In a move to adapt to the ever-evolving tax landscape, the IRS has recently released updated tax forms that bring notable changes to the computation of the global intangible low-taxed income (GILTI) tax under section 951A and the transition tax under section 965. In this detailed examination, we delve into the modifications to Form 8992, focusing on GILTI tax, and Form 965, addressing the transition tax. Understanding these revisions is vital for tax professionals and businesses aiming for compliance in the current tax environment.
Form 8992: GILTI Tax
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Background and Overview:
- Form 8992, titled "US Shareholder Calculation of Global Intangible Low-Taxed Income (GILTI)," has undergone updates to align with the final regulations issued by the Treasury Department in June 2019. GILTI rules, born out of the Tax Cuts and Jobs Act (TCJA), serve as a global backstop to territorial-style rules, preventing the exploitation of tax reforms. These provisions, operating alongside Subpart F, determine if a Controlled Foreign Corporation's (CFC) global intangible low-taxed income is subject to U.S. taxation.
Key Aspects of Form 8992 Updates:
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Inquiry Procedures:
- The updated form requires auditors to perform specific inquiries of management, those charged with governance, and other relevant parties, including predecessor auditors. This aims to unveil any previously undisclosed related party relationships and transactions.
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Testing Disclosures:
- Auditors must rigorously test the accuracy and completeness of a list of already disclosed matters, ensuring transparency in financial reporting. This involves evaluating the business purpose or economic substance behind these matters and assessing the adequacy of their accounting and disclosure in the financial statements.
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Enhanced Evidence Gathering:
- Collecting sufficient appropriate evidence is crucial, and the revised form emphasizes enhanced relevant written management representations to support the auditor's findings and conclusions.
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Form Structure Updates:
- Form 8992's Part II now reflects the US shareholder’s calculation of specified interest expense using the netting approach under Treasury Regulation §1.951A-1(c)(3)(iii). Additionally, a new column (h) has been added to Schedule A to incorporate a rule in the final regulations that reduces a loss CFC’s interest expense by its loss QBAI amount.
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Column Updates:
- Columns (i) and (j) of Schedule A have been updated to report the US shareholder’s pro rata share of interest income and pro rata share of interest expense.
Form 965: Transition Tax
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Background and Overview:
- Form 965, titled "Inclusion of Deferred Foreign Income Upon Transition to a Participation Exemption System," has been revised to provide clarity for the 2019 tax year. It is specifically used for section 965(a) inclusions derived solely from interests in pass-through entities that are U.S. shareholders of deferred foreign income corporations (DFIC).
Key Aspects of Form 965 Updates:
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Form Retirement:
- Schedules A-E, along with Schedule G, have been retired. Form 965 for the 2019 tax year will solely address section 965(a) inclusions derived through interests in pass-through entities that are U.S. shareholders of DFICs.
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Effective Use of Forms:
- Taxpayers will use the January 2020 version of Form 965, and, if applicable, the December 2019 versions of Schedule F and H for the 2019 tax year.
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Schedule F Updates:
- Schedule F sees no major changes. However, Schedule H is now utilized to report several important amounts, including section 965(a) inclusions, section 965(c) deductions, foreign taxes that are disallowed, and foreign taxes deemed paid that are disallowed under Code Sec. 965(g).
Final Regulations Impacting Both Forms:
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GILTI Final Regulations (June 2019):
- These regulations focus on the US shareholder’s pro-rata share for determining the GILTI inclusion amount, relevant aggregation rules, and the interaction of such rules with other code sections.
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Transition Tax Final Regulations (January 2019):
- Issued by the Treasury Department, these regulations primarily cover general rules and definitions contained in section 965, guidance on the determination and treatment of deductions, treatment of disregarded transactions, foreign tax credit calculations, and essential election processes.
IRS Instructions for Compliance:
For Form 8992, the IRS instructions stipulate that any US shareholder of a CFC, required to take into account its pro rata share of the CFC’s earnings in determining a GILTI inclusion under section 951A, must file Form 8992. US persons required to include amounts in income under section 965 should file Form 965. Additionally, any person required to include amounts in income under section 965 of the Code but for an aggregate foreign E&P deficit allocated in accordance with section 965(b) should also file Form 965.
The release of updated tax forms, Form 8992 and Form 965, marks a significant step in aligning tax computation with recent regulatory changes. Tax professionals and businesses must familiarize themselves with these revisions to ensure accurate reporting and compliance. The nuanced adjustments in these forms, coupled with the final regulations, reflect the IRS's commitment to staying abreast of tax legislation changes and maintaining transparency in the tax reporting process. As the tax landscape continues to evolve, staying informed about these updates becomes imperative for effective tax planning and adherence to regulatory requirements.