of the efiled Forms 5471 that is the basis of the
25,000—35,000 respondent estimates,
the Treasury Department and the IRS
have determined that the tax revenue
from section 951A estimated by the
Joint Committee on Taxation for
businesses of all sizes is less than 0.3
percent of gross receipts as shown in the
table below. Based on data for 2015 and
2017

JCT tax revenue (billion $) ...............................

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2018

7.7

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2019

12.5

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2020

9.6

Sfmt 4700

9.5

2021
9.3

2016, total gross receipts for all
businesses with gross receipts under
$25 million is $60 billion while those
over $25 million is $49.1 trillion. Given
that tax on GILTI inclusion amounts is
correlated with gross receipts, this
results in businesses with less than $25
million in gross receipts accounting for
approximately 0.01 percent of the tax
revenue. Data are not readily available
to determine the sectoral breakdown of
these entities. Based on this analysis,
smaller businesses are not significantly
impacted by these proposed regulations.
The Small Business Administration’s
small business size standards (13 CFR
part 121) identify as small entities
several industries with annual revenues
above $25 million or because of the
number of employees.
2022

2023

9.0

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2024
9.3

2025
15.1

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Total gross receipts (billion $) ..................
Percent .............................................................

2017

2018

30727
0.03

53870
0.02

2019
566676
0.02

2020

2021

2022

2023

2024

2025

2026

59644
0.02

62684
0.01

65865
0.01

69201
0.01

72710
0.01

76348
0.02

80094
0.03

Source: Research, Applied Analytics and Statistics division (IRS), Compliance Data Warehouse (IRS) (E-filed Form 5471, category 4 or 5, C
and S corporations and partnerships); Conference Report, at 689.

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The data to assess the number of
small entities potentially affected by
§ 1.951A–2(c)(7)(viii)(A)(1)(i) and (ii)
and § 1.951A–2(c)(7)(viii)(C) are not
readily available. However, businesses
that are U.S. shareholders of CFCs are
generally not small businesses because
the ownership of sufficient stock in a
CFC in order to be a U.S. shareholder
generally entails significant resources
and investment. The Treasury
Department and the IRS welcome
comments on whether the proposed
regulations would affect a substantial
number of small entities in any
particular industry.
Regardless of the number of small
entities potentially affected by
§ 1.951A–2(c)(7)(viii)(A)(1)(i) and (ii)
and § 1.951A–2(c)(7)(viii)(C), the
Treasury Department and the IRS have
concluded that there is no significant
economic impact on such entities as a
result of § 1.951A–2(c)(7)(viii)(A)(1)(i)
and (ii) and § 1.951A–2(c)(7)(viii)(C).
Furthermore, the requirements in
§ 1.951A–2(c)(7)(viii)(A)(1)(i) and (ii)
and § 1.951A–2(c)(7)(viii)(C) apply only
if a taxpayer chooses to make an
election to apply a favorable rule.
Consequently, the Treasury Department
and the IRS have determined that
§ 1.951A–2(c)(7)(viii)(A)(1)(i) and (ii)
and § 1.951A–2(c)(7)(viii)(C) will not
have a significant economic impact on
a substantial number of small entities.
Accordingly, it is hereby certified that
the collection of information
requirements of § 1.951A–
2(c)(7)(viii)(A)(1)(i) and (ii) and
§ 1.951A–2(c)(7)(viii)(C) would not have
a significant economic impact on a
substantial number of small entities.
Notwithstanding this certification, the
Treasury Department and the IRS invite
comments from the public on the
impact of § 1.951A–2(c)(7)(viii)(A)(1)(i)
and (ii) and § 1.951A–2(c)(7)(viii)(C) on
small entities.
IV. Unfunded Mandates Reform Act
Section 202 of the Unfunded
Mandates Reform Act of 1995 (2 U.S.C.
1532) requires that agencies assess
anticipated costs and benefits and take
certain other actions before issuing a
final rule that includes any federal
mandate that may result in expenditures
in any one year by a state, local, or tribal
government, in the aggregate, or by the
private sector, of $100 million in 1995

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dollars, updated annually for inflation.
This rule does not include any federal
mandate that may result in expenditures
by state, local, or tribal governments, or
by the private sector in excess of that
threshold.

PART 1—INCOME TAXES
Paragraph 1. The authority citation
for part 1 continues to read in part as
follows:

■

Authority: 26 U.S.C. 7805.

V. Executive Order 13132: Federalism

§ 1.951A–0

Executive Order 13132 (entitled
‘‘Federalism’’) prohibits an agency from
publishing any rule that has federalism
implications if the rule either imposes
substantial, direct compliance costs on
state and local governments, and is not
required by statute, or preempts state
law, unless the agency meets the
consultation and funding requirements
of section 6 of the Executive Order. This
final rule does not have federalism
implications and does not impose
substantial direct compliance costs on
state and local governments or preempt
state law within the meaning of the
Executive Order.

■

VI. Congressional Review Act
The Administrator of the Office of
Information and Regulatory Affairs of
the OMB has determined that this
Treasury decision is a major rule for
purposes of the Congressional Review
Act (5 U.S.C. 801 et seq.) (‘‘CRA’’).
Under section 801(3) of the CRA, a
major rule generally takes effect 60 days
after the rule is published in the Federal
Register. Accordingly, the Treasury
Department and IRS are adopting these
final regulations with the delayed
effective date generally prescribed
under the Congressional Review Act.
Drafting Information
The principal authors of these
regulations are Jorge M. Oben and Larry
R. Pounders of the Office of Associate
Chief Counsel (International). However,
other personnel from the Treasury
Department and the IRS participated in
their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and
recordkeeping requirements.
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 1 is
amended as follows:

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[Removed]

Par. 2. Section 1.951A–0 is removed.
■ Par. 3. Section 1.951A–2 is amended
by revising paragraph (c)(1)(iii),
redesignating the text of paragraph (c)(3)
as paragraph (c)(3)(i), adding a subject
heading to newly redesignated (c)(3)(i),
and adding paragraph (c)(3)(ii), a
reserved paragraph (c)(6), and
paragraphs (c)(7) and (8) to read as
follows:
§ 1.951A–2

*

Tested income and tested loss.

*
*
*
*
(c) * * *
(1) * * *
(iii) Gross income excluded from the
foreign base company income (as
defined in section 954) or the insurance
income (as defined in section 953) of the
corporation by reason of the exception
described in section 954(b)(4) pursuant
to an election under § 1.954–1(d)(5), or
a tentative gross tested income item of
the corporation that qualifies for the
exception described in section 954(b)(4)
pursuant to an election under paragraph
(c)(7) of this section,
*
*
*
*
*
(3) * * *
(i) In general. * * *
(ii) Coordination with the high-tax
exclusion—(A) In general. In the case of
a taxpayer that has made an election
under paragraph (c)(7) of this section, in
allocating and apportioning deductions
under this paragraph (c)(3), the taxpayer
must apply the rules of sections 861
through 865 and 904(d) (taking into
account the rules of section 954(b)(5)
and § 1.954–1(c)) in a manner that
achieves results consistent with those
under paragraph (c)(7) of this section.
(B) Application of consistency rule to
deductions allocated and apportioned
to the residual grouping in applying the
high-tax exclusion. Deductions that are
allocated and apportioned to the
residual income group under paragraph
(c)(7)(iii)(A) of this section for purposes
of applying the high-tax exclusion to a
controlled foreign corporation’s
tentative gross tested income items are

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allocated and apportioned for purposes
of determining the controlled foreign
corporation’s net income in each
relevant statutory grouping using a
method that provides for a consistent
allocation and apportionment of
deductions to gross income in the
relevant groupings. See §§ 1.954–1(c)
and 1.960–1(d)(3) for rules relating to
the allocation and apportionment of
expenses for purposes of determining
subpart F income, which is included in
the residual grouping for purposes of
applying the high-tax exclusion of
sections 951A(c)(2)(A)(i)(III) and
954(b)(4) and paragraph (c)(7) of this
section. Therefore, for example, interest
expense that is apportioned under the
modified gross income method to a
tentative gross tested income item of a
lower-tier corporation under paragraph
(c)(7)(iii)(A)(1) of this section may be
allocated and apportioned to the tested
income of the upper-tier corporation or
to the residual grouping, depending on
whether the lower-tier corporation’s
tentative gross tested income item is an
item of gross tested income or is
excluded from gross tested income
under the high-tax exclusion. See
paragraph (c)(8)(iii)(C) (Example 3) of
this section for an example illustrating
the rules of this paragraph (c)(3).
*
*
*
*
*
(6) [Reserved]
(7) Election to apply high-tax
exception of section 954(b)(4)—(i) In
general. For purposes of section
951A(c)(2)(A)(i)(III) and paragraph
(c)(1)(iii) of this section, a tentative
gross tested income item of a controlled
foreign corporation for a CFC inclusion
year qualifies for the exception
described in section 954(b)(4) only if—
(A) An election made under
paragraph (c)(7)(viii) of this section is
effective with respect to the controlled
foreign corporation for the CFC
inclusion year; and
(B) The tentative tested income item
with respect to the tentative gross tested
income item was subject to an effective
rate of foreign tax, as determined under
paragraph (c)(7)(vi) of this section, that
is greater than 90 percent of the
maximum rate of tax specified in
section 11.
(ii) Calculation of tentative gross
tested income item—(A) In general. A
tentative gross tested income item with
respect to a controlled foreign
corporation for a CFC inclusion year is
the aggregate of all items of gross
income of the controlled foreign
corporation attributable to a tested unit
(as defined in paragraph (c)(7)(iv) of this
section) of the controlled foreign
corporation in the CFC inclusion year

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that would be gross tested income
without regard to this paragraph (c)(7)
and would be in a single tested income
group (as defined in § 1.960–
1(d)(2)(ii)(C)). A controlled foreign
corporation may have multiple tentative
gross tested income items. See
paragraphs (c)(8)(iii)(A)(2)(i) (Example
1) and (c)(8)(iii)(B)(2)(i) (Example 2) of
this section for illustrations of the
application of the rule set forth in this
paragraph (c)(7)(ii)(A).
(B) Gross income attributable to a
tested unit—(1) Items properly reflected
on separate set of books and records.
Items of gross income of a controlled
foreign corporation are attributable to a
tested unit of the controlled foreign
corporation to the extent they are
properly reflected on the separate set of
books and records of the tested unit, as
modified under paragraph (c)(7)(ii)(B)(2)
of this section. Each item of gross
income of a controlled foreign
corporation is attributable to a tested
unit (and not to more than one tested
unit) of the controlled foreign
corporation. See paragraphs
(c)(8)(iii)(D)(2) and (c)(8)(iii)(D)(5)
(Example 4) of this section for
illustrations of the application of the
rule set forth in this paragraph
(c)(7)(ii)(B).
(2) Gross income determined under
federal income tax principles, as
adjusted for disregarded payments. For
purposes of paragraph (c)(7)(ii)(B)(1) of
this section, gross income must be
determined under federal income tax
principles, except that the principles of
§ 1.904–4(f)(2)(vi) apply to adjust gross
income of the tested unit, to the extent
thereof, to reflect disregarded payments.
For purposes of this paragraph
(c)(7)(ii)(B)(2), the principles of § 1.904–
4(f)(2)(vi) are applied taking into
account the rules in paragraphs
(c)(7)(ii)(B)(2)(i) through (v) of this
section.
(i) The controlled foreign corporation
is treated as the foreign branch owner
and any other tested units of the
controlled foreign corporation are
treated as foreign branches.
(ii) The principles of the rules in
§ 1.904–4(f)(2)(vi)(A) apply in the case
of disregarded payments between a
foreign branch and another foreign
branch without regard to whether either
foreign branch makes a disregarded
payment to, or receives a disregarded
payment from, the foreign branch
owner.
(iii) The exclusion for interest and
interest equivalents described in
§ 1.904–4(f)(2)(vi)(C)(1) does not apply
to the extent of the amount of a
disregarded payment that is deductible
in the country of tax residence (or

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44639

location, in the case of a branch) of the
tested unit that is the payor.
(iv) In the case of an amount
described in paragraph
(c)(7)(ii)(B)(2)(iii) of this section, the
rules for determining how a disregarded
payment is allocated to gross income of
a foreign branch or foreign branch
owner in § 1.904–4(f)(2)(vi)(B) are
applied by treating the disregarded
payment as allocated and apportioned
ratably to all of the gross income
attributable to the tested unit that is
making the disregarded payment. If a
tested unit is both a payor and payee of
an amount described in paragraph
(c)(7)(ii)(B)(2)(iii) of this section, gross
income to which the disregarded
payments are allocable include gross
income allocated to the payor tested
unit as a result of the receipt of amounts
described in paragraph
(c)(7)(ii)(B)(2)(iii) of this section, to the
extent thereof. If a tested unit makes and
receives payments described in
paragraph (c)(7)(ii)(B)(2)(iii) of this
section to and from the same tested unit,
the payments are netted so that
paragraph (c)(7)(ii)(B)(2)(iii) of this
section and the principles of § 1.904–
4(f)(2)(vi) apply only to the net amount
of such payments between the two
tested units.
(v) In the case of multiple disregarded
payments, in lieu of § 1.904–
4(f)(2)(vi)(F), disregarded payments are
taken into account under paragraph
(c)(7)(ii)(B)(2) of this section and the
principles of § 1.904–4(f)(2)(vi) under
the rules provided in this paragraph
(c)(7)(ii)(B)(2)(v). Adjustments are made
with respect to a disregarded payment
received by a tested unit before
payments made by that tested unit.
Except as provided in paragraph
(c)(7)(ii)(B)(2)(iv) of this section, if a
tested unit both makes and receives
disregarded payments, adjustments are
first made with respect to disregarded
payments that would be definitely
related to a single class of gross income
under the principles of § 1.861–8;
second, adjustments are made with
respect to disregarded payments that
would be definitely related to multiple
classes of gross income under the
principles of § 1.861–8, but that are not
definitely related to all gross income of
the tested unit; third, adjustments are
made with respect to disregarded
payments (other than interest described
in paragraph (c)(7)(ii)(B)(2)(iii) of this
section) that would be definitely related
to all gross income under the principles
of § 1.861–8; and fourth, adjustments are
made with respect to interest described
in paragraph (c)(7)(ii)(B)(2)(iii) and
disregarded payments that would not be

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definitely related to any gross income
under the principles of § 1.861–8.
(iii) Calculation of tentative tested
income item—(A) In general. A tentative
tested income item with respect to the
tentative gross tested income item
described in paragraph (c)(7)(ii)(A) of
this section is determined by allocating
and apportioning deductions for the
CFC inclusion year (including expense
for current year taxes (as defined in
§ 1.960–1(b)(4)), and not including any
items described in § 1.951A–2(c)(5) or
(c)(6)) to the tentative gross tested
income item under the principles of
§ 1.960–1(d)(3). For purposes of this
paragraph (c)(7)(iii), each tentative gross
tested income item (if any) is treated as
assigned to a separate tested income
group, as that term is described in
§ 1.960–1(d)(2)(ii)(C), and all other
income is treated as assigned to a
residual income group. For purposes of
applying §§ 1.861–9 and 1.861–9T
under the principles of § 1.960–1(d)(3),
the amount of interest deductions that
are allocated and apportioned to the
assets (or gross income, in the case of a
taxpayer that has elected the modified
gross income method) of a lower-tier
corporation, such as a corporation the
stock of which is owned by the
controlled foreign corporation indirectly
through the tested unit, are allocated
and apportioned to the residual income
category and not to any tentative gross
tested income item of the controlled
foreign corporation. See paragraphs
(c)(8)(iii)(A)(2)(iii) (Example 1),
(c)(8)(iii)(B)(2)(iv) (Example 2), and
(c)(8)(iii)(C)(2)(iv) (Example 3) of this
section for illustrations of the
application of the rules set forth in this
paragraph (c)(7)(iii)(A).
(B) Allocation and apportionment of
current year taxes imposed by reason of
disregarded payments. The principles of
§ 1.904–6(a)(2) apply to allocate and
apportion the expense for current year
taxes imposed by reason of disregarded
payments to a tentative gross tested
income item. For purposes of this
paragraph (c)(7)(iii)(B), the principles of
§ 1.904–6(a)(2) apply by—
(1) Treating the CFC as the foreign
branch owner and any other tested unit
as a foreign branch;
(2) In the case of payments to a tested
unit that is treated as a foreign branch
under paragraph (c)(7)(vi)(B)(1) of this
section, applying the principles of
§ 1.904–6(a)(2)(ii) and (iii) as if the
tested unit receiving the payment were
a foreign branch owner; and
(3) Treating any portion of a
disregarded payment between
individual tested units that does not
result in a reallocation of gross income
under paragraph (c)(7)(ii)(B)(2) of this

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section (because the amount of the
payment exceeds the gross income of
the individual tested unit making the
payment) as a payment that is described
in § 1.904–4(f)(2)(vi)(C)(4) (to which
§ 1.904–6(a)(2)(iii) applies). See
paragraph (c)(8)(iii)(B)(2)(iii) (Example
2) of this section for illustrations of the
application of the rules set forth in this
paragraph (c)(7)(iii)(B).
(C) Effect of potential and actual
changes in taxes paid or accrued.
Except as otherwise provided in this
paragraph (c)(7)(iii)(C), the amount of
current year taxes paid or accrued by a
controlled foreign corporation for
purposes of this paragraph (c)(7) does
not take into account any potential
reduction in foreign income taxes that
may occur by reason of a future
distribution to shareholders of all or
part of such income. However, to the
extent the foreign income taxes paid or
accrued by the controlled foreign
corporation are reasonably certain to be
returned to a shareholder by the foreign
country imposing such taxes, directly or
indirectly, through any means
(including, but not limited to, a refund,
credit, payment, discharge of an
obligation, or any other method) on a
subsequent distribution to such
shareholder, the foreign income taxes
are not treated as paid or accrued for
purposes of this paragraph (c)(7). In
addition, foreign income taxes that have
not been paid or accrued because they
are contingent on a future distribution
of earnings (or other similar transaction,
such as a loan to a shareholder) are not
taken into account for purposes of this
paragraph (c)(7). If, pursuant to section
905(c) and § 1.905–3, a redetermination
of U.S. tax liability is required to
account for the effect of a foreign tax
redetermination (as defined in § 1.905–
3(a)), this paragraph (c)(7) is applied in
the adjusted year taking into account the
adjusted amount of the redetermined
foreign tax.
(iv) Tested unit rules—(A) In general.
Subject to the combination rule in
paragraph (c)(7)(iv)(C) of this section,
the term tested unit means any
corporation, interest, or branch
described in paragraphs (c)(7)(iv)(A)(1)
through (3) of this section. See
paragraph (c)(8)(iii)(D) (Example 4) of
this section for an example that
illustrates the application of the tested
unit rules set forth in this paragraph
(c)(7)(iv).
(1) A controlled foreign corporation
(as defined in section 957(a)).
(2) An interest held directly or
indirectly by a controlled foreign
corporation in a pass-through entity that
is—

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(i) A tax resident (as described in
§ 1.267A–5(a)(23)(i)) of any foreign
country; or
(ii) Not treated as fiscally transparent
(as determined under the principles of
§ 1.267A–5(a)(8)) for purposes of the tax
law of the foreign country of which the
controlled foreign corporation is a tax
resident or, in the case of an interest in
a pass-through entity held by a
controlled foreign corporation indirectly
through one or more other tested units,
for purposes of the tax law of the foreign
country of which the tested unit that
directly (or indirectly through the
fewest number of transparent interests)
owns the interest is a tax resident.
(3) A branch (as described in
§ 1.267A–5(a)(2)) the activities of which
are carried on directly or indirectly
(through one or more pass-through
entities) by a controlled foreign
corporation. However, in the case of a
branch that does not give rise to a
taxable presence under the tax law of
the foreign country where the branch is
located, the branch is a tested unit only
if, under the tax law of the foreign
country of which the controlled foreign
corporation is a tax resident (or, if
applicable, under the tax law of a
foreign country of which the tested unit
that directly (or indirectly, through the
fewest number of transparent interests)
carries on the activities of the branch is
a tax resident), an exclusion, exemption,
or other similar relief (such as a
preferential rate) applies with respect to
income attributable to the branch. For
purposes of this paragraph
(c)(7)(iv)(A)(3), similar relief does not
include a credit (for example, a foreign
tax credit) against the tax imposed
under such tax law. If a controlled
foreign corporation carries on directly or
indirectly (through one or more passthrough entities) less than all of the
activities of a branch (for example, if the
activities are carried on indirectly
through an interest in a partnership),
then the rules in this paragraph apply
separately with respect to the portion
(or portions, if carried on indirectly
through more than one chain of passthrough entities) of the activities carried
on by the controlled foreign corporation.
See paragraphs (c)(8)(iii)(D)(3) and
(c)(8)(iii)(D)(4) (Example 4) of this
section for illustrations of the
application of the rules set forth in this
paragraph (c)(7)(iv)(A)(3).
(B) Items attributable to only one
tested unit. For purposes of paragraph
(c)(7) of this section, if an item is
attributable to more than one tested unit
in a tier of tested units, the item is
considered attributable only to the
lowest-tier tested unit. Thus, for
example, if a controlled foreign

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corporation directly owns a branch
tested unit described in paragraph
(c)(7)(iv)(A)(3) of this section, and an
item of gross income is (under the rules
of paragraph (c)(7)(ii)(B) of this section)
attributable to both the branch tested
unit and the controlled foreign
corporation tested unit, then the item is
considered attributable only to the
branch tested unit.
(C) Combination rule—(1) In general.
Except as provided in paragraph
(c)(7)(iv)(C)(2) of this section, tested
units of a controlled foreign corporation
(including the controlled foreign
corporation tested unit) are treated as a
single tested unit if the tested units are
tax residents of, or located in (in the
case of a tested unit that is a branch, or
a portion of the activities of a branch,
that gives rise to a taxable presence
under the tax law of a foreign country),
the same foreign country. For purposes
of this paragraph (c)(7)(iv)(C)(1), in the
case of a tested unit that is an interest
in a pass-through entity or a portion of
the activities of a branch, a reference to
the tax residency or location of the
tested unit means the tax residency of
the entity the interest in which is the
tested unit or the location of the branch,
as applicable. See paragraphs
(c)(8)(iii)(D)(2) and (c)(8)(iii)(D)(5)
(Example 4) of this section for
illustrations of the application of the
rule set forth in this paragraph
(c)(7)(iv)(C)(1).
(2) Exception for nontaxed branches.
The rule in paragraph (c)(7)(iv)(C)(1) of
this section does not apply to a tested
unit that is described in paragraph
(c)(7)(iv)(A)(3) of this section if the
branch described in paragraph
(c)(7)(iv)(A)(3) of this section does not
give rise to a taxable presence under the
tax law of the foreign country where the
branch is located. See paragraph
(c)(8)(iii)(D)(4) (Example 4) of this
section for an illustration of the
application of the rule set forth in this
paragraph (c)(7)(v)(C)(2).
(3) Effect of combination rule. If,
pursuant to paragraph (c)(7)(iv)(C)(1) of
this section, tested units are treated as
a single tested unit, then, solely for
purposes of paragraph (c)(7) of this
section, items of gross income
attributable to such tested units, and
items of deduction and foreign taxes
allocated and apportioned to such gross
income, are aggregated for purposes of
determining the combined tested unit’s
tentative gross tested income item,
tentative tested income item, and
foreign income taxes paid or accrued
with respect to such tentative tested
income item.
(v) Separate set of books and
records—(A) In general. For purposes of

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this paragraph (c)(7), the term separate
set of books and records has the
meaning set forth in § 1.989(a)–1(d). In
addition, for purposes of this paragraph
(c)(7), in the case of a tested unit or a
transparent interest that is an interest in
a pass-through entity or a portion of the
activities of a branch, a reference to the
separate set of books and records of the
tested unit or the transparent interest
means the separate set of books and
records of the entity or the branch, as
applicable.
(B) Failure to maintain separate set of
books and records. If a separate set of
books and records is not maintained for
a tested unit or transparent interest, the
items of gross income, disregarded
payments, and any other items required
to apply paragraph (c)(7) of this section
that would be reflected on a separate set
of books and records of the tested unit
or transparent interest must be
determined. Such items are treated as
properly reflected on the separate set of
books and records of the tested unit or
transparent interest for purposes of
applying paragraph (c)(7) of this section.
(C) Transparent interests. If a tested
unit of a controlled foreign corporation
or an entity an interest in which is a
tested unit of a controlled foreign
corporation holds a transparent interest,
either directly or indirectly through one
or more other transparent interests,
then, for purposes of paragraph (c)(7) of
this section (and subject to the rule of
paragraph (c)(7)(iv)(C) of this section),
items of the controlled foreign
corporation properly reflected on the
separate set of books and records of the
transparent interest are treated as being
properly reflected on the separate set of
books and records of the tested unit, as
modified under paragraph (c)(7)(ii)(B)(2)
of this section. See paragraph
(c)(8)(iii)(D)(6) (Example 4) of this
section for an illustration of the
application of the rule set forth in this
paragraph (c)(7)(v)(C).
(D) Items not taken into account for
financial accounting purposes. For
purposes of this paragraph (c)(7), an
item of gross income in a CFC inclusion
year that is not taken into account in
such year for financial accounting
purposes, and therefore not properly
reflected on a separate set of books and
records of a tested unit or a transparent
interest, or an entity an interest in
which is a tested unit or a transparent
interest, is treated as properly reflected
on a separate set of books and records
to the extent it would have been so
reflected if the item were taken into
account for financial accounting
purposes in such CFC inclusion year.
(vi) Effective rate at which foreign
taxes are imposed. For a CFC inclusion

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44641

year of a controlled foreign corporation,
the effective rate of foreign tax with
respect to the tentative tested income
items of the controlled foreign
corporation is determined separately for
each such item. See paragraphs
(c)(8)(iii)(A)(2)(v) (Example 1),
(c)(8)(iii)(B)(2)(vi) (Example 2), and
(c)(8)(iii)(C)(2)(vi) (Example 3) of this
section for illustrations of the
application of the rules set forth in this
paragraph (c)(7)(vi). The effective rate at
which foreign income taxes are imposed
on a tentative tested income item is—
(A) The U.S. dollar amount of foreign
income taxes paid or accrued with
respect to the tentative tested income
item, determined by applying paragraph
(c)(7)(vii) of this section; divided by
(B) The U.S. dollar amount of the
tentative tested income item, increased
by the amount of foreign income taxes
referred to in paragraph (c)(7)(vi)(A) of
this section.
(vii) Foreign income taxes paid or
accrued with respect to a tentative
tested income item. For a CFC inclusion
year, the amount of foreign income taxes
paid or accrued by a controlled foreign
corporation with respect to a tentative
tested income item of the controlled
foreign corporation for purposes of this
paragraph (c)(7) is the U.S. dollar
amount of the controlled foreign
corporation’s current year taxes (as
defined in § 1.960–1(b)(4)) that are
allocated and apportioned to the related
tentative gross tested income item under
the rules of paragraph (c)(7)(iii) of this
section. See paragraphs
(c)(8)(iii)(A)(2)(iv) (Example 1),
(c)(8)(iii)(B)(2)(v) (Example 2), and
(c)(8)(iii)(C)(2)(v) (Example 3) of this
section for illustrations of the
application of the rule set forth in this
paragraph (c)(7)(vii).
(viii) Rules regarding the high-tax
election—(A) Manner—(1) An election
is made under this paragraph (c)(7)(viii)
by the controlling domestic
shareholders (as defined in § 1.964–
1(c)(5)) with respect to a controlled
foreign corporation for a CFC inclusion
year (a high-tax election) in accordance
with the rules provided in forms or
instructions and by—
(i) Filing the statement required under
§ 1.964–1(c)(3)(ii) with a timely filed
original federal income tax return, or
with an amended federal income tax
return in accordance with paragraph
(c)(7)(viii)(A)(2) of this section, for the
U.S. shareholder inclusion year of each
controlling domestic shareholder in
which or with which such CFC
inclusion year ends;
(ii) Providing any notices required
under § 1.964–1(c)(3)(iii); and

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(iii) Providing any additional
information required by applicable
administrative pronouncements.
(2) In the case of an election (or
revocation) made with an amended
federal income tax return—
(i) The election (or revocation) must
be made on an amended federal income
tax return duly filed within 24 months
of the unextended due date of the
original federal income tax return for
the U.S. shareholder inclusion year with
or within which the CFC inclusion year
ends;
(ii) Each United States shareholder in
the controlled foreign corporation as of
the end of the CFC’s taxable year to
which the election relates must file
amended federal income tax returns (or
timely original federal income tax
returns if a return has not yet been filed)
reflecting the effect of such election (or
revocation) for the U.S. shareholder
inclusion year with or within which the
CFC inclusion year ends as well as for
any other taxable year in which the U.S.
tax liability of the United States
shareholder would be increased by
reason of the election (or revocation) (or
in the case of a partnership if any item
reported by the partnership or any
partnership-related item would change
as a result of the election (or
revocation)) within a single period no
greater than six months within the 24month period described in paragraph
(c)(7)(viii)(A)(2)(i) of this section; and
(iii) Each United States shareholder in
the controlled foreign corporation as of
the end of the controlled foreign
corporation’s taxable year to which the
election relates must pay any tax due as
a result of such adjustments within a
single period no greater than six months
within the 24-month period described
in paragraph (c)(7)(viii)(A)(2)(i) of this
section.
(3) In the case of a United States
shareholder that is a partnership,
paragraphs (c)(7)(viii)(A)(1) and (2) and
(c)(7)(viii)(C) of this section are applied
by substituting ‘‘Form 1065 (or
successor form)’’ for ‘‘federal income tax
return’’ and by substituting ‘‘amended
Form 1065 (or successor form) or
administrative adjustment request (as
described in § 301.6227–1), as
applicable,’’ for ‘‘amended federal
income tax return’’, each place that it
appears.
(4) A United States shareholder that is
a partner in a partnership that is also a
United States shareholder in the
controlled foreign corporation must
generally file an amended return, as
required under paragraph
(c)(7)(viii)(B)(2) of this section, and
must generally pay any additional tax
owed as required under paragraph

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(c)(7)(viii)(B)(3). However, in the case of
a United States shareholder that is a
partner in a partnership that duly files
an administrative adjustment request
under paragraph (c)(7)(viii)(A)(2) of this
section, the partner is treated as having
satisfied the requirements of paragraphs
(c)(7)(viii)(A)(2)(ii) and (iii) of this
section with respect to the interest held
through that partnership if:
(i) The partnership timely files an
administrative adjustment request
described in paragraph
(c)(7)(viii)(A)(1)(i) or (ii) of this section,
as applicable; and,
(ii) Both the partnership and its
partners timely comply with the
requirements of section 6227 with
respect to the administrative adjustment
request. See §§ 301.6227–1 through –3
for rules relating to administrative
adjustment requests.
(B) Scope. A high-tax election applies
with respect to each tentative gross
tested income item of the controlled
foreign corporation for the CFC
inclusion year and is binding on all
United States shareholders of the
controlled foreign corporation.
(C) Revocation. A high-tax election
may be revoked by the controlling
domestic shareholders of the controlled
foreign corporation in the same manner
as prescribed for an election made on an
amended return as described in
paragraph (c)(7)(viii)(A) of this section.
(D) Failure to satisfy election
requirements. A high-tax election (or
revocation) is valid only if all of the
requirements in paragraph (c)(7)(viii)(A)
of this section, including the
requirement to provide notice under
paragraph (c)(7)(viii)(A)(1)(ii) of this
section, are satisfied.
(E) Rules applicable to CFC groups—
(1) In general. In the case of a controlled
foreign corporation that is a member of
a CFC group, a high-tax election is made
under paragraph (c)(7)(viii)(A) of this
section, or revoked under paragraph
(c)(7)(viii)(C) of this section, with
respect to all controlled foreign
corporations that are members of the
CFC group and the rules in paragraphs
(c)(7)(viii)(A) through (D) of this section
apply by reference to the CFC group.
(2) Determination of the CFC group—
(i) Definition. Subject to the rules in
paragraphs (c)(7)(viii)(E)(2)(ii) and (iii)
of this section, the term CFC group
means an affiliated group as defined in
section 1504(a) without regard to
section 1504(b)(1) through (6), except
that section 1504(a) is applied by
substituting ‘‘more than 50 percent’’ for
‘‘at least 80 percent’’ each place it
appears, and section 1504(a)(2)(A) is
applied by substituting ‘‘or’’ for ‘‘and.’’
For purposes of this paragraph

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(c)(7)(viii)(E)(2)(i), stock ownership is
determined by applying the constructive
ownership rules of section 318(a), other
than section 318(a)(3)(A) and (B), by
applying section 318(a)(4) only to
options (as defined in § 1.1504–4(d))
that are reasonably certain to be
exercised as described in § 1.1504–4(g),
and by substituting in section
318(a)(2)(C) ‘‘5 percent’’ for ‘‘50 percent.
(ii) Member of a CFC group. The
determination of whether a controlled
foreign corporation is included in a CFC
group is made as of the close of the CFC
inclusion year of the controlled foreign
corporation that ends with or within the
taxable years of the controlling domestic
shareholders. One or more controlled
foreign corporations are members of a
CFC group if the requirements of
paragraph (c)(7)(viii)(E)(2) of this
section are satisfied as of the end of the
CFC inclusion year of at least one of the
controlled foreign corporations, even if
the requirements are not satisfied as of
the end of the CFC inclusion year of all
controlled foreign corporations. If the
controlling domestic shareholders do
not have the same taxable year, the
determination of whether a controlled
foreign corporation is a member of a
CFC group is made with respect to the
CFC inclusion year that ends with or
within the taxable year of the majority
of the controlling domestic shareholders
(determined based on voting power) or,
if no such majority taxable year exists,
the calendar year. See paragraph
(c)(8)(iii)(E) (Example 5) of this section
for an example that illustrates the
application of the rule set forth in this
paragraph (c)(7)(viii)(E)(2)(ii).
(iii) Controlled foreign corporations
included in only one CFC group. A
controlled foreign corporation cannot be
a member of more than one CFC group.
If a controlled foreign corporation
would be a member of more than one
CFC group under paragraph
(c)(7)(viii)(E)(2) of this section, then
ownership of stock of the controlled
foreign corporation is determined by
applying paragraph (c)(7)(viii)(E)(2) of
this section without regard to section
1504(a)(2)(B) or, if applicable, by
reference to the ownership existing as of
the end of the first CFC inclusion year
of a controlled foreign corporations that
would cause a CFC group to exist.
(ix) Definitions. The following
definitions apply for purposes of this
paragraph (c)(7).
(A) Indirectly. The term indirectly,
when used in reference to ownership,
means ownership through one or more
pass-through entities.
(B) Pass-through entity. The term
pass-through entity means a
partnership, a disregarded entity, or any

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other person (whether domestic or
foreign) other than a corporation to the
extent that income, gain, deduction or
loss of the person is taken into account
in determining the income or loss of a
controlled foreign corporation that
owns, directly or indirectly, interests in
the person.
(C) Transparent interest. The term
transparent interest means an interest in
a pass-through entity (or the activities of
a branch) that is not a tested unit.
(8) Examples—(i) Scope. This
paragraph (c)(8) provides examples
illustrating the application of the rules
in paragraph (c)(7) of this section.
(ii) Presumed facts. For purposes of
the examples in paragraph (c)(8)(iii) of
this section, except as otherwise stated,
the following facts are presumed:
(A) USP is a domestic corporation.
(B) CFC1X and CFC2X are controlled
foreign corporations organized in, and
tax residents of, Country X.
(C) CFC3Z is a controlled foreign
corporation organized in, and tax
resident of, Country Z.
(D) FDEX is a disregarded entity that
is a tax resident of Country X.
(E) FDE1Y and FDE2Y are disregarded
entities that are tax residents of Country
Y.
(F) FPSY is an entity that is organized
in, and a tax resident of, Country Y but
is classified as a partnership for federal
income tax purposes.
(G) CFC1X, CFC2X, CFC3Z, and the
interests in FDEX, FDE1Y, FDE2Y, and
FPSY are tested units (the CFC1X tested
unit, CFC2X tested unit, CFC3Z tested
unit, FDEX tested unit, FDE1Y tested
unit, FDE2Y tested unit, and FPSY
tested unit, respectively).
(H) CFC1X, CFC2X, CFC3Z, FDEX,
FDE1Y, and FDE2Y conduct activities in
the foreign country in which they are
tax resident, and properly reflect items
of income, gain, deduction, and loss on
separate sets of books and records.
(I) All entities have calendar taxable
years (for both federal income tax
purposes and for purposes of the
relevant foreign country) and use the
Euro (Ö) as their functional currency. At
all relevant times Ö1 = $1.
(J) The maximum rate of tax specified
in section 11 for the CFC inclusion year
is 21 percent.
(K) Neither CFC1X, CFC2X, nor
CFC3Z directly or indirectly earns
income described in section 952(b), has
any items of income, gain, deduction, or
loss, or makes or receives disregarded
payments. In addition, no tested unit of
CFC1X, CFC2X, or CFC3Z makes or
receives disregarded payments.
(L) An election made under section
954(b)(4) and paragraph (c)(7)(viii) of
this section is effective with respect to

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CFC1X and CFC2X, as applicable, for
the CFC inclusion year.
(iii) Examples—(A) Example 1: Effect
of disregarded interest—(1) Facts—(i)
Ownership. USP owns all of the stock of
CFC1X, and CFC1X owns all of the
interests of FDE1Y.
(ii) Gross income and deductions
(other than for foreign income taxes). In
Year 1, CFC1X generates Ö100x of gross
income from services to unrelated
parties that would be gross tested
income without regard to paragraph
(c)(7) of this section and that is properly
reflected on the books and records of
FDE1Y. The Ö100x of services income is
general category income under § 1.904–
4(d). In Year 1, FDE1Y accrues and pays
Ö20x of interest to CFC1X that is
deductible for Country Y tax purposes
but is disregarded for federal income tax
purposes. The Ö20x of disregarded
interest income received by CFC1X from
FDE1Y is properly reflected on CFC1X’s
books and records, and the Ö20x of
disregarded interest expense paid from
FDE1Y to CFC1X is properly reflected
on FDE1Y’s books and records.
(iii) Foreign income taxes. Country X
imposes no tax on net income, and
Country Y imposes a 25% tax on net
income. For Country Y tax purposes,
FDE1Y (which is not disregarded under
Country Y tax law) has Ö80x of taxable
income (Ö100x of services income from
the unrelated parties, less a Ö20x
deduction for the interest paid to
CFC1X). Accordingly, FDE1Y incurs a
Country Y income tax liability with
respect to Year 1 of Ö20x (Ö80x x 25%),
the U.S. dollar amount of which is $20x.
(2) Analysis—(i) Tentative gross tested
income items. Under paragraph
(c)(7)(ii)(A) of this section, the tentative
gross tested income item with respect to
each of the CFC1X tested unit and the
FDE1Y tested unit is the aggregate of the
gross income of CFC1X that is
attributable to the tested unit, that
would be gross tested income (without
regard to this paragraph (c)(7)), and that
would be in a single tested income
group. Under paragraphs (c)(7)(ii)(B)(1)
and (2) of this section, items of gross
income of CFC1X are attributable to the
CFC1X tested unit, or the FDE1Y tested
unit, to the extent properly reflected on
its separate set of books and records, as
determined under federal income tax
principles and adjusted to take into
account disregarded payments. Without
regard to the Ö20x disregarded interest
payment from FDE1Y to CFC1X, gross
income attributable to the CFC1X tested
unit would be Ö0 (that is, the Ö20x of
interest income reflected on the books
and records of CFC1X would be reduced
by Ö20x, the amount attributable to the
payment that is disregarded for federal

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44643

income tax purposes). Similarly,
without regard to the Ö20x disregarded
interest payment from FDE1Y to CFC1X,
gross income attributable to the FDE1Y
tested unit would be Ö100x (that is,
Ö100x of services income reflected on
the books and records of FDE1Y,
unreduced by the Ö20x disregarded
interest payment from FDE1Y to
CFC1X). However, under paragraph
(c)(7)(ii)(B)(2) of this section, the gross
income attributable to each of the
CFC1X tested unit and the FDE1Y tested
unit is adjusted by Ö20x, the amount of
the disregarded interest payment from
FDE1Y to CFC1X that is deductible for
Country Y tax purposes. Accordingly,
the tentative gross tested income item
attributable to the CFC1X tested unit
(the ‘‘CFC1X tentative gross tested
income item’’) is Ö20x (Ö0 + Ö20x), and
the tentative gross tested income item
attributable to the FDE1Y tested unit
(the ‘‘FDE1Y tentative gross tested
income item’’) is Ö80x (Ö100x ¥ Ö20x).
(ii) Foreign income tax deduction.
Under paragraph (c)(7)(iii)(A) of this
section, CFC1X’s tentative tested
income items are computed by treating
the CFC1X tentative gross tested income
item and the FDE1Y tentative gross
tested income item each as income in a
separate tested income group (the
‘‘CFC1X income group’’ and the
‘‘FDE1Y income group’’) and by
allocating and apportioning CFC1X’s
deductions for current year taxes under
the principles of § 1.960–1(d)(3)(ii)
(CFC1X has no other deductions to
allocate and apportion). Under
paragraph (c)(7)(iii)(A) of this section,
the Ö20x deduction for Country Y
income taxes is allocated and
apportioned solely to the FDE1Y income
group (the ‘‘FDE1Y group tax’’). None of
the Country Y taxes are allocated and
apportioned to the CFC1X income group
under paragraph (c)(7)(iii)(B) of this
section and the principles of § 1.904–
6(a)(2)(ii)(A), because none of the
Country Y tax is imposed solely by
reason of the disregarded interest
payment.
(iii) Tentative tested income items.
Under paragraph (c)(7)(iii) of this
section, the tentative tested income item
with respect to the CFC1X income group
(the ‘‘CFC1X tentative tested item’’), is
Ö20x. The tentative tested income item
with respect to the FDE1Y income group
(the ‘‘CFC1X tentative tested item’’) is
Ö60x (the FDE1Y tentative gross tested
income item of Ö80x, less the Ö20x
deduction for the FDE1Y group tax).
(iv) Foreign income tax paid or
accrued with respect to a tentative
tested income item. Under paragraph
(c)(7)(vii) of this section, the foreign
income taxes paid or accrued with

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respect to a tentative tested income item
is the U.S. dollar amount of the current
year taxes that are allocated and
apportioned to the related tentative
gross tested income item under the rules
of paragraph (c)(7)(iii) of this section.
Therefore, the foreign income taxes paid
or accrued with respect to the FDE1Y
tentative tested income item is $20x, the
U.S. dollar amount of the FDE1Y group
tax. The foreign income tax paid or
accrued with respect to the CFC1X
tentative tested income item is $0, the
U.S. dollar amount of the foreign tax
allocated and apportioned to the CFC1X
tentative gross tested income item under
paragraph (c)(7)(iii) of this section.
(v) Effective foreign tax rate. The
effective foreign tax rate is determined
under paragraph (c)(7)(vi) of this section
by dividing the U.S. dollar amount of
foreign income taxes paid or accrued
with respect to each respective tentative
tested income item by the U.S. dollar
amount of the tentative tested income
item increased by the U.S. dollar
amount of the relevant foreign income
taxes. Therefore, the effective foreign tax
rate with respect to the FDE1Y tentative
tested income item is 25%, computed
by dividing $20x (the U.S. dollar
amount of the foreign income taxes paid
or accrued with respect to the FDE1Y
tentative tested income item under
paragraph (c)(7)(vii) of this section) by
$80x (the sum of $60x, the U.S. dollar
amount of the FDE1Y tentative tested
income item, and $20x, the U.S. dollar
amount of the foreign income taxes paid
or accrued with respect to the FDE1Y
tentative tested income item). The
CFC1X tentative tested income item is
not subject to any foreign income tax, so
is subject to an effective foreign tax rate
of 0%, calculated as $0 (the U.S. dollar
amount of the foreign income taxes paid
or accrued with respect to the CFC1X
tentative tested income item) divided by
$20x (the U.S. dollar amount of the
CFC1X tentative tested income item).
(vi) Gross income items excluded
under sections 954(b)(4) and
951A(c)(2)(A)(i)(III). The FDE1Y
tentative tested income item is subject
to an effective foreign tax rate (25%)
that is greater than 18.9% (90% of the
maximum rate of tax specified in
section 11). Therefore, the requirement
of paragraph (c)(7)(i)(B) of this section is
satisfied, and the FDE1Y tentative gross
tested income item qualifies under
paragraph (c)(7)(i) of this section for the
high-tax exception of section 954(b)(4)
and is excluded from tested income
under sections 951A(c)(2)(A)(i)(III) and
954(b)(4) and paragraph (c)(1)(iii) of this
section. The CFC1X tentative tested
income item is subject to an effective
foreign tax rate of 0%. Therefore, the

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CFC1X tentative tested income item
does not satisfy the requirement of
paragraph (c)(7)(i)(B) of this section, and
the CFC1X tentative gross tested income
item does not qualify under paragraph
(c)(7)(i) of this section for the high-tax
exception of section 954(b)(4) and is not
excluded from tested income under
sections 951A(c)(2)(A)(i)(III) and
954(b)(4) and paragraph (c)(1)(iii) of this
section.
(B) Example 2: Disregarded payment
for services—(1) Facts—(i) Ownership.
USP owns all of the stock of CFC1X.
CFC1X owns all of the interests of
FDE1Y. FDE1Y is a tax resident of
Country Y, but is treated as fiscally
transparent for Country X tax purposes,
so that FDE1Y is subject to tax in
Country Y and CFC1X is subject to tax
in Country X with respect to FDE1Y’s
activities.
(ii) Gross income, deductions (other
than for foreign income taxes), and
disregarded payments. In Year 1, CFC1X
generates Ö1,000x of gross income from
services to unrelated parties that would
be gross tested income without regard to
paragraph (c)(7) of this section and that
is properly reflected on the books and
records of CFC1X. In Year 1, CFC1X
accrues and pays Ö480x of deductible
expenses to unrelated parties, Ö280x of
which is properly reflected on CFC1X’s
books and records and is definitely
related solely to CFC1X’s gross income
reflected on its books and records, and
Ö200x of which is properly reflected on
FDE1Y’s books and records and is
definitely related solely to FDE1Y’s
gross income reflected on its books and
records. Country X law does not provide
rules for the allocation or
apportionment of these deductions to
particular items of gross income. In Year
1, CFC1X also accrues and pays Ö325x
to FDE1Y for support services
performed by FDE1Y in Country Y; the
payment is disregarded for federal
income tax purposes. The Ö325x of
disregarded support services income
received by FDE1Y from CFC1X is
properly reflected on FDE1Y’s books
and records, and the Ö325x of
disregarded support services expense
paid from CFC1X to FDE1Y is properly
reflected on CFC1X’s books and records.
(iii) Foreign income taxes. Country X
imposes a 10% tax on net income, and
Country Y imposes a 16% tax on net
income. Country X allows a deduction,
but not a credit, for foreign income taxes
paid or accrued to another country
(such as Country Y). For Country Y tax
purposes, FDE1Y (which is not
disregarded under Country Y tax law)
has Ö125x of taxable income (Ö325x of
support services income received from
CFC1X, less a Ö200x deduction for

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expenses paid to unrelated parties).
Accordingly, FDE1Y incurs a Country Y
income tax liability with respect to Year
1 of Ö20x (Ö125x × 16%), the U.S. dollar
amount of which is $20x. For Country
X tax purposes, CFC1X has Ö500x of
taxable income (Ö1,000x of gross income
for services, less a Ö480x deduction for
expenses paid to unrelated parties by
CFC1X and FDE1Y and a Ö20x
deduction for Country Y taxes; Country
X does not allow CFC1X a deduction for
the Ö325x paid to FDE1Y for support
services because the Ö325x payment is
disregarded for Country X tax purposes).
Accordingly, CFC1X incurs a Country X
income tax liability with respect to Year
1 of Ö50x (Ö500x × 10%), the U.S. dollar
amount of which is $50x.
(2) Analysis—(i) Tentative gross tested
income item. Under paragraph (c)(7)(ii)
of this section, CFC1X has two tentative
gross tested income items, one item
with respect to CFC1X (the ‘‘CFC1X
tentative gross tested income item’’) and
one item with respect to CFC1X’s
interest in FDE1Y (the ‘‘FDE1Y tentative
gross tested income item’’). The gross
income attributable to each tested unit
comprises the gross income properly
reflected on the books and records of
each tested unit under paragraph
(c)(7)(ii)(B)(1) of this section, as adjusted
under paragraph (c)(7)(ii)(B)(2) of this
section. Without regard to the Ö325x
payment for support services from
CFC1X to FDE1Y, the gross income
attributable to the FDE1Y tested unit
would be Ö0 (that is, the Ö325x of
services income properly reflected on
the books and records of FDE1Y,
reduced by the Ö325x payment from
CFC1X to FDE1Y that is disregarded for
federal income tax purposes). Similarly,
without regard to the Ö325x payment for
support services from CFC1X to FDE1Y,
the gross income attributable to the
CFC1X tested unit would be Ö1,000x
(that is, Ö1,000x of services income
reflected on the books and records of
CFC1X, unreduced by the Ö325x
disregarded payment). However, under
paragraph (c)(7)(ii)(B)(2) of this section,
the gross income attributable to each of
the CFC1X tested unit and the FDE1Y
tested unit is adjusted by Ö325x, the
amount of the disregarded services
payment from CFC1X to FDE1Y.
Accordingly, the FDE1Y tentative gross
tested income item is Ö325x (Ö0 +
Ö325x), and the CFC1X tentative gross
tested income item is Ö675x (Ö1,000x ¥
Ö325x).
(ii) Deductions (other than for foreign
income taxes). Under paragraph
(c)(7)(iii) of this section, CFC1X’s
tentative tested income items are
computed by applying the principles of
§ 1.960–1(d)(3), treating the CFC1X

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Federal Register / Vol. 85, No. 142 / Thursday, July 23, 2020 / Rules and Regulations
tentative gross tested income item and
the FDE1Y tentative gross tested income
item each as income in a separate tested
income group (the ‘‘CFC1X income
group’’ and the ‘‘FDE1Y income group’’)
and by allocating and apportioning
CFC1X’s deductions among the income
groups under federal income tax
principles. For Year 1, CFC1X has
deductible expense (other than foreign
income tax) of Ö480x. This amount
includes Ö280x of deductible expense
that is definitely related solely the
services activity of the CFC1X tested
unit, and another Ö200x of deductible
expense (other than foreign income tax)
that is definitely related solely to the
services provided by the FDE1Y tested
unit. Therefore, Ö280x of deductible
expense (other than foreign income tax)
is allocated and apportioned to the
CFC1X income group, and Ö200x of
deductible expense (other than foreign
income tax) is allocated and
apportioned to the FDE1Y income
group.
(iii) Foreign income tax deduction.
CFC1X accrues foreign income tax in
Year 1 of Ö70x (Ö50x imposed by
Country X and Ö20x imposed by
Country Y). Under paragraph (c)(7)(iii)
of this section, the deductions for
foreign income taxes are allocated and
apportioned under the principles of
§ 1.960–1(d)(3)(ii) to the FDE1Y income
group and the CFC1X income group.
Under paragraph (c)(7)(iii)(A) of this
section and § 1.960–1(d)(3)(ii), the
principles of § 1.904–6(a)(1) generally
apply to determine the amount of the
foreign income tax paid or accrued with
respect to each income group. However,
under paragraph (c)(7)(iii)(B) of this
section, foreign income taxes imposed
by reason of the receipt of a disregarded
payment are allocated and apportioned
under the principles of § 1.904–6(a)(2).
The Country Y tax of Ö20x is imposed
solely by reason of FDE1Y’s receipt of
a Ö325x disregarded payment. As a
result, the entire Ö20x of Country Y tax
is allocated and apportioned to the
FDE1Y income group under the
principles of § 1.904–6(a)(2)(ii)(A). If
Country X had allowed a deduction for
the disregarded payment from CFC1X to
FDE1Y and not otherwise imposed tax
on CFC1X with respect to income of
FDE1Y, the foreign tax imposed by
Country X would relate only to the
CFC1X tested income group, and no
portion of it would be allocated and
apportioned to the FDE1Y income group
because the FDE1Y income would not
be included in the Country X tax base.
However, because gross income subject
to tax in Country X includes gross
income that for federal income tax

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purposes is attributable to both the
FDE1Y tested unit and the CFC1X tested
unit, the Ö50x of foreign income tax
imposed by Country X is related to both
the FDE1Y income group and to the
CFC1X income group and must be
allocated and apportioned under the
principles of § 1.904–6(a)(1)(i). Because
Country X does not provide specific
rules for the allocation or
apportionment of the Ö500x of
deductible expenses, § 1.904–6(a)(1)(ii)
applies the principles of §§ 1.861–8
through 1.861–14T to determine the
foreign law net income subject to
Country X tax for purposes of
apportioning the Ö50x of Country X tax
between the income groups. CFC1X has
Ö1,000x of gross income and Ö500x of
deductible expenses under the tax laws
of Country X, resulting in Ö500x of net
foreign law income. Of the Ö1,000x of
foreign law gross income, Ö325x
corresponds to the gross income in the
FDE1Y income group, and Ö675x
corresponds to the gross income in the
CFC1X income group. Applying federal
income tax principles to allocate and
apportion the foreign law deductions to
foreign law gross income, Ö220x of the
Ö500x foreign law deductions is
allocated and apportioned to the FDE1Y
income group and Ö280x is allocated
and apportioned to the CFC1X income
group. Of the total Ö500x of net foreign
law income, Ö105x (Ö325x Country X
gross income corresponding to the
FDE1Y income group, less Ö220x
allocable Country X expenses)
corresponds to the FDE1Y income group
and Ö395x (Ö675x Country X gross
income corresponding to the CFC1X
income group, less Ö280x allocable
Country X expenses) corresponds to the
CFC1X income group. Therefore, Ö10.5x
(Ö50x × Ö105x/Ö500x) of Country X tax
is allocated and apportioned to the
FDE1Y income group, and Ö39.5x (Ö50x
× Ö395x/Ö500x) is allocated and
apportioned to the CFC1X income
group. In total, Ö30.5x of foreign tax
(Ö10.5x of Country X tax and Ö20x of
Country Y tax) is allocated and
apportioned to the FDE1Y income group
(the ‘‘FDE1Y group tax’’), and Ö39.5x of
foreign tax (all of which is Country X
tax) is allocated and apportioned to the
CFC1X tested income group (the
‘‘CFC1X group tax’’).
(iv) Tentative tested income items.
Under paragraph (c)(7)(iii) of this
section, the tentative tested income item
attributable to FDE1Y (the ‘‘FDE1Y
tentative tested income item’’) is Ö94.5x
(the FDE1Y gross tested income item of
Ö325x, less the allocated and
apportioned deductions of Ö230.5x (the
sum of deductions (other than for

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44645

foreign income tax) of Ö200x, Country Y
tax of Ö20x, and Country X tax of
Ö10.5x)). The tentative tested income
item attributable to CFC1X (the ‘‘CFC1X
tentative tested income item’’) is
Ö355.5x (the CFC1X gross tentative
tested income item of Ö675x, less the
allocated and apportioned deductions of
Ö319.5x (the sum of deductions (other
than for foreign income tax) of Ö280x
and Country X tax of Ö39.5x)).
(v) Foreign income taxes paid or
accrued with respect to a tentative
tested income item. Under paragraph
(c)(7)(vii) of this section, the foreign
income taxes paid or accrued with
respect to a tentative tested income item
is the U.S. dollar amount of the current
year taxes that are allocated and
apportioned to the related tentative
gross tested income item under the rules
of paragraph (c)(7)(iii) of this section.
Therefore, the foreign income taxes paid
or accrued with respect to the FDE1Y
tentative tested income item is $30.5x,
the U.S. dollar amount of the FDE1Y
group tax, and the foreign income taxes
paid or accrued with respect to the
CFC1X tentative tested income item is
$39.5x, the U.S. dollar amount of the
CFC1X group tax.
(vi) Effective foreign tax rate. The
effective foreign tax rate is determined
under paragraph (c)(7)(vi) of this section
by dividing the U.S. dollar amount of
foreign income taxes paid or accrued
with respect to each respective tentative
tested income item by the U.S. dollar
amount of the tentative tested income
item increased by the U.S. dollar
amount of the relevant foreign income
taxes. Therefore, the effective foreign tax
rate for the FDE1Y tentative tested
income item is 24.4%, computed by
dividing $30.5x (the U.S. dollar amount
of the foreign income taxes paid or
accrued with respect to the FDE1Y
tentative tested income item), by $125x
(the sum of $94.5x, the U.S. dollar
amount of the FDE1Y tentative tested
income item, and $30.5x, the U.S. dollar
amount of the foreign income taxes paid
or accrued with respect to the FDE1Y
tentative tested income item). Similarly,
the effective foreign tax rate for the
CFC1X tentative tested income item is
10%, computed by dividing $39.5x (the
U.S. dollar amount of the foreign
income taxes paid or accrued with
respect to the CFC1X tentative tested
income item) by $395x (the sum of
$355.5x, the U.S. dollar amount of the
CFC1X tentative tested income item,
and $39.5x, the U.S. dollar amount of
the foreign taxes paid or accrued with
respect to the CFC1X tentative tested
income item).
(vii) Gross income items excluded
under sections 954(b)(4) and

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951A(c)(2)(A)(i)(III). The FDE1Y
tentative tested income item has an
effective foreign tax rate (24.4%) that is
greater than 18.9% (90% of the
maximum rate of tax specified in
section 11). Therefore, the requirement
of paragraph (c)(7)(i)(B) of this section is
satisfied, and the FDE1Y tentative gross
tested income item qualifies under
paragraph (c)(7)(i) of this section for the
high-tax exception of section 954(b)(4)
and is excluded from tested income
under sections 951A(c)(2)(A)(i)(III) and
954(b)(4) and paragraph (c)(1)(iii) of this
section. The CFC1X tentative tested
income item has an effective foreign tax
rate (10%) that is not greater than 90%
of the maximum rate of tax specified in
section 11. Therefore, the CFC1X
tentative gross tested income item does
not qualify under paragraph (c)(7)(i) of
this section for the high-tax exception of
section 954(b)(4) and is not excluded
from tested income under sections
951A(c)(2)(A)(i)(III) and 954(b)(4) and
paragraph (c)(1)(iii) of this section.
(C) Example 3: Interest expense
allocated and apportioned with respect
to the income of a lower-tier CFC—(1)
Facts—(i) Ownership. USP owns all of
the stock of CFC1X. CFC1X directly
owns all the interests of FDE1Y. FDE1Y
owns all of the stock of CFC3Z.
Pursuant to § 1.861–9(j) and § 1.861–
9T(j), CFC1X uses the modified gross
income method to allocate and
apportion its interest expense.
(ii) Gross income and deductions
(including for foreign income taxes).
During Year 1, CFC1X generates Ö4,000x
of gross income from services that
would be gross tested income without
regard to paragraph (c)(7) of this section,
Ö3,000x of which is properly reflected
on the books and records of the CFC1X
tested unit and Ö1,000x of which is
properly reflected on the books and
records of the FDE1Y tested unit.
CFC1X also accrues Ö1,000x of interest
expense to an unrelated person. Country
X imposes Ö200x of income taxes with
respect to the Ö3,000x of gross income
properly reflected on the books and
records of the CFC1X tested unit, and
Country Y imposes Ö200x of income
taxes with respect to the Ö1,000x of
gross income properly reflected on the
books and records of the FDE1Y tested
unit. CFC3Z generates Ö1,000x of gross
income from services that would be
gross tested income without regard to
paragraph (c)(7) of this section, and
such gross income is properly reflected
on the books and records of the CFC3Z
tested unit. CFC3Z accrues no expenses,
and Country Z imposes Ö100x of income
taxes with respect to the Ö1,000x of
gross income generated by CFC3Z.

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(2) Analysis—(i) Tentative gross tested
income items. Under paragraph (c)(7)(ii)
of this section, the Ö3,000x of gross
income that is reflected on the books
and records of the CFC1X tested unit,
and the Ö1,000x of gross income that is
reflected on the books and records of the
FDE1Y tested unit, are attributable to
the CFC1X tested unit and the FDE1Y
tested unit, respectively. Under
paragraph (c)(7)(ii) of this section, each
of these amounts is a separate tentative
gross tested income item of CFC1X (the
‘‘CFC1X tentative gross tested income
item’’ and the ‘‘FDE1Y tentative gross
tested income item,’’ respectively).
Under paragraph (c)(7)(ii) of this
section, the Ö1,000x item of tentative
gross tested income that is properly
reflected on the books and records of the
CFC3Z tested unit is attributable to the
CFC3Z tested unit. Under paragraph
(c)(7)(ii) of this section, the amount
attributable to the CFC3Z tested unit is
a tentative gross tested income item of
CFC3Z (the ‘‘CFC3Z tentative gross
tested income item’’).
(ii) Allocation and apportionment of
interest expense. To compute CFC1X’s
tentative tested income items, the
principles of § 1.960–1(d)(3) apply by
treating each of CFC1X’s tentative gross
tested income items as income in a
separate tested income group (the
‘‘CFC1X income group’’ and the
‘‘FDE1Y income group’’) and allocate
and apportion its deductions among
those income groups under federal
income tax principles. Because CFC1X
uses the modified gross income method
under § 1.861–9(j) and § 1.861–9T(j) to
allocate and apportion interest expense,
it must allocate and apportion its
interest expense between the CFC1X
income group and the FDE1Y income
group based on a combined gross
income amount that includes both the
gross income of CFC1X (including the
gross income attributable to both the
CFC1X tested unit and the FDE1Y tested
unit) and the gross income of CFC3Z,
adjusted as provided under § 1.861–9(j)
and § 1.861–9T(j). Under § 1.861–9(j)
and § 1.861–9T(j), the adjusted
combined gross income of CFC1X
comprises the CFC1X tentative gross
tested income item (Ö3,000x), or 60% of
the combined adjusted gross income
amount, the FDE1Y tentative gross
tested income item (Ö1,000x), or 20% of
the combined adjusted gross income
amount, and the CFC3Z gross tentative
tested income item (Ö1,000x), or 20% of
the combined adjusted gross income
amount. Under paragraph (c)(7)(iii) of
this section, interest expense of CFC1X
that is allocated and apportioned to the
gross income of CFC3Z under § 1.861–

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9(j) and § 1.861–9T(j) is not allocated
and apportioned to either the CFC1X
income group or the FDE1Y income
group. Therefore, Ö600x of interest
expense (60% of the Ö1,000x of interest
expense) is allocated and apportioned to
the CFC1X income group, and Ö200x of
interest expense (20% of the Ö1,000x of
interest expense) is allocated and
apportioned to the FDE1Y income
group. The Ö200x of interest expense
that is allocated and apportioned to the
Ö1,000x of gross tentative tested income
of CFC3Z is allocated and apportioned
to the residual income group for
purposes of paragraph (c)(7) of this
section, but can still be allocated and
apportioned to a statutory grouping of
tested income of CFC1X for purposes of
paragraph (c)(3) of this section. See
paragraph (c)(7)(iii) of this section.
(iii) Foreign income tax deduction.
Under paragraph (c)(7)(iii) of this
section, deductions for foreign income
taxes paid or accrued by CFC1X are
allocated and apportioned under the
principles of §§ 1.960–1(d)(3)(ii) and
§ 1.904–6(a)(1) to the CFC1X income
group and the FDE1Y income group.
Similarly, foreign income taxes paid or
accrued by CFC3Z are allocated and
apportioned under the principles of
§§ 1.960–1(d)(3)(ii) and 1.904–6(a)(1) to
the tentative gross tested income item of
CFC3Z (the ‘‘CFC3Z income group’’).
Under these principles, the Ö200x of
Country X income taxes are allocated
and apportioned to the CFC1X income
group (the ‘‘CFC1X group tax’’), the
Ö200x of Country Y income taxes are
allocated and apportioned to the FDE1Y
income group (the ‘‘FDE1Y group tax’’),
and the Ö100x of Country Z income
taxes are allocated and apportioned to
the CFC3Z income group (the ‘‘CFC3Z
group tax’’).
(iv) Tentative tested income items.
After the allocation and apportionment
of deductions to reduce the tentative
gross tested income in each income
group, under paragraph (c)(7)(iii) of this
section, CFC1X has a tentative tested
income item with respect to the CFC1X
tested unit of Ö2,200x (Ö3,000x, less
Ö600x of interest expense and Ö200x of
foreign income tax expense, the ‘‘CFC1X
tentative tested income item’’) and a
tentative tested income item with
respect to the FDE1Y tested unit of
Ö600x (Ö1,000x, less Ö200x of interest
expense and Ö200x of foreign income
tax expense, the ‘‘FDE1Y tentative
tested income item’’). CFC3Z has a
tentative tested income item of Ö900x
(Ö1,000x, less Ö100x of foreign income
tax expense, the ‘‘CFC3Z tentative tested
income item’’).
(v) Foreign income taxes paid or
accrued with respect to a tentative

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tested income item. Under paragraph
(c)(7)(vii) of this section, the foreign
income taxes paid or accrued with
respect to a tentative tested income item
is the U.S. dollar amount of the current
year taxes that are allocated and
apportioned to the related tentative
gross tested income item under the rules
of paragraph (c)(7)(iii) of this section.
Therefore, the foreign income tax paid
or accrued with respect to the CFC1X
tentative tested income item is $200x,
the U.S. dollar amount of the CFC1X
group tax. Similarly, the foreign income
tax paid or accrued with respect to the
FDE1Y tentative tested income item is
$200x, the U.S. dollar amount of the
FDE1Y group tax, and the foreign
income tax paid or accrued with respect
to the CFC3Z tentative tested income
item is $100x, the U.S. dollar amount of
the CFC3Z group tax.
(vi) Effective foreign tax rate. The
effective foreign tax rate is determined
under paragraph (c)(7)(vi) of this section
by dividing the U.S. dollar amount of
foreign income taxes paid or accrued
with respect to each respective tentative
tested income item by the U.S. dollar
amount of the tentative tested income
item increased by the U.S. dollar
amount of the relevant foreign income
taxes. Therefore, the effective foreign tax
rate for the CFC1X tentative tested
income item is 8.3%, computed by
dividing $200x (the U.S. dollar amount
of the foreign income taxes paid or
accrued with respect to the CFC1X
tentative tested income item), by
$2,400x (the sum of $2,200x, the U.S.
dollar amount of the CFC1X tentative
tested income item and $200x, the U.S.
dollar amount of the foreign taxes paid
or accrued with respect to the CFC1X
tentative tested income item). The
effective foreign tax rate for the FDE1Y
tentative tested income item is 25%,
computed by dividing $200x (the U.S.
dollar amount of the foreign taxes paid
or accrued with respect to the FDE1Y
tentative tested income item) by $800x
(the sum of $600x, the U.S. dollar
amount of the FDE1Y tentative tested
income item, and $200x, the U.S. dollar
amount of the foreign taxes paid or
accrued with respect to the FDE1Y
tentative tested income item). The
effective foreign tax rate for the CFC3Z
tentative tested income item is 10%,
computed by dividing $100x (the U.S.
dollar amount of the foreign taxes paid
or accrued with respect to the CFC3Z
tentative tested income item) by $1,000x
(the sum of $900x, the U.S. dollar
amount of the CFC3Z tentative tested
income item, and $100x, the U.S. dollar
amount of the foreign taxes paid or

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accrued with respect to the CFC3Z
tentative tested income item).
(vii) Gross income items excluded
under sections 954(b)(4) and
951A(c)(2)(A)(i)(III). The FDE1Y
tentative tested income item is subject
to tax at an effective foreign tax rate
(25%) that is greater than 18.9% (90%
of the maximum rate of tax specified in
section 11). Therefore, the requirement
of paragraph (c)(7)(i)(B) of this section is
satisfied, and the FDE1Y tentative gross
tested income item qualifies under
paragraph (c)(7)(i) of this section for the
high-tax exception of section 954(b)(4)
and is excluded from tested income
under sections 951A(c)(2)(A)(i)(III) and
954(b)(4) and paragraph (c)(1)(iii) of this
section. In computing the tested income
of CFC1X under paragraph (c)(3) of this
section, the deductions of CFC1X that
were allocated and apportioned to the
FDE1Y tentative gross tested income
item (that is, the Ö200x of interest
expense and the Ö200x of FDE1Y group
taxes) are allocated and apportioned to
this item of tentative gross tested
income. As a result, the Ö1,000x of
tentative gross tested income excluded
from tested income under section
954(b)(4), as well as the Ö200x of
interest expense and Ö200x of foreign
tax expense allocable to that gross
income, are allocated and apportioned
to the residual category under paragraph
(c)(3) of this section for purposes of
determining the tested income of
CFC1X. Under § 1.960–1(d)(3), the
$200x of foreign income taxes allocated
and apportioned to the excluded gross
income would also be assigned to the
residual income group for purposes of
determining CFC1X’s tested taxes for
purposes of section 960(d). The CFC1X
tentative tested income item and CFC3Z
tentative tested income item each have
effective foreign tax rates (8.3% and
10%, respectively) that are not greater
than 90% of the maximum rate of tax
specified in section 11. Therefore, the
CFC1X tentative gross tested income
item and the CFC3Z tentative gross
tested income item do not qualify under
paragraph (c)(7)(i) of this section for the
high-tax exception of section 954(b)(4),
and are not excluded from tested
income under sections
951A(c)(2)(A)(i)(III) and 954(b)(4) and
paragraph (c)(1)(i) of this section. Under
paragraph (c)(3) of this section, the
corresponding deductions are allocated
and apportioned to that gross tested
income in a manner that achieves a
result that is consistent the result of the
allocation and apportionment of those
deductions under paragraph (c)(7) of
this section. Accordingly, because
CFC3Z’s tentative gross tested income is

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44647

not excluded from gross tested income
under sections 951A(c)(2)(A)(i)(IIII) and
954(b)(4) and paragraph (c)(1)(i) of this
section, under paragraph (c)(3) of this
section the Ö200x of CFC1X’s interest
expense that was apportioned to
tentative gross tested income of CFC3Z
under the modified gross income
method in § 1.861–9 is allocated and
apportioned to gross tested income of
CFC1X and therefore reduces CFC1X’s
tested income. In contrast, if the CFC3Z
tentative gross tested item had been
excluded from gross tested income
under sections 951A(c)(2)(A)(i)(III) and
954(b)(4) and paragraph (c)(1)(i) of this
section, then the Ö200x of CFC1X’s
interest expense that was allocated and
apportioned to that income would be
assigned to the residual category.
(D) Example 4: Application of tested
unit rules—(1) Facts—(i) Ownership.
USP owns all of the stock of CFC1X.
CFC1X directly owns all the interests of
FDEX and FDE1Y. In addition, CFC1X
directly carries on activities in Country
Y that constitute a branch (as described
in § 1.267A–5(a)(2)) and that give rise to
a taxable presence under Country Y tax
law and Country X tax law (such
branch, ‘‘FBY’’).
(ii) Items reflected on books and
records. For the CFC inclusion year,
CFC1X had a Ö20x item of gross income
(Item A), which is properly reflected on
the books and records of FBY, and a
Ö30x item of gross income (Item B),
which is properly reflected on the books
and records of FDEX.
(2) Analysis—(i) Identifying the tested
units of CFC1X. Without regard to the
combination rule of paragraph
(c)(7)(iv)(C) of this section, CFC1X,
CFC1X’s interest in FDEX, CFC1X’s
interest in FDE1Y, and FBY would each
be a tested unit of CFC1X. See
paragraph (c)(7)(iv)(A) of this section.
Pursuant to the combination rule,
however, the FDE1Y tested unit is
combined with the FBY tested unit and
treated as a single tested unit because
FDE1Y is a tax resident of Country Y,
the same country in which FBY is
located (the ‘‘Country Y tested unit’’).
See paragraph (c)(7)(iv)(C)(1) of this
section. The CFC1X tested unit (without
regard to any items attributable to the
FDEX, FDE1Y, or FBY tested units) is
also combined with the FDEX tested
unit and treated as a single tested unit
because CFC1X and FDEX are both tax
residents of County X (the ‘‘Country X
tested unit’’). See paragraph
(c)(7)(iv)(C)(1) of this section.
(ii) Computing the items of CFC1X.
Under paragraph (c)(7)(ii)(A) of this
section, a tentative gross tested income
item is determined with respect to each
of the Country Y tested unit and the

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Country X tested unit. To determine the
tentative gross tested income item of
each tested unit, the item of gross
income that is attributable to the tested
unit is determined under paragraph
(c)(7)(ii)(B) of this section. Under
paragraph (c)(7)(ii)(B) of this section,
only Item A is attributable to the
Country Y tested unit. Item A is not
attributable to the Country X tested unit
because it is not reflected on the
separate set of books and records of the
CFC1X tested unit or the FDEX tested
unit, and an item of gross income is
only attributable to one tested unit. See
paragraph (c)(7)(ii)(B)(1) of this section.
Under paragraph (c)(7)(ii)(B) of this
section, only Item B is attributable to the
Country X tested unit.
(3) Alternative facts—branch does not
give rise to a taxable presence in
country where located—(i) Facts. The
facts are the same as in paragraph
(c)(8)(iii)(D)(1) of this section (the
original facts in this Example 4), except
that FBY does not give rise to a taxable
presence under Country Y tax law;
moreover, Country X tax law does not
provide an exclusion, exemption, or
other similar relief with respect to
income attributable to FBY.
(ii) Analysis. FBY is not a tested unit
but is a transparent interest. See
paragraphs (c)(7)(iv)(A)(3) and
(c)(7)(ix)(C) of this section. CFC1X has
a tested unit in Country X that includes
the CFC1X tested unit (without regard to
any items related to the interest in FDEX
or FDE1Y, but that includes FBY since
it is a transparent interest and not a
tested unit) and the interest in FDEX.
See paragraph (c)(7)(iv)(C) of this
section. CFC1X has another tested unit
in Country Y, the interest in FDE1Y.
(4) Alternative facts—branch is a
tested unit but is not combined—(i)
Facts. The facts are the same as in
paragraph (c)(8)(iii)(D)(1) of this section
(the original facts in this Example 4),
except that FBY does not give rise to a
taxable presence under Country Y tax
law but Country X tax law provides an
exclusion, exemption, or other similar
relief (such as a preferential rate) with
respect to income attributable to FBY.
(ii) Analysis. FBY is a tested unit. See
paragraph (c)(7)(iv)(A)(3) of this section.
CFC1X has two tested units in Country
Y, the interest in FDE1Y and FBY. The
interest in FDE1Y and FBY tested units
are not combined because FBY does not
give rise to a taxable presence under the
tax law of Country Y. See paragraph
(c)(7)(iv)(C)(2) of this section. CFC1X
also has a tested unit in Country X that
includes the activities of CFC1X
(without regard to any items related to
the interest in FDEX, the interest in

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FDE1Y, or FBY) and the interest in
FDEX.
(5) Alternative facts—split ownership
of tested unit—(i) Facts. The facts are
the same as in paragraph (c)(8)(iii)(D)(1)
of this section (the original facts in this
Example 4), except that USP also owns
CFC2X, CFC1X does not own FDE1Y,
and CFC1X and CFC2X own 60% and
40%, respectively, of the interests of
FPSY.
(ii) Analysis for CFC1X. Under
paragraph (c)(7)(iv)(C)(1) of this section,
FBY and CFC1X’s 60% interest in FPSY
are combined and treated as a single
tested unit of CFC1X (‘‘CFC1X’s Country
Y tested unit’’), and CFC1X’s interest in
FDEX and CFC1X’s other activities are
combined and treated as a single tested
unit of CFC1X (‘‘CFC1X’s Country X
tested unit’’). CFC1X’s Country Y tested
unit is attributed any item of CFC1X
that is derived through its interest in
FPSY to the extent the item is properly
reflected on the books and records of
FPSY. See paragraph (c)(7)(ii)(B)(1) of
this section.
(iii) Analysis for CFC2X. Under
paragraphs (c)(7)(iv)(A)(1) and
(c)(7)(iv)(A)(2)(i) of this section, CFC2X
and CFC2X’s 40% interest in FPSY are
tested units of CFC2X. CFC2X’s interest
in FPSY is attributed any item of CFC2X
that is derived through FPSY to the
extent that it is properly reflected on the
books and records of FPSY. See
paragraph (c)(7)(ii)(B)(1) of this section.
(iv) Analysis for not combining CFC1X
and CFC2X tested units. None of the
tested units of CFC1X are combined
with the tested units of CFC2X under
paragraph (c)(7)(iv)(C)(1) of this section
because they are tested units of different
controlled foreign corporations, and the
combination rule only combines tested
units of the same controlled foreign
corporation.
(6) Alternative facts—split ownership
of transparent interest—(i) Facts. The
facts are the same as in paragraph
(c)(8)(iii)(D)(1) of this section (the
original facts in this Example 4), except
that USP also owns CFC2X, CFC1X does
not own DE1Y, and CFC1X and CFC2X
own 60% and 40%, respectively, of the
interests in FPSY, but FPSY is not a tax
resident of any foreign country and is
fiscally transparent for Country X tax
law purposes.
(ii) Analysis for CFC1X. CFC1X’s
interest in FPSY is not a tested unit but
is a transparent interest. See paragraphs
(c)(7)(iv)(A)(2) and (c)(7)(ix)(C) of this
section. Under paragraph (c)(7)(v)(C) of
this section, any item of CFC1X that is
derived through its interest in FPSY and
is properly reflected on the books and
records of FPSY is treated as properly

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reflected on the books and records of
CFC1X.
(iii) Analysis for CFC2X. CFC2X’s
interest in FPSY is not a tested unit but
is a transparent interest. See paragraphs
(c)(7)(iv)(A)(2) and (c)(7)(ix)(C) of this
section. Under paragraph (c)(7)(v)(C) of
this section, any item of CFC2X that is
derived through its interest in FPSY and
is properly reflected on the books and
records of FPSY is treated as properly
reflected on the books and records of
CFC1X.
(E) Example 5: CFC group—
Controlled foreign corporations with
different taxable years—(1) Facts. USP
owns all the stock of CFC1X and
CFC2X. CFC2X has a taxable year
ending November 30. On December 15,
Year 1, USP sells all the stock of CFC2X
to an unrelated party for cash.
(2) Analysis. The determination of
whether CFC1X and CFC2X are in a CFC
group is made as of the close of their
CFC inclusion years that end with or
within the taxable year ending
December 31, Year 1, the taxable year of
USP, the controlling domestic
shareholder. See paragraph
(c)(7)(viii)(E)(2)(ii) of this section. Under
paragraph (c)(7)(viii)(E)(2)(i) of this
section, USP directly owns more than
50% of the stock of CFC1X as of
December 31, Year 1, the end of
CFC1X’s CFC inclusion year. USP also
directly owns more than 50% of the
stock of CFC2X as of November 30, Year
1, the end of CFC2X’s CFC inclusion
year. Therefore, CFC1X and CFC2X are
members of a CFC group, and USP must
consistently make high-tax elections, or
revocations, under paragraph (c)(7)(viii)
of this section with respect to CFC1X’s
taxable year ending December 31, Year
1, and CFC2X’s taxable year ending
November 30, Year 1. This is the case
notwithstanding that USP does not
directly own more than 50% of the
stock of CFC2X as of December 31, Year
1, the end of CFC1X’s CFC inclusion
year. See paragraph (c)(7)(viii)(E)(2)(ii)
of this section.
■ Par. 4. Section 1.951A–7 is amended
by:
■ 1. Designating the undesignated text
as paragraph (a);
■ 2. Adding a subject heading to newly
designated paragraph (a);
■ 3. Removing the word ‘‘Sections’’ and
adding in its place ‘‘Except as otherwise
provided in this section, sections’’ in
newly designated paragraph (a); and
■ 4. Adding paragraph (b).
The additions read as follows:
§ 1.951A–7

Applicability dates.

(a) In general. * * *
(b) High-tax exception. Section
1.951A–2(c)(1)(iii), (c)(3)(ii), and (c)(7)

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Federal Register / Vol. 85, No. 142 / Thursday, July 23, 2020 / Rules and Regulations
and (8) apply to taxable years of foreign
corporations beginning on or after July
23, 2020, and to taxable years of United
States shareholders in which or with
which such taxable years of foreign
corporations end. In addition, taxpayers
may choose to apply the rules in
§ 1.951A–2(c)(1)(iii), (c)(3)(ii), and (c)(7)
and (8) to taxable years of foreign
corporations that begin after December
31, 2017, and before July 23, 2020, and
to taxable years of U.S. shareholders in
which or with which such taxable years
of the foreign corporations end,
provided that they consistently apply
those rules and the rules in § 1.954–
1(c)(1)(iii)(A)(3), § 1.954–1(c)(1)(iv), and
the first sentence of § 1.954–1(d)(3)(i) to
such taxable years.
§ 1.954–0

[Amended]

Par. 5. Section 1.954–0 is amended by
removing and reserving paragraph (b).
■ Par. 6. Section 1.954–1 is amended
by:
■ 1. Adding ‘‘or’’ to the end of
paragraph (c)(1)(iii)(A)(2)(ii);
■ 2. Removing and reserving paragraphs
(c)(1)(iii)(A)(2)(iii) and (iv);
■ 3. Adding paragraphs (c)(1)(iii)(A)(3)
and (c)(1)(iv);
■ 4. In paragraph (d)(1) introductory
text, removing the language ‘‘foreign
base company oil related income, as
defined in section 954(g), or’’ in the
second sentence and adding a sentence
after the fourth sentence;
■ 5. Removing the language ‘‘imposed
by a foreign country or countries’’ in
paragraph (d)(1)(ii);
■ 6. Removing the language ‘‘in a chain
of corporations through which a
distribution is made’’ in the first
sentence in paragraph (d)(2)
introductory text;
■ 7. Removing the language ‘‘(or
deemed paid or accrued)’’ in paragraph
(d)(2)(i);
■ 8. Revising paragraph (d)(3)(i);
■ 9. Removing and reserving paragraph
(d)(3)(ii);
■ 10. Removing paragraph (d)(7);
■ 11. Revising paragraph (h)(1); and
■ 12. Adding paragraph (h)(3).
The additions and revisions read as
follows:
■

§ 1.954–1

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*

Foreign base company income.

*
*
(c) * * *

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*

*

19:54 Jul 22, 2020

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(1) * * *
(iii) * * *
(A) * * *
(3) For purposes of paragraph
(c)(1)(iii)(A) of this section, the
aggregate amount from all transactions
that falls within a single separate
category (as defined in § 1.904–
5(a)(4)(v)) and is described in paragraph
(c)(1)(iii)(A)(1)(i) of this section is a
single item of income. Similarly, the
aggregate amount from all transactions
that falls within a single separate
category (as defined in § 1.904–
5(a)(4)(v)) and is described in each one
of paragraphs (c)(1)(iii)(A)(1)(ii) through
(c)(1)(iii)(A)(1)(v) of this section is in
each case a separate single item of
income. The same principles apply for
transactions described in each one of
paragraphs (c)(1)(iii)(A)(2)(i) through (v)
of this section.
*
*
*
*
*
(iv) Treatment of deductions or loss
attributable to disqualified basis. For
purposes of paragraph (c)(1)(i) of this
section (and in the case of insurance
income, paragraph (a)(6) of this section),
in determining the amount of a net item
of foreign base company income or
insurance income, deductions or loss
described in § 1.951A–2(c)(5) or (c)(6)
are not allocated and apportioned to
gross foreign base company income or
gross insurance income.
(d) * * *
(1) * * * For rules concerning the
application of the high-tax exception of
sections 954(b)(4) and
951A(c)(2)(A)(i)(III) to tentative gross
tested income items, see § 1.951A–
2(c)(1)(iii), (c)(3)(ii), and (c)(7) and (8).
* * *
*
*
*
*
*
(3) * * *
(i) In general. The amount of foreign
income taxes paid or accrued by a
controlled foreign corporation with
respect to a net item of income for
purposes of section 954(b)(4) and this
paragraph (d) is the U.S. dollar amount
of the controlled foreign corporation’s
current year taxes (as defined in
§ 1.960–1(b)(4)) that are allocated and
apportioned under § 1.960–1(d)(3)(ii) to
the subpart F income group (as defined
in § 1.960–1(d)(2)(ii)(B)) that

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44649

corresponds with the net item of
income.
*
*
*
*
*
(h) * * *
(1) Paragraph (d)(3) of this section for
taxable years ending on or after
December 4, 2018, and before July 23,
2020. For the application of paragraph
(d)(3) of this section to taxable years of
controlled foreign corporations ending
on or after December 4, 2018, and before
July 23, 2020, and to taxable years of
United States shareholders in which or
with which such taxable years of the
controlled foreign corporations end, see
§ 1.954–1, as contained in 26 CFR part
1 revised as of April 1, 2020.
*
*
*
*
*
(3) Paragraphs (c)(1)(iii)(A)(3),
(c)(1)(iv), and (d)(3)(i) of this section for
taxable years beginning on or after July
23, 2020. Paragraphs (c)(1)(iii)(A)(3),
(c)(1)(iv), and (d)(3)(i) of this section
apply to taxable years of a controlled
foreign corporation beginning on or after
July 23, 2020, and to taxable years of
United States shareholders in which or
with which such taxable years of foreign
corporations end. In addition, taxpayers
may choose to apply the rules in
paragraphs (c)(1)(iii)(A)(3), (c)(1)(iv),
and (d)(3)(i) of this section to taxable
years of controlled foreign corporations
that begin after December 31, 2017, and
before July 23, 2020, and to taxable
years of United States shareholders in
which or with which such taxable years
of the controlled foreign corporations
end, provided that they consistently
apply those rules and the rules in
§ 1.951A–2(c)(1)(iii), (c)(3)(ii), and (c)(7)
and (8) to such taxable years.
§ 1.1502

[Amended]

Par. 7. Section 1.1502–51 is amended
in paragraph (g)(1) by removing the
language ‘‘§ 1.951A–7’’ and adding in its
place ‘‘§ 1.951A–7(a)’’ wherever it
appears.

■

Sunita Lough,
Deputy Commissioner for Services and
Enforcement.
Approved: July 1, 2020.
David Kautter,
Assistant Secretary of the Treasury (Tax
Policy).
[FR Doc. 2020–15351 Filed 7–20–20; 4:15 pm]
BILLING CODE 4830–01–P

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