What is GILTI? Six Global Intangible Low-Taxed Income debunked
by: Anthony Parent
GILTI was created in Section 951A of the US tax code by the 2017 Tax Cuts and Jobs Act, aka, Tax Reform. GILTI involves incredibly complicated calculations and huge additional compliance burdens starting for tax year 2018, and for certain types of shareholders in foreign corporations, can dramatically increase taxes. In this article, we debunk six myths surrounding GILTI, so you can lower your tax bill, or the tax bill of your clients'.
Myth #1: While "Intangible" is part of the GILTI acronym, GILTI is not limited to intangible income
Unless a Controlled Foreign Corporation (CFC) has a large tangible asset base to apply in the calculations, most of a CFC's income will be subject to current tax even if it's all from selling of services or goods. The reason why this is true is because of the convulted way GILTI is calculated. If you are an individual with a CFC, it is critical to get an opinion on your GILTI exposure even if you have no intangible assets!
Myth #2 Tax Reform made taxes simpler
Tax Reform was sold as a simplification of the US tax code. And for US taxpayers with simpler returns, their tax filings did become simpler. However, for those with interests in corporations overseas, compliance got more complicated.
The purpose of the law was to discourage something called “base erosion.” Base erosion is basically profit shifting from something that is US taxable to something that is not taxable by the US. GILTI changes the definition of what your tax base is, making it larger, thus subject to immediate taxes, as opposed to being able to defer taxes until a later date.
Myth #3: Tax reform created a territorial tax system.
A quasi/limited territorial tax jurisdiction was created by the Tax Cuts and Jobs Act of 2017. Certain active businesses are able to take advantage of this partial territorial tax system. For other businesses who have passive income or are structured differently can be negatively impacted by this very unhelpful portion of tax reform.
Myth #4: Only large corporations need to worry about GILTI
This myth is true with regards to BEAT, Base erosion alternative tax - BEAT only affects US corporations wiht $500 MM + in revenue. However it is a different story for GILTI. US Shareholders in foreign corporation that have a lot of a passive income will be hit the hardest. For instance, if your company has a lot of income from patent royalties that used to be US-tax deferrable, GILTI could affect you significantly.
Myth #5: GILTI tax rates are "low taxed."
GILTI creates no additional tax rates. What it does is expand the definition of what is taxable and sometimes as ordinary income. Meaning the top tax rate could be as high as 37% (top tax rate under tax reform) + 3.8% (Medicare Net Investment Income Tax) = 40.8%.
Think about it like this. Subpart F subjected passive income earned outside the outside to a rather terrible tax treatment. What GILTI does is subect active income to a rather terrible tax treatment. However, there are ways to lower this liabilty.
Controlled foreign corporation shareholders, or CFC for short, must now include with their currently taxable their share of the CFC’s deemed intangible income return for the tax year.
Now — beware tax reform expanded CFC definition — there is possible CFC status anytime there is a U.S. shareholder of a foreign corporation anywhere in the group. See this recent article on the traps of "downward attribution."
The new law ends prior deferral treatment and subjects “U.S. shareholders” of CFCs, defined as U.S. persons owning at least 10% of the vote or value of a specified foreign corporation, to current tax on any income more than 10% of the CFC’s qualified business asset investment (QBAI). What this means is that GILTI will hit tech companies, service providers and firms with a high degree of intangible assets particularly harshly.