Global Intangible Low-Taxed Income (GILTI)
Last Updated March 8, 2023
The global intangible low-taxed income (GILTI) regime effectively imposes a worldwide minimum tax on foreign earnings. U.S. shareholders of controlled foreign corporations (CFCs) are subjected to current taxation on most income earned through a CFC in excess of a 10% return on certain of the CFC’s tangible assets – with a reduction for certain interest expense. GILTI inclusions are reduced by a special deduction and a partial foreign tax credit. Navigating through the laws and regulations around GILTI is vital to any international tax planning strategy.
Is there a limit on the amount of foreign income taxes that can be credits in a particular taxable year?
Yes. 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. Thus, if the U.S. person pays more tax to the source country on the foreign source income than is due to the United States on the same foreign source income, the United States will limit the amount of taxes paid to the source country that can be used as credits against U.S. tax liability.
Mathematically, the foreign tax credit limitation is computed as a taxpayer’s pre-credit U.S. tax liability multiplied by a ratio (not to exceed one) wherein the numerator of which is the taxpayer’s foreign source taxable income and the denominator of which is the taxpayer’s worldwide taxable income for the year.
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. However, foreign income taxes paid or accrued with respect to amounts includible in gross income under §951A (i.e., as global intangible low-taxed income, or GILTI) may not be carried back or carried forward.
In Nov. 2022, the Treasury Department published foreign tax credit guidance aimed to clarify royalty withholding tax and cost recovery areas. This OnPoint explains the key proposals and what you need to know.
What income of a controlled foreign corporation (CFC) is currently taxed to a 10% U.S. shareholder?
A CFC’s “subpart F income” is the major component of a CFC’s income that is taxed to any U.S. shareholder who directly or indirectly owns at least 10% of the CFC. 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, exchange gains, and so on – 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 services, take 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; and income from unrecognized countries, countries with which diplomatic relations are severed, and countries that support terrorism.
Additional taxable income
In addition, a CFC’s 10% U.S. shareholders are taxed on amounts considered to be “invested in United States property,” up to the amount of the CFC’s earnings and profits that have not been taxed by subpart F – even though they are not actually subpart F income, such as:
- Property owned in the United States.
- Stock or securities owned by U.S. persons (with some exceptions).
- U.S. rights to certain intangible properties such as patents, copyrights, and business intangibles.
Also, 10% U.S. shareholders must also pay tax on the aggregate of the CFC’s GILTI deemed amount, which is also is not subpart F income.
Download: International Tax Discussion OnPoint
This concise OnPoint presentation highlights all you need to know about the international tax provisions of the Tax Cuts and Jobs Act (TCJA) to help you prepare for new revisions, including changes to the GILTI regime, the FDII calculation, and subpart F foreign tax credits.
How will GILTI be treated under Pillar Two?
Pillar Two is designed to ensure that multinational enterprises (MNEs) with substantial revenue pay a minimum rate of tax in the jurisdictions in which they operate, regardless of where they are headquartered. Under Pillar Two’s global minimum tax rules, these MNEs are subject to a minimum effective tax rate of 15% on profits earned in low-tax jurisdictions.
The OECD has released guidance clarifying that the Qualified Domestic Minimum Top-Up Tax (QDMTT) applies before any CFC taxes, and that the GILTI regime is a CFC tax under the Global Anti-Base Erosion (GloBE) Rules, not an Income Inclusion Rule (IIR). However, because GILTI applies on an aggregate basis, not on a jurisdiction-by-jurisdiction basis, it will be treated as a blended CFC tax, and the guidance addresses how to allocate taxes arising under such a blended CFC tax regime. The GILTI guidance is temporary because the GILTI rate increases in 2026.
Download: GILTI Roadmap
Our comprehensive GILTI Regulations Roadmap explores the four provisions within the preamble that were substantially revised between proposal and finalization.
Can a U.S. company still ‘invert’ after the 2017 Tax Cuts and Jobs Act?
The TCJA (Pub. L. No. 115-97) did not change the taxation of a corporate inversion, but many international provisions of the law were designed to make it less attractive from an income tax perspective to do so. The lowering of the corporate income tax rate, the creation of a favored category of income in the “foreign-derived intangible income” (FDII) deduction, and the GILTI inclusion – an anti-deferral device but at a favorable tax rate – all reduce the comparative tax attractiveness of an inversion.
At the same time, an inversion will still carry the same tax consequences as before the TCJA. An inversion puts a foreign parent corporation between a U.S. company and its shareholders. The tax consequences of such a transaction depend upon the level of control of the interposed foreign corporation, which is termed the “surrogate foreign corporation.” If the level of control is 80% or more, the foreign corporation is treated as a domestic corporation for all purposes of the code. If the level of control is less than 80%, but at least 60%, the effect is to impose a minimum amount of taxable income for the entity and its related parties, termed the “inversion gain,” for a 10-year period after the inversion is completed.
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