GILTI, or global intangible low-taxed income explained
What is “GILTI”? GILTI, or “global intangible low-taxed income,” is a deemed amount of income derived from CFCs in which a U.S. person is a 10% direct or indirect shareholder. It is computed, roughly, by determining the taxable income (or loss) of a CFC as if the CFC were a U.S. person.
The global intangible low-taxed income (GILTI) regime effectively imposes a worldwide minimum tax on foreign earnings. U.S. shareholders of controlled foreign corporations (CFCs) are subjected to current taxation on most income earned through a CFC in excess of a 10% return on certain of the CFC’s tangible assets – with a reduction for certain interest expense. GILTI inclusions are reduced by a special deduction and a partial foreign tax credit.
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.
Form 8992 & Schedule A for GILTI
It is important to note that not all US shareholders with foreign corporations will have to calculate GILTI as part of their U.S. tax return. Rather, it is limited to shareholders who own Controlled Foreign Corporations or CFCs — and meet other requirements as well.
Form 8992 is used by a U.S. shareholder to calculate the amount of the GILTI inclusion and to report related information. Generally, Schedule A (Form 8992) is also completed and attached to Form 8992.
When the Tax Cuts and Jobs Act was passed in late 2017, one of its key provisions was a reduction in the corporate tax rate from 35% to 21%. This was a major victory for businesses and corporations and was expected to lead to increased economic growth and investment. However, there was one potential downside to this corporate tax cut: it could create an incentive for companies to move their profits overseas to lower-tax jurisdictions.
The Tax Cuts and Jobs Act included a new provision known as the global intangible low-taxed income (GILTI) tax to prevent this from happening. Under this provision, companies are subject to a minimum tax on their intangible income (such as patents, trademarks, and copyrights) earned in foreign countries. The tax is designed to level the playing field so that companies cannot lower their overall tax bill by moving their profits to lower-tax jurisdictions.
So far, the tax has been largely successful in achieving its goals. In 2018, the first year that the tax was in effect, companies paid an estimated $8 billion in taxes. This is a significant amount of revenue, and it is likely that the GILTI tax will continue to raise significant amounts of revenue in the years to come.
There are some critics of the GILTI tax, however. They argue that the tax is too complex and that it creates an incentive for companies to move their operations overseas. While these are valid concerns, the tax is still a relatively new tax, and it is possible that it will be tweaked in the future to address these issues.
Overall, the GILTI tax is a reasonable and effective way to prevent companies from moving their profits overseas to avoid paying taxes from a US point of view. For people living and working overseas (long-term) global intangible low-taxed income is extremely difficult, especially since one is often taxable in two countries and a good strategy in the country of residence can be punished by GILTI laws and vice versa.
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