GILTI - What Does it Mean & When is it Triggered (Basic Summary) - Golding & Golding

GILTI – What Does it Mean & When is it Triggered (Basic Summary) – Golding & Golding

GILTI – What Does it Mean & When is it Triggered (Basic Summary)

There are a new wave of offshore and international tax enforcement initiatives in play — and GILTI is at the forefront.

GILTI is part of a new-wave of U.S. tax reform designed to combat U.S. Shareholders from deferring tax on foreign income — similar to the rules involving Subpart F Income.

What does the acronym GILTI, mean?

G: Global

I: Intangible

L: Low

T: Taxed

I: Income

Unfortunately, the Definition of GILTI (Global Intangible Low-Taxed Income) includes much more than “intangible low-taxed income.” The IRS has not yet published a comprehensive GILTI IRS Tax calculation, although proposed regulations were issued in September, 2019.

We will provide you with basic “sample examples” to help illustrate how the tax definition of GILTI plays out in the “real world.” 

GILTI (What is GILTI?)

GILTI stands for Global Intangible Low-Taxed Income. It is a new tax component impacting U.S. Taxpayers worldwide — and may result in an immediate tax liability for income the taxpayer has not even received yet (similar to Subpart F Income).

The IRS will find you “Guilty” of non-compliance, unless you get into compliance (including GILTI calculations in 2018) by assessing certain (but not all) of your foreign money and then using an incredibly complex equation (which the IRS is still confused about) to determine just how much you owe.

Even the IRS’s attempt at regulations to clarify GILTI, only made matters worse.

C-Corporate Shareholders Catch a Break

Since the current administration is all about business…they made sure that businesses can catch a big break with GILTI.

That is because there are certain deductions available to C Corporations that are not available to individuals (or flow-throughs), which significantly reduces (and may even eliminate) GILTI Tax liability.

U.S. Shareholders Catch No Break

The same deductions, exceptions, and exclusions that apply to C Corporations do not apply to individual shareholders (and flow-throughs).

Therefore, individuals may be subject to some very significant taxes they never imagined – especially if they operate a successful foreign service business.

A Simple Unintended GILTI Example

Michelle is a U.S. Citizen that has a foreign professional corporation outside of the U.S. Michelle earns $500,000 as a professional lawyer. She takes a small salary and defers the remaining money to investments (through the corporation).

Under her foreign country tax laws (where she has lived her whole life) she is not taxed on the “pre-tax” deferrals; it is similar to pre-tax deferrals made to a 401K — only they stay within the corporation and are not invested outside of the corporation.

As a result, Michelle may have a significantly higher U.S. tax liability than she may have ever imagined.

This Summary will Focus on Individuals

This summary will focus on individuals. The rules involving shareholders who are C-Corporations (various exceptions apply) will generally have more exceptions and loopholes available to them.

Global Intangible Low-Taxed Income

The concept of GILTI is similar to the concept of Subpart F income. In other words, just because the money is overseas, and may not have been actually distributed to you, does not mean that you can escape tax on the phantom income you never received.

Rather, the IRS wants you to pay tax now, even though you may not receive the money until later.

Mismatch of Foreign and U.S. Tax

Once the rules themselves — along with the application of the rules — settle, you may have foreign tax credits in the future once the income is distributed — BUT, since you have not been issued the income, and the money was deferred tax-free so you have not paid foreign taxes on the income, it will not help you now.

This income mis-match can have some pretty serious consequences.

Breaking Down the Acronym GILTI

Controlled Foreign Corporation: In order for the law to apply, the income must derive from a source that is a Controlled Foreign Corporation (CFC). There rules for CFCs have expanded but at a basic level, it means that more than 50% of the company is owned by U.S. Shareholders that own at least 10% each, and attribution rules apply.

If you are a non-corporate owner of the CFC, at the end of the day, the GILTI will usually be taxed at your progressive tax rate.

How do I Calculate GILTI?

The endgame, is to show the:

Shareholder’s “Net CFC Tested Income” for such taxable year – Shareholder’s Net Deemed Tangible Income Return for such taxable year = GILTI

Net CFC Tested Income

(A) the aggregate of such shareholder’s pro rata share of the tested income of each controlled foreign corporation with respect to which such shareholder is a United States shareholder for such taxable year of such United States shareholder (determined for each taxable year of such controlled foreign corporation which ends in or with such taxable year of such United States shareholder), over

(B) the aggregate of such shareholder’s pro rata share of the tested loss of each controlled foreign corporation with respect to which such shareholder is a United States shareholder for such taxable year of such United States shareholder (determined for each taxable year of such controlled foreign corporation which ends in or with such taxable year of such United States shareholder).

For example: if a person has 5 CFCs which results in an overall NET LOSS, then there will probably not be a GILTI issue, since there is no “Net” Tested Income (exceptions, exclusions, and limitations may apply).

Why? Because once you aggregate the different CFCs, it resulted in a loss.

What is Tested Income?

(A) Tested income: The term “tested income” means, with respect to any controlled foreign corporation for any taxable year of such controlled foreign corporation, the excess (if any) of—

(i) the gross income of such corporation determined without regard to—

– any item of income described in section 952(b)

– any gross income taken into account in determining the subpart F income of such corporation

– any gross income excluded from the foreign base company income (as defined in section 954) and the insurance income (as defined in section 953) of such corporation by reason of section 954(b)(4)

– (IV) any dividend received from a related person (as defined in section 954(d)(3)), and

– (V) any foreign oil and gas extraction income (as defined in section 907(c)(1)) of such corporation,

(ii) the deductions (including taxes) properly allocable to such gross income under rules similar to the rules of section 954(b)(5) (or to which such deductions would be allocable if there were such gross income)

What is Tested loss?

-In general The term “tested loss” means, with respect to any controlled foreign corporation for any taxable year of such controlled foreign corporation, the excess (if any) of the amount described in subparagraph (A)(ii) over the amount described in subparagraph (A)(i).

-(ii) Coordination with subpart F to deny double benefit of losses Section 952(c)(1)(A) shall be applied by increasing the earnings and profits of the controlled foreign corporation by the tested loss of such corporation

Net Deemed Tangible Income Return

The term “net deemed tangible income return” means, with respect to any United States shareholder for any taxable year, the excess of

— (A) 10 percent of the aggregate of such shareholder’s pro rata share of the qualified business asset investment of each controlled foreign corporation with respect to which such shareholder is a United States shareholder for such taxable year (determined for each taxable year of each such controlled foreign corporation which ends in or with such taxable year of such United States shareholder),

over

(B) the amount of interest expense taken into account under subsection (c)(2)(A)(ii) in determining the shareholder’s net CFC tested income for the taxable year to the extent the interest income attributable to such expense is not taken into account in determining such shareholder’s net

Simple Example

Using applicable Assets, if a person has $40,000 in assets that qualify for the GILTI analysis, then 10% ($4,000) of the value can be used to reduce the Net CFC Tested income

Are you Out of Compliance?

If you are out of compliance for not properly disclosing foreign income, accounts, assets, and/or investments — you may consider submitting to IRS Voluntary Disclosure (IRM, Streamlined or Reasonable Cause) in order to get into compliance.

What Type of Attorney Should I Hire?

IRS Voluntary Disclosure is a specialized area of law. An IRS Voluntary Disclosure is a complex undertaking. It requires the coordination of several moving parts, including strategy development, Tax Preparation, Legal Analysis, Negotiation and more.

You should hire a Tax Attorney who has the following credentials:

  • ~20 Years of Private Practice experience representing his/her own clients
  • Experienced in Criminal and Civil Tax Litigation
  • Experienced representing clients in Eggshell and Reverse Eggshell Audits.
  • Advanced Tax Degree (LL.M.)
  • EA (Enrolled Agent) or CPA (Certified Public Accountant)
  • Preferably a Board Certified Tax Law Specialist

We Specialize in Safely Disclosing Foreign Money

We have successfully handled a diverse range of IRS Voluntary Disclosure and International Tax Investigation/Examination cases involving FBAR, FATCA, and high-stakes matters for clients around the globe (In over 65 countries!)

Whether it is a simple or complex case, safely getting clients into compliance is our passion, and we take it very seriously.

Examples of areas of tax we handle

Who Decides to Disclose Unreported Money?

What Types of Clients Do we Represent?

We represent Attorneys, CPAs, Doctors, Investors, Engineers, Business Owners, Entrepreneurs, Professors, Athletes, Actors, Entry-Level staff, Students, Former/Current IRS Agents and more.

You are not alone, and you are not the only one to find himself or herself in this situation.

Sean M. Golding, JD, LL.M., EA (Board Certified Tax Law Specialist)

Our Managing Partner, Sean M. Golding, JD, LLM, EA  earned an LL.M. (Master’s in Tax Law) from the University of Denver and is also an Enrolled Agent (the highest credential awarded by the IRS, and authorizes him to represent clients nationwide.)

Mr. Golding and his team have successfully handled several hundred IRS Offshore/Voluntary Disclosure Procedure cases. Whether it is a simple or complex case, safely getting clients into compliance is our passion, and we take it very seriously.

He is frequently called upon to lecture and write on issues involving IRS Voluntary Disclosure.

Less than 1% of Tax Attorneys Nationwide are Board Certified Tax Law Specialists 

The Board Certified Tax Law Specialist exam is offered in many states, and is widely regarded as one of (if not) the hardest tax exam given in the United States for practicing Attorneys. Certification also requires the completion of significant ethics and experience requirements.

In California alone, out of more than 200,000 practicing attorneys (with thousands of attorneys practicing in some area of tax law), less than 350 attorneys are Board Certified Tax Law Specialists.

Beware of Copycat Law Firms

Unlike other attorneys who call themselves specialists or experts in Voluntary Disclosure but are not “Board Certified,” handle 5-10 different areas of tax law, purchase multiple keyword specific domain names, and even practice outside of tax, we are absolutely dedicated to Offshore Voluntary Disclosure.

*Click here to learn the benefits of retaining a Board Certified Tax Law Specialist with advanced tax credentials.

IRS Penalty List

The following is a list of potential IRS penalties for unreported and undisclosed foreign accounts and assets:

Failure to File

If you do not file by the deadline, you might face a failure-to-file penalty. If you do not pay by the due date, you could face a failure-to-pay penalty. The failure-to-file penalty is generally more than the failure-to-pay penalty.

The penalty for filing late is usually 5 percent of the unpaid taxes for each month or part of a month that a return is late. This penalty will not exceed 25 percent of your unpaid taxes. If you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.

Failure to Pay

f you do not pay your taxes by the due date, you will generally have to pay a failure-to-pay penalty of ½ of 1 percent of your unpaid taxes for each month or part of a month after the due date that the taxes are not paid. This penalty can be as much as 25 percent of your unpaid taxes. If both the failure-to-file penalty and the failure-to-pay penalty apply in any month, the 5 percent failure-to-file penalty is reduced by the failure-to-pay penalty.

However, if you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax. You will not have to pay a failure-to-file or failure-to-pay penalty if you can show that you failed to file or pay on time because of reasonable cause and not because of willful neglect.

Civil Tax Fraud

If any part of any underpayment of tax required to be shown on a return is due to fraud, there shall be added to the tax an amount equal to 75 percent of the portion of the underpayment which is attributable to fraud.

A Penalty for failing to file FBARs

The civil penalty for willfully failing to file an FBAR can be as high as the greater of $100,000 or 50 percent of the total balance of the foreign financial account per violation. See 31 U.S.C. § 5321(a)(5). Non-willful violations that the IRS determines were not due to reasonable cause are subject to a $10,000 penalty per violation.

A Penalty for failing to file Form 8938

The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.

A Penalty for failing to file Form 3520

The penalty for failing to file each one of these information returns, or for filing an incomplete return, is the greater of $10,000 or 35 percent of the gross reportable amount, except for returns reporting gifts, where the penalty is five percent of the gift per month, up to a maximum penalty of 25 percent of the gift.

A Penalty for failing to file Form 3520-A

The penalty for failing to file each one of these information returns or for filing an incomplete return, is the greater of $10,000 or 5 percent of the gross value of trust assets determined to be owned by the United States person.

A Penalty for failing to file Form 5471

The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.

A Penalty for failing to file Form 5472

The penalty for failing to file each one of these information returns, or to keep certain records regarding reportable transactions, is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency.

A Penalty for failing to file Form 926

The penalty for failing to file each one of these information returns is ten percent of the value of the property transferred, up to a maximum of $100,000 per return, with no limit if the failure to report the transfer was intentional.

A Penalty for failing to file Form 8865

Penalties include $10,000 for failure to file each return, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return, and ten percent of the value of any transferred property that is not reported, subject to a $100,000 limit.

Fraud penalties imposed under IRC §§ 6651(f) or 6663

Where an underpayment of tax, or a failure to file a tax return, is due to fraud, the taxpayer is liable for penalties that, although calculated differently, essentially amount to 75 percent of the unpaid tax.

A Penalty for failing to file a tax return imposed under IRC § 6651(a)(1)

Generally, taxpayers are required to file income tax returns. If a taxpayer fails to do so, a penalty of 5 percent of the balance due, plus an additional 5 percent for each month or fraction thereof during which the failure continues may be imposed. The penalty shall not exceed 25 percent.

A Penalty for failing to pay the amount of tax shown on the return under IRC § 6651(a)(2)

If a taxpayer fails to pay the amount of tax shown on the return, he or she may be liable for a penalty of .5 percent of the amount of tax shown on the return, plus an additional .5 percent for each additional month or fraction thereof that the amount remains unpaid, not exceeding 25 percent.

An Accuracy-Related Penalty on underpayments imposed under IRC § 6662

Depending upon which component of the accuracy-related penalty is applicable, a taxpayer may be liable for a 20 percent or 40 percent penalty

Possible Criminal Charges related to tax matters include tax evasion (IRC § 7201)

Filing a false return (IRC § 7206(1)) and failure to file an income tax return (IRC § 7203). Willfully failing to file an FBAR and willfully filing a false FBAR are both violations that are subject to criminal penalties under 31 U.S.C. § 5322.  Additional possible criminal charges include conspiracy to defraud the government with respect to claims (18 U.S.C. § 286) and conspiracy to commit offense or to defraud the United States (18 U.S.C. § 371).

A person convicted of tax evasion

Filing a false return subjects a person to a prison term of up to three years and a fine of up to $250,000. A person who fails to file a tax return is subject to a prison term of up to one year and a fine of up to $100,000. Failing to file an FBAR subjects a person to a prison term of up to ten years and criminal penalties of up to $500,000.  A person convicted of conspiracy to defraud the government with respect to claims is subject to a prison term of up to not more than 10 years or a fine of up to $250,000.  A person convicted of conspiracy to commit offense or to defraud the United States is subject to a prison term of not more than five years and a fine of up to $250,000.

What Should You Do?

Everyone makes mistakes. If at some point that you should have been reporting your foreign income, accounts, assets or investments the prudent and least costly (but most effective) method for getting compliance is through one of the approved IRS offshore voluntary disclosure program.

Be Careful of the IRS

With the introduction and enforcement of FATCA for both Civil and Criminal Penalties, renewed interest in the IRS issuing FBAR Penalties, crackdown on Cryptocurrency (and IRS joining J5), the termination of OVDP, and recent foreign bank settlements with the IRS…there are not many places left to hide.

4 Types of IRS Voluntary Disclosure Programs

There are typically four types of IRS Voluntary Disclosure programs, and they include:

Contact Us Today; Let us Help You.

International Tax Lawyers - Golding & Golding, A PLC

International Tax Lawyers - Golding & Golding, A PLC

Golding & Golding: Our International Tax Lawyers practice exclusively in the area of IRS Offshore & Voluntary Disclosure. We represent clients in 70 different countries. Managing Partner, Sean M. Golding, JD, LL.M., EA and his team have represented thousands of clients in all aspects of IRS offshore disclosure and compliance during his 20-year career as an Attorney. Mr. Golding's articles have been referenced in such publications as the Washington Post, Forbes, Nolo and various Law Journals nationwide.

Sean holds a Master's in Tax Law from one of the top Tax LL.M. programs in the country at the University of Denver, and has also earned the prestigious Enrolled Agent credential. Mr. Golding is also a Board Certified Tax Law Specialist Attorney (A designation earned by Less than 1% of Attorneys nationwide.)
International Tax Lawyers - Golding & Golding, A PLC