What Is Global Intangible Low-Taxed Income (GILTI)?
GILTI, or global intangible low-taxed income, is a kind of income received overseas by US-controlled foreign companies (CFCs) that receives preferential tax status under the US tax law. The US tax on GILTI is designed to prevent erosion of the US tax base by deterring multinational corporations from moving income from the US to other jurisdictions with lower tax rates, such as intellectual property (IP) rights.
Prior to the passage of the Tax Cuts and Jobs Act (TCJA) in 2017, US corporations and individuals were liable to US income taxes on their international earnings. However, money made by overseas subsidiaries of US firms was taxed only when it was returned to the US as dividends. The TCJA altered the tax regulations for multinational firms by usually exempting the active business profits of overseas subsidiaries from U.S. corporate taxes, even if repatriated.
- GILTI refers to revenue made overseas by controlled CFCs—that is, controlled subsidiaries of US corporations—from readily transportable intangible assets like as intellectual property rights.
- The GILTI tax is designed to deter the transfer of intellectual assets and associated income to nations having corporation tax rates lower than the 21% in the United States.
- GILTI taxes typically range from 10.5% to 13.125%, which is much lower than the ordinary corporation tax rate in the United States.
- The IRS has suggested restrictions to prevent GILTI from being taxed at unintendedly high rates in high-tax nations.
Despite the fact that the TCJA reduced the top corporate income tax rate from 35% to a flat 21% beginning in 2018, the US corporation tax rate still topped the rate in many other nations. Furthermore, certain tax havens, such as Jersey, Guernsey, and the Isle of Man, charged no corporation tax at all, with only a few low-rate exemptions for specific financial services, natural resource, and real estate profits. Ownership of a successful patent, for example, in a foreign subsidiary in a lower-rate or no-tax country rather than in the United States, might result in significant tax savings for a multinational corporation. Because of fears that multinational corporations may attempt to shift earnings overseas to avoid paying US taxes, the TCJA contains measures, including the GILTI tax, to deter such tax avoidance schemes.
GILTI is often defined as foreign income obtained by CFCs from intangible assets such as intellectual property, trademarks, and patents. CFCs are foreign businesses in which U.S. shareholders possess more than 50% of the vote or value. Each shareholder owns 10% or more of the CFC. CFC shareholders that possess 10% or more of a CFC are subject to GILTI tax, which normally ranges from 10.5% (half of the current ordinary corporation tax rate of 21%) to 13.125%.
How the Tax on GILTI Works
The GILTI tax does not directly target revenue from particular intangible assets; rather, it functions as a type of minimum tax on the earnings of select CFCs. It requires a sophisticated formula to identify the fraction of a CFC’s revenue that is GILTI. GILTI is commonly defined as the amount of a CFC’s total income that exceeds the net deemed tangible income return, which is equal to 10% of the CFC’s investment in depreciable, tangible business assets less specified interest expenditure.
This approach essentially establishes a business tax exemption in the United States for a 10% return on CFC tangible assets. Profits from CFCs in excess of the exemption level are deemed to represent income from investments in intangible assets (i.e., more mobile assets) and are taxed as GILTI. As a consequence, the GILTI tax is especially relevant for CFCs with strong earnings from physical, or fixed, assets such as delivering services, transportation, procurement, distribution, and technology and software. GILTI is subject to special reduced foreign tax credit restrictions.
The GILTI methodology requires rigorous and comprehensive cost and credit allocations, which might result in tax rates greater than 13.125%, especially if income is subject to high foreign tax rates. The Treasury Department and the Internal Revenue Service have developed rules governing the computation and handling of GILTI. They have also suggested laws on the taxation of CFC income in order to alleviate the unanticipated high rates of US tax on income subject to high foreign tax rates.
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