What is Global Intangible Low-Taxed Income (GILTI)?
Global intangible low-taxed income, called “GILTI,” is a category of income that is earned abroad by U.S.-controlled foreign corporations (CFCs) and is subject to special treatment under the U.S. tax code. The U.S. tax on GILTI is intended to prevent erosion of the U.S. tax base by discouraging multinational companies from shifting their profits from easily moved assets, such as intellectual property (IP) rights, from the US to foreign jurisdictions with tax rates below U.S. rates.
Before the enactment of the Tax Cuts and Jobs Act (TCJA) in 2017, U.S. businesses and individuals were subject to U.S. income taxes on their worldwide income. But, income earned by the foreign subsidiaries of U.S. corporations was subject to tax only when repatriated to the United States as dividends. The TCJA changed the tax rules for multinational corporations by generally exempting the earnings of foreign subsidiaries’ active businesses from U.S. corporate taxation, even if repatriated.
- GILTI is income earned abroad by controlled CFCs, i.e., controlled subsidiaries of U.S. corporations, from easily movable intangible assets, such as IP rights.
- The tax on GILTI is intended to discourage moving intangible assets and related profits to countries with tax rates below the 21% U.S. corporate rate.
- The tax on GILTI generally ranges from 10.5% to 13.125%, well below the regular U.S. corporate tax rate.
- The IRS has proposed regulations to prevent GILTI earned in high-tax countries from being taxed at unintended high rates.
Although the TCJA lowered the top corporate income tax from a rate of 35% to a flat 21% effective in 2018, the U.S. corporate tax rate still exceeded the rate in many countries. And, some tax havens, including Jersey, Guernsey, and the Isle of Man, generally imposed no corporate tax at all with a only few low-rate exceptions for certain financial services, natural resource and real estate income. Situating ownership of a profitable patent, for example, in a foreign subsidiary in a lower-rate or no-tax jurisdiction instead of in the U.S. still could produce a substantial tax savings for a multinational enterprise. Because of concerns that multinationals might seek to move profits abroad to escape the U.S. tax, the TCJA included provisions, particularly the tax on GILTI, to discourage such tax avoidance strategies.
Generally, GILTI is foreign income earned by CFCs from intangible assets, such as copyrights, trademarks, and patents. CFCs are foreign corporations in which more than 50% of the vote or value is owned by U.S. shareholders who each own 10% or more of the CFC. CFC shareholders who own 10% or more of a CFC are liable for the tax on GILTI which generally applies at a rate between 10.5%, half of the current regular corporate tax rate of 21%, and 13.125%.
How the Tax on GILTI Works
The tax on GILTI is not targeted directly at the income from specific intangible assets; rather, it operates as a form of minimum tax on the profits of some CFCs. It requires a complex calculation that determines
the portion of a CFC’s income that constitutes GILTI. GILTI generally equals the amount of the CFC’s total income in excess of a CFC’s net deemed tangible income return, which equals 10% of the CFCs’ investment in depreciable, tangible business assets minus certain interest expense.
This calculation effectively creates an exemption from U.S. corporate tax for a 10% return on the tangible investments of CFCs. CFC profits in excess of the exemption amount are presumed to be income from investments in intangible—i.e., more mobile—assets, and are taxed as GILTI. As a result, the tax on GILTI is particularly significant for CFCs whose profits are high in relation to their investment in tangible, or fixed, assets, such as CFCs providing services, logistics, procurement, distribution, and technology and software. Special reduced foreign tax credit rules also apply with respect to GILTI.
The GILTI formula entails difficult and detailed expense and credit allocations and can result in tax rates higher than 13.125%, particularly where income is subject to high foreign tax rates. The Treasury Department and IRS have issued regulations prescribing the calculation and treatment of GILTI. They also have proposed regulations on the tax treatment of CFC income to address the unintended high rates of US tax on income subject to high foreign tax rates.