A new category of income, Global Intangible Low Taxed Income (GILTI), seems to indicate that as the authors of this law were drafting the bill, they may have been so sleep deprived that they forgot the definition of word simplification; however, they somehow managed to retain their tax sense of humor.
What is GILTI?
As the acronym suggests, GILTI is not a favorable category of income for a U.S. shareholder to have. The logic behind this new type of income is that Controlled Foreign Corporations (CFC) will be allowed a regular rate of return on their business assets without having this income be subject to U.S. tax. Income above the regular rate of return will be Subpart F income.
Specifically, GILTI is income that exceeds 10% of a CFC’s Qualified Business Asset Investment (QBAI). A CFC’s QBAI is defined as the CFC’s fixed assets that are depreciable as trade or business assets under IRC Section 167 and does not include the CFC’s intangible property such as patents trademarks and other that are amortizable under Section 197.
In other words, if a CFC has $100,000 of depreciable assets the CFC’s GILTI income would be its income in excess of $10,000. Generally, income that is Effectively Connected Income, Foreign Base Company Income, or income that is taxed at a rate that is more than 18.9% will not be GILTI.
The GILTI computation is done at the shareholder level so income in one CFC can be offset by losses in another CFC if there is a common shareholder.
What Are the Implications of Having GILTI Income?
GILTI is a new type of Subpart F income. Consequently, any 10% or greater U.S. Shareholder of a CFC that has GILTI will have to include the GILTI in their gross income in the year earned.
Who does this impact?
This new Subpart F income impacts the shareholders of CFCs that have low levels of depreciable assets as compared to their income. Typically this would be the tech companies and service providers who have a significant amount of intangible assets and low levels of fixed and depreciable assets.
Listen to our recent podcast hereon how GILTI income is taxed to C corporations as well as other international provisions in the 2017 tax reform bill.
What Steps Can We Take to Prepare for the New GILTI inclusions?
- U.S. taxpayers should review the income and assets in each of their CFCs to determine if they can anticipate having and GILT Income inclusion based on the ratio of fixed assets to income.
- If the U.S. taxpayer is an individual, consider planning opportunities such as using a C corporation blocker to effectuate a more tax efficient structure.
For additional information on deemed repatriation, please contact Withum’s Chaya Siegfried by filling out the form below.