The Global Intangible Low-taxed Income (GILTI) is a new provision, enacted as a part of the Tax Cuts & Jobs Act (TCJA) tax reform legislation. The provision defines GILTI income as the amount of income earned by a U.S. foreign subsidiary above a certain threshold amount. Under the TCJA, a U.S. person (includes U.S. individuals, domestic corporations, partnerships, trusts and estates) that owns at least 10 percent of the value or voting rights in one or more Controlled Foreign Corporations (CFC) will be required to include its global intangible low-taxed income as currently taxable income, regardless of whether any amount is distributed to the shareholder.
The threshold amount is 10 percent of a foreign subsidiary’s Qualified Business Asset Investment (QBAI). QBAI is essentially the tangible assets – such as machines and other equipment – of the foreign subsidiary inclusive of depreciation. The rationale for this standard is that 10 percent represents a reasonable rate of return on a firm’s tangible assets. GILTI income is the excess income above that rate of return.
GILTI creates no additional tax rates. What it does is expand the definition of what is taxable. Basically, for tax years beginning after December 31, 2017, the GILTI provisions generally require U.S. CFCs’ shareholders to include in their currently taxable Subpart F income their share of the CFC’s deemed intangible income return for the tax year. Thus, while the provision nominally targets income on intangible assets overseas, it really targets any income that can be defined as “excessive” measured relative to a foreign subsidiary’s tangible assets.
In order to compute the GILTI inclusion, a U.S. shareholder of a CFC must first determine the amount of its net deemed tangible income return for the year. Any earnings above and beyond the deemed tangible income return are automatically considered GILTI, regardless of the actual character of the earnings.
Once the U.S. shareholder has determined its net deemed tangible income return for the year, it subtracts this amount from its pro rata share of the CFC’s net tested income or loss to determine GILTI.
US Shareholders in foreign corporation that have a lot of a passive income will be hit the hardest. It doesn’t seem to help small and medium sized businesses with global aspirations, especially for foreign business where profit is high relative to the fixed asset base, such as:
- Services companies
- Procurement/Distribution companies
- Software/Technology companies
The law’s structure curtails the impact of this provision, however: Through 2025, taxpayers may claim a deduction equal to the amount of 50 percent of GILTI, and 37.5 percent thereafter. Accordingly, taxpayers reporting GILTI income face effective U.S. tax rates on that income of 10.5 percent through 2025 and 13.125 percent thereafter. These deductions are limited under certain circumstances.
To discuss how GILTI could impact your company, contact Bolden. We are here to help!
