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?
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.”
- 1 GILTI (What is GILTI?)
- 2 C-Corporate Shareholders Catch a Break
- 3 U.S. Shareholders Catch No Break
- 4 This Summary will Focus on Individuals
- 5 Global Intangible Low-Taxed Income
- 6 Breaking Down the Acronym GILTI
- 7 How do I Calculate GILTI?
- 8 Net CFC Tested Income
- 9 Net Deemed Tangible Income Return
- 10 Are you Out of Compliance?
- 11 Golding & Golding: About our International Tax Law Firm
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.
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.
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),
(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
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.
Golding & Golding: About our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure.
We are the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants, and Financial Professionals across the globe. Our attorneys have worked with thousands of clients on offshore disclosure matters, including FATCA & FBAR.
Each case is led by a Board-Certified Tax Law Specialist with 20-years experience, and the entire matter (tax and legal) is handled by our team, in-house.
*Please beware of copycat tax and law firms misleading the public about their credentials and experience.