Tax laws are passed by Congress, tax revenues are then collected by the Treasury Department, and the reporting and collection process is done by the International Revenue Service (IRS). Today, a new U.S revenue stream has been added by the Tax Cuts and Jobs Act (TCJA) of 2017 called global intangible low-taxed income (GILTI). Since the new GILTI rules are an attempt by Congress to subject more income of foreign corporations to U.S income taxes, anyone who owns an interest in a foreign corporation must, therefore, pay attention.
Profit-shifting abroad for tax advantages have already been handled by numerous tax laws that have been passed. Making sure that U.S business selling to foreign related parties do not run afoul of the transfer pricing rules is a must as well as making sure that all U.S persons (individuals, corporations, partnerships, and trusts and estates) include certain types of income of a controlled foreign corporation (CFC) on the tax returns they submit to the U.S. In other words, the GILT rules are another tool used to tax foreign profits. For tax years of a CFC that begin after December 31, 2017, the GILT rules are applicable.
If you think a foreign corporation selling tangible property can’t have global intangible low-taxed income, then you're wrong. The income of a CFC is where GILTI comes from - an excess of a standard rate of return on the tangible assets of the CFC. Any U.S person who owns at least 10% of the value or voting rights of a CFC is required by the GILTI rules to include its share of the GILTI income in its U.S taxable income - doesn’t matter whether or not any amount was received from the CFC.
A GILTI is still applicable for a foreign corporation in a high-tax jurisdiction. A U.S foreign tax credit is available for Domestic C corporations based on 80% of the taxes that the foreign corporation have paid off, attributable to the GILTI income. However, they are considered the lucky ones. There are no tax credits given for foreign taxes paid on the GILTI income that individuals, partnerships, S corporations, and trusts and estates must include on their U.S returns. This means only C corporations are impacted whether the foreign corporation’s income is low-taxed.
A deduction equal to 50% of the GILTI income is also available for domestic C Corporation required to be included in its return, which then lowers the tax rate on the GILTI income. It starts with the regular corporate tax rate of 21% to an effective rate of 10.5%. For individual taxpayers or other entities, there is no corresponding deduction.
Understanding a few additional terms is the first step to calculating GILTI income. The shareholder’s share of a CFC’s gross income less the share of the CFC’s deductions allocable to that gross income is called tested income (or loss). On the other hand, the average of the foreign corporation's aggregate adjusted bases of its tangible asset used in the production of the tested income is called qualified business asset investment (QBAI). What is deemed to be 10% of QBAI less certain specified interest expense is called deemed tangible income return (DTIR). CFC’s tested income less DTIR results to GILTI. To put it simply, GILTI is the net income of the foreign corporation not already subject to U.S taxation. It is also not deemed generated by the business’ tangible assets.
We are only discussing the general overview of the new GILTI rules and the involved calculations in this article. There are more specific definitions and computational rules that you will be dealing with along the way. For instance, when a taxpayer has an ownership interest in multiple CFCs, there are special aggregation rules that must be considered. Furthermore, to be treated as a corporation for purposes of reporting the GILTI income, there is an election that individuals can make that can effectively allow a foreign tax credit and lower rates on the GILTI income.
This goes to show how critical planning really is. If you’re unsure how to best navigate these complex rules and want to minimize the potential tax burden associated with this new IRS tool, you may want to consider asking for a tax professional’s help.
Flynn Financial Group Inc