International Tax

Global Intangible Low-Taxed Income (GILTI) (Portfolio 6215 -1st)

  • This Portfolio describes who is subject to GILTI and provides guidance and a detailed discussion on the GILTI computation and some simultaneous equations involved, allocation and apportionment rules, and the ยง250 deduction, with numerous examples.

Description

Public Law No. 115-97, the tax reform and simplification law known as the Tax Cuts and Jobs Act of 2017 (TCJA), redesigned the U.S. international income taxation system to a territorial regime, under which foreign earnings of a U.S. corporation’s foreign subsidiaries are not subject to U.S. income tax when earned or distributed to the U.S. parent corporation and instead taxed under local jurisdictions. To discourage U.S. corporations from shifting their intangible income offshore to low-tax foreign jurisdictions in response to this change, the GILTI provisions were introduced and impose a minimum rate of U.S. income tax on select types of foreign income earned by controlled foreign corporations (CFCs).

GILTI can apply to foreign income subject to any tax rate and to a wide range of income from land, appreciated assets, and other tangible property โ€” even in the absence of apparent intangible property inputs. GILTI income can be offset by similar losses and other circumstances.

Special foreign tax credit rules apply to GILTI inclusions in a manner unfavorable to the taxpayer. Only 80% of foreign income taxes imposed on income giving rise to GILTI inclusions are creditable against U.S. income taxes on such inclusions, unused foreign tax credits cannot be carried back or forward, and certain expense allocation and apportionment rules may limit the full use of foreign tax credits.

While only U.S. corporations may benefit from the tax-free territorial regime, U.S. individuals and other noncorporate taxpayers may be subject to the GILTI regime where they own stock in foreign corporations, with higher U.S. federal income tax rates and no ability to use certain foreign tax credits. Often, such noncorporate taxpayers may elect to be taxed on their GILTI inclusions at corporate tax rates.

Table of Contents

I. Introduction
II. U.S. Shareholders of Controlled Foreign Corporations
III. GILTI Computations
IV. Section 250 Deduction
V. Foreign Tax Credits (FTCs)
VI. Previously Taxed Earnings and Profits (PTEP) and Section 1248

Libin Shang
Libin Zhang
Partner
Fried, Frank, Harris, Shriver & Jacobson LLP
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