How to Calculate GILTI Tax on Foreign Earnings

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The global intangible low-taxed income (GILTI) regime effectively imposes a worldwide minimum tax on foreign earnings. GILTI is a deemed amount of income derived from controlled foreign corporations (CFCs) when a U.S. person is a 10% direct or indirect shareholder. This newly defined category of foreign income was introduced by the 2017 Tax Cuts and Jobs Act (TCJA).

Navigating the laws and regulations around GILTI is vital to international tax planning for U.S. corporations. Along with creating a tax on foreign earnings, GILTI interacts with numerous tax code provisions and affects the calculation of:

• Foreign tax credits
• Section 250 deduction
• Foreign-derived intangible income (FDII)
• Subpart F high-tax exception rules

This article explores key components of the new GILTI regulation – including how to calculate the GILTI tax and what income is subject to GILTI – to help tax practitioners understand how it may impact their corporate tax planning strategies.

Expert insight: Three things to know about GILTI

Bloomberg Tax’s Alex Bayrak examines the fundamentals of the global intangible low-taxed income tax, including how to calculate GILTI tax on foreign earnings and how GILTI interacts with various provisions of the tax code.

GILTI tax calculation

U.S. shareholders of 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 can be reduced by a partial foreign tax credit.

GILTI = Net CFC Tested Income – (10% x QBAI – Interest Expense)

Tested income: The gross income (or loss) of a CFC as if the CFC were a U.S. person, minus:

• 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

QBAI: Qualified business asset investment. The average of the adjusted bases in specified tangible property, subject to depreciation, and used in the CFC’s business to earn the gross income.

Interest expense: Certain business expenses associated with those assets used to calculate QBAI.

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GILTI and Subpart F income

A CFC’s Subpart F income is the major component of its 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, sale, or 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 bribes, kickbacks, etc.; a portion of 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 income subject to U.S. income tax

A CFC’s U.S. shareholders are also 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. This includes CFC investments such as:

• Tangible property owned in the U.S.
• Debt owed by U.S. persons (with some exceptions)
• U.S. rights to certain intangible properties such as patents, copyrights, and business intangibles

GILTI foreign tax credit limitation

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 of 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 foreign taxes that can be credited against U.S. tax liability.

Mathematically, the foreign tax credit limitation is computed as a taxpayer’s precredit U.S. tax liability multiplied by a ratio (not to exceed one), 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 GILTI may not be carried back or carried forward.

Additionally, there is a 20% reduction to GILTI-related foreign income taxes eligible for credit in the U.S.

How GILTI is applied in low-tax jurisdictions

Pillar Two of the Organization for Economic Co-operation and Development (OECD)’s Inclusive Framework on Base Erosion and Profit Shifting is designed to ensure that multinational enterprises with substantial revenue pay a minimum tax rate of 15% in the jurisdictions in which they operate, regardless of where they are headquartered. If companies try to shift profits to low- or no-tax jurisdictions, their country of residence has the right to “top up” taxes to the 15% global minimum rate.

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) tax. However, because GILTI applies on an aggregate basis, not on a jurisdiction-by-jurisdiction basis, it will be treated as a blended CFC tax. The guidance addresses how to allocate taxes arising under such a blended CFC tax regime. Note that this current GILTI guidance is temporary; the GILTI rate will increase in 2026.

Tax planning implications of the GILTI regime

Many of the TCJA’s international provisions were designed to reduce the comparative tax attractiveness of a corporate inversion, a tax strategy that puts a foreign parent corporation between a U.S. company and its shareholders. While the TCJA didn’t change how a corporate inversion is taxed, its antideferral devices make inversion less attractive from an income tax perspective:

• A lower corporate income tax rate
• The creation of a favored income category in the FDII deduction
• The GILTI inclusion’s favorable tax rate

At the same time, an inversion will still carry the same tax consequences as before the TCJA. 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 tax 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.