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International Tax Update: What is the GILTI Provision?

June 17, 2019

The TCJA introduced the Global Intangible Low Tax Income (GILTI) provision, which aims to discourage companies from shifting profits out of the U.S. to avoid tax…Are you well-read on the provision?

Attention U.S. multinationals…are you aware of the changes the Tax Cuts and Jobs Act (TCJA) has made to how your foreign profits are taxed? The TCJA introduced GILTI, or Global Intangible Low Tax Income as an anti-base erosion provision aimed at discouraging companies from using intellectual property (IP) to shift profits out of the U.S. Here are the ins and outs of GILTI.

Some background

December 2017’s TCJA made numerous changes to international tax rules, including the U.S. shift from a worldwide corporate tax system to a territorial tax system. What does this mean exactly? Essentially, U.S. based multinational corporations must now pay income taxes only against U.S. earnings, rather than the corporate tax on worldwide earnings.

Additionally, the TCJA introduces various anti-deferral provisions, aimed at preventing companies from deferring foreign earnings to avoid paying taxes. This includes Section 951(A), which requires U.S. shareholders to include the “global intangible low-taxed income,” or GILTI of their controlled foreign corporations (CFCs).

What is the purpose of GILTI?

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

How does this strategy 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.

Some things to note about GILTI

Some things to note about GILTI:

  • Shareholders of CFCs with 10% ownership must include their portion of the foreign income on their personal tax returns (*a CFC is any foreign corporation where U.S. shareholders have more than 50% of the control or value)
  • Rather than facing a 21% domestic rate on earnings, companies subject to GILTI would be subject to a 10.5-13.125% rate…a substantial incentive! This is achieved by applying a 50 percent deduction allowed. In addition, they can claim a foreign tax credit for 80% of the foreign taxes paid or accrued to further lower their taxes.
  • Individuals subject to GILTI under the proposed regulations are also able to use the 50 percent deduction. Unlike companies they can only apply the foreign tax credit if they make a IRC § 962 election to be taxed as a corporation.

Failure to report GILTI is never a good idea…you don’t want to capture the attention of the IRS.

We can take the time to understand your international business structure and help you calculate your includible income under the new law.

Contact us. Also, don’t forget to check out our Guide to Doing Business in the U.S.

The TCJA…So Many Changes, So Many Questions…we can help you navigate this huge tax overhaul! Visit our Tax Reform Center for everything you and your business need to know, now.

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