What is GILTI: IRS Overview of Global Intangible Low-Taxed Income

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What does GILTI Mean?

What does GILTI Mean?

What is GILTI

What is GILTI: As part of the Tax Cuts and Jobs Act (TCJA), the international tax rules involving foreign earnings from CFC was modified. While the foreign Dividends Received Deduction (DRD) was subsequently increased to 100% (with the effect of having a primarily territorial system for foreign income of foreign subsidiaries) — the government also introduced GILTI (Global Intangible Low-Taxed Income). The main priority for GILTI is to ensure U.S. shareholders of Controlled Foreign Corporations (CFCs) are paying necessary tax on certain income generated from foreign businesses — even if it is not repatriated. GILTI does not apply to all taxpayers, and it does not apply to all types of foreign income; it is not the same as Subpart F Income. The rules are different for Individuals vs Domestic Corporate Shareholders — but individuals can make a 962 election and consider filing 8993 in addition to Form 8992.

What does the acronym GILTI, mean?

G: Global

I: Intangible

L: Low

T: Taxed

I: Income

C-Corporate Shareholders Catch a Break

For C-Corporations, the rules involving GILTI are not that bad. That is because there are certain deductions available to C Corporations that are not available to individuals (or flow-through), which significantly reduces (and may even eliminate) GILTI Tax liability. Domestic Shareholder Corporations received a 50% deduction and 80% of foreign tax credits, although, in accordance with the finalized regulations, individuals can make a 962 election re: GILTI.

A Simple Unintended GILTI Example

Michelle is a U.S. Citizen that has a foreign professional corporation outside of the U.S. Michelle earns $500,000 as a professional lawyer. She takes a small salary and defers the remaining money to investments (through the corporation). Under her foreign country tax laws (where she has lived her whole life) she is not taxed on the “pre-tax” deferrals; it is similar to pre-tax deferrals made to a 401K — only they stay within the corporation and are not invested outside of the corporation. As a result, Michelle may have a significantly higher U.S. tax liability than she may have ever imagined.

This Summary will Focus on Individuals

This summary will focus on individuals. The rules involving shareholders who are C-Corporations (various exceptions apply) will generally have more exceptions and loopholes available to them.

GILTI: Global Intangible Low-Taxed Income

The concept of GILTI is similar to the concept of Subpart F income. In other words, just because the money is overseas, and may not have been actually distributed to you, does not mean that you can escape tax on the phantom income you never received.

Rather, the IRS wants you to pay tax now, even though you may not receive the money until later.

Mismatch of Foreign and U.S. Tax

Once the rules themselves — along with the application of the rules — settle, you may have foreign tax credits in the future once the income is distributed — BUT, since you have not been issued the income, and the money was deferred tax-free so you have not paid foreign taxes on the income, it will not help you now.

This income mismatch can have some pretty serious consequences.

Breaking Down the Acronym GILTI

Controlled Foreign Corporation: In order for the law to apply, the income must derive from a source that is a Controlled Foreign Corporation (CFC). The rules for CFCs have expanded but at a basic level, it means that more than 50% of the company is owned by U.S. Shareholders that own at least 10% each, and attribution rules apply.

If you are a non-corporate owner of the CFC, at the end of the day, the GILTI will usually be taxed at your progressive tax rate.

Net CFC Tested Income

      • (A) the aggregate of such shareholder’s pro rata share of the tested income of each controlled foreign corporation with respect to which such shareholder is a United States shareholder for such taxable year of such United States shareholder (determined for each taxable year of such controlled foreign corporation which ends in or with such taxable year of such United States shareholder), over

      • (B) the aggregate of such shareholder’s pro rata share of the tested loss of each controlled foreign corporation with respect to which such shareholder is a United States shareholder for such taxable year of such United States shareholder (determined for each taxable year of such controlled foreign corporation which ends in or with such taxable year of such United States shareholder).

For example: if a person has 5 CFCs which results in an overall NET LOSS, then there will probably not be a GILTI issue, since there is no “Net” Tested Income (exceptions, exclusions, and limitations may apply).

Why? Because once you aggregate the different CFCs, it resulted in a loss.

What is GILTI Tested Income?

      • (A) Tested income: The term “tested income” means, with respect to any controlled foreign corporation for any taxable year of such controlled foreign corporation, the excess (if any) of—

        • (i) the gross income of such corporation determined without regard to—

          • – any item of income described in section 952(b)

          • – any gross income taken into account in determining the subpart F income of such corporation

          • – any gross income excluded from the foreign base company income (as defined in section 954) and the insurance income (as defined in section 953) of such corporation by reason of section 954(b)(4)

          • – (IV) any dividend received from a related person (as defined in section 954(d)(3)), and

          • – (V) any foreign oil and gas extraction income (as defined in section 907(c)(1)) of such corporation,

        • (ii) the deductions (including taxes) properly allocable to such gross income under rules similar to the rules of section 954(b)(5) (or to which such deductions would be allocable if there were such gross income)

What is GILTI Tested loss?

      • -In general The term “tested loss” means, with respect to any controlled foreign corporation for any taxable year of such controlled foreign corporation, the excess (if any) of the amount described in subparagraph (A)(ii) over the amount described in subparagraph (A)(i).

      • -(ii) Coordination with subpart F to deny double benefit of losses Section 952(c)(1)(A) shall be applied by increasing the earnings and profits of the controlled foreign corporation by the tested loss of such corporation

Net Deemed Tangible Income Return

      • The term “net deemed tangible income return” means, with respect to any United States shareholder for any taxable year, the excess of

      • — (A) 10 percent of the aggregate of such shareholder’s pro rata share of the qualified business asset investment of each controlled foreign corporation with respect to which such shareholder is a United States shareholder for such taxable year (determined for each taxable year of each such controlled foreign corporation which ends in or with such taxable year of such United States shareholder),

        • over

      • (B) the amount of interest expense taken into account under subsection (c)(2)(A)(ii) in determining the shareholder’s net CFC tested income for the taxable year to the extent the interest income attributable to such expense is not taken into account in determining such shareholder’s net

Simple Example of GILTI

Using applicable Assets, if a person has $40,000 in assets that qualify for the GILTI analysis, then 10% ($4,000) of the value can be used to reduce the Net CFC Tested income

Are you Out of Compliance?

Offshore Amnesty Programs are programs developed by the Internal Revenue Service to assist Taxpayers who are already out of compliance for non-reporting.

Some of the more common programs include:

Golding & Golding: About our International Tax Law Firm

Our GILTI team specializes exclusively in international tax, and specifically IRS offshore disclosure for Taxpayers with Accounts in Greece.

Contact our firm for assistance.