GILTI stands for Global intangible low-tax income, which is income earned from other countries by U.S-controlled foreign corporations (CFCs), and it undergoes peripheral treatment under tax law. The U.S. taxes these earnings to prevent the collapse of the tax system and to keep big companies under their tax system by making it hard to move assets such as intellectual property (IP) rights to other countries with favorable tax rates.
Businesses in the U.S. formally filed their whole taxes under the U.S. income tax until 2017, when the government enacted the Tax Cuts and Jobs Act (TCJA). However, U.S. companies in foreign states only pay tax when their earnings are sent to the U.S. as dividends. The TCJA rule changes everything by omitting all active U.S multinational corporations earning on foreign soil from the U.S. tax system.
The purpose of the TCJA is to lower the multinational corporation income tax rate from 35 percent to 21 percent. The act took effect in 2018, but the U.S. tax system imposed more rates than other continents. There are tax havens like Jersey, the Isle of Man, and Guernsey, where no corporate tax is paid, or low taxes are paid by exempted companies like financial services, natural resources, and real estate companies. However, even countries with no or low tax rates can still produce a significant amount of tax. Because of the fear of losing taxes paid by these big companies, the U.S. tax system enacted the TCJA, which encompasses provisions and GILTI tax.
All Controlled Foreign Corporations (CFCs) earnings on foreign soil, including intangible assets to copyrights to patents and trademarks, are considered GILTI earnings. CFCs are corporations that operate 50 percent of their business in the U.S. or the U.S. and have shareholders, each with 10 percent or more of the total revenue. These stakeholders with 10 percent or more in the cooperation are liable to tax GILTI, which is between 10.5 percent and 13.125 percent. Now, with this law, any foreign income made by the CFCs, whether repatriated or not, is subject to tax in the U.S. unless there is an exemption; else, it is considered GILTI. The law targeted U.S. shareholders with CFCs, but unfortunately, every multinational corporation taxpayer is facing the hardship of the GILTI.
Corporate shareholders are entitled to 50 percent of their GILTI income. They can also claim 80 percent of foreign paid taxes. But it was still unclear whether individuals who can neither claim the 50 percent deduction nor are able to claim tax foreign credit can still qualify for a 962 election as a corporation for GILTI reasons. However, after some time, the regulation was finalized.
U.S. shareholders can reduce the burden if they are ready to make individual decisions such as agreeing to domestic tax, denying to be an entity, or establishing a U.S. C corporation and taking over the CFC.
However, the administrative and filing procedures associated with taking this step can be detrimental to the actual business owner. But a freelancer has more accessible options if only the individual qualifies for Foreign Earned Income Exclusion (FEIE) and is recognized as a foreign corporation. As a freelancer, you can decide to pay yourself a lower salary to mitigate GILTI. But the salary must not be below your standard deduction or total deduction.
The option is for CFC owners with certain qualifications like:
Qualifies for FEIE
Makes about $115,000 or less from the business
With minimum income
Render service or have minimal depreciable assets
A citizen of a country with no or low tax rate
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