How to Calculate GILTI Tax on Foreign Earnings

Is GILTI set to expire on Dec. 31, 2025?

No, GILTI is not set to expire in 2025, but it is among the TCJA provisions that will change at the end of 2025 if Congress does not act. Starting in 2026, the Section 250 deduction for GILTI will be reduced to 37.5%, increasing the effective corporate tax rate to 13.125% on this income.

[Download our exclusive roadmap for a full overview of the 2025 TCJA Expiring or Changing Provisions.]

Tax planning implications of the GILTI regime and TCJA expiration

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.

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 formula

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.

[This GILTI Fundamentals and Calculations OnPoint outlines the critical components of the U.S. GILTI rules, including how it compares to other international minimum tax initiatives.] 

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.

What is the GILTI high-tax exception?

The GILTI high-tax exception is a provision that allows certain income of a CFC to be excluded if it is subject to a high rate of foreign tax. Specifically, income that is excluded from foreign base company income or insurance income by reason of the high-tax exception under section 954(b)(4) is not included in the GILTI calculation. This high-tax exception applies to income that is subject to a foreign effective tax rate that exceeds 90% of the U.S. corporate tax rate, which is currently 21%, making the threshold for the high-tax exception 18.9%.

The high-tax exception is elective, meaning that taxpayers can choose whether to apply it. If the election is made, the high-taxed income is excluded from both subpart F income and tested income for GILTI purposes. The regulations provide that the GILTI high-tax exclusion can be applied to certain high-taxed income even if that income would not otherwise be foreign base company income or insurance income.

The GILTI high-tax exclusion was finalized by regulations issued in 2020, which allow for an elective exclusion of certain high-taxed income from the GILTI calculation, aligning the rules more closely with the subpart F high-tax exception. This elective exclusion is intended to prevent double taxation and reduce the compliance burden for taxpayers with high-taxed foreign income.

How to calculate GILTI tax with Workpapers

Here is an overview of the step-by-step process to calculate GILTI tax, and how Workpapers can remove risk and improve accuracy.

Step 1: Consolidate CFC data

Start by gathering information on each controlled foreign corporation (CFC) including gross income and exclusions (e.g., Subpart F income and high-taxed income).

Bloomberg Tax Workpapers’ automation features make it easier to aggregate large datasets across different input files and push them to all of your spreadsheets. This saves time and helps to ensure data accuracy and reduce manual errors, especially when making last-minute changes.

Step 2: Calculate tested income for each CFC

The next step is determining the tested income – or loss – for each CFC. Bloomberg Tax Workpapers provides a dedicated GILTI template tailored to align with U.S. taxable income principles. Here are the steps:

1. Adjust the gross income of the CFC to reflect U.S. taxable income by removing exempt foreign income: effectively connected income (ECI), subpart F income, high-tax exclusion, related person dividends, and foreign oil and gas extraction income
2. Integrate any allowable deductions, including cost of goods sold (COGS) and operational expenses.
3. Use Bloomberg Tax Workpapers’ built-in formulas to calculate the high-tax exemption, saving time and ensuring compliance.

Step 3: Aggregate tested income across all CFCs

Bloomberg Tax Workpapers simplifies the aggregation process across multiple foreign subsidiaries. The platform automatically consolidates data from all CFCs to deliver an aggregated tested income figure.

This aggregated approach ensures tax professionals can quickly review the collective impact of GILTI calculations, while eliminating repetitive manual processes often prone to human error.

Step 4: Determine 10% of QBAI minus interest expense

Calculate the 10% return on QBAI while accounting for interest expenses attributable to tangible property. Bloomberg Tax Workpapers allows you to input QBAI amounts and interest data directly into the template to ensure consistent accuracy.

For businesses lacking quarterly inputs, Bloomberg Tax Workpapers’ flexible design accommodates beginning- and end-of-year values, helping you adapt calculations to real-world scenarios.

Step 5: Subtract QBAI deduction from net CFC tested income

With Bloomberg Tax Workpapers, the software takes care of this step for you. Input your aggregated tested income, QBAI, and associated interest deductions, and the automated calculations provide your initial GILTI inclusion amount.

Step 6: Apply foreign tax credits and section 250 deduction to reduce GILTI liability

Foreign tax credits and Section 250 deductions are essential to reducing the overall impact of GILTI liability. While GILTI-related foreign income taxes cannot be carried forward or backward, they can offset up to 80% of the U.S. tax liability on GILTI.

Bloomberg Tax Workpapers automates foreign tax credit application according to U.S. limitations and seamlessly integrates with Section 250 deduction calculations, giving you an accurate post-deduction GILTI liability figure.