Form 1118 (Rev. December 2020)Department of the Treasury

Form 1118
(Rev. December 2020)
Department of the Treasury
Internal Revenue Service

Foreign Tax Credit—Corporations
▶ Attach to the corporation’s tax return.

▶ Go to www.irs.gov/Form1118 for instructions and the latest
information.

For calendar year 20 , or other tax year beginning , 20 , and
ending , 20

OMB No. 1545-0123

Attachment
Sequence No. 118

Name of corporation Employer identification number

Use a separate Form 1118 for each applicable category of
income (see instructions).
a Separate Category (Enter code—see instructions.) . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . ▶

b If code 901j is entered on line a, enter the country code for
the sanctioned country (see instructions) . . . . . . . . . . . . . . ▶
c If one of the RBT codes is entered on line a, enter the country
code for the treaty country (see instructions) . . . . . . . . . . . . ▶

Schedule A Income or (Loss) Before Adjustments (Report all

amounts in U.S. dollars. See Specific Instructions.)

1. EIN or Reference ID
Number

(see instructions)*

2. Foreign Country or
U.S. Possession

(enter two-letter code—use
a separate line for each)

(see instructions)

Gross Income or (Loss) From Sources Outside the United States

3. Inclusions Under Sections 951(a)(1) and 951A
(see instructions)

4. Dividends
(see instructions) 5. Interest

(a) Exclude Gross-Up (b) Gross-Up (section 78) (a)
Exclude Gross-Up (b) Gross-Up (section 78)

A
B
C

Totals (add lines A through C) . . . . . . . ▶

6. Gross Rents, Royalties,
and License Fees

7. Sales

8. Gross Income From

Performance of Services
9. Section 986(c) Gain 10. Section 987 Gain 11. Section 988
Gain

12. Other
(attach schedule)

A
B
C

Totals

13. Total
(add columns 3(a)

through 12)

14. Allocable Deductions

(a) Dividends
Received Deduction

(see instructions)

(b) Deduction Allowed Under
Section 250(a)(1)(A)—Foreign

Derived Intangible Income

(c) Deduction Allowed Under
Section 250(a)(1)(B)—Global

Intangible Low-Taxed Income

Rental, Royalty, and Licensing Expenses

(d) Depreciation, Depletion,
and Amortization

(e) Other Allocable
Expenses

(f) Expenses Allocable
to Sales Income

A
B
C

Totals

14. Allocable Deductions (continued)

(g) Expenses Allocable
to Gross Income From

Performance of Services

(h) Other Allocable
Deductions (attach schedule)

(see instructions)

(i) Total Allocable Deductions
(add columns 14(a)

through 14(h))

15. Apportioned
Share of Deductions
(enter amount from

applicable line of Schedule H,
Part II, column (d))

16. Net Operating
Loss Deduction

17. Total Deductions
(add columns 14(i)

through 16)

18. Total Income or (Loss)
Before Adjustments
(subtract column 17

from column 13)

A
B
C

Totals

* For section 863(b) income, NOLs, income from RICs, high-
taxed income, section 965, section 951A, and reattribution of
income by reason of disregarded payments, use a single line
(see instructions).
Also, for reporting branches that are QBUs, use a separate line
for each such branch.

For Paperwork Reduction Act Notice, see separate instructions.

Cat. No. 10900F Form 1118 (Rev. 12-2020)

Form 1118 (Rev. 12-2020) Page 2
Schedule B Foreign Tax Credit (Report all foreign tax amounts
in U.S. dollars.)

Part I—Foreign Taxes Paid, Accrued, and Deemed Paid (see
instructions)
1. Credit Is Claimed for Taxes

(check one):

Paid Accrued

2. Foreign Taxes Paid or Accrued (attach schedule showing
amounts in foreign currency and conversion rate(s) used)

Tax Withheld at Source on:

(a) Dividends
(b) Distributions of

Previously Taxed Earnings
and Profits

(c) Branch Remittances (d) Interest
(e) Rents, Royalties,

and License Fees
(f) Other

Date Paid Date Accrued

A

B
C

Totals (add lines A through C) . ▶
2. Foreign Taxes Paid or Accrued (attach schedule showing
amounts in foreign currency and conversion rate(s) used)

Other Foreign Taxes Paid or Accrued on:

(g) Sales (h) Services Income (i) Other
(j) Total Foreign Taxes Paid or Accrued

(add columns 2(a) through 2(i))

3. Tax Deemed Paid
(see instructions)

A
B
C

Totals

Part II—Separate Foreign Tax Credit (Complete a separate Part
II for each applicable category of income.)
1a Total foreign taxes paid or accrued (total from Part I, column
2(j)) . . . . . . . . . . . . . . . . . . . . . . .

b

Foreign taxes paid or accrued by the corporation during prior
tax years that were suspended due to the rules of section 909
and for
which the related income is taken into account by the

corporation during the current tax year (see instructions) . . . . .
. . .

2 Total taxes deemed paid (total from Part I, column 3) . . . . . .
. . . . . . . . . . . . . . . . . . . . .
3 Reductions of taxes paid, accrued, or deemed paid (enter total
from Schedule G) . . . . . . . . . . . . . . . . . . ( )
4 Taxes reclassified under high-tax kickout . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . .
5

Enter the sum of any carryover of foreign taxes (from Schedule
K, line 3, column (xiv), and from Schedule I, Part III, line 3)
plus any
carrybacks to the current tax year . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . .

6 Total foreign taxes (combine lines 1a through 5) . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . .
7

Enter the amount from the applicable column of Schedule J,
Part I, line 11 (see instructions). If Schedule J is not required to
be completed, enter the
result from the “Totals” line of column 18 of the applicable
Schedule A . . . . . . . . . . . . . . . . . . . . . . . . . . .

8a Total taxable income from all sources (enter taxable income
from the corporation’s tax return) . . . . . . . . . . . . . .
b Adjustments to line 8a (see instructions) . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . .
c Subtract line 8b from line 8a . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . .

9 Divide line 7 by line 8c. Enter the resulting fraction as a
decimal (see instructions). If line 7 is greater than line 8c, enter
1 . . . . . . . . . . .
10 Total U.S. income tax against which credit is allowed
(regular tax liability (see section 26(b)) minus any American
Samoa economic development credit)
11 Multiply line 9 by line 10 . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . .
12 Increase in limitation (section 960(c)) . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . .
13 Credit limitation (add lines 11 and 12) (see instructions) . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14 Separate foreign tax credit (enter the smaller of line 6 or line
13). Enter here and on the appropriate line of Part III . . . . . . . .
. . . . ▶

Form 1118 (Rev. 12-2020)

Form 1118 (Rev. 12-2020) Page 3
Schedule B Foreign Tax Credit (continued) (Report all foreign
tax amounts in U.S. dollars.)

Part III—Summary of Separate Credits (Enter amounts from
Part II, line 14 for each applicable category of income. Do not
include taxes paid to sanctioned countries.)
1 Credit for taxes on section 951A category income . . . . . . . . .
. . . . . . . . . . . . . . . . . . .
2 Credit for taxes on foreign branch category income . . . . . . . .
. . . . . . . . . . . . . . . . . . . .
3 Credit for taxes on passive category income . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . .
4 Credit for taxes on general category income . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . .
5 Credit for taxes on section 901(j) category income (combine

all such credits on this line) . . . . . . . . . . . . . . . .
6 Credit for taxes on income re-sourced by treaty (combine all
such credits on this line) . . . . . . . . . . . . . . . .
7 Total (add lines 1 through 6) . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . .
8 Reduction in credit for international boycott operations (see
instructions) . . . . . . . . . . . . . . . . . . . . . . . . . . .
9 Total foreign tax credit (subtract line 8 from line 7). Enter
here and on the appropriate line of the corporation’s tax return .
. . . . . . . . ▶

Schedule C Tax Deemed Paid With Respect to Section 951(a)(1)
Inclusions by Domestic Corporation Filing Return (Section
960(a))

Use this schedule to report the tax deemed paid by the
corporation with respect to section 951(a)(1) inclusions of
earnings from foreign corporations under
section 960(a). For each line in Schedule C, include the column
10 amount in column 3 of the line in Schedule B, Part I that
corresponds with the identifying
number specified in column 1 of Schedule A and that also
corresponds with the identifying number entered in column 1b
of this Schedule C (see
instructions).

1a. Name of Foreign Corporation

1b. EIN or
Reference ID

Number of the
Foreign Corporation

(see instructions)

1c. QBU Reference
ID (if applicable)

2. Tax Year End
(Year/Month)

(see instructions)

3. Country of
Incorporation (enter
country code—see

instructions)

4. Functional Currency
of Foreign Corporation

(enter code - see
instructions)

5. Subpart F Income Group

(a) Reg. sec. 1.960-1(d)
(2)(ii)(B)(2)(enter code)

(b) Reg. sec. 1.904-4(c)
(3)(i)-(iv) (enter code)

(c) Unit

6. Total Net Income in Subpart F
Income Group (in functional currency

of foreign corporation)

7. Total Current Year Taxes in
Subpart F Income Group

(in U.S. Dollars)

8. Section 951(a)(1) Inclusion Attributable to Subpart F Income
Group

(a) Functional Currency (b) U.S. Dollars

9. Divide column 8(a) by column 6
10. Tax Deemed Paid (multiply

column 7 by column 9)

Total (add amounts in column 10) . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . ▶

Form 1118 (Rev. 12-2020)

Form 1118 (Rev. 12-2020) Page 4
Schedule D Tax Deemed Paid With Respect to Section 951A
Income by Domestic Corporation Filing the Return (Section
960(d))

Use this schedule to figure the tax deemed paid by the
corporation with respect to section 951A inclusions of earnings
from foreign corporations under
section 960(d).

Part I—Foreign Corporation’s Tested Income and Foreign Taxes

1a. Name of Foreign Corporation

1b. EIN or
Reference ID

Number of the
Foreign Corporation

(see instructions)

2. Tax Year End
(Year/Month)

(see instructions)

3. Country of
Incorporation (enter

country code—
see instructions)

4. Functional
Currency of Foreign

Corporation
(enter code)

5. Pro rata share of
CFC’s tested
income from

applicable Form
8992 schedule

(see instructions)

6. CFC’s tested

income from

applicable Form
8992 schedule

(see instructions)

7. Divide column 5
by column 6

8. CFC’s tested
foreign income

taxes from
Schedule Q
(Form 5471)

(see instructions)

9. Pro rata share of
tested foreign

income taxes paid
or accrued by CFC
(Multiply amount in

column 7 by amount
in column 8)

Total (add amounts in column 5) . . . . . . . . . . . . . . . . . . . . ▶
Total (add amounts in column 9) . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . ▶
Part II—Foreign Income Tax Deemed Paid

1. Global Intangible Low-Taxed Income
(Section 951A Inclusion)

2. Inclusion Percentage.
Divide Part II, Column 1, by

Part I, Column 5 Total

3. Multiply Part I, Column 9 Total, by
Part II, Column 2 Percentage

4. Tax Deemed Paid
(Multiply Part II, column 3, by 80%.

Enter the result here and include on the line of
Schedule B, Part I, column 3 that corresponds with the

line with “951A” in column 2 of Schedule A.)

Form 1118 (Rev. 12-2020)

Form 1118 (Rev. 12-2020) Page 5
Schedule E Tax Deemed Paid With Respect to Previously Taxed
Earnings and Profits (PTEP) by Domestic Corporation Filing the
Return

(Section 960(b))
Part I—Tax Deemed Paid by Domestic Corporation

Use this part to report the tax deemed paid by the domestic
corporation with respect to distributions of PTEP from first-tier
foreign corporations under section 960(b). For each line in
Schedule E, Part I, include the column 11 amount in column 3
of the line in Schedule B, Part I that corresponds with the
identifying number specified in column 1 of Schedule A and
that also corresponds with the identifying number specified in

column 1b of this Schedule E, Part I (see instructions).

1a. Name of
Distributing Foreign

Corporation

1b. EIN or
Reference ID

Number of the
Foreign

Corporation
(see

instructions)

2. Tax Year End
(Year/Month)

(see
instructions)

3. Country of
Incorporation
(enter country

code—
see

instructions)

4. Functional
Currency of the

Distributing
Foreign

Corporation

5. PTEP Group
(enter code)

6. Annual PTEP
account

(enter year)

7. Total amount of
PTEP in the
PTEP Group

8. Total amount of
the PTEP group

taxes with respect
to PTEP group

9. Distribution from
the PTEP Group

10. Divide column 9
by column 7

11. Foreign income
taxes properly

attributable to PTEP
and not previously

deemed paid

(multiply column 8

by column 10)

Total (add amounts in column 11) . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . ▶

Part II—Tax Deemed Paid by First- and Lower-Tier Foreign
Corporations
Use this part to report the tax deemed paid by a foreign
corporation with respect to distributions of PTEP from lower-
tier foreign corporations under section 960(b) that relate to
distributions reported in Part I (see instructions).

1a. Name of Distributing Foreign Corporation

1b. EIN or
Reference ID

Number of the
Foreign

Corporation
(see

instructions)

2. Tax Year End
(Year/Month)

(see
instructions)

3. Country of
Incorporation
(enter country

code—see
instructions)

4a. Name of Recipient
Foreign Corporation

4b. EIN or
Reference ID

Number of the
Foreign

Corporation
(see

instructions)

5. Tax Year End
(Year/Month)

(see
instructions)

6. Country of
Incorporation
(enter country

code—see
instructions)

7. Functional Currency of the
Distributing Foreign

Corporation
8. PTEP Group (enter code)

9. Annual PTEP account
(enter year)

10. Total Amount of
PTEP in the PTEP

Group

11. Total Amount of the
PTEP group taxes with
respect to PTEP group

12. PTEP Distributed
13. Divide column 12 by

column 10

14. Foreign income taxes
properly attributable to PTEP
and not previously deemed
paid (multiply column 11 by

column 13)

Form 1118 (Rev. 12-2020)

Form 1118 (Rev. 12-2020) Page 6
Schedule F-1 Tax Deemed Paid by Domestic Corporation Filing
Return—Pre-2018 Tax Years of Foreign Corporations

Use this schedule to figure the tax deemed paid by the
corporation with respect to dividends from a first-tier foreign
corporation under section 902(a), and

deemed inclusions of earnings from a first- or lower-tier foreign
corporation under section 960(a). Report all amounts in U.S.
dollars unless otherwise
specified.

IMPORTANT: Applicable to dividends or inclusions from
tax years of foreign corporations beginning on or before
December 31, 2017.
If taxpayer does not have such a dividend or inclusion, do not
complete Schedule F-1 (see instructions).

Part I—Dividends and Deemed Inclusions From Post-1986
Undistributed Earnings
For each line in Schedule F-1, Part I, include the column 12
amount in column 3 of the line in Schedule B, Part I that
corresponds with the identifying number specified in column 1
of Schedule A and that also corresponds with the identifying
number specified in either column 1b or 1c of this Schedule F-
1, Part I (see instructions).

1a. Name of Foreign Corporation
(identify DISCs and former DISCs)

1b. EIN (if any)
of the

Foreign
Corporation

1c. Reference ID
Number

(see instructions)

2. Tax Year End
(Year/Month)

(see instructions)

3. Country of
Incorporation
(enter country

code—see
instructions)

4. Post-1986
Undistributed Earnings
(in functional currency)

(attach schedule)

5. Opening Balance
in Post-1986 Foreign

Income Taxes

6. Foreign Taxes Paid and Deemed
Paid for Tax Year Indicated

(a) Taxes Paid
(b) Taxes Deemed Paid

(see instructions)

7. Post-1986 Foreign
Income Taxes

(add columns 5, 6(a), and 6(b))

8. Dividends and Deemed Inclusions

(a) Functional
Currency (b) U.S. Dollars

9. Divide Column 8(a)
by Column 4

10. Multiply Column 7
by Column 9

11. Section 960(c) Limitation
12. Tax Deemed Paid
(subtract column 11

from column 10)

Total (add amounts in column 12) . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . ▶
Form 1118 (Rev. 12-2020)

Form 1118 (Rev. 12-2020) Page 7
Schedule F-1 Tax Deemed Paid by Domestic Corporation Filing
Return—Pre-2018 Tax Years of Foreign Corporations
(continued)

IMPORTANT: Applicable to dividends or inclusions from
tax years of foreign corporations beginning on or before
December 31, 2017.
If taxpayer does not have such a dividend or inclusion, do not
complete Schedule F-1 (see instructions).

Part II—Dividends Paid Out of Pre-1987 Accumulated Profits
For each line in Schedule F-1, Part II, include the column 8(b)
amount in column 3 of the line in Schedule B, Part I that
corresponds with the identifying number specified in column

1 of Schedule A and that also corresponds with the identifying
number specified in either column 1b or 1c of this Schedule F-
1, Part I (see instructions).

1a. Name of Foreign Corporation
(identify DISCs and former DISCs)

1b. EIN (if any)
of the

Foreign Corporation

1c. Reference ID
Number

(see instructions)

2. Tax Year End
(Year/Month)

(see instructions)

3. Country of Incorporation
(enter country code—

see instructions)

4. Accumulated Profits
for Tax Year Indicated

(in functional currency computed
under section 902) (attach schedule)

5. Foreign Taxes Paid and Deemed
Paid on Earnings and Profits (E&P)

for Tax Year Indicated
(in functional currency)

(see instructions)

6. Dividends Paid

(a) Functional Currency (b) U.S. Dollars

7. Divide Column 6(a)
by Column 4

8. Tax Deemed Paid (see instructions)

(a) Functional Currency (b) U.S. Dollars

Total (add amounts in column 8b) . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . ▶

Part III—Deemed Inclusions From Pre-1987 Earnings and
Profits
For each line in Schedule F-1, Part III, include the column 8
amount in column 3 of the line in Schedule B, Part I that
corresponds with the identifying number specified in column 1
of Schedule A and that also corresponds with the identifying
number specified in either column 1b or 1c of this Schedule F-
1, Part I (see instructions).

1a. Name of Foreign Corporation
(identify DISCs and former DISCs)

1b. EIN (if any)
of the

Foreign Corporation

1c. Reference ID
Number

(see instructions)

2. Tax Year End
(Year/Month)

(see instructions)

3. Country of Incorporation
(enter country code—

see instructions)

4. E&P for Tax Year Indicated
(in functional currency

translated from U.S. dollars, computed under
section 964) (attach schedule)

5. Foreign Taxes Paid and
Deemed Paid for Tax Year Indicated

(see instructions)

6. Deemed Inclusions

(a) Functional Currency (b) U.S. Dollars

7. Divide Column 6(a)
by Column 4

8. Tax Deemed Paid
(multiply column 5 by column 7)

Total (add amounts in column 8) . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . ▶

Form 1118 (Rev. 12-2020)

Form 1118 (Rev. 12-2020) Page 8
Schedule F-2 Tax Deemed Paid by First- and Second-Tier
Foreign Corporations Under Section 902(b)—Pre-2018 Tax
Years of Foreign

Corporations
Use Part I to compute the tax deemed paid by a first-tier foreign
corporation with respect to dividends from a second-tier foreign
corporation. Use Part II to
compute the tax deemed paid by a second-tier foreign
corporation with respect to dividends from a third-tier foreign
corporation. Report all amounts in U.S.
dollars unless otherwise specified.

IMPORTANT: Applicable to dividends from tax years of
foreign corporations beginning on or before December 31, 2017.
If taxpayer does not have such a dividend, do not complete
Schedule F-2 (see instructions).

Part I—Tax Deemed Paid by First-Tier Foreign Corporations
Section A—Dividends Paid Out of Post-1986 Undistributed
Earnings (Include the column 10 results in Schedule F-1, Part I,
column 6(b).)

1a. Name of Second-Tier Foreign Corporation
and Its Related First-Tier Foreign Corporation

1b. EIN (if any)
of the Second-Tier

Foreign Corporation

1c. Reference ID
Number

(see instructions)

2. Tax Year End
(Year/Month)

(see instructions)

3. Country of
Incorporation

(enter country code—
see instructions)

4. Accumulated Profits
for Tax Year Indicated

(in functional currency—
see instructions)

5. Opening Balance
Post-1986 Foreign

Income Taxes

6. Foreign Taxes Paid and Deemed Paid for Tax Year Indicated

(a) Taxes Paid
(b) Taxes Deemed Paid

(see instructions)

7. Post-1986 Foreign
Income Taxes

(add columns 5, 6(a), and 6(b))

8. Dividends Paid (in functional currency)

(a) of Second-Tier Corporation (b) of First-Tier Corporation

9. Divide Column 8(a)
by Column 4

10. Tax Deemed Paid
(multiply column 7

by column 9)

Section B—Dividends Paid Out of Pre-1987 Accumulated
Profits (Include the column 8(b) results in Schedule F-1, Part I,
column 6(b).)

1a. Name of Second-Tier Foreign Corporation
and Its Related First-Tier Foreign Corporation

1b. EIN (if any)
of the Second-Tier

Foreign Corporation

1c. Reference ID
Number

(see instructions)

2. Tax Year End
(Year/Month)

(see instructions)

3. Country of
Incorporation

(enter country code—
see instructions)

4. Accumulated Profits
for Tax Year Indicated

(in functional currency—
attach schedule)

5. Foreign Taxes Paid and
Deemed Paid for Tax Year Indicated

(in functional currency—
see instructions)

6. Dividends Paid
(in functional currency)

(a) of Second-Tier Corporation (b) of First-Tier Corporation

7. Divide Column 6(a)
by Column 4

8. Tax Deemed Paid
(see instructions)

(a) Functional Currency

of Second-Tier Corporation

(b) U.S. Dollars

Form 1118 (Rev. 12-2020)

Form 1118 (Rev. 12-2020) Page 9
Schedule F-2 Tax Deemed Paid by First- and Second-Tier
Foreign Corporations Under Section 902(b)—Pre-2018 Tax
Years of Foreign

Corporations (continued)

IMPORTANT: Applicable to dividends from tax years of
foreign corporations beginning on or before December 31, 2017.
If taxpayer does not have such a dividend, do not complete
Schedule F-2 (see instructions).

Part II—Dividends Deemed Paid by Second-Tier Foreign
Corporations
Section A—Dividends Paid Out of Post-1986 Undistributed
Earnings (In general, include the column 10 results in Section
A, column 6(b), of Part I. However, see instructions for
Schedule F-1, Part I, column 6(b), for an exception.)

1a. Name of Third-Tier Foreign Corporation
and Its Related Second-Tier Foreign Corporation

1b. EIN (if any)
of the Third-Tier

Foreign Corporation

1c. Reference ID
Number

(see instructions)

2. Tax Year End
(Year/Month)

(see instructions)

3. Country of
Incorporation

(enter country code—
see instructions)

4. Post-1986
Undistributed Earnings

(in functional currency—
attach schedule)

5. Opening Balance in
Post-1986 Foreign

Income Taxes

6. Foreign Taxes Paid and Deemed Paid for Tax Year Indicated

(a) Taxes Paid
(b) Taxes Deemed Paid (from

Schedule F-3, Part I, column 10)

7. Post-1986 Foreign
Income Taxes

(add columns 5, 6(a), and 6(b))

8. Dividends Paid
(in functional currency)

(a) of Third-Tier Corporation (b) of Second-Tier Corporation

9. Divide Column 8(a)
by Column 4

10. Tax Deemed Paid
(multiply column 7

by column 9)

Section B—Dividends Paid Out of Pre-1987 Accumulated
Profits (In general, include the column 8(b) results in Section
A, column 6(b), of Part I. However, see instructions for
Schedule F-1, Part I, column 6(b) for an exception.)

1a. Name of Third-Tier Foreign Corporation
and Its Related Second-Tier Foreign Corporation

1b. EIN (if any)
of the Third-Tier

Foreign Corporation

1c. Reference ID
Number

(see instructions)

2. Tax Year End

(Year/Month)

(see instructions)

3. Country of
Incorporation

(enter country code—
see instructions)

4. Accumulated Profits
for Tax Year Indicated

(in functional currency—
attach schedule)

5. Foreign Taxes Paid and
Deemed Paid for Tax Year Indicated

(in functional currency—
see instructions)

6. Dividends Paid
(in functional currency)

(a) of Third-Tier Corporation (b) of Second-Tier Corporation

7. Divide Column 6(a)
by Column 4

8. Tax Deemed Paid
(see instructions)

(a) Functional Currency
of Third-Tier Corporation

(b) U.S. Dollars

Form 1118 (Rev. 12-2020)

Form 1118 (Rev. 12-2020) Page 10
Schedule F-3 Tax Deemed Paid by Certain Third-, Fourth-, and
Fifth-Tier Foreign Corporations Under Section 902(b)—Pre-
2018 Tax Years of

Foreign Corporations

Use this schedule to report taxes deemed paid with respect to
dividends from eligible post-1986 undistributed earnings of
fourth-, fifth-, and sixth-tier
controlled foreign corporations. Report all amounts in U.S.
dollars unless otherwise specified.

IMPORTANT: Applicable to dividends from tax years of
foreign corporations beginning on or before December 31, 2017.
If taxpayer does not have such a dividend, do not complete
Schedule F-3 (see instructions).

Part I—Tax Deemed Paid by Third-Tier Foreign Corporations
(In general, include the column 10 results in Schedule F-2, Part
II, Section A, column 6(b). However, see
instructions for Schedule F-1, Part I, column 6(b), for an
exception.)

1a. Name of Fourth-Tier Foreign Corporation
and Its Related Third-Tier Foreign Corporation

1b. EIN (if any)
of the Fourth-Tier

Foreign Corporation

1c. Reference ID
Number

(see instructions)

2. Tax Year End
(Year/Month)

(see instructions)

3. Country of
Incorporation

(enter country code—
see instructions)

4. Post-1986
Undistributed Earnings

(in functional currency—
attach schedule)

5. Opening Balance in
Post-1986 Foreign

Income Taxes

6. Foreign Taxes Paid and Deemed Paid for Tax Year Indicated

(a) Taxes Paid
(b) Taxes Deemed Paid
(from Part II, column 10)

7. Post-1986 Foreign
Income Taxes

(add columns 5, 6(a), and 6(b))

8. Dividends Paid
(in functional currency)

(a) of Fourth-Tier CFC (b) of Third-Tier CFC

9. Divide Column 8(a)
by Column 4

10. Tax Deemed Paid
(multiply column 7

by column 9)

Form 1118 (Rev. 12-2020)

Form 1118 (Rev. 12-2020) Page 11
Schedule F-3 Tax Deemed Paid by Certain Third-, Fourth-, and
Fifth-Tier Foreign Corporations Under Section 902(b)—Pre-
2018 Tax Years of

Foreign Corporations (continued)

IMPORTANT: Applicable to dividends from tax years of
foreign corporations beginning on or before December 31, 2017.
If taxpayer does not have such a dividend, do not complete
Schedule F-3 (see instructions).

Part II—Tax Deemed Paid by Fourth-Tier Foreign Corporations

(In general, include the column 10 results in column 6(b) of
Part I. However, see instructions for Schedule F-1,
Part I, column 6(b), for an exception.)

1a. Name of Fifth-Tier Foreign Corporation
and Its Related Fourth-Tier Foreign Corporation

1b. EIN (if any)
of the Fifth-Tier

Foreign Corporation

1c. Reference ID
Number

(see instructions)

2. Tax Year End
(Year/Month)

(see instructions)

3. Country of
Incorporation

(enter country code—
see instructions)

4. Post-1986
Undistributed Earnings

(in functional currency—
attach schedule)

5. Opening Balance in
Post-1986 Foreign

Income Taxes

6. Foreign Taxes Paid and Deemed Paid for Tax Year Indicated

(a) Taxes Paid
(b) Taxes Deemed Paid
(from Part III, column 10)

7. Post-1986 Foreign
Income Taxes

(add columns 5, 6(a), and 6(b))

8. Dividends Paid
(in functional currency)

(a) of Fifth-Tier CFC (b) of Fourth-Tier CFC

9. Divide Column 8(a)
by Column 4

10. Tax Deemed Paid
(multiply column 7

by column 9)

Part III—Tax Deemed Paid by Fifth-Tier Foreign Corporations
(In general, include the column 10 results in column 6(b) of
Part II, above. However, see instructions for Schedule
F-1, Part I, column 6(b), for an exception.)

1a. Name of Sixth-Tier Foreign Corporation
and Its Related Fifth-Tier Foreign Corporation

1b. EIN (if any)
of the Sixth-Tier

Foreign Corporation

1c. Reference ID
Number

(see instructions)

2. Tax Year End
(Year/Month)

(see instructions)

3. Country of
Incorporation

(enter country code—
see instructions)

4. Post-1986
Undistributed Earnings

(in functional currency—
attach schedule)

5. Opening Balance in
Post-1986 Foreign

Income Taxes

6. Foreign Taxes Paid
for Tax Year Indicated

7. Post-1986 Foreign

Income Taxes

(add columns 5 and 6)

8. Dividends Paid
(in functional currency)

(a) of Sixth-Tier CFC (b) of Fifth-Tier CFC

9. Divide Column 8(a)
by Column 4

10. Tax Deemed Paid
(multiply column 7

by column 9)

Form 1118 (Rev. 12-2020)

Form 1118 (Rev. 12-2020) Page 12
Schedule G Reductions of Taxes Paid, Accrued, or Deemed Paid

Part I—Reduction Amounts

A Reduction of Taxes Under Section 901(e)—Attach separate
schedule . . . . . . . . . . . . . . . . . . . . . . . . .

B Reduction of Foreign Oil and Gas Taxes—Enter amount from
Schedule I, Part II, line 4 . . . . . . . . . . . . . . . . . . .

C

Reduction of Taxes Due to International Boycott Provisions—
Enter appropriate portion from Schedule C (Form 5713) (see
instructions).
Important: Enter only “specifically attributable taxes” here . . . .
. . . . . . . . . . . . . . . . . . . . . . . . .

D Reduction of Taxes for Section 6038(c) Penalty—Attach
separate schedule . . . . . . . . . . . . . . . . . . . . . . .

E Taxes suspended under section 909 . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . .

F

Other Reductions of Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . .
1. Enter code—see instructions ▶
2. If more than one code is entered on line F1 or if code OTH is
entered on line F1, attach schedule (see instructions).

Total (add lines A through F). Enter here and on Schedule B,
Part II, line 3 . . . . . . . . . . . . . . . . . . . . . . . . . ▶

Part II—Other Information

G Check this box if, during the tax year, the corporation paid or
accrued any foreign tax that was disqualified for credit under
section 901(m) . . . . . . . . . ▶

H Check this box if, during the tax year, the corporation paid or
accrued any foreign tax that was disqualified for credit under
section 901(j), (k), or (l) . . . . . . . ▶

Form 1118 (Rev. 12-2020)

Form 1118 (Rev. 12-2020) Page 13
Schedule H Apportionment of Certain Deductions (Complete
only once for all categories of income.)

Part I—Research and Experimental Deductions
(a) Sales Method

Product Line #1 (SIC Code: )

(i) Gross Sales
(ii) R&E

Deductions

Product Line #2 (SIC Code: )

(iii) Gross Sales
(iv) R&E

Deductions

(b) Gross Income Method—Check method used: Option 1
Option 2

Product Line #1 (SIC Code: )

(v) Gross Income
(vi) R&E

Deductions

Product Line #2 (SIC Code: )

(vii) Gross Income
(viii) R&E

Deductions

(c) Total R&E
Deductions

(enter the sum of all
amounts entered in all

applicable “R&E
Deductions” columns)

1 Totals (see instructions)
2 Total to be apportioned

3

Apportionment among
statutory groupings
(see instructions):

a Enter Code
(1) Section 245A dividend
(2) Other . . . . .
(3) Total line a . . .

b Enter Code
(1) Section 245A dividend
(2) Other . . . . .
(3) Total line b . . .

c Enter Code

(1) Section 245A dividend
(2) Other . . . . .
(3) Total line c . . .

d Enter Code
(1) Section 245A dividend
(2) Other . . . . .
(3) Total line d . . .

e Enter Code
(1) Section 245A dividend
(2) Other . . . . .
(3) Total line e . . .

f Enter Code
(1) Section 245A dividend
(2) Other . . . . .
(3) Total line f . . .

4

Total foreign (add lines
3a(3), 3b(3), 3c(3), 3d(3),
3e(3), and 3f(3)) . . ▶

Important: See Computer-Generated Schedule H in instructions.
Form 1118 (Rev. 12-2020)

Form 1118 (Rev. 12-2020) Page 14
Schedule H Apportionment of Certain Deductions (Complete
only once for all categories of income.) (continued)

Part II—Interest Deductions, All Other Deductions, and Total
Deductions
(a) Average Value of Assets—

Check method used:

Tax book value
Alternative tax book value

(i) Nonfinancial
Corporations

(ii) Financial
Corporations

(b) Interest Deductions

(iii) Nonfinancial
Corporations

(iv) Financial
Corporations

(c) All Other
Deductions

(attach schedule)
(see instructions)

(d) Totals
(add the

corresponding
amounts from

column (c), Part I;

columns (b)(iii) and
(b)(iv), Part II; and
column (c), Part II)

Additional note:
Be sure to also enter
the totals from lines
3a(2), 3b(2), 3c(2),

3d(2), 3e(2), and 3f(2)
below in column 15

of the corresponding
Schedule A.

1a Totals (see instructions) . . . . . . . . . . . . .
b

Amounts specifically allocable under Temporary Regulations
section 1.861-10T(e) . . . . . . . . . . . . . .

c Other specific allocations under Temporary Regulations
section 1.861-10T
d Assets excluded from apportionment formula . . . . . .

2

Total to be apportioned (subtract the sum of lines 1b, 1c, and
1d from line 1a) . . . . . . . . . . . . . . . .

3 Apportionment among statutory groupings (see instructions):
a Enter Code

(1) Section 245A dividend . . . . . . . . . . . .
(2) Other . . . . . . . . . . . . . . . . . .
(3) Total line a . . . . . . . . . . . . . . . .

b Enter Code
(1) Section 245A dividend . . . . . . . . . . . .
(2) Other . . . . . . . . . . . . . . . . . .
(3) Total line b . . . . . . . . . . . . . . . .

c Enter Code
(1) Section 245A dividend . . . . . . . . . . . .
(2) Other . . . . . . . . . . . . . . . . . .
(3) Total line c . . . . . . . . . . . . . . . .

d Enter Code
(1) Section 245A dividend . . . . . . . . . . . .
(2) Other . . . . . . . . . . . . . . . . . .
(3) Total line d . . . . . . . . . . . . . . . .

e Enter Code
(1) Section 245A dividend . . . . . . . . . . . .
(2) Other . . . . . . . . . . . . . . . . . .
(3) Total line e . . . . . . . . . . . . . . . .

f Enter Code
(1) Section 245A dividend . . . . . . . . . . . .
(2) Other . . . . . . . . . . . . . . . . . .
(3) Total line f . . . . . . . . . . . . . . . .

4 Total foreign (add lines 3a(3), 3b(3), 3c(3), 3d(3), 3e(3), and
3f(3)) ▶

Section 904(b)(4) Adjustments

5

Expenses Allocated and Apportioned to Foreign Source Section
245A Dividend. Enter the sum of lines 3a(1), 3b(1), 3c(1),
3d(1), 3e(1), and 3f(1). Include the
column (d) result as a negative amount on Schedule B, Part II,
line 8b . . . . . . . . . . . . . . . . . . . . . . . . . . . .

6 Enter expenses allocated and apportioned to U.S. source
section 245A dividend. Include the column (d) result as a
negative amount on Schedule B, Part II, line 8b
Important: See Computer-Generated Schedule H in instructions.
Form 1118 (Rev. 12-2020)

Version A, Cycle 9
INTERNAL USE ONLY
DRAFT AS OF
November 4, 2020
Form 1118 (Rev. December 2020)
SE:W:CAR:MP
Foreign Tax Credit—Corporations
Form 1118
(Rev. December 2020)
Rev. December 2020. Cat. No. 10900F
Department of the Treasury
Internal Revenue Service
Foreign Tax Credit—Corporations
▶ Attach to the corporation’s tax return.▶ Go
to www.irs.gov/Form1118 for instructions and the latest
information.
OMB No. 1545-0123
Attachment
Sequence No. 118
Attachment Sequence No. 118. For Paperwork Reduction Act
Notice, see separate instructions.

Use a separate Form 1118 for each applicable category of
income (see instructions).
a
Separate Category (Enter code—see instructions.) ▶
b
If code 901j is entered on line a, enter the country code for the
sanctioned country (see instructions) ▶
c
If one of the RBT codes is entered on line a, enter the country
code for the treaty country (see instructions) ▶
Schedule A
Income or (Loss) Before Adjustments (Report all amounts in
U.S. dollars. See Specific Instructions.)
1. EIN or Reference IDNumber(see instructions)*
2. Foreign Country or
U.S. Possession(enter two-letter code—usea separate line for
each)(see instructions)
Gross Income or (Loss) From Sources Outside the United States
3. Inclusions Under Sections 951(a)(1) and 951A(see
instructions)
4. Dividends(see instructions)
5. Interest
1. E I N or Reference I D Number (see instructions)*. *For
section 863(b) income, N O L s, income from R I C s, high-
taxed income, section 965, and section 951A, use a single line
(see instructions).
2. Foreign Country or U.S. Possession (enter two-letter code—
use a separate line for each) (see instructions).
(a) Exclude Gross-Up
Gross Income or (Loss) From Sources Outside the United
States. 3. Inclusions Under Sections 951(a)(1) and 951A (see
instructions). (a) Exclude Gross-Up.
(b) Gross-Up (section 78)
Gross Income or (Loss) From Sources Outside the United
States. 3. Inclusions Under Sections 951(a)(1) and 951A (see
instructions). (b) Gross-Up (section 78).

(a) Exclude Gross-Up
Gross Income or (Loss) From Sources Outside the United
States. 4. Dividends (see instructions). (a) Exclude Gross-Up.
(b) Gross-Up (section 78)
Gross Income or (Loss) From Sources Outside the United
States. 4. Dividends (see instructions). (b) Gross-Up (section
78).
Gross Income or (Loss) From Sources Outside the United
States. 5. Interest.
A
B
C
Totals (add lines A through C) ▶
6. Gross Rents, Royalties,and License Fees
7. Sales
8. Gross Income From Performance of Services
9. Section 986(c) Gain
10. Section 987 Gain
11. Section 988 Gain
12. Other(attach schedule)
A
B
C
Totals
13. Total(add columns 3(a)through 12)
14. Allocable Deductions
(a) DividendsReceived Deduction(see instructions)
(b) Deduction Allowed Under Section 250(a)(1)(A)—Foreign
Derived Intangible Income
(c) Deduction Allowed Under Section 250(a)(1)(B)—Global
Intangible Low-Taxed Income
Rental, Royalty, and Licensing Expenses
(d) Depreciation, Depletion,and Amortization
(e) Other AllocableExpenses
(f) Expenses Allocableto Sales Income
13. Total (add columns 3(a) through 12).

14. Allocable Deductions. (a) Dividends Received Deduction
(see instructions).
14. Allocable Deductions. (b) Deduction Allowed Under Section
250(a)(1)(A)—Foreign Derived Intangible Income.
14. Allocable Deductions. (c) Deduction Allowed Under Section
250(a)(1)(B)—Global Intangible Low-Taxed Income.
14. Allocable Deductions. Rental, Royalty, and Licensing
Expenses. (d) Depreciation, Depletion, and Amortization.
14. Allocable Deductions. Rental, Royalty, and Licensing
Expenses. (e) Other Allocable Expenses.
14. Allocable Deductions. (f) Expenses Allocable to Sales
Income.
A
B
C
Totals
14. Allocable Deductions (continued)
(g) Expenses Allocableto Gross Income From Performance of
Services
(h) Other AllocableDeductions (attach schedule) (see
instructions)
(i) Total Allocable Deductions(add columns 14(a)through 14(h))
15. ApportionedShare of Deductions(enter amount
fromapplicable line of Schedule H, Part II, column (d))
16. Net OperatingLoss Deduction
17. Total Deductions(add columns 14(i)through 16)
18. Total Income or (Loss)Before Adjustments(subtract column
17from column 13)
14. Allocable Deductions (continued). (g) Expenses Allocable
to Gross Income From Performance of Services.
14. Allocable Deductions (continued). (h) Other Allocable
Deductions.
14. Allocable Deductions (continued). (i) Total Allocable
Deductions (add columns 14(a) through 14(h)).
15. Apportioned Share of Deductions (enter amount from
applicable line of Schedule H, Part II, column (d)).

16. Net Operating Loss Deduction.
17. Total Deductions (add columns 14(i) through 16).
18. Total Income or (Loss) Before Adjustments (subtract
column 17 from column 13).
A
B
C
Totals
* For section 863(b) income, NOLs, income from RICs, high-
taxed income, section 965, section 951A, and reattribution of
income by reason of disregarded payments, use a single line
(see instructions). Also, for reporting branches that are QBUs,
use a separate line for each such branch.
For Paperwork Reduction Act Notice, see separate instructions.
Cat. No. 10900F
Form 1118 (Rev. 12-2020)
Form 1118 (Rev. 12-2020)
Page 2
Schedule B
Foreign Tax Credit (Report all foreign tax amounts in U.S.
dollars.)
Part I—Foreign Taxes Paid, Accrued, and Deemed Paid (see
instructions)
1. Credit Is Claimed for Taxes (check one):
2. Foreign Taxes Paid or Accrued (attach schedule showing
amounts in foreign currency and conversion rate(s) used)
(a) Dividends
(b) Distributions ofPreviously Taxed Earnings and Profits
(c) Branch Remittances
(d) Interest
(e) Rents, Royalties,and License Fees
(f) Other
Date Paid
1. Credit is Claimed for Taxes: Paid. Date Paid.
Date Accrued
1. Credit is Claimed for Taxes: Accrued. Date Accrued.

2. Foreign Taxes Paid or Accrued (attach schedule showing
amounts in foreign currency and conversion rate(s) used). Tax
Withheld at Source on: (a) Dividends.
2. Foreign Taxes Paid or Accrued (attach schedule showing
amounts in foreign currency and conversion rate(s) used). Tax
Withheld at Source on: (b) Distributions of Previously Taxed
Income Earnings and Profits.
2. Foreign Taxes Paid or Accrued (attach schedule showing
amounts in foreign currency and conversion rate(s) used). Tax
Withheld at Source on: (c) Branch Remittances.
2. Foreign Taxes Paid or Accrued (attach schedule showing
amounts in foreign currency and conversion rate(s) used). Tax
Withheld at Source on: (d) Interest.
2. Foreign Taxes Paid or Accrued (attach schedule showing
amounts in foreign currency and conversion rate(s) used). Tax
Withheld at Source on: (e) Rents, Royalties, and License Fees.
2. Foreign Taxes Paid or Accrued (attach schedule showing
amounts in foreign currency and conversion rate(s) used). Tax
Withheld at Source on: (f) Other.
A
B
C
Totals (add lines A through C) ▶
2. Foreign Taxes Paid or Accrued (attach schedule showing
amounts in foreign currency and conversion rate(s) used)
(g) Sales
(h) Services Income
(i) Other
(j) Total Foreign Taxes Paid or Accrued(add columns 2(a)
through 2(i))
3. Tax Deemed Paid(see instructions)
2. Foreign Taxes Paid or Accrued (attach schedule showing
amounts in foreign currency and conversion rate(s) used). Other
Foreign Taxes Paid or Accrued on: (g) Sales.
2. Foreign Taxes Paid or Accrued (attach schedule showing
amounts in foreign currency and conversion rate(s) used). Other

Foreign Taxes Paid or Accrued on: (h) Services Income.
2. Foreign Taxes Paid or Accrued (attach schedule showing
amounts in foreign currency and conversion rate(s) used). Other
Foreign Taxes Paid or Accrued on: (i) Other.
2. Foreign Taxes Paid or Accrued (attach schedule showing
amounts in foreign currency and conversion rate(s) used). (j)
Total Foreign Taxes Paid or Accrued (add columns 2(a) through
2(i)).
3. Tax Deemed Paid (see instructions).
A
B
C
Totals
Part II—Separate Foreign Tax Credit (Complete a separate Part
II for each applicable category of income.)
1
a
Total foreign taxes paid or accrued (total from Part I, column
2(j))
b

Foreign taxes paid or accrued by the corporation during prior
tax years that were suspended due to the rules of section 909
and for which the related income is taken into account by the
corporation during the current tax year (see instructions)
2
Total taxes deemed paid (total from Part I, column 3)
3
Reductions of taxes paid, accrued, or deemed paid (enter total
from Schedule G)
( )
4
Taxes reclassified under high-tax kickout
5

Enter the sum of any carryover of foreign taxes (from Schedule

K, line 3, column (xiv), and from Schedule I, Part III, line 3)
plus any carrybacks to the current tax year
6
Total foreign taxes (combine lines 1a through 5)
7

Enter the amount from the applicable column of Schedule J,
Part I, line 11 (see instructions). If Schedule J is not required to
be completed, enter the result from the “Totals” line of column
18 of the applicable Schedule A
8
a
Total taxable income from all sources (enter taxable income
from the corporation’s tax return)
b
Adjustments to line 8a (see instructions)
c
Subtract line 8b from line 8a
9
Divide line 7 by line 8c. Enter the resulting fraction as a
decimal (see instructions). If line 7 is greater than line 8c, enter
1
10
Total U.S. income tax against which credit is allowed (regular
tax liability (see section 26(b)) minus any American Samoa
economic development credit)
11
Multiply line 9 by line 10
12
Increase in limitation (section 960(c))
13
Credit limitation (add lines 11 and 12) (see instructions)
14
Separate foreign tax credit (enter the smaller of line 6 or line
13). Enter here and on the appropriate line of Part III ▶
Form 1118 (Rev. 12-2020)

Form 1118 (Rev. 12-2020)
Page 3
Schedule B
Foreign Tax Credit (continued) (Report all foreign tax amounts
in U.S. dollars.)
Part III—Summary of Separate Credits (Enter amounts from
Part II, line 14 for each applicable category of income. Do not
include taxes paid to sanctioned countries.)
1
Credit for taxes on section 951A category income
2
Credit for taxes on foreign branch category income
3
Credit for taxes on passive category income
4
Credit for taxes on general category income
5
Credit for taxes on section 901(j) category income (combine all
such credits on this line)
6
Credit for taxes on income re-sourced by treaty (combine all
such credits on this line)
7
Total (add lines 1 through 6)
8
Reduction in credit for international boycott operations (see
instructions)
9
Total foreign tax credit (subtract line 8 from line 7). Enter here
and on the appropriate line of the corporation’s tax return
▶
Schedule C
Tax Deemed Paid With Respect to Section 951(a)(1) Inclusions
by Domestic Corporation Filing Return (Section 960(a))
Use this schedule to report the tax deemed paid by the
corporation with respect to section 951(a)(1) inclusions of

earnings from foreign corporations under section 960(a). For
each line in Schedule C, include the column 10 amount in
column 3 of the line in Schedule B, Part I that corresponds with
the identifying number specified in column 1 of Schedule A and
that also corresponds with the identifying number entered in
column 1b of this Schedule C (see instructions).
1a. Name of Foreign Corporation
1b. EIN or Reference ID Number of the Foreign Corporation(see
instructions)
1c. QBU Reference ID (if applicable)
2. Tax Year End (Year/Month) (see instructions)
3. Country of Incorporation (enter country code—
see instructions)
4. Functional Currency of Foreign Corporation (enter code -
see instructions)
5. Subpart F Income Group
(a) Reg. sec. 1.960-1(d)(2)(ii)(B)(2)(enter code)
(b) Reg. sec. 1.904-4(c)(3)(i)-(iv) (enter code)
(c) Unit
1a. Name of Foreign Corporation.
1b. E I N or Reference I D Number of the Foreign Corporation
(see instructions).
1c. Q B U Reference I D (if applicable).
2. Tax Year End (Year/Month) (see instructions).
3. Country of Incorporation (enter country code—see
instructions).
4. Functional Currency of Foreign Corporation (enter code - see
instructions).
5. Subpart F Income Group. (a) Reg. sec. 1.960-1(d)(2)(i
i)(B)(2)(enter code).
5. Subpart F Income Group. (b) Reg. sec. 1.904-4(c)(3)(i)-(i v)
(enter code).
5. Subpart F Income Group. (c) Unit.
6. Total Net Income in Subpart F Income Group (in functional
currency of foreign corporation)
7. Total Current Year Taxes in Subpart F Income

Group (in U.S. Dollars)
8. Section 951(a)(1) Inclusion Attributable to Subpart F Income
Group
(a) Functional Currency
(b) U.S. Dollars
9. Divide column 8(a) by column 6
10. Tax Deemed Paid (multiply column 7 by column 9)
6. Total Net Income in Subpart F Income Group (in functional
currency of foreign corporation).
7. Total Current Year Taxes in Subpart F Income Group (in U.S.
Dollars).
8. Section 951(a)(1) Inclusion Attributable to Subpart F Income
Group. (a) Functional Currency.
8. Section 951(a)(1) Inclusion Attributable to Subpart F Income
Group. (b) U.S. Dollars.
9. Divide column 8(a) by column 6.
10. Tax Deemed Paid (multiply column 7 by column 9).
Total (add amounts in column 10) ▶
Form 1118 (Rev. 12-2020)
Form 1118 (Rev. 12-2020)
Page 4
Schedule D
Tax Deemed Paid With Respect to Section 951A Income by
Domestic Corporation Filing the Return (Section 960(d))
Use this schedule to figure the tax deemed paid by the
corporation with respect to section 951A inclusions of earnings
from foreign corporations under section 960(d).
Part I—Foreign Corporation’s Tested Income and Foreign Taxes
1a. Name of Foreign Corporation
1b. EIN or Reference IDNumber of theForeign Corporation(see
instructions)
2. Tax Year End(Year/Month)(see instructions)
3. Country of Incorporation (enter country code—
see instructions)
4. Functional Currency of Foreign Corporation (enter code)
5. Pro rata share of CFC’s tested income from applicable Form

8992 schedule (see instructions)
6. CFC’s tested income from applicable Form 8992 schedule
(see instructions)
7. Divide column 5 by column 6
8. CFC’s tested foreign income taxes from Schedule Q
(Form 5471) (see instructions)
9. Pro rata share of tested foreign income taxes paid or accrued
by CFC (Multiply amount in column 7 by amount in column 8)
Total (add amounts in column 5) ▶
Entry 5. 5.
Entry 5. 5.
Entry 5. 5.
Entry 5. 5.
Total (add amounts in column 9) ▶
Part II—Foreign Income Tax Deemed Paid
1. Global Intangible Low-Taxed Income(Section 951A
Inclusion)
2. Inclusion Percentage.Divide Part II, Column 1, byPart I,
Column 5 Total
3. Multiply Part I, Column 9 Total, byPart II, Column 2
Percentage
4. Tax Deemed Paid(Multiply Part II, column 3, by 80%.Enter
the result here and include on the line of Schedule B, Part I,
column 3 that corresponds with the line with “951A” in column
2 of Schedule A.)
Form 1118 (Rev. 12-2020)
Form 1118 (Rev. 12-2020)
Page 5
Schedule E
Tax Deemed Paid With Respect to Previously Taxed Earnings
and Profits (PTEP) by Domestic Corporation Filing the Return
(Section 960(b))
Part I—Tax Deemed Paid by Domestic Corporation
Use this part to report the tax deemed paid by the domestic
corporation with respect to distributions of PTEP from first-tier
foreign corporations under section 960(b). For each line in

Schedule E, Part I, include the column 11 amount in column 3
of the line in Schedule B, Part I that corresponds with the
identifying number specified in column 1 of Schedule A and
that also corresponds with the identifying number specified in
column 1b of this Schedule E, Part I (see instructions).
1a. Name of Distributing Foreign Corporation
1b. EIN or Reference IDNumber of theForeign Corporation(see
instructions)
2. Tax Year End(Year/Month)(see instructions)
3. Country of Incorporation (enter country code—
see instructions)
4. Functional Currency of the Distributing Foreign Corporation
5. PTEP Group (enter code)
6. Annual PTEP account (enter year)
7. Total amount of PTEP in the PTEP Group
8. Total amount of the PTEP group taxes with respect to PTEP
group
9. Distribution from the PTEP Group
10. Divide column 9 by column 7
11. Foreign income taxes properly attributable to PTEP and not
previously deemed paid (multiply column 8 by column 10)
Total (add amounts in column 11) ▶
Part II—Tax Deemed Paid by First- and Lower-Tier Foreign
Corporations
Use this part to report the tax deemed paid by a foreign
corporation with respect to distributions of PTEP from lower-
tier foreign corporations under section 960(b) that relate to
distributions reported in Part I (see instructions).
1a. Name of Distributing Foreign Corporation
1b. EIN or Reference ID Number of the ForeignCorporation(see
instructions)
2. Tax Year End(Year/Month)(see instructions)
3. Country of Incorporation (enter country code—
see instructions)
4a. Name of RecipientForeign Corporation
4b. EIN or Reference ID Number of the ForeignCorporation(see

instructions)
5. Tax Year End(Year/Month)(see instructions)
6. Country of Incorporation (enter country code—see
instructions)
7. Functional Currency of the Distributing Foreign Corporation
8. PTEP Group (enter code)
9. Annual PTEP account (enter year)
10. Total Amount of PTEP in the PTEP Group
11. Total Amount of the PTEP group taxes with respect to
PTEP group
12. PTEP Distributed
13. Divide column 12 by column 10
14. Foreign income taxes properly attributable to PTEP and not
previously deemed paid (multiply column 11 by column 13)
Form 1118 (Rev. 12-2020)
Form 1118 (Rev. 12-2020)
Page 6
Schedule F-1
Tax Deemed Paid by Domestic Corporation Filing Return—Pre-
2018 Tax Years of Foreign Corporations
Use this schedule to figure the tax deemed paid by the
corporation with respect to dividends from a first-tier foreign
corporation under section 902(a), and deemed inclusions of
earnings from a first- or lower-tier foreign corporation under
section 960(a). Report all amounts in U.S. dollars unless
otherwise specified.
IMPORTANT: Applicable to dividends or inclusions from
tax years of foreign corporations beginning on or before
December 31, 2017.If taxpayer does not have such a dividend or
inclusion, do not complete Schedule F-1 (see instructions).
Part I—Dividends and Deemed Inclusions From Post-1986
Undistributed Earnings
For each line in Schedule F-1, Part I, include the column 12
amount in column 3 of the line in Schedule B, Part I that
corresponds with the identifying number specified in column 1
of Schedule A and that also corresponds with the identifying

number specified in either column 1b or 1c of this Schedule F-
1, Part I (see instructions).
1a. Name of Foreign Corporation
(identify DISCs and former DISCs)
1b. EIN (if any)of theForeignCorporation
1c. Reference ID Number(see instructions)
2. Tax Year End (Year/Month)(see instructions)
3. Country of Incorporation(enter countrycode—
see instructions)
4. Post-1986 Undistributed Earnings (in functional
currency)(attach schedule)
5. Opening Balancein Post-1986 Foreign Income Taxes
6. Foreign Taxes Paid and DeemedPaid for Tax Year Indicated
(a) Taxes Paid
(b) Taxes Deemed Paid (see instructions)
1a. Name of Foreign Corporation (identify D I S C's and former
D I S C's).
1b. E I N (if any) of the Foreign Corporation.
1c. Reference I D Number (see instructions).
2. Tax Year End (Year/Month) (see instructions).
3. Country of Incorporation (enter country code—see
instructions).
4. Post-1986 Undistributed Earnings (in functional currency)
(attach schedule).
5. Opening Balance in Post-1986 Foreign Income Taxes.
6. Foreign Taxes Paid and Deemed Paid for Tax Year Indicated.
(a) Taxes Paid.
6. Foreign Taxes Paid and Deemed Paid for Tax Year Indicated.
(b) Taxes Deemed Paid (see instructions).
7. Post-1986 ForeignIncome Taxes(add columns 5, 6(a), and
6(b))
8. Dividends and Deemed Inclusions
(a) FunctionalCurrency
(b) U.S. Dollars
9. Divide Column 8(a)by Column 4
10. Multiply Column 7by Column 9

11. Section 960(c) Limitation
12. Tax Deemed Paid(subtract column 11from column 10)
7. Post-1986 Foreign Income Taxes (add columns 5, 6(a), and
6(b)).
8. Dividends and Deemed Inclusions. (a) Functional Currency.
8. Dividends and Deemed Inclusions. (b) U.S. Dollars.
9. Divide Column 8(a) by Column 4.
10. Multiply Column 7 by Column 9.
11. Section 960(c) Limitation.
12. Tax Deemed Paid (subtract column 11 from column 10).
Total (add amounts in column 12) ▶
Form 1118 (Rev. 12-2020)
Form 1118 (Rev. 12-2020)
Page 7
Schedule F-1
Tax Deemed Paid by Domestic Corporation Filing Return—Pre-
2018 Tax Years of Foreign Corporations (continued)
IMPORTANT: Applicable to dividends or inclusions from
tax years of foreign corporations beginning on or before
December 31, 2017.If taxpayer does not have such a dividend or
inclusion, do not complete Schedule F-1 (see instructions).
Part II—Dividends Paid Out of Pre-1987 Accumulated Profits
For each line in Schedule F-1, Part II, include the column 8(b)
amount in column 3 of the line in Schedule B, Part I that
corresponds with the identifying number specified in column 1
of Schedule A and that also corresponds with the identifying
number specified in either column 1b or 1c of this Schedule F-
1, Part I (see instructions).
1a. Name of Foreign Corporation
(identify DISCs and former DISCs)
1b. EIN (if any)of theForeign Corporation
1c. Reference IDNumber(see instructions)
2. Tax Year End(Year/Month)(see instructions)
3. Country of Incorporation(enter country code—
see instructions)
4. Accumulated Profitsfor Tax Year Indicated(in functional

currency computed under section 902) (attach schedule)
5. Foreign Taxes Paid and Deemed Paid on Earnings and Profits
(E&P)for Tax Year Indicated(in functional currency)(see
instructions)
6. Dividends Paid
(a) Functional Currency
(b) U.S. Dollars
7. Divide Column 6(a)by Column 4
8. Tax Deemed Paid (see instructions)
(a) Functional Currency
(b) U.S. Dollars
5. Foreign Taxes Paid and Deemed Paid on Earnings and Profits
(E&P) for Tax Year Indicated (in functional currency) (see
instructions).
6. Dividends Paid. (a) Functional Currency.
6. Dividends Paid. (b) U.S. Dollars.
7. Divide Column 6(a) by Column 4.
8. Tax Deemed Paid (see instructions). (a) Functional Currency.
8. Tax Deemed Paid (see instructions). (b) U.S. Dollars.
Total (add amounts in column 8b) ▶
Part III—Deemed Inclusions From Pre-1987 Earnings and
Profits
For each line in Schedule F-1, Part III, include the column 8
amount in column 3 of the line in Schedule B, Part I that
corresponds with the identifying number specified in column 1
of Schedule A and that also corresponds with the identifying
number specified in either column 1b or 1c of this Schedule F-
1, Part I (see instructions).
1a. Name of Foreign Corporation
(identify DISCs and former DISCs)
1b. EIN (if any)of theForeign Corporation
1c. Reference IDNumber(see instructions)
2. Tax Year End(Year/Month)(see instructions)
3. Country of Incorporation(enter country code—
see instructions)
4. E&P for Tax Year Indicated(in functional currencytranslated

from U.S. dollars, computed under section 964) (attach
schedule)
5. Foreign Taxes Paid andDeemed Paid for Tax Year
Indicated(see instructions)
6. Deemed Inclusions
(a) Functional Currency
(b) U.S. Dollars
7. Divide Column 6(a)by Column 4
8. Tax Deemed Paid(multiply column 5 by column 7)
5. Foreign Taxes Paid and Deemed Paid for Tax Year Indicated
(see instructions).
6. Deemed Inclusions. (a) Functional Currency.
6. Deemed Inclusions. (b) U.S. Dollars.
7. Divide Column 6(a) by Column 4.
8. Tax Deemed Paid (multiply column 5 by column 7).
Total (add amounts in column 8) ▶
Form 1118 (Rev. 12-2020)
Form 1118 (Rev. 12-2020)
Page 8
Schedule F-2
Tax Deemed Paid by First- and Second-Tier Foreign
Corporations Under Section 902(b)—Pre-2018 Tax Years of
Foreign Corporations
Use Part I to compute the tax deemed paid by a first-tier foreign
corporation with respect to dividends from a second-tier foreign
corporation. Use Part II to compute the tax deemed paid by a
second-tier foreign corporation with respect to dividends from a
third-tier foreign corporation. Report all amounts in U.S.
dollars unless otherwise specified.
IMPORTANT: Applicable to dividends from tax years of
foreign corporations beginning on or before December 31,
2017.If taxpayer does not have such a dividend, do not complete
Schedule F-2 (see instructions).
Part I—Tax Deemed Paid by First-Tier Foreign Corporations
Section A—Dividends Paid Out of Post-1986 Undistributed
Earnings (Include the column 10 results in Schedule F-1, Part I,

column 6(b).)
1a. Name of Second-Tier Foreign Corporationand Its Related
First-Tier Foreign Corporation
1b. EIN (if any)of the Second-TierForeign Corporation
1c. Reference IDNumber(see instructions)
2. Tax Year End(Year/Month)(see instructions)
3. Country ofIncorporation(enter country code—
see instructions)
4. Accumulated Profitsfor Tax Year Indicated(in functional
currency—see instructions)
5. Opening BalancePost-1986 ForeignIncome Taxes
6. Foreign Taxes Paid and Deemed Paid for Tax Year Indicated
(a) Taxes Paid
(b) Taxes Deemed Paid(see instructions)
7. Post-1986 ForeignIncome Taxes(add columns 5, 6(a), and
6(b))
8. Dividends Paid (in functional currency)
(a) of Second-Tier Corporation
(b) of First-Tier Corporation
9. Divide Column 8(a)by Column 4
10. Tax Deemed Paid(multiply column 7by column 9)
6. Foreign Taxes Paid and Deemed Paid for Tax Year Indicated.
(a) Taxes Paid.
6. Foreign Taxes Paid and Deemed Paid for Tax Year Indicated.
(b) Taxes Deemed Paid (see instructions).
7. Post-1986 Foreign Income Taxes (add columns 5, 6(a), and
6(b)).
8. Dividends Paid (in functional currency). (a) of Second-Tier
Corporation.
8. Dividends Paid (in functional currency). (b) of First-Tier
Corporation.
9. Divide Column 8(a) by Column 4.
10. Tax Deemed Paid (multiply column 7 by column 9).
Section B—Dividends Paid Out of Pre-1987 Accumulated
Profits (Include the column 8(b) results in Schedule F-1, Part I,
column 6(b).)

1a. Name of Second-Tier Foreign Corporationand Its Related
First-Tier Foreign Corporation
1b. EIN (if any)of the Second-TierForeign Corporation
1c. Reference IDNumber(see instructions)
2. Tax Year End(Year/Month)(see instructions)
3. Country ofIncorporation(enter country code—
see instructions)
4. Accumulated Profitsfor Tax Year Indicated(in functional
currency— attach schedule)
5. Foreign Taxes Paid andDeemed Paid for Tax Year Indicated
(in functional currency—see instructions)
6. Dividends Paid(in functional currency)
(a) of Second-Tier Corporation
(b) of First-Tier Corporation
7. Divide Column 6(a)by Column 4
8. Tax Deemed Paid(see instructions)
(a) Functional Currencyof Second-Tier Corporation
(b) U.S. Dollars
5. Foreign Taxes Paid and Deemed Paid for Tax Year Indicated
(in functional currency—see instructions).
6. Dividends Paid (in functional currency). (a) of Second-Tier
Corporation.
6. Dividends Paid (in functional currency). (b) of First-Tier
Corporation.
7. Divide Column 6(a) by Column 4.
8. Tax Deemed Paid (see instructions). (a) Functional Currency
of Second-Tier Corporation.
8. Tax Deemed Paid (see instructions). (b) U.S. Dollars.
Form 1118 (Rev. 12-2020)
Form 1118 (Rev. 12-2020)
Page 9
Schedule F-2
Tax Deemed Paid by First- and Second-Tier Foreign
Corporations Under Section 902(b)—Pre-2018 Tax Years of
Foreign Corporations (continued)
IMPORTANT: Applicable to dividends from tax years of

foreign corporations beginning on or before December 31,
2017.If taxpayer does not have such a dividend, do not complete
Schedule F-2 (see instructions).
Part II—Dividends Deemed Paid by Second-Tier Foreign
Corporations
Section A—Dividends Paid Out of Post-1986 Undistributed
Earnings (In general, include the column 10 results in Section
A, column 6(b), of Part I. However, see instructions for
Schedule F-1, Part I, column 6(b), for an exception.)
1a. Name of Third-Tier Foreign Corporationand Its Related
Second-Tier Foreign Corporation
1b. EIN (if any)of the Third-TierForeign Corporation
1c. Reference IDNumber(see instructions)
2. Tax Year End(Year/Month)(see instructions)
3. Country ofIncorporation(enter country code—
see instructions)
4. Post-1986Undistributed Earnings(in functional currency—
attach schedule)
5. Opening Balance inPost-1986 ForeignIncome Taxes
6. Foreign Taxes Paid and Deemed Paid for Tax Year Indicated
(a) Taxes Paid
(b) Taxes Deemed Paid (from Schedule F-3, Part I, column 10)
7. Post-1986 ForeignIncome Taxes(add columns 5, 6(a), and
6(b))
8. Dividends Paid(in functional currency)
(a) of Third-Tier Corporation
(b) of Second-Tier Corporation
9. Divide Column 8(a)by Column 4
10. Tax Deemed Paid(multiply column 7by column 9)
6. Foreign Taxes Paid and Deemed Paid for Tax Year Indicated.
(a) Taxes Paid.
6. Foreign Taxes Paid and Deemed Paid for Tax Year Indicated.
(b) Taxes Deemed Paid (from Schedule F-3, Part I, column 10).
7. Post-1986 Foreign Income Taxes (add columns 5, 6(a), and
6(b)).
8. Dividends Paid (in functional currency). (a) of Third-Tier

Corporation.
8. Dividends Paid (in functional currency). (b) of Second-Tier
Corporation.
9. Divide Column 8(a) by Column 4.
10. Tax Deemed Paid (multiply column 7 by column 9).
Section B—Dividends Paid Out of Pre-1987 Accumulated
Profits (In general, include the column 8(b) results in Section
A, column 6(b), of Part I. However, see instructions for
Schedule F-1, Part I, column 6(b) for an exception.)
1a. Name of Third-Tier Foreign Corporationand Its Related
Second-Tier Foreign Corporation
1b. EIN (if any)of the Third-TierForeign Corporation
1c. Reference IDNumber(see instructions)
2. Tax Year End(Year/Month)(see instructions)
3. Country ofIncorporation(enter country code—
see instructions)
4. Accumulated Profitsfor Tax Year Indicated(in functional
currency—attach schedule)
5. Foreign Taxes Paid andDeemed Paid for Tax Year Indicated
(in functional currency—see instructions)
6. Dividends Paid(in functional currency)
(a) of Third-Tier Corporation
(b) of Second-Tier Corporation
7. Divide Column 6(a)by Column 4
8. Tax Deemed Paid(see instructions)
(a) Functional Currencyof Third-Tier Corporation
(b) U.S. Dollars
5. Foreign Taxes Paid and Deemed Paid for Tax Year Indicated
(in functional currency—see instructions).
6. Dividends Paid (in functional currency). (a) of Third-Tier
Corporation.
6. Dividends Paid (in functional currency). (b) of Second-Tier
Corporation.
7. Divide Column 6(a) by Column 4.
8. Tax Deemed Paid (see instructions). (a) Functional Currency
of Third-Tier Corporation.

8. Tax Deemed Paid (see instructions). (b) U.S. Dollars.
Form 1118 (Rev. 12-2020)
Form 1118 (Rev. 12-2020)
Page 10
Schedule F-3
Tax Deemed Paid by Certain Third-, Fourth-, and Fifth-Tier
Foreign Corporations Under Section 902(b)—Pre-2018 Tax
Years of Foreign Corporations
Use this schedule to report taxes deemed paid with respect to
dividends from eligible post-1986 undistributed earnings of
fourth-, fifth-, and sixth-tier controlled foreign
corporations. Report all amounts in U.S. dollars unless
otherwise specified.
IMPORTANT: Applicable to dividends from tax years of
foreign corporations beginning on or before December 31,
2017.If taxpayer does not have such a dividend, do not complete
Schedule F-3 (see instructions).
Part I—Tax Deemed Paid by Third-Tier Foreign Corporations
(In general, include the column 10 results in Schedule F-2, Part
II, Section A, column 6(b). However, see instructions for
Schedule F-1, Part I, column 6(b), for an exception.)
1a. Name of Fourth-Tier Foreign Corporationand Its Related
Third-Tier Foreign Corporation
1b. EIN (if any)of the Fourth-TierForeign Corporation
1c. Reference IDNumber(see instructions)
2. Tax Year End(Year/Month)(see instructions)
3. Country ofIncorporation(enter country code—
see instructions)
4. Post-1986Undistributed Earnings(in functional currency—
attach schedule)
5. Opening Balance inPost-1986 ForeignIncome Taxes
6. Foreign Taxes Paid and Deemed Paid for Tax Year Indicated
(a) Taxes Paid
(b) Taxes Deemed Paid(from Part II, column 10)
7. Post-1986 ForeignIncome Taxes(add columns 5, 6(a), and
6(b))

8. Dividends Paid(in functional currency)
(a) of Fourth-Tier CFC
(b) of Third-Tier CFC
9. Divide Column 8(a)by Column 4
10. Tax Deemed Paid(multiply column 7by column 9)
6. Foreign Taxes Paid and Deemed Paid for Tax Year Indicated.
(a) Taxes Paid.
6. Foreign Taxes Paid and Deemed Paid for Tax Year Indicated.
(b) Taxes Deemed Paid (from Part II, column 10).
7. Post-1986 Foreign Income Taxes (add columns 5, 6(a), and
6(b)).
8. Dividends Paid (in functional currency). (a) of Fourth-Tier C
F C.
8. Dividends Paid (in functional currency). (b) of Third-Tier C
F C.
9. Divide Column 8(a) by Column 4.
10. Tax Deemed Paid (multiply column 7 by column 9).
Form 1118 (Rev. 12-2020)
Form 1118 (Rev. 12-2020)
Page 11
Schedule F-3
Tax Deemed Paid by Certain Third-, Fourth-, and Fifth-Tier
Foreign Corporations Under Section 902(b)—Pre-2018 Tax
Years of Foreign Corporations (continued)
IMPORTANT: Applicable to dividends from tax years of
foreign corporations beginning on or before December 31,
2017.If taxpayer does not have such a dividend, do not complete
Schedule F-3 (see instructions).
Part II—Tax Deemed Paid by Fourth-Tier Foreign Corporations
(In general, include the column 10 results in column 6(b) of
Part I. However, see instructions for Schedule F-1, Part I,
column 6(b), for an exception.)
1a. Name of Fifth-Tier Foreign Corporationand Its Related
Fourth-Tier Foreign Corporation
1b. EIN (if any)of the Fifth-TierForeign Corporation
1c. Reference IDNumber(see instructions)

2. Tax Year End(Year/Month)(see instructions)
3. Country ofIncorporation(enter country code—
see instructions)
4. Post-1986Undistributed Earnings(in functional currency—
attach schedule)
5. Opening Balance inPost-1986 ForeignIncome Taxes
6. Foreign Taxes Paid and Deemed Paid for Tax Year Indicated
(a) Taxes Paid
(b) Taxes Deemed Paid(from Part III, column 10)
7. Post-1986 ForeignIncome Taxes(add columns 5, 6(a), and
6(b))
8. Dividends Paid(in functional currency)
(a) of Fifth-Tier CFC
(b) of Fourth-Tier CFC
9. Divide Column 8(a)by Column 4
10. Tax Deemed Paid(multiply column 7by column 9)
6. Foreign Taxes Paid and Deemed Paid for Tax Year Indicated.
(a) Taxes Paid.
6. Foreign Taxes Paid and Deemed Paid for Tax Year Indicated.
(b) Taxes Deemed Paid (from Part III, column 10).
7. Post-1986 Foreign Income Taxes (add columns 5, 6(a), and
6(b)).
8. Dividends Paid (in functional currency). (a) of Fifth-Tier C F
C.
8. Dividends Paid (in functional currency). (b) of Fourth-Tier C
F C.
9. Divide Column 8(a) by Column 4.
10. Tax Deemed Paid (multiply column 7 by column 9).
Part III—Tax Deemed Paid by Fifth-Tier Foreign Corporations
(In general, include the column 10 results in column 6(b) of
Part II, above. However, see instructions for Schedule F-1, Part
I, column 6(b), for an exception.)
1a. Name of Sixth-Tier Foreign Corporationand Its Related
Fifth-Tier Foreign Corporation
1b. EIN (if any)of the Sixth-TierForeign Corporation
1c. Reference IDNumber(see instructions)

2. Tax Year End(Year/Month)(see instructions)
3. Country ofIncorporation(enter country code—
see instructions)
4. Post-1986Undistributed Earnings(in functional currency—
attach schedule)
5. Opening Balance inPost-1986 ForeignIncome Taxes
6. Foreign Taxes Paidfor Tax Year Indicated
7. Post-1986 ForeignIncome Taxes(add columns 5 and 6)
8. Dividends Paid(in functional currency)
(a) of Sixth-Tier CFC
(b) of Fifth-Tier CFC
9. Divide Column 8(a)by Column 4
10. Tax Deemed Paid(multiply column 7by column 9)
6. Foreign Taxes Paid for Tax Year Indicated.
7. Post-1986 Foreign Income Taxes (add columns 5 and 6).
8. Dividends Paid (in functional currency). (a) of Sixth-Tier C F
C.
8. Dividends Paid (in functional currency). (b) of Fifth-Tier C F
C.
9. Divide Column 8(a) by Column 4.
10. Tax Deemed Paid (multiply column 7 by column 9).
Form 1118 (Rev. 12-2020)
Form 1118 (Rev. 12-2020)
Page 12
Schedule G
Reductions of Taxes Paid, Accrued, or Deemed Paid
Part I—Reduction Amounts
A
Reduction of Taxes Under Section 901(e)—Attach separate
schedule
B
Reduction of Foreign Oil and Gas Taxes—Enter amount from
Schedule I, Part II, line 4
C

Reduction of Taxes Due to International Boycott Provisions—

Enter appropriate portion from Schedule C (Form 5713) (see
instructions).Important: Enter only “specifically attributable
taxes” here
D
Reduction of Taxes for Section 6038(c) Penalty—Attach
separate schedule
E
Taxes suspended under section 909
F

Other Reductions of Taxes
2. If more than one code is entered on line F1 or if code OTH is
entered on line F1, attach schedule (see instructions).
Total (add lines A through F). Enter here and on Schedule B,
Part II, line 3 ▶
Part II—Other Information
G
Check this box if, during the tax year, the corporation paid or
accrued any foreign tax that was disqualified for credit under
section 901(m) ▶
H
Check this box if, during the tax year, the corporation paid or
accrued any foreign tax that was disqualified for credit under
section 901(j), (k), or (l) ▶
Form 1118 (Rev. 12-2020)
Form 1118 (Rev. 12-2020)
Page 13
Schedule H
Apportionment of Certain Deductions (Complete only once for
all categories of income.)
Part I—Research and Experimental Deductions
(a) Sales Method
)
(i) Gross Sales
(ii) R&EDeductions

)
(iii) Gross Sales
(iv) R&E
Deductions
(b) Gross Income Method—Check method used:
)
(v) Gross Income
(vi) R&EDeductions
)
(vii) Gross Income
(viii) R&EDeductions
(c) Total R&E Deductions(enter the sum of all amounts entered
in all applicable “R&E Deductions” columns)
(a) Sales Method. Product Line #1. (i) Gross Sales.
(a) Sales Method. Product Line #1. (ii) R&E Deductions.
(a) Sales Method. Product Line #2. (iii) Gross Sales.
(a) Sales Method. Product Line #2. (iv) R&E Deductions.
(b) Gross Income Method. Product Line #1. (v) Gross Income.
(b) Gross Income Method. Product Line #1. (vi) R&E
Deductions.
(b) Gross Income Method. Product Line #2. (vii) Gross Income.
(b) Gross Income Method. Product Line #2. (viii) R&E
Deductions.
(c) Total R&E Deductions (enter the sum of all amounts entered
in all applicable “R&E Deductions” columns).
1
Totals (see instructions)
2
Total to be apportioned
3

Apportionment among statutory groupings (see instructions):
a
(1) Section 245A dividend
(2) Other

(3) Total line a
b
(1) Section 245A dividend
(2) Other
(3) Total line b
c
(1) Section 245A dividend
(2) Other
(3) Total line c
d
(1) Section 245A dividend
(2) Other
(3) Total line d
e
(1) Section 245A dividend
(2) Other
(3) Total line e
f
(1) Section 245A dividend
(2) Other
(3) Total line f
4

Total foreign (add lines 3a(3), 3b(3), 3c(3), 3d(3), 3e(3), and
3f(3)) ▶
Important: See Computer-Generated Schedule H in instructions.
Form 1118 (Rev. 12-2020)
Form 1118 (Rev. 12-2020)
Page 14
Schedule H
Apportionment of Certain Deductions (Complete only once for
all categories of income.) (continued)
Part II—Interest Deductions, All Other Deductions, and Total
Deductions
(a) Average Value of Assets—Check method used:

(i) Nonfinancial
Corporations
(ii) Financial Corporations
(b) Interest Deductions
(iii) Nonfinancial Corporations
(iv) Financial Corporations
(c) All Other Deductions (attach schedule)(see
instructions)
(d) Totals(add the corresponding amounts from
column (c), Part I; columns (b)(iii) and
(b)(iv), Part II; and column (c), Part II)

Additional note:Be sure to also enter the totals from lines3a(2),
3b(2), 3c(2),3d(2), 3e(2), and 3f(2) below in column 15of the
corresponding Schedule A.
(a) Average Value of Assets. (i) Nonfinancial Corporations.
(a) Average Value of Assets. (ii) Financial Corporations.
(b) Interest Deductions. (iii) Nonfinancial Corporations.
(b) Interest Deductions. (iv) Financial Corporations.
(c) All Other Deductions (see instructions).
(d) Totals (add the corresponding amounts from column (c),
Part I; columns (b)(iii) and (b)(iv), Part II; and column (c), Part
II). Additional note: Be sure to also enter the totals from lines
3a(2), 3b(2), 3c(2), 3d(2), 3e(2), and 3f(2) below in column 15
of the corresponding Schedule A.
1a
Totals (see instructions)
b

Amounts specifically allocable under Temporary Regulations
section 1.861-10T(e)
c
Other specific allocations under Temporary Regulations section
1.861-10T
d
Assets excluded from apportionment formula

2

Total to be apportioned (subtract the sum of lines 1b, 1c, and 1d
from line 1a)
3
Apportionment among statutory groupings (see instructions):
a
(1) Section 245A dividend
(2) Other
(3) Total line a
b
(1) Section 245A dividend
(2) Other
(3) Total line b
c
(1) Section 245A dividend
(2) Other
(3) Total line c
d
(1) Section 245A dividend
(2) Other
(3) Total line d
e
(1) Section 245A dividend
(2) Other
(3) Total line e
f
(1) Section 245A dividend
(2) Other
(3) Total line f
4
Total foreign (add lines 3a(3), 3b(3), 3c(3), 3d(3), 3e(3), and
3f(3)) ▶
Section 904(b)(4) Adjustments
5

Expenses Allocated and Apportioned to Foreign Source Section
245A Dividend. Enter the sum of lines 3a(1), 3b(1), 3c(1),
3d(1), 3e(1), and 3f(1). Include the column (d) result as a
negative amount on Schedule B, Part II, line 8b
6
Enter expenses allocated and apportioned to U.S. source section
245A dividend. Include the column (d) result as a negative
amount on Schedule B, Part II, line 8b
Important: See Computer-Generated Schedule H in instructions.
Form 1118 (Rev. 12-2020)
f1_1: f1_2: f1_3: f1_4: f1_5: f1_6: f1_7: f1_8: f1_9: f1_10:
f1_11: f1_12: f1_13: f1_14: f1_15: f1_16: f1_17: f1_18: f1_19:
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f1_38: f1_39: f1_40: f1_41: f1_42: f1_43: f1_44: f1_45: f1_46:
f1_47: f1_48: f1_49: f1_50: f1_51: f1_52: f1_53: f1_54: f1_55:
f1_56: f1_57: f1_58: f1_59: f1_60: f1_61: f1_62: f1_63: f1_64:
f1_65: f1_66: f1_67: f1_68: f1_69: f1_70: f1_71: f1_72: f1_73:
f1_74: f1_75: f1_76: f1_77: f1_78: f1_79: f1_80: f1_81: f1_82:
f1_83: f1_84: f1_85: f1_86: f1_87: f1_88: f1_89: f1_90: f1_91:
f1_92: f1_93: f1_94: f1_95: f1_96: f1_97: f1_98: f1_99:
f1_100: f1_101: f1_102: f1_103: f1_104: f1_105: f1_106:
f1_107: f1_108: f1_109: f1_110: f1_111: f1_112: f1_113:
f1_114: f1_115: f1_116: f1_117: f1_118: f1_119: f1_120: c2_1:
0f2_1: f2_2: f2_3: f2_4: f2_5: f2_6: f2_7: f2_8: f2_9: f2_10:
f2_11: f2_12: f2_13: f2_14: f2_15: f2_16: f2_17: f2_18: f2_19:
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f2_29: f2_30: f2_31: f2_32: f2_33: f2_34: f2_35: f2_36: f2_37:
f2_38: f2_39: f2_40: f2_41: f2_42: f2_43: f2_44: f2_45: f2_46:
f2_47: f2_48: f2_49: f2_50: f2_51: f2_52: f2_53: f2_54: f2_55:
f2_56: f2_57: f2_58: f2_59: f2_60: f2_61: f2_62: f2_63: f2_64:
f2_65: f2_66: f2_67: f2_68: f2_69: f3_1: f3_2: f3_3: f3_4:
f3_5: f3_6: f3_7: f3_8: f3_9: f3_10: f3_11: f3_12: f3_13:
f3_14: f3_15: f3_16: f3_17: f3_18: f3_19: f3_20: f3_21: f3_22:
f3_23: f3_24: f3_25: f3_26: f3_27: f3_28: f3_29: f3_30: f3_31:
f3_32: f3_33: f3_34: f3_35: f3_36: f3_37: f3_38: f3_39: f3_40:

f3_41: f3_42: f3_43: f3_44: f3_45: f3_46: f3_47: f3_48: f3_49:
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f3_59: f3_60: f3_61: f3_62: f3_63: f3_64: f3_65: f3_66: f3_67:
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f3_77: f3_78: f3_79: f3_80: f3_81: f3_82: f3_83: f3_84: f3_85:
f3_86: f3_87: f3_88: f3_89: f3_90: f3_91: f3_92: f3_93: f3_94:
f3_95: f3_96: f3_97: f3_98: f3_99: f3_100: f4_1: f4_2: f4_3:
f4_4: f4_5: f4_6: f4_7: f4_8: f4_9: f4_10: f4_11: f4_12: f4_13:
f4_14: f4_15: f4_16: f4_17: f4_18: f4_19: f4_20: f4_21: f4_22:
f4_23: f4_24: f4_25: f4_26: f4_27: f4_28: f4_29: f4_30: f4_31:
f4_32: f4_33: f4_34: f4_35: f4_36: f4_37: f4_38: f4_39: f4_40:
f4_41: f4_42: f4_43: f4_44: f4_45: f4_46: f4_47: f4_48: f4_49:
f4_50: f4_51: f4_52: f4_53: f4_54: f4_55: f4_56: f4_57: f4_58:
f4_59: f4_60: f4_61: f4_62: f4_63: f4_64: f4_65: f4_66: f4_67:
f4_68: f4_69: f4_70: f4_71: f4_72: f5_1: f5_2: f5_3: f5_4:
f5_5: f5_6: f5_7: f5_8: f5_9: f5_10: f5_11: f5_12: f5_13:
f5_14: f5_15: f5_16: f5_17: f5_18: f5_19: f5_20: f5_21: f5_22:
f5_23: f5_24: f5_25: f5_26: f5_27: f5_28: f5_29: f5_30: f5_31:
f5_32: f5_33: f5_34: f5_35: f5_36: f5_37: f5_38: f5_39: f5_40:
f5_41: f5_42: f5_43: f5_44: f5_45: f5_46: f5_47: f5_48: f5_49:
f5_50: f5_51: f5_52: f5_53: f5_54: f5_55: f5_56: f5_57: f5_58:
f5_59: f5_60: f5_61: f5_62: f5_63: f5_64: f5_65: f5_66: f5_67:
f5_68: f5_69: f5_70: f5_71: f5_72: f5_73: f5_74: f5_75: f5_76:
f5_77: f5_78: f5_79: f5_80: f5_81: f5_82: f5_83: f5_84: f5_85:
f5_86: f5_87: f5_88: f5_89: f5_90: f5_91: f5_92: f5_93: f5_94:
f5_95: f5_96: f5_97: f5_98: f5_99: f5_100: f5_101: f5_102:
f5_103: f5_104: f5_105: f5_106: f5_107: f5_108: f5_109:
f5_110: f5_111: f5_112: f5_113: f5_114: f5_115: f5_116:
f5_117: f5_118: f5_119: f5_120: f5_121: f5_122: f5_123:
f5_124: f5_125: f5_126: f5_127: f5_128: f5_129: f5_130:
f5_131: f5_132: f5_133: f5_134: f5_135: f5_136: f5_137:
f5_138: f5_139: f5_140: f5_141: f5_142: f5_143: f5_144:
f5_145: f5_146: f5_147: f5_148: f5_149: f5_150: f5_151:
f5_152: f5_153: f5_154: f5_155: f5_156: f5_157: f5_158:
f5_159: f5_160: f5_161: f5_162: f5_163: f5_164: f5_165:
f5_166: f5_167: f5_168: f5_169: f6_1: f6_2: f6_3: f6_4: f6_5:

f6_6: f6_7: f6_8: f6_9: f6_10: f6_11: f6_12: f6_13: f6_14:
f6_15: f6_16: f6_17: f6_18: f6_19: f6_20: f6_21: f6_22: f6_23:
f6_24: f6_25: f6_26: f6_27: f6_28: f6_29: f6_30: f6_31: f6_32:
f6_33: f6_34: f6_35: f6_36: f6_37: f6_38: f6_39: f6_40: f6_41:
f6_42: f6_43: f6_44: f6_45: f6_46: f6_47: f6_48: f6_49: f6_50:
f6_51: f6_52: f6_53: f6_54: f6_55: f6_56: f6_57: f6_58: f6_59:
f6_60: f6_61: f6_62: f6_63: f6_64: f6_65: f6_66: f6_67: f6_68:
f6_69: f6_70: f6_71: f6_72: f6_73: f6_74: f6_75: f6_76: f6_77:
f6_78: f6_79: f6_80: f6_81: f6_82: f6_83: f6_84: f6_85: f6_86:
f6_87: f6_88: f6_89: f6_90: f6_91: f6_92: f6_93: f6_94: f6_95:
f6_96: f6_97: f6_98: f6_99: f6_100: f6_101: f6_102: f6_103:
f6_104: f6_105: f6_106: f6_107: f6_108: f6_109: f6_110:
f6_111: f6_112: f6_113: f7_1: f7_2: f7_3: f7_4: f7_5: f7_6:
f7_7: f7_8: f7_9: f7_10: f7_11: f7_12: f7_13: f7_14: f7_15:
f7_16: f7_17: f7_18: f7_19: f7_20: f7_21: f7_22: f7_23: f7_24:
f7_25: f7_26: f7_27: f7_28: f7_29: f7_30: f7_31: f7_32: f7_33:
f7_34: f7_35: f7_36: f7_37: f7_38: f7_39: f7_40: f7_41: f7_42:
f7_43: f7_44: f7_45: f7_46: f7_47: f7_48: f7_49: f7_50: f7_51:
f7_52: f7_53: f7_54: f7_55: f7_56: f7_57: f7_58: f7_59: f7_60:
f7_61: f7_62: f7_63: f7_64: f7_65: f7_66: f7_67: f7_68: f7_69:
f7_70: f7_71: f7_72: f7_73: f7_74: f7_75: f7_76: f7_77: f7_78:
f7_79: f7_80: f7_81: f7_82: f7_83: f7_84: f7_85: f7_86: f7_87:
f7_88: f7_89: f7_90: f7_91: f7_92: f7_93: f7_94: f7_95: f7_96:
f7_97: f7_98: f7_99: f7_100: f7_101: f7_102: f7_103: f7_104:
f7_105: f7_106: f7_107: f7_108: f7_109: f7_110: f7_111:
f7_112: f7_113: f7_114: f7_115: f7_116: f7_117: f8_1: f8_2:
f8_3: f8_4: f8_5: f8_6: f8_7: f8_8: f8_9: f8_10: f8_11: f8_12:
f8_13: f8_14: f8_15: f8_16: f8_17: f8_18: f8_19: f8_20: f8_21:
f8_22: f8_23: f8_24: f8_25: f8_26: f8_27: f8_28: f8_29: f8_30:
f8_31: f8_32: f8_33: f8_34: f8_35: f8_36: f8_37: f8_38: f8_39:
f8_40: f8_41: f8_42: f8_43: f8_44: f8_45: f8_46: f8_47: f8_48:
f8_49: f8_50: f8_51: f8_52: f8_53: f8_54: f8_55: f8_56: f8_57:
f8_58: f8_59: f8_60: f8_61: f8_62: f8_63: f8_64: f8_65: f8_66:
f8_67: f8_68: f8_69: f8_70: f8_71: f8_72: f8_73: f8_74: f8_75:
f8_76: f8_77: f8_78: f8_79: f8_80: f8_81: f8_82: f8_83: f8_84:
f8_85: f8_86: f8_87: f8_88: f8_89: f8_90: f8_91: f8_92: f8_93:

f8_94: f8_95: f8_96: f8_97: f8_98: f8_99: f8_100: f8_101:
f8_102: f8_103: f8_104: f8_105: f8_106: f8_107: f8_108:
f8_109: f8_110: f8_111: f8_112: f8_113: f8_114: f8_115:
f8_116: f8_117: f8_118: f8_119: f8_120: f8_121: f8_122:
f8_123: f8_124: f8_125: f8_126: f8_127: f8_128: f8_129:
f8_130: f9_1: f9_2: f9_3: f9_4: f9_5: f9_6: f9_7: f9_8: f9_9:
f9_10: f9_11: f9_12: f9_13: f9_14: f9_15: f9_16: f9_17: f9_18:
f9_19: f9_20: f9_21: f9_22: f9_23: f9_24: f9_25: f9_26: f9_27:
f9_28: f9_29: f9_30: f9_31: f9_32: f9_33: f9_34: f9_35: f9_36:
f9_37: f9_38: f9_39: f9_40: f9_41: f9_42: f9_43: f9_44: f9_45:
f9_46: f9_47: f9_48: f9_49: f9_50: f9_51: f9_52: f9_53: f9_54:
f9_55: f9_56: f9_57: f9_58: f9_59: f9_60: f9_61: f9_62: f9_63:
f9_64: f9_65: f9_66: f9_67: f9_68: f9_69: f9_70: f9_71: f9_72:
f9_73: f9_74: f9_75: f9_76: f9_77: f9_78: f9_79: f9_80: f9_81:
f9_82: f9_83: f9_84: f9_85: f9_86: f9_87: f9_88: f9_89: f9_90:
f9_91: f9_92: f9_93: f9_94: f9_95: f9_96: f9_97: f9_98: f9_99:
f9_100: f9_101: f9_102: f9_103: f9_104: f9_105: f9_106:
f9_107: f9_108: f9_109: f9_110: f9_111: f9_112: f9_113:
f9_114: f9_115: f9_116: f9_117: f9_118: f9_119: f9_120:
f9_121: f9_122: f9_123: f9_124: f9_125: f9_126: f9_127:
f9_128: f9_129: f9_130: f10_1: f10_2: f10_3: f10_4: f10_5:
f10_6: f10_7: f10_8: f10_9: f10_10: f10_11: f10_12: f10_13:
f10_14: f10_15: f10_16: f10_17: f10_18: f10_19: f10_20:
f10_21: f10_22: f10_23: f10_24: f10_25: f10_26: f10_27:
f10_28: f10_29: f10_30: f10_31: f10_32: f10_33: f10_34:
f10_35: f10_36: f10_37: f10_38: f10_39: f10_40: f10_41:
f10_42: f10_43: f10_44: f10_45: f10_46: f10_47: f10_48:
f10_49: f10_50: f10_51: f10_52: f10_53: f10_54: f10_55:
f10_56: f10_57: f10_58: f10_59: f10_60: f10_61: f10_62:
f10_63: f10_64: f10_65: f10_66: f10_67: f10_68: f10_69:
f10_70: f11_1: f11_2: f11_3: f11_4: f11_5: f11_6: f11_7:
f11_8: f11_9: f11_10: f11_11: f11_12: f11_13: f11_14: f11_15:
f11_16: f11_17: f11_18: f11_19: f11_20: f11_21: f11_22:
f11_23: f11_24: f11_25: f11_26: f11_27: f11_28: f11_29:
f11_30: f11_31: f11_32: f11_33: f11_34: f11_35: f11_36:
f11_37: f11_38: f11_39: f11_40: f11_41: f11_42: f11_43:

f11_44: f11_45: f11_46: f11_47: f11_48: f11_49: f11_50:
f11_51: f11_52: f11_53: f11_54: f11_55: f11_56: f11_57:
f11_58: f11_59: f11_60: f11_61: f11_62: f11_63: f11_64:
f11_65: f11_66: f11_67: f11_68: f11_69: f11_70: f11_71:
f11_72: f11_73: f11_74: f11_75: f11_76: f11_77: f11_78:
f11_79: f11_80: f11_81: f11_82: f11_83: f11_84: f11_85:
f11_86: f11_87: f11_88: f11_89: f11_90: f11_91: f11_92:
f11_93: f11_94: f11_95: f11_96: f11_97: f11_98: f11_99:
f11_100: f11_101: f11_102: f11_103: f11_104: f11_105:
f11_106: f11_107: f11_108: f11_109: f11_110: f11_111:
f11_112: f11_113: f11_114: f11_115: f11_116: f11_117:
f11_118: f11_119: f11_120: f11_121: f11_122: f11_123:
f11_124: f11_125: f11_126: f11_127: f11_128: f11_129:
f11_130: f11_131: f11_132: f11_133: f11_134: f11_135: f12_1:
f12_2: f12_3: f12_4: f12_5: f12_6: f12_7: f12_8: c12_1:
0c12_2: 0f13_1: f13_2: c13_1: 0f13_3: f13_4: f13_5: f13_6:
f13_7: f13_8: f13_9: f13_10: f13_11: f13_12: f13_13: f13_14:
f13_15: f13_16: f13_17: f13_18: f13_19: f13_20: f13_21:
f13_22: f13_23: f13_24: f13_25: f13_26: f13_27: f13_28:
f13_29: f13_30: f13_31: f13_32: f13_33: f13_34: f13_35:
f13_36: f13_37: f13_38: f13_39: f13_40: f13_41: f13_42:
f13_43: f13_44: f13_45: f13_46: f13_47: f13_48: f13_49:
f13_50: f13_51: f13_52: f13_53: f13_54: f13_55: f13_56:
f13_57: f13_58: f13_59: f13_60: f13_61: f13_62: f13_63:
f13_64: f13_65: f13_66: f13_67: f13_68: f13_69: f13_70:
f13_71: f13_72: f13_73: f13_74: f13_75: f13_76: f13_77:
f13_78: f13_79: f13_80: f13_81: f13_82: f13_83: f13_84:
f13_85: f13_86: f13_87: f13_88: f13_89: f13_90: f13_91:
f13_92: f13_93: f13_94: f13_95: f13_96: f13_97: f13_98:
f13_99: f13_100: f13_101: f13_102: f13_103: f13_104:
f13_105: f13_106: f13_107: f13_108: f13_109: f13_110:
f13_111: f13_112: f13_113: f13_114: f13_115: f13_116:
f13_117: f13_118: f13_119: f13_120: f13_121: f13_122:
f13_123: f13_124: f13_125: f13_126: f13_127: f13_128:
f13_129: f13_130: f13_131: f13_132: f13_133: f13_134:
f13_135: f13_136: f13_137: f13_138: f13_139: f13_140:

f13_141: f13_142: f13_143: f13_144: f13_145: f13_146:
f13_147: f13_148: f13_150: f13_151: f13_152: f13_153:
f13_154: f13_155: f13_156: f13_157: f13_158: f13_159:
f13_160: f13_161: f13_162: f13_163: f13_164: f13_165:
f13_166: f13_167: f13_168: f13_169: f13_170: f13_171:
f13_172: f13_173: f13_174: f13_175: f13_176: f13_177:
f13_178: f13_179: f13_180: f13_181: f13_182: f13_183:
f13_184: f13_185: f13_186: f13_187: f13_188: f13_189:
f13_190: f13_191: f13_192: f13_193: f13_194: f13_195:
f13_196: f13_197: f13_198: f13_199: f13_200: c14_1: 0f14_1:
f14_2: f14_3: f14_4: f14_5: f14_6: f14_7: f14_8: f14_9:
f14_10: f14_11: f14_12: f14_13: f14_14: f14_15: f14_16:
f14_17: f14_18: f14_19: f14_20: f14_21: f14_22: f14_23:
f14_24: f14_25: f14_26: f14_27: f14_28: f14_29: f14_30:
f14_31: f14_32: f14_33: f14_34: f14_35: f14_36: f14_37:
f14_38: f14_39: f14_40: f14_41: f14_42: f14_43: f14_44:
f14_45: f14_46: f14_47: f14_48: f14_49: f14_50: f14_51:
f14_52: f14_53: f14_54: f14_55: f14_56: f14_57: f14_58:
f14_59: f14_60: f14_61: f14_62: f14_63: f14_64: f14_65:
f14_66: f14_67: f14_68: f14_69: f14_70: f14_71: f14_72:
f14_73: f14_74: f14_75: f14_76: f14_77: f14_78: f14_79:
f14_80: f14_81: f14_82: f14_83: f14_84: f14_85: f14_86:
f14_87: f14_88: f14_89: f14_90: f14_91: f14_92: f14_93:
f14_94: f14_95: f14_96: f14_97: f14_98: f14_99: f14_100:
f14_101: f14_102: f14_103: f14_104: f14_105: f14_106:
f14_107: f14_108: f14_109: f14_110: f14_111: f14_112:
f14_113: f14_114: f14_115: f14_116: f14_117: f14_118:
f14_119: f14_120: f14_121: f14_122: f14_123: f14_124:
f14_125: f14_126: f14_127: f14_128: f14_129: f14_130:
f14_131: f14_132: f14_133: f14_134: f14_135: f14_136:
f14_137: f14_138: f14_139: f14_140: f14_141: f14_142:
f14_143: f14_144: f14_145: f14_146: f14_147: f14_148:
f14_149: f14_150: f14_151: f14_152:

7SEPTEMBER–OCTOBER 2018 © 2018 CCH
INCORPORATED AND ITS AFFILIATES. ALL RIGHTS
RESERVED.

Choice Of Entity Corner
S Corporations and the New International
Tax Provisions of the TCJA

By Joseph E. Tierney III

O ver the course of the years, many of my clients have operated
as S cor-porations. Where they have had international
operations, my primary concern has been to make sure that their
foreign subsidiaries are organized
in the countries in which their principal manufacturing or
production operations
are located. In short, I’ve tried to be sure that these subsidiaries
haven’t generated
subpart F income. None of this has engaged choice of entity
considerations.

But the new foreign tax provisions of the Tax Cuts and Jobs Act
of 2017 (the
“TCJA”) now very directly engage choice of entity issues. The
purpose of this col-
umn is to explore some of the implications of these provisions
for S corporations
and whether a domestic C corporation should be introduced into
the group headed
by an S corporation to hold the shares of controlled foreign
corporations (“CFCs”).

Let’s use an example to work our way through these issues.
Assume XYZ is an
S corporation. It owns all the stock of several CFCs
incorporated and operating

in The Peoples Republic of Shangri-La. These entities have not
generated subpart
F income up to now because their principal production and sales
operations are
located in Shangri-La and they are incorporated in Shangri-La.
We’ll assume that
these CFCs have on November 5, 2017, and December 31, 2017,
$10,000,000
of earnings and profits (“E&P”) that has not been taxed under
subpart F and are
not “effectively connected” to a U.S. trade or business.

So, how is XYZ affected by the provisions of the TCJA? The
basic concept
underlying the new law is the establishment of a territorial tax
system. The key
notion is that, in the future, earnings of our Shangri-La
subsidiaries would be
taxed only in Shangri-La, and when earnings are “repatriated”
through dividends,
those dividends will not be taxed in the United States.1 To
achieve this, the TCJA
created Code Sec. 245A. It establishes a 100% deduction for
dividends received
by a “specified shareholder” from the foreign source E&P of a
foreign corporation
(called the “participation deduction”). A “specified
shareholder” is a domestic C
corporation that owns 10% or more of a foreign corporation
other than a “passive
foreign investment corporation”—an exception I’ll ignore in
this column. Code
Sec. 246(c)(5) creates a holding period rule (366 days of a 731-
day period hav-
ing the ex-dividend date in the middle) that wouldn’t be a
problem for us. But,

unfortunately, this deduction is not available to S corporations
or their shareholders.

To help pay for this new approach, under new Code Sec. 965,
each 10%
shareholder of a “specified foreign corporation” (generally, a
CFC or a foreign
corporation having a domestic corporation as a shareholder)
having “deferred

JOSEPH E. TIERNEY III is a
Shareholder of Meissner
Tierney Fisher & Nichols S.C. in
Milwaukee, Wisconsin.

ENTITY CHOICE CORNER

foreign income” (essentially, post-86 E&Ps that weren’t
taxed under subpart F or “effectively connected” to a U.S.
trade or business) must include in the shareholder’s 2017
return an amount equal to the shareholder’s pro rata share
of “accumulated deferred post 1986 foreign income” of
such corporations. These corporations are called “deferred
foreign income corporations” (“DFICs”) in the statute.
The required inclusion is through the mechanics of subpart
F. In effect, the amount that is to be taxed under Code Sec.
965 becomes subpart F income included under Code Sec.
951. This inclusion is required of all types of shareholders
of DFICs, including C corporations and S corporations,
as well as individuals, partnerships and trusts. So, XYZ’s
shareholders must pick up $10,000,000 as taxable income
for 2017 through subpart F (specifically Code Sec. 951).

There are two ironies for my S corporation clients in

this. First, all the good work done to make sure that their
foreign subsidiaries did not generate subpart F income
seems wasted because the shareholders of these corpora-
tions must include all the deferred income accumulated
over the course of the years in their respective 2017 tax
returns—a feature shared with all other types of sharehold-
ers of DFICs. Second, they won’t have the benefit of the
participation dividend deduction going forward because
the dividends that would otherwise constitute participa-
tion dividends are taxable to S corporations—which is not
the case for C corporation shareholders.

There are, however, three important relief provisions at
work in Code Sec. 965, and one significant benefit from
its application. Let’s start with the relief provisions. First,
reduced tax rates are applicable. The rates are scaled down
to 15.5% for the “cash position” of the foreign subsidiary
corporations and 8% for other assets (the balance), and
the foreign tax credit (to the extent available) is similarly
scaled down. But this scale down is measured against the
maximum corporate rate for 2017 (35%), and so, for S
corporation shareholders, this translates to reduced rates of
roughly 17.5% for cash assets and roughly 9.1% for non-
cash assets.2 There are extensive provisions dealing with
the distinction between a foreign corporation’s cash posi-
tion and its non-cash assets. And notice that the “blocked
currency” rules under Code Sec. 964(b) could operate to
convert what are “cash assets” into “non-cash assets.”

Second, under Code Sec. 965(h), each taxpayer may elect
an eight-year deferred payout of the tax attributable to the
Code Sec. 965 inclusion (8% for each of the first five years,
then 15% in the sixth year, 20% in the 7th year and 25% in
the 8th year). See new Proposed Reg. §1.965-7(b) for details,
including provisions for a “consent agreement,” a description
of “acceleration events” that will terminate deferral, and an

exception that will forestall acceleration for certain events

if there is a “section 965(h) eligible transferee” who signs a
“transfer agreement.” Heads up estate planners; death is an
acceleration event and the exception does not seem available.

Third, under Code Sec. 965(i), shareholders of S cor-
porations may elect permanent deferral until a “triggering
event.” The statute imposes joint liability for the deferred
tax on the S corporation and requires annual reporting.
The triggering events include (i) loss of S status (though
reinstatement where the termination is inadvertent will
apparently forestall the triggering event), (ii) sale of “sub-
stantially all the assets” (presumably 70% of gross assets
and 90% of net assets), liquidation of the S corporation
or cessation of business, or ceasing to exist, or (iii) disposi-
tion of stock, including by gift or death (inclusion is pro
rata). Code Sec. 965(i)(4) goes on to say that upon any
triggering event, the eight-year deferral under Code Sec.
965(h) can be elected, provided that, for a triggering event
is described in (ii) above, the consent of the Commissioner
will be needed. But Code Sec. 965(i)(2)(C) also provides
an event described in number (iii) above, a disposition of
stock, won’t be a triggering event if the transferee assumes
the remaining net tax liability of the transferor.

Proposed Reg. §1.965-7(c) provides rules for the Code
Sec. 965(i) permanent deferral election for S corporation
shareholders. It provides the structure for the rules relat-
ing to electing the eight-year deferral after a triggering
event, requiring the filing of a “consent agreement” and
specifies that, in the case of a triggering event described in
(ii) above, filing this agreement automatically gives rise to
the necessary IRS consent to use the eight-year deferral.

Proposed Reg. §1.965-7(c) also specifies rules under

which a disposition of stock will not constitute a triggering
event. What is required is an “eligible transferee” (someone
other than a “domestic passthrough entity” such as a trust),
and that transferor and eligible transferee file a “transfer
agreement” with the Service. It specifies a form of “transfer
agreement” to affect the assumption of the net tax liability,
and makes clear that the transferor remains jointly and
severally liable also. Again heads up estate planners: these new
regulations give you just a 30-day window after the death of
an S corporation shareholder to file the transfer agreement
to preserve the permanent deferral election. But how the
transfer agreement works in a death setting seems unclear.3

Notice also that the permanent deferral with respect to a
particular DFIC will be available only if the S corporation
has sufficient ownership of the DFIC that qualifies under
Code Sec. 958(a); and if it does, then all of the DFIC’s
income passing through to the S corporation (even income
from domestic partnerships) will be protected by the elec-
tion under Code Sec. 965(i). However, if the S corpora-
tion is not a “U.S. shareholder” under Code Sec. 951(b),

JOURNAL OF PASSTHROUGH ENTITIES SEPTEMBER –
OCTOBER 20188

the permanent deferral election will not be available. For
example, if the S corporation’s ownership of shares in the
DFIC is entirely through a domestic passthrough entity
(e.g., a domestic partnership) that is a U.S. shareholder
of the DFIC, but its percentage interest in the domestic
partnership pulls up less than 10% of the interest in the
DFIC so that the S corporation itself will not be a “U.S.
shareholder” of the DFIC, the domestic partnership’s K-1
will pass through income under Code Sec. 965(a) and

deduction under Code Sec. 965(c) to the S corporation,
but the 965(i) election will not be available to the S cor-
poration’s shareholders with respect to that DFIC to defer
the related tax. See Notice 2018-26, section 3.05(b) and
the VIII. D. of the Preamble to the proposed regulations.4

Section 3.04(b) of Notice 2018-26 promised us regula-
tions providing that any change in a non-corporate entity’s
status under Reg. §301.7701-3 after November 2, 2017,
will be disregarded in the application of Code Sec. 965
if it reduces the tax otherwise due under Code Sec. 965.
Proposed Reg. §1.965-4(c)(2) fulfills this promise. This
will be true even if the election would properly relate back
to a date before November 5, 2017. However, suppose
our S corporation acquires 100% of a C corporation on
October 1, 2017 and which makes a QSub election on
November 30, 2017 to be effective on October 1, 2017.
This election shouldn’t be vitiated by this regulation
because this election is not made under Reg. §301.7701-3,
but rather under Reg. §1.1361-3.

As noted above, there is a significant benefit to the
shareholders of our S corporation from the application of
Code Sec. 965, which has otherwise caused them to endure
inclusion of substantial accumulated deferred income (in
our hypothetical, $10,000,000). These amounts (in effect all
of the remaining foreign source E&P of these corporations)
immediately become previously taxed E&P under Code
Sec. 959.5 Thus, when XYZ does repatriate these earnings
as distributions, they will not be included in gross income,
not even as dividends.6 So, while our S corporation share-
holders won’t have available the participation deduction
under Code Sec. 245A, they will have protection for these
distributions to our S corporation hereafter up to the total
amount of the earnings brought into taxation by Code Sec.
965. This is true even though our S corporation shareholders

may not pay the Code Sec. 965 tax for many years into the
future because of their permanent deferral election under
Code Sec. 965(i). Of course, once distributions from these
foreign corporations to our S corporation have exceeded
this amount, those distributions will be dividends and will
give rise to tax at the shareholder level at the 23.8% rate.7

Moreover, under Code Sec. 961(a), all of the income
taken into account by virtue of Code Sec. 965 adds to

the basis of the shareholders in their stock even though
a portion of that income is deductible under Code Sec.
965(c). Under Code Sec. 965(f )(2), the deductible por-
tion is treated as tax-exempt income under Code Sec.
1366(a)(1)(A) and Code Sec. 1367(a)(1)(A). Proposed
Reg. §1.965-3(f )(2)(ii) confirms this. But S corporations
that have had a prior C corporation life catch a break; the
amount of the Code Sec. 965(c) deduction is not treated
as “exempt income” under Code Sec. 1368(e)(1) and
will therefore be added to the Accumulated Adjustment
Account under Code Sec. 1368(e)(1)(A).8 See Code Sec.
965(f )(2)(B) and Proposed Reg. §1.965-3(f )(2)(ii) and
(iii) which confirms this and give us an example.

Before we leave the subject of Code Sec. 965, there is
an additional point to make regarding the Code Sec. 962
election. Code Sec. 962 provides an election that may be
made by an individual to have his tax calculated on income
coming to him under Code Sec. 951 (together with a gross-
up of the foreign taxes paid by the CFC) at Code Sec. 11
rates (21% now) which would also give him the foreign
tax credit available under Code Sec. 960. We’ll see that this
election may be helpful in dealing with the GILTI tax for
2018 and subsequent years. But, if the includible amount
under Code Sec. 965 is sizable, it may be very unwise to
make this election for 2017. It is true that the 962 election

would operate to reduce the effective rates of tax imposed
under Code Sec. 965 on the shareholders by up to two
percentage points.9 However, the Code Sec. 962 election
would cause subsequent repatriation of these earnings to
be taxed as dividends (hopefully) because of Code Sec.
962(d), thus vitiating the significant benefit provided to
our S corporation shareholders under Code Sec. 959(a)(1)!

As we move on from Code Sec. 965, we will see that our
travails as an S corporation are not ended. For 2018 and
thereafter, we must contend with new Code Sec. 951A
(the “GILTI” tax). Code Sec. 951A includes in the gross
income of a 10% shareholder of a foreign corporation
that is a CFC an amount defined as the CFC’s GILTI
(essentially the shareholder’s pro rata share of the excess of
(i) net foreign source taxable income earned by the owned
foreign corporation, over (ii) a 10% return on the adjusted
basis of business-related tangible personal property within
these foreign corporations, determined under ADS (for
XYZ, let’s say $100,000)). This tax is a big hit; for our S
corporation shareholders, the tax is at 37%, and they will
also have paid the foreign tax without credit, though they
seem to be able to deduct those taxes.10 The only good
thing here is that they end up with previously taxed E&P
under Code Sec. 959.11

Code Sec. 951A(c)(2)(A)(i)(III) specifically excludes
from “tested income” any income excluded from foreign

9SEPTEMBER–OCTOBER 2018 © 2018 CCH
INCORPORATED AND ITS AFFILIATES. ALL RIGHTS
RESERVED.

ENTITY CHOICE CORNER

base company income under Code Sec. 954(b)(4). That
provision excludes income that the taxpayer establishes
is taxed at not less than 90% of the Code Sec. 11 rate
(“high-tax income”). Given the new Code Sec. rate (21%),
the applicable rate is 18.9%, and we may well be able
to establish that given Shangri-La’s corporate tax rate.
Unfortunately, it appears that such “high-tax income”
must be within foreign base company income before it
can be excluded under Code Sec. 951A. If so, then this
exception won’t help us. That would be too bad and
inconsistent with the statutory purpose. Indeed, it sug-
gests that XYZ might be better off if its CFCs re-organized
in different countries so that its earnings in Shangri-La
would be foreign base company income! For if its CFCs
produced foreign base company income within Code Sec.
954(a), that income would be excluded both from subpart
F income and from GILTI because of the application of
Code Sec. 954(b)(4).12

So, what can be done about GILTI? Understand, if XYZ
were a C corporation, GILTI would not be too serious a
matter. That’s so because a C corporation U.S. shareholder
is entitled to reduce GILTI by 50% (under new Code Sec.
250), is subject to a 21% base tax rate and can use the for-
eign tax credit to the extent of 80% of the foreign taxes paid
or accrued by the CFC on the GILTI. [If you have sales of
U.S. manufactured goods abroad for use abroad, Code Sec.
250 also offers you an additional deduction of 37.5% for
that income (called “foreign-derived intangible income”).
But the deductions provided by Code Sec. 250 are apparently
not available to S corporation shareholders. So there are two
things you can do: (1) you can pitch the CFCs into a C
corporation, or (2) elect Code Sec. 962 treatment.

As noted above, Code Sec. 962 provides an election that

may be made by an individual to have his tax calculated
on income coming to him under Code Sec. 951 (together
with a gross-up of the foreign taxes paid by the CFC) at
Code Sec. 11 rates (21% now) which would also give
him the foreign tax credit available under Code Sec. 960.
Presumably, an individual who is a shareholder of an S
corporation can elect this treatment as to his pass-through
income.13

Thus, our individual shareholder can apply Code Sec.
11 rates and the foreign tax credit is available to him. And
he can make this choice year-by-year because this election
is annual. However, the two deductions provided in Code
Sec. 250 are not made available by the election and the
previously taxed E&P treatment is likewise not available
(see Code Sec. 962(d)). (I’ve been exposed to a contrary
argument on Code Sec. 250 … that the 250 deductions
would be available by reason of the Code Sec. 962 election,
though that is not the consensus.) And, of course, the new

participation deduction under Code Sec. 245A will not be
available with respect to the dividend treatment we hope
that results from Code Sec. 962(d).14

But we may not care. Assuming we haven’t made the
Code Sec. 962 election for 2017, the 21% rate and the
foreign tax credit may be enough for two reasons. First,
because our S corporation has the benefit of $10,000,000
of previously taxed E&P by reason of Code Sec. 965, the
first $10,000,000 of corporate distributions from the
CFCs will be exempt from tax under Code Sec. 959(a).
Thus, the loss of previously taxed E&P treatment because
of Code Sec. 962(d) for earnings in 2018 and subsequent
years may be less important. In effect, XYZ may have
covered its potential dividend needs for some time into
the future given the stacking rules of Code Sec. 959(c).

Appreciate that the regulations under Code Sec. 962 fol-
low the same stacking rules as are imposed in Code Sec.
959(c). See Reg. §1.962-3(b). Second, given the relatively
high rates of Shangri-La income taxes, the FTC may
reduce the shareholder’s rate to very small numbers even
without the deductions provided in new Code Sec. 250.
Finally, use of the Code Sec. 962 election in 2018 or later
years preserves direct use of the PTI account arising out
of the Code Sec. 965 inclusion because the 962 election
only applies to amounts included under Code Sec. 951 for
the year of the election, and preserves our S corporation’s
direct ownership of its CFCs.

I’m hearing that specialists in foreign tax are looking to
create C corporation holding companies. In our setting,
doing so should engage the successor rule contained in
Code Sec. 959(a) and Reg. §1.959-1(d) with respect to
XYZ’s $10,000,000 PTI account resulting from the Code
Sec. 965 inclusion. So, when the CFCs distribute their
earnings that have been previously taxed under Code Sec.
965 to the new holding company, the holding company
can exclude them. But when the holding company, in turn,
makes a distribution to XYZ out of amounts the holding
company excluded under Code Sec. 959(a), is that distribu-
tion a dividend? I don’t think Code Sec. 959(d) applies to
protect XYZ, and I do think the excluded amounts received
by the holding company add to its earnings and profits.

If we nonetheless do decide to use a C holding company
to hold XYZ’s CFCs, we can simply create a new domestic
subsidiary corporation and transfer the stock into it. But
I’ve encountered resistance to this on the basis that doing
so might have Shangri-La tax and regulatory implications.
Where the CFCs are currently owned by a QSub, elimi-
nating the QSub election would do the job.

On the other hand, it might be possible to restructure
XYZ in what is being called an “S inversion” transaction,

Continued on page 52

JOURNAL OF PASSTHROUGH ENTITIES SEPTEMBER –
OCTOBER 201810

Entity Choice
Continued from page 10

essentially an F reorganization in
which the shareholders contribute
their S corporation stock into a new
holding company and file a QSub
election so that the existing XYZ
becomes a QSub of the new hold-
ing company. In effect, the existing
S election automatically migrates to
the holding company.15 We could
then move any of our domestic
assets and operations into LLCs
and distribute the interests in these
LLCs up to the holding company
so that existing XYZ holds only the
CFCs, and then terminate the QSub
election leaving existing XYZ as a C
corporation holding only the CFCs.
Presumably, all this could be treated
as an “F Reorganization.” The new
holding company would be the same
S corporation but with a new EIN
and the old EIN would remain with
XYZ, now a C corporation.16

Recall our prior discussion of
section 3.04(b) of Notice 2018-26,
which tells us about coming regula-
tions that will make classification
elections under Reg. §301.7701-3
ineffective for purposes of Code Sec.
965 if made after November 5, 2017.
These concepts were incorporated
into Proposed Reg. §1.965-4 entitled
“disregard of certain transactions.” I
don’t think I care for two reasons: (i)
the changes in the status of entities
are being made by the QSub elec-
tion, not under Reg. §301.7701-3,
and (ii) more importantly, here
I’m looking to put the holdings of
our S corporation into a corpora-
tion to reduce the GILTI tax, not
to defeat Code Sec. 965 … there
should be no effect on the Code
Sec. 965 tax at all and no applica-
tion for either 3.04(b) of the Notice
or for Proposed Reg. §1.965-4.
Moreover, there is no policy reason

for the Service to be grouchy about
this transaction.

Finally, the new law creates a struc-
ture that operates to tax “base erosion”
and other abuses. It is set out in Code
Sec. 59A. Here we do catch a break.
This provision does not apply to S cor-
porations or to other corporations that
have less than a three-year average of

annual gross sales of $500,000,000.
No more need be said.

ENDNOTES
1 This, in turn, means that there won’t be a

foreign tax credit given for taxes paid by
the subsidiaries in Shangri-La when those
dividends are paid. The gross-up and credit
structure embodied in Code Sec. 78 and Code
Sec. 902 has been repealed. Indeed, Code Sec.
78 survives only to gross-up a subsidiary’s
foreign taxes where subpart F causes the
subsidiary’s income to be directly taxed to a
domestic corporation, and Code Sec. 960(a)
then permits a foreign tax credit for the domes-
tic corporation. This, of course, won’t help XYZ,
our S corporation, because XYZ is not treated
as a corporation for purposes of subpart A (the
foreign tax credit) and subpart F (controlled
foreign corporations) under Code Sec. 1373.

2 The calculations are (i) for non-cash assets,
39.6/35 = 1.131 × 8% = 9.051% and (ii) for cash
assets, 39.6/35 = 1.131 × 15.5% = 17.537%. The
deduction that achieves this rate reduction is
created in Code Sec. 965(c), and the IRS tells us
in section 3.06 of Notice 2018-26 that regula-
tions under Code Sec. 965(o) will provide that
the Code Sec. 965(c) deduction will not be an
itemized deduction for purposes of the 2%
floor in pre-2018 Code Sec. 67, disallowance
under post-2017 Code Sec. 67, and the AMT.
Proposed Reg. §1.965-3(f )(1) confirms this.

3 Assume that death is the transfer event and

that the personal representative or trustee is
the transferee. Presumably, the personal rep-
resentative or trustee would sign the transfer
agreement on behalf of both the decedent (see
Proposed Reg. §1.965-7(c)(3)(iv)(B)(3)) and the
transferee. But there the music stops. Neither
the personal representative nor the trustee
can qualify as an “eligible transferee” because
both the estate and the trust (even with a Code
Sec. 645 election) are “domestic passthrough
entities.” See Proposed Reg. §1.965-1(f )(19). This
suggests that the Service contemplates that
the “transfer” on death is not to the personal
representative or trustee, but to whomever
the S corporation stock is ultimately to be
transferred. If so, what happens during admin-
istration of the estate or trust? If the stock is
to be transferred to a trust, will we be OK if it
is a grantor trust? In this context, what is the
effect of the grantor trust rules and Code Sec.

1361(c)(2)(A)(i) and 1361(d)(1)(A) making a QSST
a grantor trust. Yipes.

4 I’m not sure why the same problem doesn’t
exist with respect to the Code Sec. 965(h)
eight-year deferral election. See Proposed
Reg. §1.965-7(b)(1) which pointedly notes that
the domestic pass-through entity must be a
Code Sec. 958(a) shareholder for the domestic
pass-through owner to have the (h) election
available. In my example, the S corporation
would not qualify. Ugh!

5 Given the election to defer payment of the tax
liability created by the operation of Code Sec.

965 (called “net tax liability” in the statute)
under subsections (h) and (i) of Code Sec. 965, it
is hard to imagine that the benefits of exclusion
under Code Sec. 959 are immediately available.
But the mechanics are clear, Code Sec. 965(a)
creates immediate inclusion in gross income
and Code Sec. 959 provides the exclusion.

6 See Code Sec. 959(d).
7 This assumes that the dividends would be “qual-

ified dividends” under Code Sec. 1(h)(11)(B),
which would be so if its foreign corpora-
tions are “qualified foreign corporations”
within Code Sec. 1(h)(11)(C)(i)(II). For that to
be true, Shangri-La must have a qualifying
tax treaty with the United States within Code
Sec. 1(h)(11)(C)(i)(II). In that regard, see Notice
2011-64 for the latest list of countries with
such treaties. Unfortunately, Shangri-La wasn’t
listed in the Notice.

8 Id. That treatment is consistent with the treat-
ment of tax-exempt income under Code Sec.
1368(e)(1)(A).

9 Because the Code Sec. 962 election would
impose the Code Sec. 11 rates, our sharehold-
ers would be taxed at 15.5% on cash balances
rather than 17.5%, and 8% on non-cash bal-
ances rather than 9.1%.

10 S e e t h e p a r e n t h e t i c a l i n C o d e S e c .
951A(c)(2)(A)(ii).

11 See Code Sec. 951A(f )(1)(A).

12 Really? See Code Sec. 951A(c)(2)(A)(i)(III) and

Code Sec. 954(b)(4).
13 The discussion of the Code Sec. 962 election

contained in Notice 2018-26 and the provi-
sions in new Proposed Reg. §1.962-2(a) clearly
imply this. See also the definitions of “domestic
passthrough entity” and “domestic passthrough
owner” contained in Proposed Reg. §1.965-1(f )
(19) and (20), and section 3.05(b) and the discus-
sion in section 5 of that Notice. Moreover, the
conference committee seems to think so, also;
see the text of its report at footnote 1513.

14 It is not completely clear that distributions
under Code Sec. 962(d) are dividends … they
should be and if so, could constitute “quali-
fied dividends” under Code Sec. 1(h)(11)(B) if
Shangri-La is a treaty country.

15 CCA 200941019 (Apr. 9, 2009).
16 For a more detailed description of the “S

corporation inversion,” see Adam J. Tutaj,
Moving the Immovable: Finding Flexibility in
an F Reorganization, J. Passthrough Entities,
March–April 2016, at 7.

JOURNAL OF PASSTHROUGH ENTITIES SEPTEMBER –
OCTOBER 201852

Copyright of Journal of Passthrough Entities is the property of
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39

ITAI GRINBERG is a Professor of Law at
Georgetown Law and a member of the
Institute of International Economic Law
at Georgetown.

International Taxation
in an Era of Digital
Disruption: Analyzing the
Current Debate
By Itai Grinberg*

Introduction

For the University of Chicago Federal Tax Conference in
November 2018, I was
asked to write a paper “discussing what the U.S. position should
be and how the
U.S. tax rules should be changed (or not) in reaction to
European tax changes
such as the proposed gross tax on digital receipts, the digital
PE, and the diverted
profits tax.”

A core tax policy claim some European governments are
advancing is that user

data or user participation in the digital economy justifies a
gross tax on digital
receipts, new profit attribution criteria, or a special formulary
apportionment
(“FA”) factor in a future formulary regime. One fundamental
question these
claims raise is whether there is anything unique about the
digital economy. In
the BEPS project the OECD undertook an evaluation of whether
the digital
economy can (or should) be “ring-fenced,” and concluded that it
neither can
be nor should be. But the OECD’s conclusion is not stopping
some European
governments from pursuing proposals that attempt to apply
special tax regimes
to a limited set of digital businesses.1

Importantly, simply concluding that there should be no special
rules for the
digital economy does not resolve the broader question of
whether the interna-
tional tax system requires reform prompted in part by the
digitalization of the
economy. Indeed, a debate about this question is ongoing at the
OECD. We
know more about the contours of that debate today than we did
when I was
first asked to undertake this paper. The practical reality appears
to be that all the
largest economies have come to agree either that a) there is
something wrong
with the taxation of the “digital economy,” or b) there is
something more fun-
damentally wrong with the structure of the current international
tax system in

an era of globalization and digitalization.2 Government
representatives have now
made this plain in multiple public forums. So, one way or the
other, we lack a
stable status quo.3

MARCH–APRIL 2019 © 2019 I. GRINBERG

40 INTERNATIONAL TAX JOURNAL MARCH –APRIL 2019

INTERNATIONAL TAXATION IN AN ERA OF DIGITAL
DISRUPTION: ANALYZING THE CURRENT DEBATE

This paper sets out some considerations for U.S. inter-
national tax policymaking and international tax diplo-
macy in this uncertain environment. To that end, Part
I briefly describes four disparate background consider-
ations that should inform our thinking. Part IA describes
the decline of the arm’s-length standard, which under-
pinned our historic understandings about how to attri-
bute profits as among entities within a multinational
corporation (“MNC”). I argue that internationally the
arm’s-length standard as we knew it before the BEPS
project is largely gone, and has been replaced by an
unsustainable concept for profit attribution that I label
the bourgeois labor theory of value (“BLTV”). Part IB
describes the relationship between the arm’s-length stan-
dard, jurisdiction to tax, and the attribution of profits
to permanent establishments (“PE”). It highlights that
under OECD principles, attribution of profits to PEs is
accomplished through application of the OECD’s trans-
fer pricing guidelines (“TPG”). Part IC recounts various
acts of tax unilateralism abroad, often focused on the
tech sector, and including the trend toward abandoning

historic limits on jurisdiction to tax. Part ID describes
the United States’ 2017 tax reform in that global context,
with a particular focus on the global intangible low-taxed
income (“GILTI”) and the BEAT.

The remainder of the paper is intended as an explora-
tion of the second (or third, or fourth) best. For purposes
of this paper, I therefore do not analyze options that
were considered and rejected in the most recent U.S. tax
reform, including a destination-based cash flow tax or an
integrated corporate tax system, and certain options that
never made it into the most recent tax reform debate,
such as adopting a VAT.

The discussion is instead limited to three options
that have been discussed in general terms in the current
global debate. Each of these options preserves a classic
corporate tax system that includes an entity-level tax
on the normal return to capital. One further important
caveat is that in this paper I attempt as best I can to fill in
ideas that have been described with a very high level of
generality with additional potential content, in order to
motivate the analysis.

Part II focuses on the European Commission and Her
Majesty’s Treasury (“HMT”) stated view that user par-
ticipation should be acknowledged as a source of value
creation in the digital economy and concludes that the
user participation concept has application well beyond
the so-called digital economy. Applying the concept in
a manner that is limited to the digital economy is intel-
lectually indefensible; at most it amounts to mercantilist
ring-fencing.

The user participation theory does, however, have an
important relationship to other more generally applica-

ble proposals for international tax reform. In particular,
it involves a shift toward destination-based income taxa-
tion, in much the same manner as some other proposals
for fundamental international income allocation reform,
albeit only for one sector.

At least two more comprehensive and principled pro-
posals to reform the international tax system’s attribu-
tion of profits are apparently now being considered at the
OECD. These respectively are often loosely referred to
by the monikers “marketing intangibles” and “minimum
taxation.” As publicly described, these ideas seem to be at
an early stage of development.

Part III evaluates a version of the “marketing intan-
gibles” idea which I label the destination-based residual
market profit allocation (“DBRMPA”). Part IV evalu-
ates a version of a minimum tax system that combines
inbound and outbound measures, and which I label
“minimum effective taxation.”

Part III builds on the discussion about “where we
go from here” in transfer pricing provided by Andrus
and Oosterhuis in a paper for the 2016 University of
Chicago conference. The DBRMPA is related to that
conference discussion of two years ago. In particular, it
represents a compromise between the present transfer
pricing system and sales or destination-based reforms
to the transfer pricing system described in the Andrus/
Oosterhuis paper. Part III concludes that splitting
taxing rights over “excess” returns4 between the pres-
ent transfer pricing system and a destination-based
approached is complex. It creates new sources of poten-
tial conflict as between sovereigns and as between
sovereigns and multinationals. Moreover, some desti-
nation specification problems for which solutions do

not exist or at least are not widely known would need
to be addressed. Finally, the DBRMPA likely requires
extensive tax harmonization and information exchange;
more so than a minimum tax approach. Importantly all
of the above conclusions regarding a DBRMPA apply
with equal rigor as technical critiques of user participa-
tion. The difference is simply that a DBRMPA applies
to the whole economy and therefore—unlike user par-
ticipation—has some principled basis. If a DBRMPA
were pursued, Part III suggests that a formulary mech-
anism for doing so is the least technically challenging
approach.

Part IV builds on the discussion of the GILTI and
the BEAT in Part I as well as other discussions of the
pros and cons of those provisions in tax forums over the
last year. Part IV postulates that there may be a more

41MARCH–APRIL 2019

sensible path for multilateral cooperation around min-
imum effective taxation. This approach could be both
responsive to the current global international tax debate
and build on (and help repair) our 2017 international
tax reform. I conclude that a minimum effective taxation
approach would be preferable to a DBRMPA.

I. Background
A. The Decline of the Arm’s-Length Standard
Article 9 of the OECD Model Tax Convention is
intended to ensure that MNCs do not obtain inappro-
priate tax advantages by pricing transactions within the
group differently than independent enterprises would do
at “arm’s length.” More than half of world trade is now

intra-firm.5 Thus, more than half of world trade is sub-
ject to transfer pricing.

Under the arm’s-length principle, multinational
groups are supposed to divide their income for tax
purposes among affiliates in the different countries
in which the MNC does business, in a way that is
meant to emulate the results that would transpire if
the transactions had occurred between independent
enterprises.6 For most of the last 40 years, the arm’s-
length principle represented a consensual solution
reached among technicians for the problem of allocat-
ing tax between different parts of an MNC.7 Although
the mantra of “arm’s length” masked real disagreement,
and members of the transfer pricing practitioner com-
munity often held the view that there was substantial
controversy as to the proper implementation of the
arm’s-length standard, the range of interpretation was,
in practice, reasonably narrow. Major transfer pricing
disputes arose with regularity, but they were addressed
within a framework that largely respected intercom-
pany contracts and the concept of allocation of risk
within a multinational group.8

In the last decade, however, the “arm’s-length stan-
dard” became extraordinarily controversial.9 Transfer
pricing even became the subject of contentious discus-
sion among high-level elected officials with no tax exper-
tise at all.10 Moreover, the so-called “stateless income”11
narrative became commonly accepted by tax policymak-
ers in almost every developed economy.

As a result, preexisting norms developed by the com-
munity of transfer pricing specialists came under heavy
and perhaps deserving scrutiny. Views around the
level of deference to be given to intergroup contrac-

tual arrangements in transfer pricing analyses diverged
substantially, the consensus on the scope for recharac-
terizing intergroup transactions frayed, the consensus

on respecting intergroup equity contributions declined.
Disputes among government officials about whether
value creation in cross-border transactions undertaken
by multinationals should be attributed to capital, labor,
the market, user participation, or government support
are now aired routinely.12

Enormous political pressures coming from the highest
levels of government and the G-20 meant that some sort
of outcome on transfer pricing was politically necessary
as part of the BEPS project.13 Thus, in 2015, the BEPS
project in effect endorsed the commonly held idea that
the then-existing OECD TPG were broken. However, at
the technical level bureaucrats failed to reach meaningful
consensus on a clearly delineated alternative. The result
was a reliance on high levels of constructive ambiguity
buried in many pages of technocratic language in the
transfer pricing outputs of the BEPS project.14

One phrase that captures this ambiguity is the com-
mitment to “align income taxation with value creation.”
Everyone agrees on the principle—but no one agrees
what it means.15

Nevertheless, if there was one central theme to the
BEPS transfer pricing guidance taken as a whole, it was
to put great weight for purposes of allocating intangi-
ble income and income associated with the contractual
allocation of risk on “people functions.” The people
functions of interest were activities by people who are
of sufficiently high skill to engage in the development,
enhancement, maintenance, protection, and exploita-

tion of intangibles (the so-called “DEMPE functions”)
as well as to be able to control financial risks, including
those associated with the employment of intangibles.
It is these people functions that the post-BEPS TPG
treat as “meriting” the allocation of excess returns from
intangibles. In contrast, contractual or legal ownership
of an intangible is not particularly significant, nor is
“routine” labor.16 I call this approach to transfer pricing
the BLTV.

The labor theory of value asserts that the value of
a good or service is fully dependent upon the labor
used in its production. This theory was an important
lynchpin in the philosophical ideas of Karl Marx. In
contrast, conventional capitalist economic theory
relies on a theory of marginalism, in which the value of
any good or service is thought to be determined by its
marginal utility. Moreover, the pricing of a good or
service is based on a relationship between that marginal
utility, and the marginal productivity of all the factors
of production required to produce the relevant good
or service. In addition to labor, a key factor of produc-
tion required to produce most goods and services is

42 INTERNATIONAL TAX JOURNAL MARCH –APRIL 2019

INTERNATIONAL TAXATION IN AN ERA OF DIGITAL
DISRUPTION: ANALYZING THE CURRENT DEBATE

capital—including real and intangible assets purchased
with capital.

The BLTV attributes profits quite heavily to the
labor of certain highly educated workers who occupy

upper middle management roles—roles and back-
grounds broadly similar to those who negotiate transfer
pricing rules for governments. The theoretical basis in
economics for this BEPS transfer pricing settlement is
unclear. It turns the Marxian labor theory of value on
its head while being inconsistent with the conventional
economic view, too. To my mind this feature makes it
even less coherent than other possible bases for transfer
pricing.

In the 2013 to 2015 period, the BLTV clearly seemed
like an attractive alternative theory to various govern-
ment officials. It addressed the “cash box” problem of
multinational income being parked in zero tax places
like the Cayman Islands and Bermuda, while attributing
income to what the relevant officials viewed as “mean-
ingful” activity.

However, the post-BEPS BLTV version of the OECD’s
TPG, if implemented in good faith by tax administra-
tions around the world, would effectively provide that
an MNC can in various situations save hundreds of mil-
lions or even billions of dollars by moving 20 or a 100
key jobs to a low-tax jurisdiction from a high-tax juris-
diction. And many of those jurisdictions—Switzerland,
Ireland, and increasingly the UK—are attractive places
to live, with talented, high-skill labor pools already in
place.

Requiring that DEMPE activities be conducted in
tax-favorable jurisdictions in order to justify income
allocations to those jurisdictions encourages DEMPE
jobs to move to those jurisdictions. This transfer pric-
ing result—that income may be shifted by moving high-
skilled jobs—is deeply geopolitically unstable. From the
corporate perspective, there can be huge incentives to

shift DEMPE jobs if enough tax liability rides on the
decision. At the same time, large developed economies
with higher tax rates simply will not accept an arrange-
ment that sees them losing both tax revenue and head-
quarters and R&D jobs.

In providing the above critique regarding the BEPS
transfer pricing settlement, I do not wish to be misunder-
stood. Outside the transfer pricing area (BEPS Actions
8–10), I believe the BEPS project had many notable
accomplishments. Global best practices and minimum
standards were developed with respect to important
issues like hybridity, interest expense deductions, infor-
mation reporting, and more. The BEPS project certainly
showed how soft law in the international tax space can

be quite efficacious. But transfer pricing is sufficiently
important that the failure to reach a sensible result in
this space casts a shadow over the BEPS project generally.
The failure to grapple in a sensible way with the ques-
tions raised by transfer pricing is one important reason
the post-BEPS environment is characterized by much of
the global tax chaos the BEPS project was supposed to
prevent.17

B. The Relationship Between the Arm’s-
Length Standard, Jurisdiction to Tax, and
the Attribution of Profits to PEs
Tax treaties specify when an enterprise based in one
state has a sufficient connection to another state to
justify taxation by the latter state. Under Article 5 of
the OECD Model Tax Convention, a sufficient con-
nection exists when an enterprise resident in one state
(the “residence state”) has a “permanent establishment”
in another state (the “source state”). The PE threshold
must be met before the source state may tax that enter-

prise on active business income properly attributable
to the enterprise’s activity in the source state. The PE
rule encapsulated in Article 5 thus represents the basic
international standard governing jurisdiction to tax a
non-resident enterprise.

Under Article 7 of the OECD’s Model Tax Convention,
profits attributable to a PE are those that the PE would
have derived if it were a separate and independent enter-
prise performing the activities which cause it to be a PE.18
In 2010, the OECD issued a report on the attribution of
profits to PEs. The report concluded that a PE should be
treated as if it were distinct and separate from its overseas
head office; and that assets and risks should be attributed
to the PE or the head office in line with the location of
“significant people functions.”

The post-2010 OECD approach to attributing prof-
its to a PE is commonly referred to as the Authorized
OECD Approach (“AOA”).19 This approach is based
on the adoption of the 2010 version of the business
profits article (Article 7) of the OECD Model Tax
Convention. Step one of the AOA leads to the recog-
nition of internal dealings between the PE and its head
office.20 Then, under step two, the guidance in the
OECD’s TPG is applied by analogy to determine the
arm’s-length pricing of the internal dealing between
the PE and the head office.21 The 2010 report on the
AOA made clear that as the TPG were modified in the
future, the AOA should be applied “by taking into
account the guidance in the Guidelines as so modified
from time to time.”22

43MARCH–APRIL 2019

In the BEPS project, many countries focused on the
idea that technological progress (especially the Internet)
and the globalization of business have made it easier to
be heavily involved in the economic life of another juris-
diction without meeting the historic PE threshold. In the
end the BEPS project produced some notable changes
to the PE threshold.23 These changes to Article 5 of the
OECD Model Tax Convention are now being transposed
into the global tax treaty network via the multilateral
instrument, which itself represents another success of the
BEPS project. Importantly, however, the BEPS project
concluded that the AOA did not need to be revisited in
light of the changes to Article 5.

Fundamentally, the AOA was developed because if
associated enterprises in different countries were taxed
under the arm’s-length standard under Article 9, but PEs
were taxed under some other rule under Article 7, dis-
tortions between structures involving PEs and structures
involving subsidiaries would arise. As a result, the OECD
Model Tax Convention attempts to apply the TPG and
the arm’s-length principle as consistently as possible in
both cases.24

Applying the AOA means that the PE and its head
office are treated like independent enterprises. Note,
however, that modern tax treaty PE tests are built to a
significant degree on an underlying idea of dependence
that differs from dependence/independence of owner-
ship.25 Thus, the AOA taxes a PE as if the PE and its
head office are independent enterprises, but by definition
a dependent agent PE requires dependence. This paradox
is a product of the decision to have the transfer pricing
rules trump the PE rules and make the arm’s-length stan-
dard the central organizing principle.26 As a result, in

our current legal construct, discussing the attribution of
profits to a PE requires discussing which rules we wish to
use to allocate MNE profits generally.

The alternative to the dependency criteria for estab-
lishing the existence of a PE is physical presence.
Arguably, that mechanism for establishing a PE is just
a proxy for meaningful presence in the economic life
of a jurisdiction through dependent agents. Historically
the physical presence rule was also a pragmatic admin-
istrative consideration. The physical presence of either
an enterprise or a dependent agent of the enterprise was
necessary in order to collect tax revenues from a tax-
payer. Today, however, the pragmatic consideration is
much less important in business-to-business transac-
tions, given the development of reverse-charging type
mechanisms and the ability to require a resident busi-
ness to withhold from a non-resident. Moreover, in the
Internet era, it seems to me a losing argument to suggest

that large digital firms do not have a meaningful global
presence. So the principled debate with respect to juris-
diction to tax and attribution of profits to PEs is just
the debate about how to allocate the profits of an MNE
among jurisdictions generally.27

C. The Rise of International Tax
Unilateralism and the Push to Tax Big Tech
Many jurisdictions decided quite quickly that they were
not satisfied with the BEPS transfer pricing outcomes, at
least with respect to specific companies or sectors where
they wished to collect more revenue. The marquee actor
in this story is the United Kingdom.

In 2015, before the BEPS project had ended, the United
Kingdom imposed a 25% tax on profits deemed to be ar-

tificially diverted away from the UK. The Diverted Profit
Tax (“DPT”) targets instances where, under existing PE
rules, an MNC legitimately avoids a UK taxable pres-
ence, despite the fact that the MNC is supplying goods
or services to UK customers. The UK took the position
that the DPT was not covered by the United Kingdom’s
income tax treaties, and therefore that the PE rules tax
treaties specify as to when a state has jurisdiction to tax
an enterprise based in another state did not apply to the
DPT.

The primary justification for OECD countries rec-
ommending and the G-20 launching the BEPS project
had been to develop rules-based multilateral reforms that
would prevent unilateral actions by the countries partic-
ipating in the BEPS project. The UK adopted the DPT
at the same time that it was helping lead the BEPS proj-
ect. The UK’s decision both to lead a multilateral project
that was supposed to set internationally agreed rules that
would prevent inconsistent unilateral action, and at the
same time unilaterally adopt the DPT, a tax that was not
consistent with BEPS, was broadly perceived as a signif-
icant blow to tax multilateralism. The decision treated
sovereignty as a license for organized hypocrisy. But for
the DPT, one could imagine that a more cooperative
international tax environment might have evolved out of
the BEPS project.28

Under the DPT, Her Majesty’s Revenue and Customs
(“HMRC”) can choose which companies it wishes
to pursue and to what degree.29 Thus, the DPT also
struck a blow against non-discrimination principles in
international taxation. Indeed, in press interviews UK
government officials referred to the DPT simply as the
“Google Tax.”30 The extent to which the DPT is an
arbitrary levy on targets of interest to HMRC is well-il-

lustrated by the 12-fold increase in revenues raised
by the DPT between 2015/2016 and 2017/2018.31

44 INTERNATIONAL TAX JOURNAL MARCH –APRIL 2019

INTERNATIONAL TAXATION IN AN ERA OF DIGITAL
DISRUPTION: ANALYZING THE CURRENT DEBATE

Twelve-fold increases in revenue without a change in
the rate or rules simply do not happen when tax law
functions in the normal way.32

Following the UK’s lead, by late 2017, countries as
diverse as Australia, Argentina, Chile, France, India,
Israel, Italy, Japan, Mexico, New Zealand, Poland, Spain,
and Uruguay had taken unilateral actions not limited
by or consistent with the BEPS agreements. These mea-
sures are generally designed to increase levels of inbound
corporate income taxation. Many are structured so that,
as a practical matter, they primarily affect U.S. MNCs.
Among other examples, in 2016 Australia enacted a DPT-
like measure with a 40% tax rate (also publicly known
as the “Google Tax”). India imposed a 6% “equalization
levy” on outbound payments to non-resident companies
for digital advertising services. India’s legislation autho-
rized extending the tax to all digital services by admin-
istrative action. The Israel Tax Authority announced an
interpretation of Israeli law that significantly reduces the
level of physical presence necessary for direct taxation of
non-resident digital companies. The Korean government
is considering amendments to the Korean Corporate
Tax Act to override Korean tax treaties and treat “global
information and communications technology com-
panies” as having a digital Korean PE. Uruguay has

enacted, and Argentina is considering, measures similar
to those adopted in India. During this same time period
the Directorate-General for Competition (“DG Comp”)
at the European Commission reconceptualized its “state
aid” concept in the international tax context, notably by
claiming that DG Comp was not limited by the OECD’s
arm’s-length standard in determining whether tax rulings
were consistent with EU law.33

More recently, governments around the world have
been proposing or enacting taxes targeted specifically at
digital advertising and online platforms. India went first
with its previously-mentioned tax on digital advertising.
Then, in September 2017, the European Commission
called for new international rules that would alter the
application of PE and transfer pricing rules for the digi-
tal economy alone.34 Moreover, the Commission argued
that until such time as a digital-specific reform of the
international tax system was agreed upon, an interim tax
based on turnover, or a withholding mechanism, should
be imposed on digital platform companies.35 The UK fol-
lowed up on the Commission’s digital tax proposals with
its own position paper on corporation tax and the digital
economy.36 On October 29, 2018, the UK announced
the introduction of a “digital services tax” that is based
on turnover and is explicitly ring-fenced to hit only large
search engine, social media, and online marketplace

businesses.37 Other unilateral measures focusing on the
digital economy have been taken by India (significant
economic presence PE),38 Israel (digital PE), and others.
Like the earlier round of unilateral measures, some of
these proposals have been described both in government
documents and in the media as taxes targeting “GAFA:”
Google, Apple, Facebook, and Amazon. However, the
proposals generally are structured to have an impact

beyond those four corporations.

Separately, in 2017 Germany adopted its “Act against
Harmful Tax Practices with regard to Licensing of
Rights.” New section 4j of the German Income Tax Act
restricts deductions for royalties and similar payments
made to related parties if such payments are subject to
a non-OECD compliant preferential tax regime and are
taxed at an effective rate below 25%.39 The provision also
includes a conduit rule along the same general lines as
U.S. code provision section 7701(l).40

In 2017 the UK also opened consultations on a royalty
withholding tax proposal, which is now scheduled to be
enacted and in force from April 6, 2019.41 This withhold-
ing tax would generally apply where a non-UK entity
making sales in the UK does not have a taxable presence
in the UK. Withholding is also extended to payments
for the right to distribute goods or perform specified ser-
vices in the UK. Since there is no UK entity making a
payment, the proposal applies almost exclusively to cases
where a non-UK company selling to UK customers pays
a royalty to a 3rd country jurisdiction. HMT describes
the proposal as a step to tax the digital economy, but
acknowledges that it has application beyond the digital
sector. For example, imagine a Brazilian MNC has a sub-
sidiary in Ireland making sales in the UK and paying a
royalty to an entity in the Cayman Islands. Under these
proposals, the UK would be trying to withhold from the
royalty paid from Ireland to the Cayman Islands. The
proposal thus raises the enforcement issues raised in the
canonical SDI Netherlands case.

Realistically, more unilateral measures to increase
source country taxation, market country taxation, or
both are coming. These changes are likely to be somewhat

uncoordinated, and sometimes unprincipled. Moreover,
these moves toward source or market country taxation
are likely to affect “old-line” businesses as well as the dig-
ital sector. Tax directors of multinationals in a wide range
of industries already highlight that the label “BEPS” is
used to justify a wide range of source-country tax adjust-
ments that produce significant tax controversies.

Historically the multilateral international tax archi-
tecture was focused on residence country taxation. The
international tax architecture around the world appears

45MARCH–APRIL 2019

to be shifting toward more source-based or destination-
based taxation, but that transition is turning out to be
very messy. The strategic questions for the United States
created by this unsettled state of international tax affairs
featured prominently in the final round of discussions
about U.S. international tax reform.42

D. U.S. Tax Reform, the BEAT and the GILTI
By the time of the 2016 elections, there was wide-
spread consensus that the United States needed to
reform its aberrant international corporate tax system.
Commentators called for a lower corporate tax rate,
and a move away from a deferral system and toward the
dividend exemption systems that had become an inter-
national norm. Other countries had been taking these
steps for years, while also increasing their reliance on
consumption taxes and decreasing their reliance on cor-
porate income taxes.

Nevertheless, at the outset of 2017, few commen-

tators thought the U.S. political system would suc-
cessfully bring a tax reform package to fruition. Then,
as we all know, the United States surprised the world
by enacting tax reform. The international corporate
component of the reform was labeled as a shift to a
“territorial” regime. However, the law enacted actually
moved the United States closer to a current worldwide
tax system for outbound taxation, instantiated in a
regime now known as the “GILTI.” At the same time,
the United States followed the global trend in enacting
unilateral measures intended to strengthen inbound
taxation. The United States did so by adopting the
“base erosion anti-abuse tax” in new section 59A of the
Code (“BEAT”).

The GILTI is the main subject of Dana Trier’s con-
ference paper and the panel immediately preceding the
presentation of this paper at the conference. Therefore,
I will not go to any great lengths to describe the GILTI
here. Practitioners have also written about the various
twists and turns of the BEAT, and I do not propose to
reconstruct the full breadth of that discussion, either.
Nevertheless, for the sake of completeness a brief back-
ground on these provisions is appropriate.

1. GILTI. Code Sec. 951A requires each U.S. share-
holder of a controlled foreign corporation (“CFC”) to
include currently in its gross income its share of GILTI
for the year. In very general terms, GILTl refers to a
U.S. shareholder’s share of a CFC’s income above a 10%
return on qualified business asset investment (“QBAI”)
with respect to everything other than five enumer-
ated categories of CFC income. Those categories are

effectively connected income, subpart F income, income
that would be subpart F income but for the Code Sec.

954(b)(4) high-tax kickout, certain intercompany divi-
dends, and foreign oil and gas extraction income. A U.S.
shareholder of a CFC includes in income its GILTI in a
manner similar to the inclusion mechanism for subpart
F income. GILTI is eligible for a 50% deduction under
Code Sec. 250 (through 2025). Therefore, a minimum
effective U.S. tax rate of 10.5% applies to all GILTI earn-
ings of CFCs of U.S. shareholders. Special rules apply
regarding foreign taxes associated with GILTI. Very gen-
erally, if a U.S. shareholder that is a domestic corporation
elects to take foreign tax credits for a taxable year, all of
the foreign taxes associated with GILTI are included in
its income as a deemed dividend under Code Sec. 78.
However, only 80% of these foreign taxes are allowed as
deemed paid foreign tax credits in the new GILTI for-
eign tax credit basket.43

The New York State Bar Association (“NYSBA”)
observes that the GILTI can be understood conceptu-
ally as a hybrid between “a flat minimum domestic and
foreign tax rate on a U.S. shareholder’s GILTI inclusions
not associated with QBAI (the ‘flat rate theory’) and the
imperfect adding of the GILTI regime onto the subpart
F regime (the ‘add-on theory’).”44 One’s understanding of
which theory should dominate can influence many reg-
ulatory decisions. But no matter how one thinks about
the regime enacted in the statute (or how the regulations
are written), the regime will generally produce at least a
minimum 10.5% combined domestic and foreign tax on
a U.S. shareholder’s GILTI not attributable to QBAI.45
Moreover, given that the concerns in international tax
policy are overwhelmingly intangible income-driven,
and that the digital sector is “tangible asset light,” ignor-
ing QBAI constitutes a reasonable first-order simplifica-
tion for purposes of this paper.

Finally, it should be noted that most of the complexity
entailed by the international tax regulations now being
issued by the U.S. Treasury in this area are the product of
the QBAI concept, the foreign tax credit basketing system
enacted for GILTI, and the legislative design decision to
layer a shareholder-level calculation on top of entity-level
concepts. None of these features is inherent in or essential
to enacting a flat rate minimum tax policy.46

2. The Relationship Between GILTI and the Digital
Tax Debate. The consequences of GILTI for the interna-
tional tax debate in the “digital” space should have been
profound. When the BEPS project began, the digital
economy was a special area of focus because it was consid-
ered an important case of so-called “stateless income.”47

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INTERNATIONAL TAXATION IN AN ERA OF DIGITAL
DISRUPTION: ANALYZING THE CURRENT DEBATE

Following the 2017 legislation, the minimum tax rates
on foreign earnings achievable for U.S.-headquartered
firms have changed. Speaking generally, an intangible
driven U.S.-parented multinational simply will not
be able to achieve an effective tax rate on their for-
eign earnings that is below 10.5%. An effective rate
of 10.5% for corporate shareholders (after taking into
account the 50% deduction described above) is com-
paratively unfavorable to the CFC regimes of most of
the major trading partners of the United States, which
typically tax CFC earnings in relatively limited circum-
stances. As a practical matter the consequence is that
BEPS leading to stateless income—the original driver

for the entire international tax reform debate—is now
a phenomenon that exists only for non-U.S. headquar-
tered multinationals.

Google, Apple, Facebook, Amazon, the four compa-
nies specifically targeted in documents issued at various
points by the Commission, the French government, and
the German coalition agreement, each face a 10.5%
minimum tax on their foreign earnings. Since every
EU member state has a dividend exemption system that
does not include a minimum tax, and instead provides
a 0% tax rate on foreign earnings when repatriated,
companies like Volkswagen, Allianz, Daimler, Siemens
in Germany, or BNP Paribas and Carrefour in France
do not face a minimum tax burden on their foreign
earnings. They can, and in some circumstances still do,
generate stateless income and achieve 0% tax on their
foreign earnings. That is the reality of current U.S. cor-
porate tax law as compared with the current corporate
tax law of the largest continuing members of the EU.
Meanwhile, the UK’s corporate tax reforms beginning
in 2012 were explicitly designed to ensure the ability of
UK-headquartered multinationals to achieve a zero rate
of tax on foreign earnings by generally exempting those
earnings from UK tax.

Therefore, when the Commission or HMT now pro-
pose a solution for the digital sector, that proposal is not
about addressing low-taxed income or leveling an unlevel
playing field—the justifications given for rule changes in
BEPS just a few years ago. Rather, the proposals are now
clearly about a revenue shift to move tax revenue from
jurisdictions of residence to the jurisdictions where digi-
tal companies have users.48

3. BEAT. The BEAT was enacted to address legislative

concerns that the former U.S. international tax regime
made foreign ownership of almost any asset or business
more attractive than U.S. ownership from a tax perspec-
tive, thereby creating tax-driven incentives for foreign

takeovers of U.S. firms and foreign acquisition of busi-
ness units previously owned by U.S. MNCs and financial
pressures that encourage U.S. MNCs to “invert” (move
their headquarters abroad), produce abroad for the U.S.
market, and shift business income to low-tax jurisdic-
tions abroad. Until recently, little policy attention was
given to reining in the benefits that U.S. law gives to
inbound multinationals that make foreign status more
attractive than domestic status. In this regard the United
States was a global outlier: in the rest of the world, gov-
ernments have been focusing their policy efforts almost
exclusively on inbound taxpayers that minimize their
income in local jurisdictions since the onset of the finan-
cial crisis. With the BEAT, the United States took a bold
but highly imperfect step to join the global consensus
that inbound must be addressed.

New section 59A of the Code imposes an additional
tax equal to the “base erosion minimum tax amount”
(the “BEAT tax”) of “applicable taxpayers.”49 The BEAT
tax generally means “the excess (if any) of an amount
equal to 10 percent… of the modified taxable income of
such taxpayer for the taxable year, over an amount equal
to the regular tax liability … of the taxpayer for the tax-
able year, reduced (but not below zero) by [certain cred-
its].”50 In other words, the BEAT tax is calculated as the
difference between the corporation’s regular tax liability
and an alternative calculation based on the corporation’s
modified taxable income.

Modified taxable income for BEAT tax purposes is

generally defined as taxable income computed without
regard to any deduction with respect to a payment to a
foreign related party.51 Certain exceptions (notably for
certain payments for services) apply. Payments for cost of
goods sold (“COGS”) also have no effect on the calcula-
tion of modified taxable income because, as a technical
matter, COGS are a reduction in gross receipts (rather
than a deductible payment).52 The characterization of
payments, especially with respect to transactions involv-
ing bundled services and goods, can therefore affect
whether a payment is within the scope of the BEAT
provision. The BEAT’s “modified taxable income” base
is also determined without regard to the base erosion per-
centage of any net operating loss (“NOL”) allowed for
the tax year.

Only “applicable taxpayers” are subject to the BEAT
at all. To be an applicable taxpayer, a U.S. corporation
and its affiliates53 must meet certain criteria.54 Notably,
the U.S. corporation generally must have a “base erosion
percentage” of 3% or higher. This base erosion percent-
age is generally determined by dividing the aggregate
amount of a taxpayer’s “base erosion tax benefits” for the

47MARCH–APRIL 2019

taxable year, by the sum of the aggregate amount of the
deductions allowable to the taxpayer, plus certain base
erosion tax benefits allowable to the taxpayer.

The BEAT has been the subject of cogent critiques by
the NYSBA and other commentators.55 The key BEAT
complications for purposes of this discussion relate to
the treatment of foreign tax credits and the base erosion

percentage concept. In my view, these two features of the
BEAT should be removed.

Most tax credits are disregarded in determining regu-
lar tax liability for purposes of the BEAT calculation.56
Most importantly, foreign tax credits are disregarded.
The treatment of foreign tax credits under the BEAT dis-
favors foreign taxes paid by BEAT taxpayers relative to
any other business expense. In other words, foreign taxes
are in effect not even deductible for BEAT taxpayers. In
various circumstances, the rule disregarding the value of
foreign tax credits for purposes of measuring hypotheti-
cal regular tax liability increases the BEAT minimum tax
dollar for dollar.57 Foreign taxes paid by U.S. MNCs are
thus treated almost as if they were equivalent to bribes
and payments made to entities in Iran and North Korea.
This treatment is not justifiable. Moreover, disallow-
ing foreign tax credits has no clear relationship to base
erosion.

Second, if a taxpayer’s “base erosion percentage” is 3%
or less, they are not subject to the BEAT. The base ero-
sion percentage is generally determined by dividing the
aggregate amount of “base erosion tax benefits” of the
taxpayer for the taxable year, by the sum of the aggregate
amount of the deductions allowable to the taxpayer plus
certain other tax benefits allowable to the taxpayer. Since
both the numerator and denominator of the base erosion
percentage fraction represent gross rather than net con-
cepts, the rule is highly manipulable, and the cliff feature
encourages manipulation.

Importantly, the BEAT includes a broad grant of reg-
ulatory authority to the Treasury. The provision includes
specific authority to prescribe such regulations as may
be necessary or appropriate. The BEAT also includes a

number of specific grants of regulatory authority. These
include providing “for such adjustments to the applica-
tion of this section as are necessary to prevent the avoid-
ance of the purposes of this section, including through”
the use of unrelated persons, conduit transactions, other
intermediaries, or transactions designed in whole or in
part to characterize payments otherwise subject to the
BEAT as not subject to the BEAT, or (quite extraor-
dinarily) even regulations preventing taxpayers from
obtaining benefits from substituting payments not sub-
ject to the BEAT as drafted with payments that would

normally not be subject to the BEAT.58 The intent
behind the scope of this remarkable grant of specific reg-
ulatory authority is not discussed in the legislative his-
tory. Nevertheless, the language is sufficiently expansive
as to raise the question of whether Congress intended the
BEAT to give Treasury authority to reconsider allocation
of profits generally for minimum tax purposes.

II. Value Creation and User
Participation59

Academic commentators of all ideological stripes have
now explained in multiple articles that the international
tax system is not now, and never has been, based on a
value creation principle.60 Moreover, as I suggested in
Part IA, no one entirely knows or agrees on the precise
meaning of “value creation.” Finally, the consensus aca-
demic view is that any exercise to define specific sources
of value creation is entirely subjective.61

Nevertheless, post-BEPS, various governments often
repeat the mantra that “the international tax frame-
work is based on a principle that the profits of a busi-
ness should be taxed in the countries in which it creates

value.”62 One proposal that features prominently among
“value creationists” is known by the label “user partic-
ipation.” It purports to give appropriate credit to user
participation in value creation in the digital economy.
This idea originated from HMT, was then taken up by
the European Commission, and is now being studied by
the OECD.

HMT and the European Commission both maintain
there is something distinctive about value creation in the
digital economy. They focus on the example of a user
uploading data on a social media platform to illustrate
the importance of user participation in the digital space.
The Commission argues that in this case user participa-
tion contributes to value creation because users’ “data
will later be used and monetised for targeted advertising.
The profits are not necessarily taxed in the country of the
user (and viewer of the advert), but rather in the country
where the advertising algorithms has been developed, for
example. This means that the user contribution to the
profits is not taken into account when the company is
taxed.”63

HMT and the Commission also assert there is some-
thing special about online marketplaces and other “col-
laborative platforms,” that “generates revenue through
matching suppliers and purchasers of a good,” or
“charges a commission for bringing together supply and
demand for assets and possessions owned by individuals.
The success of those businesses is reliant on the active

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INTERNATIONAL TAXATION IN AN ERA OF DIGITAL

DISRUPTION: ANALYZING THE CURRENT DEBATE

involvement of users on either side of the intermediated
market and the expansion of that user base to allow the
business to benefit from network effects, economies of
scale and market power.”64 In contrast, HMT claims par-
ticipation of users in non-digital businesses is generally
“passive.”

Two immediate questions arise with respect to the
user participation theory put forth by HMT and the
Commission. The first question is whether there is any
reason to believe that users only meaningfully con-
tribute to value creation in the context of certain digital
platforms. The second is how, across the whole of the
economy, one would determine when users contribute to
value creation, and to what degree.

If user participation is a meaningful concept, it can-
not be rationally limited to information communication
technologies. Consider a clinical trial from a user partic-
ipation perspective: such trials involve a corporation giv-
ing thousands of individuals free medicine over a period
of years in exchange for those users providing deeply per-
sonal medical data, as well as a service to the company—
the use of their bodies for purposes of experimentation.
The resulting data is monetized by obtaining a patent
and customizing products to specific diseases and patient
populations. This user data is also required for regulatory
approvals, without which the company may not sell any-
thing at all.

The data provided by patients is deeply private bio-
metric and health information. In this sense, the data
users provide in exchange for free products in the medical
economy is often substantially more extensive and per-

sonal than the data that a digital user provides. Moreover,
their engagement with the providers of their treatment is
often more sustained than a digital user of a social media
platform. After all, in some cases disengaging from the
company (ceasing to supply data in exchange for treat-
ment) might fundamentally impact a drug user’s health.
In sum, both active user participation and data contribu-
tion appear to be part of the medical economy.

The most meaningful objection to the above analogy
between user participation in the digital economy and
user participation in the medical economy relates to the
fact that the medical economy generally does not ben-
efit from either “multisided business models” or net-
work effects. Indeed Commission, HMT, and OECD
documents each often highlight these two economic
phenomena in describing potential justifications for a
special profit allocation for user participation in the dig-
ital economy.65

Neither multisided business models nor network effects
are new economic phenomena, nor are those phenomena

limited to the digital platform businesses affected by user
participation proposals. Multisided platform businesses
are generally defined as businesses that a) offer distinct
products or services, b) to different groups of custom-
ers, c) whom a “platform” connects, d) in simultaneous
transactions. In simpler terms, they are market makers—
businesses that help unrelated parties get together to
exchange value. Network effects refer to the phenome-
non whereby a product or service gains additional value
as more people use it.

Before the advent of the Internet, the classic example
of a multisided business model with network effects used

in economics discussions involved financial intermedia-
tion. Credit card businesses represent one example. On
one side of the business consumers are offered conven-
ience and financing, and on the other side merchants
obtain a mechanism to receive payment other than in
cash. Moreover, the more merchants accept a credit card,
the more attractive a credit card is to consumers, and
the more consumers hold a credit card, the more willing
merchants are to accept the card and its related intercon-
nection fee.66 Other “non-digital” multisided business
models with network effects include newspapers, tradi-
tional broadcast television, video game consoles, finan-
cial exchanges, and even farmer’s markets (which charge
rent to sellers, and allow shoppers to enter the market
for free).

Of course a farmer’s market has network effects
because it is more valuable to buyers and sellers respec-
tively to the extent that there are more farmers and more
local shoppers participating. However, the magnitude
of the network effect is much greater, and potentially
more salient for tax purposes, when the “platform”
(the marketplace) involved can intermediate transac-
tions globally. That issue of magnitude is presumably
what HMT and the European Commission think is
special—network effects and multisided business mod-
els combined with so-called “cross-jurisdictional scale
without mass.”

Focusing on the issue of large network effects com-
bined with cross-jurisdictional scale without mass brings
us to financial exchanges. Network effects are the key
feature of successful financial market making, because
for transactions to take place there must be both buyers
and sellers. Specifically, market liquidity is an important
feature in determining transaction costs and making a

market attractive to participants, and the number of par-
ticipants is what determines liquidity. As the number of
buyers and sellers on a given exchange increase, liquidity
increases, and costs fall. Without enough buyers and sell-
ers, the market literally falls apart.

49MARCH–APRIL 2019

As an example, consider the Lloyd’s insurance market-
place, based in the UK. The vast majority of Lloyd’s busi-
ness involves insuring non-UK risks, often without any
physical presence in the jurisdictions where the covered
risk exists on behalf of either Lloyd’s or the underwrit-
ers and syndicates that form the Lloyd’s marketplace.67
Moreover, the vast majority of the capital in the Lloyd’s
market does not come from the UK.68 But, as Lloyd’s
itself explains, the certainty provided by the marketplace
as well as the network effects from Lloyd’s global net-
work of insurance companies, brokers, and coverholders
“makes Lloyd’s the world’s leading (re)insurance plat-
form.”69 The London stock exchange is another import-
ant financial marketplace, albeit one where at least some
of the offerings are not as bespoke (and therefore require
less data) than is customary at Lloyd’s.

Do users somehow participate less “actively” in tradi-
tional financial marketplaces when they enter into trans-
actions than they do in online sharing marketplaces?
The key participation feature of online marketplaces are
reviews and ratings of sellers and buyers.

Much more complex user data is shared among the
specialist syndicates, brokers, and coverholders partici-
pating in the Lloyd’s insurance market than is shared by

short-term renters on a vacation rentals platform.70 And
these market participants interact in more complicated
ways than do renters and owners. Moreover, Lloyd’s has
now created a mandate that syndicates enter into many
of their contracts electronically over a digital platform.71
So, using Lloyd’s as an example, it becomes difficult to
see the clear distinction between an insurance interme-
diation platform and, for instance, the accommodation
intermediation platform represented by Airbnb. It is true
that historically one business (reinsurance) was global-
ized before the advent of the Internet while the other
(home rentals) was not. And historically underwriters
sometimes exchanged views offline, while renters often
found it hard to exchange views at all. However, now
both businesses are globalized, users on both the buy side
and the sell side share their views with one another in
both industries, and one industry is fully digitalized while
the other is working to move in that direction. It seems
intellectually unsustainable to claim there is a relevant
difference with respect to user participation between the
accommodation traded on Airbnb and bespoke products
traded electronically in financial markets.

The Internet of Things (“IoT”) is likely to make the
distinction between businesses with network effects and
multisided business models and more “traditional” busi-
ness even harder to maintain. IoT refers to the network
of physical objects embedded with sensors and network

connectivity that allows the collection and exchange
of data. Such sensors are becoming ubiquitous in the
devices we encounter in our daily environment. A large
number of IoT applications are being developed in
various domains by start-ups, SMEs, and large MNCs
alike.72

One widely discussed IoT example is the idea of the
“connected car.” Connected cars are likely to feature seats
that face a windshield that is akin to a computer screen.73
Trends in automotive research and development involve
navigation and entertainment display screens built into
the dashboard to offer Internet-based information and
media, as well as sensors intended to pick up information
from roads and other networked cars. On one model of
what constitutes “active user participation,” a connected
car would have all the components for user participation
in place. The user would provide geo proximity data by
driving, financial information by leasing, and be in a car
that acts as a channel to deliver advertising to a “captive”
recipient.

On another model, use of a connected car would not
constitute “active user participation” because the user of a
connected car would not be actively writing a message or
rating a product or service. In that case, however, clicks
on a social media platform would also seem to consti-
tute “passive” user participation. It seems inconceivable
that “going” to a website or “searching” virtually should
be classified as active user participation but going some-
where physically should be classified as passive activity.

Some projections suggest that there will be more than
30 billion IoT devices in use by 2020.74 In addition to
connected cars, commercial and industrial applications,
driven largely by building automation, industrial auto-
mation, and lighting, are projected to account for many
of the new connected devices coming into use between
2018 and 2030.75 If those projections come to pass, it
is hard to imagine that user participation in historically
non-digital sectors will not exceed any de minimis user
participation threshold.

In sum, it does not seem intellectually defensible to
suggest that users only meaningfully contribute to value
creation in the context of certain digital platforms, or to
think that the boundaries of the idea are clear enough to
allow for anything approaching reasonable implementa-
tion. Indeed, as articulated thus far it is difficult to view
the proposal as anything other than either a) ill-conceived
or b) transparently instrumentalist and mercantilist.

But understanding the user participation perspective
remains important. For one thing, the user participation
proposal highlights the political angle much of Europe
brings to the current digital tax debate. Even more

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INTERNATIONAL TAXATION IN AN ERA OF DIGITAL
DISRUPTION: ANALYZING THE CURRENT DEBATE

importantly, HMT and the Commission have both
suggested that when “active user participation” is pres-
ent, “jurisdictions in which users are located should be
entitled to tax a portion of those businesses’ profits.”76
HMT wishes to achieve this result using what is in effect
a formulary system.77 The Commission proposes doing
so based on a facts and circumstances arm’s-length anal-
ysis of the value of user participation.78 Either way, these
proposals seek to allocate some (although not all) of the
excess return of a business to the destination jurisdiction.
And that issue—destination-based income taxation—
lies at the heart of the intellectual debate about the future
of the corporate income tax as applied cross-border.

Indeed, the core of Part III is a discussion of a pro-

posal for allocating excess returns through a reform of
the international tax system that would create a hybrid
between a destination-based income tax and the present
residence-based system. Such a system would, like the
user participation proposals, allocate a part of the excess
return of a business to market (“user”) jurisdictions.
Thus, the second key question regarding a user partic-
ipation proposal, namely, how, across the whole of the
economy, one would determine to what degree users
contribute to “value creation,” is conceptually parallel
to the question of how, across the whole of the econ-
omy, one would allocate a part of the excess return to
market jurisdictions. That is the “bridge” between the
user participation proposal and the “marketing intan-
gibles” or “DBRMPA” proposal described in Part III.
Importantly, this means that all of the technical and
administrative issues that will be described in Part IIIB
below also apply in equal measure to any user partici-
pation proposal.

The principled issue is whether, how, and to what
degree, across the whole of the economy, law should
allocate the excess return of a business to consumer/user/
market jurisdictions for corporate income tax purposes.
The key difference between the proposal described in
Part III and the user participation theory is that the pro-
posal in Part III does not attempt to ring-fence the dig-
ital economy. Rather, it tackles this allocation question
generally, without resorting to unsustainable and unjus-
tifiable distinctions in business models.

III. Where We Go from Here: Destination-
Based Income Tax Reform?
This Part considers the “marketing intangibles” or
DBRMPA idea that constitutes a compromise between
the current transfer pricing system and a destination-

basis income tax. This hybrid approach may be under

consideration in some form or other at the OECD. My
formulation of this approach may or may not be the same
as what is under discussion at the OECD, as the proposal
has not been publicly described in any detail. However,
no matter how a marketing intangibles concept is formu-
lated, certain key issues will have to be addressed. These
include how to split excess returns between the current
arm’s-length system and an allocation to market coun-
tries, and how to determine destination so as to split
the amount allocated to market countries among such
countries.

The DBRMPA described here is a compromise
between the present transfer pricing system and a form
of destination-based income tax known as a destina-
tion-based residual profit allocation (“DBRPA”). The
DBRMPA proposal divides intangible returns between
those generated by so-called “customer-based” or mar-
keting intangibles and those generated by other (presum-
ably usually “production-based”) intangibles. Residual
returns deemed attributable to customer-based or mar-
keting intangibles would be allocated to the market—
the jurisdictions where the customers reside. Residual
returns deemed attributable to other intangibles would
be allocated based on current transfer pricing rules (i.e.,
the BLTV). Importantly, in this sense the DBRMPA
functions in the same way as user participation, but does
so across the whole economy, instead of ring-fencing this
change based on a cliff effect determined by whether a
business is categorized as being “digitalized” or not.

A. Background: The Destination-Based
Residual Profit Allocation
The DBRPA proposal was developed by a group con-

sisting of Alan Auerbach, Michael Devereaux, Michael
Keen, Paul Oosterhuis, Wolfgang Schön, and John Vella.
The idea is explained in the excellent paper authored by
Joe Andrus and Paul Oosterhuis for this conference in
2016 entitled “Transfer Pricing After BEPS: Where Are We
and Where Should We Be Going.” Further details appear
in a presentation given by Paul Oosterhuis at Oxford
University in 2016.79 The proposal represents an attempt
to move toward a destination-basis corporate income tax
system by means that can at least be described as remain-
ing consistent with some of the principles of the current
“arm’s-length” transfer pricing architecture.

The DBRMPA is fundamentally a compromise be-
tween a DBRPA and the current transfer pricing system.
Thus, analyzing the DBRMPA first and foremost requires
understanding the DBRPA.80

The DBRPA proposal is animated by the understand-
ing that the location of consumers is less mobile than the

51MARCH–APRIL 2019

location of booked profits, intellectual property, corpo-
rate assets, corporate employees, or any other element
of value creation. In this sense it is similar to sales-based
FA. However, the DBRPA attempts to separate “excess”
or “residual” returns from “routine returns,” and provide
a normal rate of return to productive functions. The
first-order advantages of a DBRPA are supposed to be
reduced incentives to shift income to low-tax jurisdic-
tions, reduced complexity and reduced administrative
burdens.

The core idea is to salvage the existing arm’s-length
system with respect to routine returns, while using a
sales-based system to allocate residual returns. How
would it work? To allocate excess/residual returns, the
DBRPA deems the country in which customer sales take
place to be an “entrepreneurial” affiliate with respect to
local market sales, and ascribes all “non-routine” profits
to that affiliate.81 Achieving this result would require
MNCs to measure gross revenues by country and by
product using some concept of “destination” or “place
of supply.” Global costs would need to be measured at a
product line level, and then either traced or apportioned
out to revenues from specific countries.

The DBRPA mechanism for allocating the residual
share to the market is quite similar to a cost-sharing ap-
proach for allocating income attributed to intangibles.
However, instead of allocating the residual profit to an
“entrepreneurial risk-taker” in an MNC group defined as
the affiliate that owns the intangible property and takes
on financial risk (as in contemporary cost-sharing mod-
els), the residual profit is instead allocated to affiliates in
the respective market jurisdictions. The proposal in effect
imposes deemed contractual arrangements to which tra-
ditional transfer pricing methods are then applied. As a
result, the DBRPA allocates excess returns on a product
line by product line basis rather than an entity by entity
basis. In doing so it appropriately escapes the “formulary
apportionment” label.

1. Comparison of DBRPA with Sales-Based FA. The
most important difference between a DBRPA and sales-
based FA is that a DBRPA would modify transfer pricing
methodologies so as to allocate only “excess” or “resid-
ual” profits to the jurisdiction of sale.82 Sales-based FA
systems do not necessarily allocate any income to juris-

dictions where corporate functions take place. In the
United States, our status as a very large market obscures
this concern that sales-based FA raises. But consider a
small jurisdiction; let’s call it Denmark. Whatever the
theoretical merits, it is probably hard for politicians to
explain to Danish taxpayers that a Danish corporation

which exploits a range of local benefits to make outputs
that are wholly or almost wholly exported will pay no or
almost no corporate income tax in Denmark. The cost-
plus markup on productive functions in the DBRPA is
somewhat responsive to the concern that sales-based FA
provides no revenue to jurisdictions where economic
activity takes place. It solves the “Denmark problem” to
some degree.

Although DBRPA is not a sales-based FA proposal, in
many circumstances DBRPA could produce results that
are similar to the residual sales-based formulary appor-
tionment (“RFA”) proposal put forth by Avi-Yonah,
Clausing and Durst in 2011. RFA would allocate a fixed
markup (7.5% in the Durst et al proposal) on costs to
entities that undertake activity within an MNC.83 All
other profits would then be allocated to the destination/
market country.

The key difference between DBRPA and RFA is that
DBRPA imposes a destination-basis allocation for
residual returns on a product line by product line and
individualized country by country basis.84 If percentage
of gross sales revenue on the one hand and percent-
age of corporate profit on the other vary significantly
by country, DBRPA and RFA would generate differ-
ent results.85 Similarly, if average profit levels vary by
product line and some countries generate more reve-
nue for an MNE from high-profit products while other

countries generate more revenue for an MNE from
low-profit products, DBRPA and RFA would generate
different results.86

DBRPA requires determining where sales occur.
Andrus and Oosterhuis correctly observe that using
location of sales to allocate income “raises several par-
ticularly difficult issues,81 including: the treatment of
remote sales, the treatment of sales through intermedi-
aries, the treatment of sales of raw materials, compo-
nents and intermediate goods, the treatment of capital
goods sales and the treatment of services.”87 At mini-
mum, addressing these issues would require augmented
information exchange and potentially some degree of
collection assistance. These issues also have first-order
ramifications for DBRMPA, and so are addressed fur-
ther below. Another important issue discussed below is
that, like both sales-based FA and RFA, DBRPA likely
requires countries to agree on rules that define the cor-
porate income tax base.

Other technical questions also arise in thinking about
DBRPA.88 Such issues include the treatment of losses,
the treatment of flow-through entities, the treatment
of certain financial transactions, and the treatment of
M&A. In addition, financial accounting treatment may

52 INTERNATIONAL TAX JOURNAL MARCH –APRIL 2019

INTERNATIONAL TAXATION IN AN ERA OF DIGITAL
DISRUPTION: ANALYZING THE CURRENT DEBATE

be problematic, and there are important questions about
the compatibility of these ideas with tax treaties and

international trade commitments. These issues were out-
lined in the 2016 Andrus and Oosterhuis effort. I do not
rehash that discussion below, although these concerns
may be relevant to a DBRMPA as well.

B. Destination-Based Residual Marketing
Profit Allocation
A DBRMPA has the same starting point as a DBRPA:
affiliates of an MNE are compensated for their functions
on a cost plus or return on assets basis using arm’s-length
principles. Unlike in the DBRPA, however, the “residual
return” must then be divided between marketing or cus-
tomer-based intangibles and other intangibles. This divi-
sion is necessary in order to then allocate income deemed
to arise from customer-based or marketing intangibles to
the market of destination for the good or service, while
allocating the remaining residual return under existing
transfer pricing principles.
Going forward in this Part I will use the term “marketing
intangibles.” There may very well be a substantive distinc-
tion between marketing intangibles and customer-based
intangibles. For example, in the U.S. core deposits of
a financial institution were historically thought of as a
“customer-based” intangible, but might not be a market-
ing intangible. Similarly, the value of a “network effect”
might be considered a “customer-based” intangible but
not a marketing intangible.89 However, in this discussion
I explicitly do not intend to invoke such substantive dis-
tinctions. I am simply choosing a single term (marketing
intangibles) for ease of exposition.90

The conceptual motivation for the DBRMPA derives
from at least two sources. First, some believe certain
export-driven jurisdictions would adamantly reject a
DBRPA. However, at least two of the most prominent
of these jurisdictions, Germany and Japan, may believe

that the intangible value held by their domestically-head-
quartered corporations derives primarily from produc-
tion intangibles rather than from marketing intangibles.
Thus, these jurisdictions (the theory presumably goes)
might be willing to accept a DBRMPA. Second, some
policymakers may believe that marketing intangibles
are fundamentally “customer-based,” and therefore
more appropriately allocated to jurisdictions of destina-
tion (“the market”) than is income attributable to other
intangibles.

Both of these premises are subject to doubt. For pur-
poses of this paper, however, I will set those two questions
aside and limit myself to administrative and pragmatic
issues associated with the DBRMPA. This drafting

decision is not because I’m persuaded by the premises
described above.

The DBRMPA raises three basic administrative con-
cerns. First, it retains all of the problems of current
transfer pricing law, because with respect to residual
returns that are not allocated to the marketing intangi-
bles current law applies. Second, the proposal imposes
an inadministrable distinction between residual returns
associated with marketing intangibles and other resid-
ual returns. Third, since a DBRMPA allocates residual
returns associated with marketing intangibles to the mar-
ket jurisdiction, all the challenges associated with any
destination-basis income tax proposal are present in the
DBRMPA.

The problems of current transfer pricing law are well-
known, and were also discussed in Part IA. Part IIIB.1
discusses historical evidence suggesting that the distinc-
tion between marketing intangibles and other intan-

gibles is not administrable, and also considers various
potential solutions to that concern. Part IIIB.2 discusses
the difficulties associated with determining destination
for purposes of allocating revenues in a destination-basis
income tax. There are two sub-issues. First, mechanisms
used in the VAT to determine destination do not work in
an income tax. Second, solutions to determine destina-
tion by building on existing income tax-based concepts
are insufficiently robust. Part IIIB.3 describes the diffi-
culties that arise because the DBRMPA relies on unitary
tax principles for purposes of allocating costs, but not
for purposes of determining revenues. Part IIIB.4 con-
cludes that the DBRMPA, while it seems attractive as a
political compromise at 100,000 feet, entails a level of
complexity and embedded sources for further conflict
as between sovereigns and as between sovereigns and
multinationals that is problematic. It also would require
a significant degree of international tax harmonization.

1. Dividing a Residual Return Between Marketing-
Based and Other Intangibles. The DBRMPA raises
an important and likely technically irresolvable point
of controversy: the extent to which residual returns are
attributable to customer-based or other intangible assets.

A legislative definition of “marketing” or “custom-
er-based” intangibles would presumably be required to
operationalize a basic DBRMPA proposal. One could
certainly imagine such definitions. For example, a statute
might define income associated with patents, copyrights,
trade secrets, and any other intangible clearly related to
product function or composition as “production-based”
intangible income, and specify that all other income not
allocated to a routine return was “marketing intangible”

53MARCH–APRIL 2019

income. Alternatively, a statute could define marketing
intangibles to include trademarks, tradenames, and fran-
chises as well as the value of installed customer bases,
expectation of future business from that base, and good-
will and going concern value.

A working legislative definition does not solve the
underlying valuation problem. Conceptually the
DBRMPA requires valuation of all “marketing intan-
gibles” as distinct from all other intangibles in order to
produce a ratio via which all residual income could be
divided between marketing intangible income (which
in this usage can equivalently be called “customer-based
intangible income”) and other intangible income.

This issue—distinguishing between customer-based
intangibles and other intangibles—is not new for
U.S. law. Prior to enactment of the Omnibus Budget
Reconciliation Act of 1993, many categories of intan-
gibles were eligible for income forecast depreciation,
often on accelerated schedules.91 As a result the value of
customer-based intangibles as opposed to patents and
other intangibles acquired in various transactions had
to be determined. Amortization deductions before 1993
depended on the acquirer’s ability to establish that an
acquired intangible had a limited useful life that could
be established with reasonable accuracy and an ascertain-
able value separate from goodwill, since goodwill was
non-amortizable.92 Amortizable intangibles were then
amortized under various useful lives.

In contrast, Code Sec. 197 spreads amortization over
a 15-year straight line period, without regard to their

“type.” Code Sec. 197 obviates the need to ascertain in-
dividual valuations for different categories of intangibles,
and greatly diminishes the incentive taxpayers once had
to characterize acquired intangibles as assets distinguish-
able from goodwill and going concern value.

Fred Goldberg, a former Commissioner of the IRS,
explained the administrative problem created by prior
law to Congress in 1992, shortly after he left the job
of Commissioner of the IRS and became the Assistant
Secretary of the Treasury for Tax Policy. He testified that
the need to allocate basis among purchased intangibles
not only resulted in substantial uncertainty and dissim-
ilar treatment of similarly situated taxpayers, but also
imposed large wasteful transaction and administrative
costs on taxpayers and the government. Before 1993,
disputes over the amortization of customer-based or
market-based intangibles, including but not limited to
items such as core deposits held by financial institutions,
insurance expirations, and newspaper and magazine sub-
scription lists, produced many prominent, large dollar
litigations.93 As one author described the problem, “the

governance of purchase price allocations to intangible
assets [has become] an administrative quagmire and a
judicial disaster.”94

For tax years between 1979 and 1987, for all unre-
solved audit cases (on any issue) in examination, appeals,
or litigation as of mid-1989, in fully 70% of those cases
in which taxpayers claimed that an intangible assets had
a determinable useful life over which amortization was
available, the IRS proposed adjustments and claimed
that the assets were in fact goodwill.95 Moreover, for
that same period, the single category of intangible assets
over which this dispute arose most often were customer

or market-based intangibles.96 The debate before 1993
regarding acquired intangibles largely focused on dis-
tinguishing between customer-based intangibles and
goodwill, the latter of which was not amortizable under
pre-1993 law. But the core problem was allocating pur-
chase price premia across intangible asset categories
generally.

This same issue—whether an intangible is a customer
or market-based intangible or some other intangi-
ble (goodwill or something else) would arise in a new
guise in a regime that distinguishes between “marketing
intangibles” and other intangibles. As long as one result
is more favorable for the taxpayer on the one hand or
the government on the other, or for one government or
another, incentives for controversies regarding classifi-
cation arise. But relative to pre-1993 U.S. law, the dif-
ference would be that instead of being limited to cases
where intangibles were acquired, the controversy would
arise with respect to every single cross-border transaction
in which a non-routine return existed. The intangible
classification incentive of a foreign sovereign where any
DEMPE functions took place and the incentives of the
IRS would always be at cross-purposes. To paraphrase
Fred Goldberg’s 1992 congressional testimony regarding
the analogous issue a generation ago, if we go down this
path, “[n]o amount of after the fact enforcement and
litigation can possibly remedy the situation.”97 We will
have re-created a mess from a generation ago and com-
pounded it exponentially.

a. A “Two-Sided” Valuation

Solution

? Another key dif-
ficulty with a DBRMPA arises from the fact that, like the
DBRPA, this is a transactional method. The DPRMPA
therefore has the complexity associated with determining
profit levels on a product line by product line and coun-
try-by-country basis.

However, the DBRMPA differs from the DBRPA in
that it requires a profit split of the residual profit being
allocated for each transaction between profits attributed

54 INTERNATIONAL TAX JOURNAL MARCH –APRIL 2019

INTERNATIONAL TAXATION IN AN ERA OF DIGITAL
DISRUPTION: ANALYZING THE CURRENT DEBATE

to marketing intangibles and other residual profits. A
methodology must be chosen to undertake this profit
split.98 In transfer pricing terms, on first impression

a DBRMPA would seem to require application of the
transactional profit split method to all transactions,
even where only one party makes unique and valuable
contributions.

We’ve spent years in transfer pricing trying to limit
the use of the transactional profit split method. The
OECD’s recent guidance on the application of the trans-
actional profit split explains why: “[a] weakness of the
transactional profit split method relates to difficulties in
its application.”99 As a result, the OECD perspective is
that “where the accurate delineation of the transaction
determines that one party to the transaction performs
only simple functions, does not assume economically
significant risks in relation to the transaction and does
not otherwise make any contribution which is unique
and valuable, a transactional profit split method typically
would not be appropriate.”100 For the same reason, the
OECD maintains that “a lack of comparables alone is
insufficient to warrant the use of a transactional profit
split.”101

In various high-profile cases over the years, the appli-
cation of the transactional profit split produced highly
intractable disputes between taxpayers and governments

and between competent authorities in governments. One
well-remembered example is the IRS transfer pricing dis-
pute with Glaxo SmithKline Holdings (Americas) Inc. &
Subsidiaries (“GSK”) for the tax years 1989–2005.102 The
essence of the dispute was over the level of U.S. profits
reported by GSK after making intercompany payments
that needed to take into account production intangibles
developed by and trademarks owned by its UK parent,
relative to the value of GSK’s marketing intangibles in
the United States.103

The facts of the GSK case required coordination be-
tween the United States and the UK with respect to
what current OECD TPG would describe as a two-sided
transactional profit split. The public record suggests the
UK government never acceded to the U.S. assertion as
to the share of the GSK profits that were attributable to
U.S. marketing intangibles rather than UK production
intangibles.104 The GSK case is particularly well-remem-
bered, and the size of the dispute was unusual, but the
basic setup is not unique.

Two-sided transactional profit splits lend themselves to
requiring intergovernmental coordination through MAP
to avoid double juridical taxation. Even after the BEPS

project and the advent of the multilateral instrument,
mandatory binding arbitration is still available only in a

limited set of MAP cases, and the risk of failures of MAP
coordination remains high in transactional profit splits.
Sometimes, maybe this is just the way it has to be. But
why would we want to adopt an international tax system
that sets up this exact type of dispute between taxpayers
and governments and as between national tax adminis-
trations in every case; including in the broad swath of
cases where everyone previously agreed the transactional
profit split method had no relevance?105

b. A Relative “Capitalized Expenditure” Approach?
Another potential approach to splitting residual profit
between profits being allocated to marketing intan-
gibles and profits being allocated to other intangibles
could involve specifying which expenditures contribute
to developing marketing intangibles and which expen-
ditures contribute to developing other intangibles.
Governments would then presumably establish “useful
lives” for various buckets of expenditure. The resulting
relative “capitalized values” associated with marketing
intangibles as compared to other intangibles would pro-
duce a ratio. The ratio would change each year as a result

of both new expenditures by the MNC and the operation
of whatever “amortization schedule” was adopted for the
various buckets of expenditure. The “amortization sched-
ule” would not produce actual deductions; it would sim-
ply establish the annual ratio of “marketing intangibles”
to “other intangibles.” That ratio (as it adjusted each year,
presumably on a product line by product line basis),
would provide the ratio of excess return to be allocated
through the current arm’s-length system as opposed to
being assigned to market jurisdictions for each specified
product line.

Something akin to this approach is said to have been
used in some advanced pricing agreements entered into
by some multinationals both with the IRS and with for-
eign tax administrations. But generalizing this approach
would be very resource intensive. Moreover, the approach
transmutes the debate as to what constitutes a “market-
ing” or “customer-based” intangible as opposed to other
intangibles into a debate as to what costs develop a “mar-
keting intangible” and what costs develop other intangi-
bles (e.g., production intangibles) and what the respective
useful lives of such expenditures should be.106 It is unclear
to me that this represents a meaningful improvement on
the basic two-sided DBRMPA method described in Part

IIIB.1.a. It certainly highlights the relationship between
the problem of relative valuation in a DBRMPA and the
useful life issues Code Sec. 197 was enacted to eliminate.

Finally, the relative capitalized expenditure approach is
hard to translate into the context of the digital business

55MARCH–APRIL 2019

models that are at the heart of this debate. Which expen-
ditures can be attributed to creating “network effects,” and
thereby a form of “marketing intangible?” Considered
prima facie as an intellectual matter, arguably few or none.
But is that an answer that would be globally accepted?

c. A “One-Sided” Valuation

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