What Is IRC 951A and How Does It Impact GILTI Calculations?
Explore how IRC 951A influences GILTI calculations, affecting multinational tax strategies and compliance for qualifying entities.
The Internal Revenue Code Section 951A, introduced as part of the Tax Cuts and Jobs Act of 2017, affects how U.S. multinational corporations calculate their global intangible low-taxed income (GILTI). This provision seeks to curb profit shifting to low-tax jurisdictions by taxing certain foreign earnings.
Qualifying Entities Subject to GILTI
The GILTI provision applies to U.S. shareholders of controlled foreign corporations (CFCs). A CFC is any foreign corporation where U.S. shareholders own more than 50% of the total combined voting power or value, as defined under IRC Section 957. U.S. shareholders are those holding at least 10% of the voting power or value of the foreign corporation.
The GILTI inclusion is calculated at the shareholder level. Each U.S. shareholder determines their share of the CFC’s GILTI by aggregating the tested income and tested loss of all CFCs they own. This net amount is included in the shareholder’s gross income, regardless of whether the income is repatriated to the U.S. Industries with significant foreign operations, such as technology and pharmaceuticals, are particularly affected. Companies in these sectors may consider increasing tangible asset investments to reduce GILTI exposure.
Calculating Tested Income and Tested Loss
Tested income and tested loss calculations are critical to determining GILTI. Tested income refers to the gross income of a CFC, excluding items like effectively connected income, Subpart F income, and high-taxed income, minus deductions properly allocable to that income. A tested loss occurs when a CFC’s allocable deductions exceed its gross income.
High-taxed income, subject to a foreign tax rate exceeding 90% of the U.S. corporate tax rate, is excluded from the calculation. With the 2024 U.S. corporate tax rate at 21%, income taxed at a foreign rate above 18.9% qualifies for this exclusion. Shareholders aggregate tested income and losses across multiple CFCs, resulting in a net tested income or loss that impacts the GILTI inclusion. For instance, if a shareholder owns two CFCs—one with $500,000 in tested income and the other with a $200,000 tested loss—the net tested income would be $300,000.
How QBAI Affects GILTI
Qualified Business Asset Investment (QBAI) introduces a tangible asset component into the GILTI calculation. QBAI represents the average adjusted bases of a CFC’s tangible property used in its trade or business, calculated quarterly. This serves as a partial offset against a CFC’s tested income, known as the deemed tangible income return, which is 10% of the QBAI.
For example, a manufacturing firm with a QBAI of $5 million would have a $500,000 deemed tangible income return, reducing its tested income by that amount. Accurate reporting of asset bases and adherence to local tax laws are essential for maximizing this benefit. Strategic asset management, such as optimizing depreciation schedules, can further enhance QBAI-related offsets.
Interaction with Foreign Tax Credits
The relationship between GILTI and foreign tax credits (FTCs) requires careful planning. Under IRC Sections 901 and 960, U.S. taxpayers can claim credits for foreign taxes paid on income also subject to U.S. taxation. For GILTI, FTCs are limited to 80% of the foreign taxes attributable to the GILTI inclusion.
The GILTI-specific FTC basket means these credits cannot offset U.S. tax on non-GILTI income. This separation necessitates precise record-keeping and planning to maximize FTC utilization. Companies should align the timing of foreign income recognition and tax payments to optimize benefits. However, the 80% limitation may lead to excess credits that cannot be carried back or forward, emphasizing the need for strategies like restructuring or adjusting intercompany pricing to manage tax exposure.
Consolidated Filing Considerations
When U.S. corporations file consolidated tax returns, GILTI calculations become more complex due to the interplay among group members. Consolidated filing allows affiliated corporations to combine taxable income and deductions, but GILTI rules introduce additional challenges.
Within a consolidated group, GILTI is determined by aggregating the tested income, tested loss, and QBAI of all CFCs owned by the group. This aggregation can reduce overall GILTI inclusion if a member’s high tested income offsets another’s tested loss. However, foreign tax credits are applied at the consolidated level and are subject to GILTI-specific limitations.
Intercompany transactions within the group can also influence GILTI calculations. For instance, intercompany dividends or cost-sharing arrangements may affect a CFC’s tested income or QBAI. Companies must comply with transfer pricing regulations under IRC Section 482 while optimizing their overall GILTI exposure. Aligning intercompany agreements with the group’s tax strategy can mitigate risks and improve tax efficiency.