{"id":2082,"date":"2023-01-18T19:17:12","date_gmt":"2023-01-18T19:17:12","guid":{"rendered":"https:\/\/gtmtax.com\/insight\/common-pitfalls-gilti-high-tax-exception-and-interest-expense-apportionment\/"},"modified":"2025-07-23T20:03:14","modified_gmt":"2025-07-23T20:03:14","slug":"common-pitfalls-gilti-high-tax-exception-and-interest-expense-apportionment","status":"publish","type":"insight","link":"https:\/\/gtmtax.com\/insight\/common-pitfalls-gilti-high-tax-exception-and-interest-expense-apportionment\/","title":{"rendered":"Navigating the GILTI High-Tax Exception: Key Insights on the Consistency Rule and High-Tax Exclusion"},"content":{"rendered":"
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It has now been five years since the passage of the Tax Cuts and Jobs Act<\/a> remade the U.S. international tax landscape. With taxpayers beginning to revisit their international tax calculations for year-end, we are putting together a series of short blog posts highlighting a few commonly overlooked technical issues.<\/span><\/p>\n

In this post, we discuss the consistency rule in the allocation and apportionment of deductions to the residual grouping in applying the GILTI high-tax exception (\u201cGILTI HTE\u201d).<\/strong> This rule is particularly relevant where a holding company CFC with large amounts of interest expense holds interests in lower-tier tested units (other CFCs or foreign branches) which qualify for the GILTI HTE. If the taxpayer elects the GILTI HTE election, the rule causes some interest expense of the upper-tier CFC to be apportioned to the residual income group, increasing the upper-tier CFC\u2019s tested income, and reducing its effective foreign tax rate (\u201cETR\u201d).<\/p>\n

The Consistency Rule<\/h2>\n

For a refresher on the GILTI HTE rules, see this post<\/a>.<\/p>\n

In the GILTI high-tax exception calculation, each tentative gross tested income item is treated as assigned to a separate tested income group, and all other income is treated as assigned to a residual income group. For purposes of applying Reg. \u00a7\u00a71.861-9 and 1.861-9T under the principles of Reg. \u00a71.960-1(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 CFC 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 CFC.[1]<\/span><\/span><\/span><\/a><\/p>\n

In the case of a taxpayer that has made a GILTI HTE election, in allocating and apportioning deductions to gross tested income, the taxpayer must apply the rules of Sec. 861 through 865 and 904(d) (taking into account the rules of Sec. 954(b)(5) and Reg. \u00a71.954-1(c)) in a manner that achieves results consistent with the calculation of tested income items for GILTI HTE purposes.[2]<\/span><\/span><\/span><\/a> Deductions that are allocated and apportioned to the residual income group for purposes of applying the GILTI HTE to a CFC\u2019s gross tested income items are allocated and apportioned for purposes of determining the CFC\u2019s 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. 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 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 GILTI HTE.[3]<\/span><\/span><\/span><\/a><\/p>\n

Example:\u00a0The Consistency Rule<\/h2>\n

\u00a0The GILTI regulations illustrate the application of this consistency rule with the following example:[4]<\/span><\/span><\/span><\/a><\/p>\n