Global Intangible Low-Taxed Income (GILTI): Overview & FAQs US
- Roger Pay
- 10 hours ago
- 6 min read
GILTI: Overview and FAQs Explained
Global Intangible Low-Taxed Income (GILTI): Overview & FAQs US
The Global Intangible Low-Taxed Income (GILTI) is a provision in the U.S. tax code, enacted as part of the 2017 Tax Cuts and Jobs Act (TCJA). Its primary aim is to discourage U.S. multinational corporations from shifting profits, particularly those derived from intangible assets, to foreign jurisdictions with lower tax rates. GILTI essentially imposes a minimum tax on the foreign earnings of U.S. shareholders in controlled foreign corporations (CFCs).
Key Concepts
Controlled Foreign Corporation (CFC): A foreign corporation where U.S. shareholders (U.S. persons owning at least 10% of the company's stock by vote or value) collectively own more than 50% of the stock.
U.S. Shareholder: A U.S. person (individual, corporation, partnership, trust, or estate) who directly or indirectly owns 10% or more of the voting power or value of a foreign corporation's stock.
Tested Income: The gross income of a CFC, excluding certain items like subpart F income, income effectively connected with a U.S. trade or business, and certain other exclusions.
Qualified Business Asset Investment (QBAI): The average adjusted basis of a CFC's tangible, depreciable assets used in its business.
Net Deemed Tangible Income Return (NDTIR): 10% of the U.S. shareholder's pro rata share of the CFC's QBAI, reduced by allocable interest expense.
GILTI Inclusion: The excess of a U.S. shareholder's net CFC tested income over their net deemed tangible income return.
How GILTI Works
The GILTI regime taxes U.S. shareholders on their share of a CFC's income above a 10% return on the CFC's tangible assets. The calculation involves:
Determining the CFC's tested income: This is the CFC's gross income with certain exclusions.
Calculating the QBAI: This is the average value of the CFC's depreciable, tangible assets.
Computing the NDTIR: This is 10% of the QBAI, less certain interest expenses.
Calculating the GILTI inclusion: This is the U.S. shareholder's pro rata share of the CFC's tested income minus their share of the NDTIR.
Tax Rates and Deductions
Corporate Shareholders: For corporate U.S. shareholders, a deduction under Section 250 of the Internal Revenue Code is generally allowed for 50% of the GILTI inclusion, resulting in an effective U.S. federal income tax rate between 10.5% and 13.125% (one-half of the 21% corporate tax rate). However, this deduction is scheduled to decrease to 37.5% in 2025, raising the effective tax rate to 13.125% to 16.406%. Corporate shareholders may also be able to claim a foreign tax credit for 80% of the foreign taxes paid that are attributable to the GILTI income.
Individual Shareholders: Individual U.S. shareholders are generally taxed on their GILTI inclusion at their ordinary income tax rates (ranging from 10% to 37%). They are generally not eligible for the Section 250 deduction or the indirect foreign tax credit. However, individuals can elect under Section 962 to be taxed as a domestic corporation on their GILTI, which would allow them to claim the deduction and the foreign tax credit.
Reporting GILTI
U.S. shareholders report their GILTI inclusion on IRS Form 8992, "U.S. Shareholder Calculation of Global Intangible Low-Taxed Income (GILTI)." They may also need to file Form 5471, "Information Return of U.S. Persons With Respect to Certain Foreign Corporations."
Frequently Asked Questions (FAQs)
What is the purpose of GILTI? The main goal of GILTI is to discourage U.S. corporations from shifting profits, especially those from intangible assets, to low-tax foreign jurisdictions.
Who is subject to GILTI? U.S. shareholders who own, directly or indirectly, 10% or more of the voting power or value of a CFC's stock are subject to GILTI. This includes individuals, corporations, partnerships, and trusts.
What income is subject to GILTI? Generally, all income earned by a CFC is considered for GILTI, except for certain categories like subpart F income, effectively connected income, and some other exclusions.
How is GILTI calculated? The calculation involves determining the CFC's tested income, QBAI, and then the GILTI inclusion based on the formula: Net CFC Tested Income – (10% x QBAI – Interest Expense) = GILTI.
What is the tax rate on GILTI? For corporations, the effective tax rate is currently between 10.5% and 13.125%, but is scheduled to increase in 2025. For individuals, the tax rate is their ordinary income tax rate.
Can foreign tax credits be used to offset GILTI tax? Corporate shareholders can claim a deemed paid foreign tax credit for up to 80% of the foreign taxes attributable to the GILTI inclusion. These credits cannot be carried back or forward or used against other foreign source income. Individuals electing under Section 962 may also be able to claim these credits.
Is there any way to reduce GILTI tax? Yes, several strategies may help reduce GILTI tax, including:
High-Tax Exclusion (HTE): If the CFC's income is subject to a foreign effective tax rate greater than 18.9% (for 2024), an election can be made to exclude this income from GILTI.
Section 962 Election: Individuals can elect to be taxed as a U.S. corporation on their GILTI, allowing them to potentially use the Section 250 deduction and the foreign tax credit.
Distributions: Distributing earnings from the CFC as wages or dividends might reduce the CFC's taxable income and thus the GILTI liability.
What happens if GILTI is not reported correctly? Failure to properly calculate and report GILTI can lead to penalties and interest on the underpaid tax. There can also be penalties for not filing the required forms.
Is GILTI the same as Subpart F income? No, while both GILTI and Subpart F aim to prevent tax deferral, they target different types of income. Subpart F generally targets passive income and certain related-party transaction income, while GILTI is broader and aimed at taxing income above a certain return on tangible assets.
How Bestar can Help
Global Intangible Low-Taxed Income (GILTI): Overview & FAQs US
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