What Is GILTI and How Does It Impact Your Taxes?
Understand how GILTI affects your tax obligations, including calculation methods and compliance requirements for international income.
Global Intangible Low-Taxed Income (GILTI) represents a key aspect of the U.S. tax code, introduced under the Tax Cuts and Jobs Act of 2017. It targets income earned by controlled foreign corporations (CFCs) to ensure multinational companies pay a minimum tax on overseas earnings. This provision aims to curb profit shifting to low-tax jurisdictions and boost tax revenue.
Entities Subject to These Rules
The GILTI provisions apply to U.S. shareholders of controlled foreign corporations (CFCs). A CFC is a foreign corporation in which U.S. shareholders own more than 50% of the voting power or stock value. U.S. shareholders are defined as those owning at least 10% of the voting power or value of the corporation. This broad definition captures many multinational enterprises with foreign subsidiaries under the GILTI regime.
Corporations with intangible assets, such as intellectual property in low-tax jurisdictions, are particularly affected. These entities often generate substantial income with minimal physical presence. The GILTI rules ensure such income is subject to U.S. taxation, prompting many businesses to reconsider their international tax strategies and restructure operations to optimize taxes.
Calculation Process
The calculation of GILTI encompasses several steps to determine the inclusion amount that impacts a U.S. shareholder’s tax liability.
Tested Income
Tested income includes a CFC’s gross income, excluding specified items such as effectively connected income, Subpart F income, high-taxed income, dividends from related parties, and foreign oil and gas extraction income. After subtracting allocable deductions, including taxes, the remaining amount constitutes the tested income. For instance, if a CFC has $1 million in gross income, $200,000 in excluded income, and $300,000 in deductions, the tested income would be $500,000.
Tested Loss
A tested loss arises when a CFC’s allowable deductions exceed its gross income, excluding the same items as in tested income. This loss offsets tested income from other CFCs owned by the same U.S. shareholder, reducing the GILTI inclusion amount. For example, if one CFC incurs a $100,000 tested loss and another generates $200,000 in tested income, the net tested income would be $100,000.
Net Deemed Tangible Income Return
The net deemed tangible income return (NDTIR) reduces the GILTI inclusion amount and is calculated as 10% of a CFC’s qualified business asset investment (QBAI). QBAI refers to the average adjusted basis of a CFC’s tangible property used in its trade or business. For example, a CFC with $2 million in QBAI would have an NDTIR of $200,000. This deduction narrows the focus of GILTI taxation to income derived from intangible assets.
Foreign Tax Credit Factors
The Foreign Tax Credit (FTC) allows taxpayers to reduce U.S. tax liability by claiming credit for foreign taxes paid. For GILTI, the FTC operates under a separate limitation and is calculated on a basket-by-basket basis, with GILTI assigned its own basket. Only 80% of foreign taxes paid can be credited. For example, if $100,000 in foreign taxes is paid on GILTI-related income, $80,000 is creditable.
High-Tax Exclusion
The High-Tax Exclusion provides relief by reducing or eliminating GILTI inclusion for income already subject to a high effective foreign tax rate. To qualify, the foreign tax rate must exceed 90% of the highest U.S. corporate tax rate, currently 18.9%. Companies must conduct detailed calculations and maintain precise documentation to determine eligibility.
Reporting Requirements
U.S. shareholders of CFCs must report their GILTI inclusion on annual tax returns using Form 8992 and Form 5471. These forms require detailed information, including the CFC’s tested income, tested loss, QBAI, and foreign taxes paid. The complexity of these forms often necessitates professional assistance or advanced tax software, especially for multinational enterprises with multiple CFCs.
Noncompliance Penalties
Failure to comply with GILTI reporting and payment obligations can result in significant penalties. For instance, failure to file Form 5471 carries a penalty of $10,000 per CFC per year, with additional penalties for continued noncompliance. Noncompliance may also result in the disallowance of foreign tax credits or deductions, increasing the effective tax rate on GILTI.