Global businesses face complex tax rules since the enactment of GILTI (Global Intangible Low-Taxed Income) under the Tax Cuts and Jobs Act (TCJA). The GILTI rules apply to U.S. citizens or corporations who, directly or indirectly, own 10% or more of the voting power of all types of stock shares in a controlled foreign corporation (CFC). The shareholder must pay annual taxes on any income the CFC generates on intangible assets. Here are some answers to frequently asked questions about the GILTI provision.

What is GILTI?

GILTI is a tax on intellectual property (IP). GILTI covers all income earned by a CFC except:

• Subpart F income,
• income that is effectively connected to a U.S. trade or business,
• income from certain foreign oil and gas extractions, and
• related party dividends.

What is the purpose of GILTI?

The primary purpose of GILTI is to reduce the incentive for U.S. based multinational corporations to use IP to shift income to low or zero tax jurisdictions.

How does this work exactly?

Intellectual property is any product of the human mind that the law protects from unauthorized use by others. Examples include patents, trademarks, industrial designs and copyrights, and income from these assets is taxed at the corporate rate. Some companies, in attempt to lower their tax liabilities, will transfer IP rights to other countries with lower tax rates. However, the way the law was written has impacted the entire entity structure and not just IP.

Who is subject to GILTI?

U.S. shareholders who own directly or indirectly 10% or more voting power of all types of shares of CFCs are subject to GILTI. This typically includes individuals, trusts, and corporations.

How do you calculate GILTI?

The formula for calculating GILTI is:

Net CFC tested income – (10% x qualified business asset investment (QBAI) – interest expense) = GILTI

There are a few nuances to consider in the formula in relation to the income.

What is the tax rate for GILTI?

For individual shareholders the tax rate can range from 10% to 37% based on the individual’s income tax bracket.

Currently, the rate for corporate shareholders can range from 10.5% to 13.125%.

There are various items available to lower the GILTI tax. Some of the items for consideration are foreign taxes paid, eligibility of the high-tax exclusion election, and Section 962 election.

How is GILTI reported?

To report the inclusion amounts related to GILTI, U.S. shareholders must file IRS Form 8992, titled “U.S. Shareholder Calculation of Global Intangible Low-Taxed Income (GILTI).” In addition, the U.S. shareholder needs to file Form 5471, known as the “Information Return of U.S. Persons with Respect to Certain Foreign Corporations.” These forms are part of the taxpayer’s tax filings and need to be filed by the regular tax-return deadline, including any extensions.

Questions? Contact our International Tax Services Team.