TOPIC
Global Intangible Low-Taxed Income (GILTI)
Last Updated Oct. 28, 2020
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.
What is “GILTI”?
GILTI, or “global intangible low-taxed income,” is a deemed amount of income derived from CFCs in which a U.S. person is a 10% direct or indirect shareholder. It is computed, roughly, by determining the taxable income (or loss) of a CFC as if the CFC were a U.S. person. The following is then subtracted:
- CFC’s income that is effectively connected with a U.S. trade or business
- Income that is otherwise subpart F income
- Income that is not subpart F income because it is subject to an exception for income that is highly taxed
- Related party dividends
- Oil and gas extraction income
The resulting amount is further reduced by:
- An amount calculated as 10% of tangible property used in the CFC’s business to earn the gross income that resulted from the first calculation (pro-rating assets that produced includible and excludible income)
- Certain interest expense associated with those assets
What if the CFC’s income computation resulted in a loss?
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Our comprehensive GILTI Regulations Roadmap explores the four provisions within the preamble that were substantially revised between proposal and finalization.
Key IRC Sections
Is there a limitation on the amount of foreign income taxes that can be credited 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.
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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 currently to any U.S. shareholder who owns directly, or indirectly, 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
In addition, a CFC’s 10% U.S. shareholders are taxed on amounts considered to be “invested in United States property,” such as property owned in the United States, stock or securities of U.S. persons (with some exceptions), and U.S. rights to certain intangible properties such as patents, copyrights, and business intangibles, 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.
Finally, 10% U.S. shareholders must pay tax on the aggregate of the CFC’s “global intangible low-taxed income,” or GILTI – this also is not subpart F income.
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Can a U.S. company still “invert” after the 2017 tax act?
The TCJA (Pub. L. No. 115-97) did not change the taxation of a corporate inversion, but many international provisions of that act 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 “global intangible low-taxed income” (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 2017 tax act. 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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