The Global Intangible Low‐taxed Income (GILTI) is a new anti‐base erosion provision, introduced by the Tax Cuts and Jobs Act (TCJA), P.L. 115‐97. The GILTI provisions are defined on Sec. 951A of the Internal Revenue Code (IRC) and were enacted to discourage U.S. taxpayers from shifting profits out of the United States to lower‐tax jurisdictions. Without proper planning, U.S. shareholders of foreign corporations may need to immediately recognize their share of almost all income earned by a controlled foreign corporation (CFC).
Mechanically, it functions as a U.S. minimum tax on earnings of CFCs that exceeded 10% of the CFC’s tangible depreciable property. GILTI is effective for the years beginning after December 31, 2017. Its rules apply to all U.S. shareholders of CFCs, including individuals and partnerships. Under the provisions of Sec. 951A, a 10% U.S. shareholder of a controlled foreign corporation (CFC) is required to include in his gross income his portion of the GILTI inclusion for the taxable year, regardless of actual repatriation. Corporations may deduct 50% of any GILTI inclusion, consequently resulting in a reduction of its tax to an effective tax rate of 10.5% on GILTI. In addition, an indirect foreign tax credit may be claimed by the C corporation in order to further reduce the GILTI tax.However, in the case of an an individual shareholder, or an investor in a flow‐through entity, the GILTI inclusion is taxed at the highest ordinary income tax rate applicable for said individual and he or she will not be entitled to claim any foreign tax credits on such income. In the case of individuals, this could repersent.
Taxed in the foreign corporation’s jurisdiction, despite not having received the actual distribution of such income. Example: a U.S. shareholder of a Brazilian corporation may be paying an additional 37% GILT. Inclusion tax on income which was already subjected to taxes in Brazil of 34%. Regardless of dividends being actually repatriated to the U.S., the U.S. shareholder may need to include in his taxable income his pro‐rata share of the GILTI inclusion. GILTI rules will prevent the deferral of the tax on the foreign earnings of the controlled foreign corporation, which could result in (for this specific case) an effective tax rate of 71% for a U.S. shareholder of this Brazilian corporation. GILTI will heavily impact foreign business where profits are high in relation to the 10% cap of the foreign entity’s fixed depreciable assets.This commonly is the case of service companies, distribution companies, and software/ technology companies. The GILTI rules introduced significant changes to the law and will require U.S. shareholders to once again reexamine their global tax planning.