GILTI TAX: WHAT IS IT & HOW DOES IT WORK?
Introduced as part of the 2017 Tax Cuts and Jobs Act, GILTI is a new tax provision that affects US multinational companies generating foreign profits through intangible assets such as copyrights, trademarks, and patents. It is short for global intangible low-taxed income. How does this tax reform work, though? Let’s find out. Read on as we discuss what GILTI tax means for businesses and how it impacts tax planning.
What Is GILTI Tax?
Prior to the Tax Cuts and Jobs Act, US-based multinational companies could defer paying tax on business earnings generated by their foreign subsidiaries (controlled foreign corporation or CFC) until those profits were returned to the United States in the form of dividends.
This type of flexibility in tax deferrals provided an incentive to US multinationals to shift their profits to foreign countries with low income tax rates. Under the GILTI tax provision, US multinationals must now report the income from intangible assets being held by a company’s foreign subsidiaries. This income must now be included as part of the company’s gross income annually.
The tax provision has been issued to discourage US companies from moving their assets to foreign countries to avoid paying tax.
How Is It Calculated?
Calculating the amount of tax on GILTI is very complicated. In particular, if a US corporation has multiple foreign subsidiaries, then determining taxable foreign income can become increasingly difficult. As per the tax guidelines available, you can calculate GILTI as the total active income generated by a controlled foreign corporation that has exceeded 10% of the company’s depreciable tangible property.
To learn more about this, click here to get in touch with one of our tax planning experts at RightTaxMate.
How Does It Impact Tax Planning?
GILTI impacts US corporations with foreign subsidiaries that generate high profits relative to their fixed assets.
According to Sec. 951A, 10% US shareholders of a CFC must include their share of the corporation’s GILTI in current income. There are certain tax benefits attached to reporting tax on this foreign income, as well. As per IRC Section 250, a domestic corporation can get a 50% deduction for GILTI. It can also claim a foreign tax credit up to 80% for foreign taxes accrued or paid on GILTI for the current year.
Accounting for these taxes and determining which tax credits and deductions you qualify for is critical to effective tax planning.
To learn more about how the GILTI tax affects your business, get in touch with RightTaxMate.
We can help you calculate the GILTI inclusion and ensure effective reporting. Schedule a free appointment with us today for more information.