The Tax Cuts and Jobs Act (TCJA) enacted a new provision that will likely affect most companies with foreign business income. This new provision, addressing the treatment of global intangible low-taxed income (GILTI), presents a substantial shift in the U.S. taxation of foreign earning. If GILTI rules apply, a U.S. shareholder must include foreign earnings in U.S. taxable income on a current basis. While the TCJA introduced a participation exemption to move the United States to a territorial system, the GILTI provisions arguably make the U.S. tax system more global than it has ever been.
Applicability to U.S. taxpayers
The GILTI rules (contained in the new section 951A) require a 10 percent U.S. shareholder of a controlled foreign corporation (CFC) to include in current income the shareholder’s pro rata share of the GILTI income of the CFC. The GILTI rules apply to C corporations, S corporations, partnerships and individuals.
The annual GILTI inclusion generally equals the aggregate “net CFC tested income” of the U.S. shareholder, reduced by the U.S. shareholder’s “net deemed tangible income return.” Net CFC tested income generally includes a CFC’s gross income subject to certain exclusions, such as income effectively connected with a U.S. trade or business and subpart F income, less allocable deductions. The net deemed tangible income return is a 10 percent return on the U.S. shareholder’s pro rata share of the adjusted tax basis of tangible depreciable property of CFCs that earn tested income, reduced by allocable interest expense to the extent that such expense reduced tested income. As a result, U.S. shareholders will need to assess whether they have GILTI inclusions every year.
The impact GILTI can have on taxpayers may differ significantly. Most notably, U.S. shareholders that are C corporations may deduct up to 50 percent, subject to limitations, of any GILTI inclusion, reducing the effective rate on GILTI income to 10.5 percent instead of the normal 21 percent. In addition, U.S. corporate shareholders may also claim an indirect foreign tax credit for 80 percent of the foreign tax paid by the shareholder’s CFCs that is determined to be allocable to GILTI income. The 50 percent deduction and indirect foreign tax credit, however, are generally not available to individuals subject to GILTI. Finally, due to new, complex foreign tax credit expense allocation rules, U.S. shareholders may still owe U.S. tax on foreign earnings subject to GILTI—even if the foreign earnings have already been subject to a substantial rate of foreign tax.
Opportunities and risks
Computing GILTI requires a significant amount of information and is a complex calculation. However, understanding the impact GILTI will have on your organization may maximize planning opportunities and minimize risk.
How can we help?
It is key to work with an advisor who understands your business, goals and tax structure as well as the complexities of the TCJA. RSM tax professionals can assist companies with the following:
- Computing estimated annual GILTI inclusion, section 250 deduction, foreign tax credit and residual U.S. tax—given current projections and current structure
- Considering available entity classification elections to lessen GILTI inclusions
- Planning and considering for the impact GILTI may have on dispositions of foreign subsidiaries
- Considering implications of intercompany debt in existing structures or future foreign acquisitions
- Advising on the financial statement implications of GILTI under ASC 740
- Assessing GILTI impact in an overall entity selection evaluation (e.g., pass-through versus C corporation)
- Reassessing transfer pricing strategies
- Reassessing general international tax strategies given the changes brought forth by the TCJA