What’s the Difference Between FDII and GILTI?
The foreign-derived intangible income (FDII) and global intangible low-taxed income (GILTI) regimes are an attempt by Congress to use tax reform to encourage international tax planning by U.S. multinational corporations that increases investments in the U.S. The intent appears to have been to favor structures where a multinational corporation holds its high-return, foreign-income-producing assets and operations in the U.S. instead of adopting a corporate tax planning strategy that places those assets and operations in overseas subsidiaries.
Comparing FDII and GILTI
The FDII tax deduction rules operate in tandem with the GILTI rules under §951A. But while the FDII and GILTI regimes have similar policy objectives and incorporate similar calculations, they are each applied to foreign income differently:
- FDII is the portion of a domestic corporation’s intangible income relative to total net income that’s derived from serving foreign markets. Section 250 allows a domestic corporation to deduct 37.5% of the excess of the corporation’s income from export sales over a fixed return on its tangible depreciable assets for the year.
- GILTI requires U.S. shareholders of controlled foreign corporations (CFCs) to include in their income (in a manner similar to the inclusion of Subpart F income) the excess of the CFC’s “tested income” over the shareholder’s share of the deemed tangible income return of its CFC. Section 250 allows shareholders to claim a 50% deduction of their GILTI inclusion.
What is included in QBAI?
Both the FDII and GILTI regimes use the term “qualified business asset investment” (QBAI) to refer to the tangible depreciable asset base.
FDII permits deduction of a specified percentage of the excess income derived from export sales above a fixed return on QBAI, while GILTI requires inclusion of the U.S. shareholders’ share of the excess of CFC income over the fixed return on QBAI.
FDII deduction calculation
Section 250 allows a U.S. corporation to claim a limited FDII deduction, generally calculated as 37.5% of its net foreign-derived income relative to total net income, and then multiplied by its deemed intangible income.
Deemed intangible income is generally calculated as the excess of total net income over a routine 10% rate of return on the adjusted tax basis of total fixed assets.
What qualifies as FDII income?
Under the broad definition of FDII, a corporation’s foreign-derived income may include sales of intangible or tangible products (whether manufactured or purchased for resale by the corporation) to a foreign person for use outside the U.S., as well as income derived from a broad range of services.
What income is excluded from FDII?
Certain income is categorically excluded from qualifying as FDII:
- Amounts included in gross income under §951(a)(1) (Subpart F and investments in U.S. property)
- GILTI included in gross income
- Financial services income
- Any dividend received from a controlled foreign corporation with respect to which the corporation is a U.S. shareholder
- Any domestic oil and gas extraction income
- Any foreign branch income
What’s the difference between Subpart F income and GILTI?
Subpart F is the major component of taxable income for U.S. shareholders who directly or indirectly own at least 10% of a CFC. These shareholders are taxed on the portion of the CFC’s income that qualifies as Subpart F income.
Subpart F income consists of the following:
- Foreign personal holding company income, including income generally considered to be passive – such as interest, dividends, rent, royalties, capital gains, and exchange gains – with some exceptions when these items are earned in active businesses
- Sales and services income from transactions with or on behalf of related persons when either the purchase or sale, or the service, takes place outside the country of incorporation, subject to exceptions in each case
- Insurance income from policies outside a CFC’s country of incorporation
- Items imposed as a penalty, including:
- The amount of bribes, kickbacks, etc.
- A portion of income not otherwise treated as Subpart F income if a CFC has business considered to be affected by an international boycott
- Income from unrecognized countries, countries with which diplomatic relations are severed, and countries that support terrorism
U.S. shareholders of a CFC must pay a tax on the aggregate of the CFC’s GILTI, which isn’t Subpart F income. These shareholders may also be taxed on earnings and profits that don’t qualify as Subpart F income, including amounts considered to be invested in U.S. property. These include:
- Property owned in the U.S.
- Stock or securities of U.S. persons (with some exceptions)
- U.S. rights to certain intangible properties such as patents, copyrights, and business intangibles
Can you take a foreign tax credit against GILTI income?
There is a 20% reduction to GILTI-related foreign income taxes eligible for credit in the U.S.
It’s important to remember that FDII calculations on foreign income are interrelated with the effect of foreign tax credits, which can provide an offset when U.S. tax rules impose tax on the same income earned in foreign countries.
However, foreign tax credits are limited annually to the amount of U.S. tax on foreign source taxable income as computed under U.S. tax principles. Therefore, if the U.S. person pays more tax to the source country on the foreign source income than is due to the U.S. on the same foreign source income, the U.S. will limit the amount of taxes paid to the source country that can be used as credits against U.S. tax liability.
Foreign income taxes not credited because of the limitation can generally be carried back or forward to other taxable years, subject to the limitations for those years.
Streamline your FDII and GILTI calculations with Bloomberg Tax Workpapers
As international tax planning for U.S. corporations becomes more complex, tax practitioners need to stay ahead of global tax developments and understand how to adapt their corporate tax planning strategies to reflect the latest tax laws and compliance requirements.
Download our comprehensive GILTI Regulations Roadmap to explore the final GILTI provisions and their international tax implications.
Translating tax regulations into useable calculations is cumbersome, and relying on someone to manually keep your tax calculations up to date can be dangerous. Bloomberg Tax Workpapers automatically updates your calculations with the latest tax laws and includes explanations to give you confidence and clarity on any changes. Created by experts, our FDII and GILTI templates simplify these challenging calculations and help you manage your entire workpapers process with a single solution that removes risk, gives you more control, and saves time.
Request a demo to see how Bloomberg Tax Workpapers will work for you.