It’s my annual Taxes from A to Z series! If you’re wondering how to figure basis for cryptocurrency or whether you can claim home office expenses during COVID, you won’t want to miss a single letter.
G is for GILTI.
GILTI – which ranks up there as one of the best tax acronyms of all-time – stands for global intangible low-taxed income.
In the days before the Tax Cuts and Jobs Act (TCJA), the United States took the position that resident taxpayers, including corporations, were subject to tax on their worldwide income. But as you well know, not all corporations paid tax on their worldwide income. With a few elections and a presence overseas – even an insignificant one – those businesses could defer tax earned by foreign subsidiaries until the funds were repatriated to the US.
You might recall some of those pre-TCJA discussions – like this one from Steve Jobs – where some companies made clear that they were happy to keep money parked overseas until the US changed its policy.
In 2017, it did.
Now, the post-TCJA rule is that income earned by active foreign subsidiaries of US companies is typically exempt from US tax even if those funds are repatriated. But that rule applies to income earned from activities like manufacturing, not passive income. Income from passive income remains taxable.
That sounds great for those multinational companies. But the worry was that it might encourage those multinational companies with intangible assets that are easily moved – like trademarks and copyrights (remember, many of the companies making the move overseas are pharma or tech companies) – from shifting those assets offshore.
Enter new section 951A.
Under the new rules, a US shareholder of a foreign corporation must include in income its global intangible low-taxed income – or GILTI. The rules are extensive and the calculations can be confusing, but here’s the gist: those taxpayers are now subject to a 10.5% minimum tax on that income (the GILTI). Let me explain that number.
GILTI is defined as the total active income earned by a US company’s foreign subsidiaries that exceeds 10% of the company’s depreciable tangible property. Or put another way: GILTI = Net CFC Tested Income – Net Deemed Tangible Income Return (NDTIR).
- A CFC (controlled foreign corporation) is any foreign corporation that is more than 50% owned by U.S. shareholders.
- NDTIR = 10% x QBAI, or Qualified Business Asset Investment – Interest Expense
A corporation can generally deduct 50% of GILTI and claim a foreign tax credit for 80% of foreign taxes paid or accrued on the income. Keep in mind that the US corporate tax rate is now a flat 21%. So if the tax rate in a foreign country is 0%, the effective US tax rate on GILTI will be 10.5%, or 50% of the 21%. Make sense? With that as a baseline, the result is supposed to make tax rate shopping abroad less appealing.
The calculation changes for taxable years beginning after December 31, 2025, when the deduction changes from 50% to 37.5%, resulting in a minimum 13.125% effective US tax rate.
I know, I just lost you (and to be fair, most folks except a handful of international tax experts). But since this is meant to be a primer, here’s what you need to know: since GILTI computations can be complicated, companies must carefully consider tax planning – including location – when considering a move abroad. Without tax planning, those traditional, pre-TCJA strategies for setting up subsidiaries may no longer be tax advantageous. And that was, of course, the point of the law in the first place.
You can find the rest of the series here:
- A is for ATIN
- B is for BEAT Regs
- C is for Cryptocurrency Reporting
- D is for De Minimis
- E is for Extended Due Dates
- F is for FTE
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