Global Intangible Low-Taxed Income (GILTI)
The Global Intangible Low-Taxed Income (GILTI) regulation was enacted in Section 951A of the U.S. Internal Revenue Code by the 2017 U.S. Tax Cuts and Jobs Act (TCJA) and is effective for tax years beginning after December 31, 2017. While certain provisions of the TCJA included reforms that moved the U.S. towards a territorial tax system by exempting foreign profits from U.S. taxation, GILTI regulations seem to accomplish the complete opposite, as the principles are characteristic of a worldwide tax system.
What is GILTI?
Simplistically, GILTI is the income earned by U.S. controlled foreign corporations in excess of a specified threshold. The Internal Revenue Code defines this threshold as 10 percent of a foreign corporation’s Qualified Business Asset Investment (QBAI) where QBAI is the adjusted basis of tangible assets such as property, plant, and equipment used in the foreign corporation’s business. In effect, Congress considers a 10 percent rate of return on tangible assets reasonable as such, any amount in excess of 10 percent is deemed excessive relative to the foreign corporation’s tangible assets and is therefore GILTI income. It is important to note that despite its name, GILTI does not only apply to income from intangible assets as it aims to capture any source of income in excess of the specified 10 percent rate of return.
Who is subject to GILTI?
GILTI provisions apply to U.S. shareholders who directly or indirectly own 10 percent of the votes or value of a Controlled Foreign Corporation (CFC). A U.S. shareholder includes a U.S. citizen or resident individual, U.S. partnership, U.S. S-corporation, U.S. C-corporation, any estate with income derived from sources within the U.S., and any trust whereby a U.S. person or court exercises primary authority. A CFC is a foreign corporation in which greater than 50 percent of the votes or value, is owned directly or indirectly by U.S. shareholders.
A 10 percent U.S. shareholder of a CFC is required to include its pro-rata share of GILTI income on its income tax returns on an ongoing basis; this is termed the GILTI Inclusion Amount. The minimum tax on a corporate U.S. shareholder’s GILTI Inclusion Amount is 10.5 percent through 2025 and 13.125 percent thereafter, subject to limited deductions and tax credits.
How can DJB help?
As a fairly new and complex policy, GILTI calculations require a thorough understanding of the intricacies of Section 951A, as well as an understanding of a taxpayer’s existing structure and business goals.
If you think you may be subject to GILTI, DJB’s U.S. tax advisors can perform a comprehensive GILTI assessment based on your facts. Our advisors can also provide an assessment of your GILTI inclusion amount and the resulting tax for purposes of remitting estimated tax payments and quarterly or annual financial statement disclosures.