How to Calculate GILTI: A Clear and Confident Guide
Calculating the Global Intangible Low-Taxed Income (GILTI) can be a complex process, but it is essential for multinational corporations to comply with the tax laws of the United States. GILTI is a tax on the income earned by foreign subsidiaries of U.S. companies that is not subject to U.S. taxation. The tax was introduced as part of the 2017 Tax Cuts and Jobs Act (TCJA) to prevent U.S. companies from shifting profits to low-tax jurisdictions.
To calculate GILTI, companies need to determine the net CFC tested income, which is the gross income of a controlled foreign corporation (CFC) as if the CFC were a U.S. person, minus certain deductions. The tax is then calculated by subtracting a deemed return on the CFC’s tangible assets, known as the Qualified Business Asset Investment (QBAI), and a partial foreign tax credit. The calculation of GILTI can be complex and involves several factors, including the CFC’s income, expenses, and foreign tax credits.
The calculation of GILTI can be challenging for companies, and failure to comply with the tax laws can result in significant penalties. Therefore, it is essential for companies to have a thorough understanding of the GILTI rules and regulations. In the following sections, we will explore the steps involved in calculating GILTI and provide guidance on how to comply with the tax laws.
Understanding GILTI
Definition of GILTI
Global Intangible Low-Taxed Income (GILTI) is a tax provision that was introduced by the United States’ Tax Cuts and Jobs Act (TCJA) in 2017. GILTI is a tax on the foreign income of US multinational corporations and is designed to prevent companies from shifting profits to low-tax countries. GILTI taxes the income earned by foreign subsidiaries of US companies that is in excess of a certain threshold.
Purpose of GILTI
The purpose of GILTI is to prevent US companies from shifting profits to foreign subsidiaries in low-tax jurisdictions. The tax is intended to ensure that US companies pay a minimum tax rate on their foreign earnings, regardless of where those earnings are generated. The GILTI tax is calculated as the excess of a US shareholder’s net income from controlled foreign corporations (CFCs) over a deemed return on the CFCs’ tangible assets.
The GILTI tax aims to create a level playing field for US companies by ensuring that they are not at a disadvantage to foreign companies that operate in low-tax jurisdictions. The tax is also designed to discourage US companies from shifting profits to tax havens and to encourage them to invest in the US.
In summary, GILTI is a tax on the foreign income of US multinational corporations that is designed to prevent companies from shifting profits to low-tax countries. The tax is intended to ensure that US companies pay a minimum tax rate on their foreign earnings, regardless of where those earnings are generated.
Determining CFC Status
Criteria for CFC
A foreign corporation is classified as a Controlled Foreign Corporation (CFC) if a United States shareholder owns more than 50% of the total combined voting power of all classes of stock that are entitled to vote or more than 50% of the total value of the stock of the corporation. A United States shareholder is defined as a US person who owns 10% or more of the total combined voting power of all classes of stock entitled to vote of a foreign corporation.
Shareholder Implications
US shareholders of a CFC are subject to certain tax implications. Under the Global Intangible Low-Taxed Income (GILTI) regime, US shareholders of a CFC are required to include their share of the CFC’s GILTI in their gross income. The GILTI inclusion amount is calculated as the excess of the US shareholder’s net CFC tested income over a deemed return on the CFC’s tangible assets.
US shareholders may also be subject to Subpart F income, which is a category of income that is subject to immediate taxation in the year it is earned, regardless of whether the income is distributed to the shareholder. Subpart F income includes passive income such as dividends, interest, and royalties.
It is important for US shareholders to determine the CFC status of a foreign corporation in order to properly calculate their tax liability under the GILTI regime and Subpart F income rules.
Calculating GILTI Income
Net CFC Tested Income
To calculate GILTI income, one must first determine the Net CFC Tested Income. This is the gross income of a Controlled Foreign Corporation (CFC) as if the CFC were a U.S. person, minus the CFC’s income that is effectively connected with a U.S. trade or business, and income that is otherwise Subpart F income.
The formula for Net CFC Tested Income is as follows:
Net CFC Tested Income = Gross Income - Effectively Connected Income - Subpart F IncomeNet Deemed Tangible Income Return
The next step in calculating GILTI income is to determine the Net Deemed Tangible Income Return. This is the excess of the CFC’s Qualified Business Asset Investment (QBAI) over a deemed return on that investment.
The formula for Net Deemed Tangible Income Return is as follows:
Net Deemed Tangible Income Return = QBAI x (10% - Applicable Percentage)The Applicable Percentage is calculated as follows:
Applicable Percentage = (Interest Expense - Interest Income) / Net CFC Tested IncomeIt is important to note that the Applicable Percentage cannot be less than zero.
Once both the Net CFC Tested Income and Net Deemed Tangible Income Return have been calculated, the GILTI inclusion amount can be determined by subtracting the Net Deemed Tangible Income Return from the Net CFC Tested Income.
It is important to consult with a tax professional to ensure accurate and compliant GILTI calculations.
Sources:
GILTI Inclusions to Income
U.S. Shareholder Calculations
Under the GILTI rules, U.S. shareholders of controlled foreign corporations (CFCs) are required to include GILTI in their gross income. The calculation of GILTI is based on the U.S. shareholder’s pro-rata share of the CFC’s net tested income. Net tested income is the excess of a CFC’s total income over its net deemed tangible income return. The net deemed tangible income return is 10% of the CFC’s qualified business asset investment (QBAI).
The U.S. shareholder’s GILTI inclusion is treated similarly to a Subpart F income inclusion under IRC Section 951(a)(1)(A). However, the inclusion amount is determined in a fundamentally different manner. The GILTI inclusion is calculated on a CFC-by-CFC basis, rather than on a consolidated basis.
Reporting GILTI on Tax Returns
U.S. shareholders of CFCs must report their GILTI inclusions on their U.S. federal income tax returns. The GILTI inclusion is reported on Form 8992, which is attached to the U.S. shareholder’s income tax return.
The IRS has provided guidance on the reporting of GILTI on Form 8992. The form requires the U.S. shareholder to provide information about each CFC, including the CFC’s name, EIN, and country of incorporation. The U.S. shareholder must also provide information about the CFC’s gross income, deductions, and net income.
In addition to reporting the GILTI inclusion on Form 8992, the U.S. shareholder must also compute its foreign tax credit limitation. The foreign tax credit limitation is the amount of foreign taxes that can be used to offset the U.S. shareholder’s GILTI inclusion.
Overall, the GILTI rules are complex and require careful planning and analysis. U.S. shareholders of CFCs should work closely with their tax advisors to ensure that they are in compliance with the GILTI rules and are maximizing their tax benefits.
GILTI Deductions and Credits
Qualified Business Asset Investment
Under the GILTI rules, a deduction is allowed for a portion of the taxpayer’s qualified business asset investment (QBAI). QBAI is defined as the average of the aggregate adjusted bases as of the close of each quarter of the taxpayer’s specified tangible property used in a trade or business of the taxpayer.
The QBAI deduction is calculated as 10% of the QBAI. The deduction is limited to 90% of the GILTI. The QBAI deduction can significantly reduce the GILTI inclusion amount.
Foreign Tax Credit
A taxpayer may be entitled to a foreign tax credit (FTC) for foreign taxes paid or accrued on income that is included in the taxpayer’s gross income for U.S. tax purposes. The FTC is designed to reduce the double taxation of income that is subject to tax in both the U.S. and a foreign country.
The GILTI inclusion amount can be reduced by a partial FTC. The amount of the FTC that can be claimed is limited to the lesser of the foreign taxes paid or accrued on the tested income or the U.S. tax liability on the tested income. The FTC is calculated on a country-by-country basis.
Taxpayers must file Form 1118, Foreign Tax Credit, to claim the FTC. The form requires detailed calculations and information about the taxpayer’s foreign income and taxes paid or accrued. Taxpayers should consult with a tax professional to ensure that they are properly claiming the FTC and maximizing their tax benefits.
Overall, the QBAI deduction and FTC can be powerful tools for reducing the GILTI inclusion amount. Taxpayers should carefully consider their options and consult with a tax professional to determine the best strategy for their particular situation.
GILTI Planning Strategies
Election Strategies
Taxpayers can elect to aggregate their CFCs and calculate GILTI on a consolidated basis. This election is made annually and once made, is binding for five years. Electing to consolidate CFCs may result in a lower GILTI inclusion due to the offsetting of high-tax income from one CFC with low-tax income from another. However, taxpayers must weigh the benefits of the election against the increased compliance costs and complexity of the consolidated calculation.
Income Exclusion Planning
Taxpayers may consider planning strategies to exclude or reduce GILTI inclusion. One strategy is to increase the tested loss of a CFC by incurring expenses or losses in high-tax jurisdictions. Another strategy is to increase the tested income of a CFC by transferring intangible property to a high-tax jurisdiction. Taxpayers should also consider the use of foreign tax credits to offset GILTI inclusion.
Taxpayers may also consider the use of check-the-box elections to change the classification of a foreign entity to a disregarded entity or a partnership. This may allow taxpayers to exclude certain income from the calculation of GILTI. However, taxpayers should be aware of the potential negative tax consequences of check-the-box elections, such as the loss of foreign tax credits.
Overall, taxpayers should carefully consider their GILTI planning strategies and consult with their tax advisors to ensure compliance with the complex GILTI rules and regulations.
Compliance and Reporting Requirements
IRS Forms and Documentation
US taxpayers must report their GILTI calculations on their annual tax returns using Form 8992 and Form 8993. Form 8992 is used to calculate the GILTI inclusion amount, while Form 8993 is used to calculate the GILTI deduction. The forms require detailed information about the taxpayer’s foreign income and assets, as well as their foreign tax credits and other deductions. Taxpayers are advised to consult with a tax professional to ensure that they are completing the forms accurately and completely.
Deadlines and Penalties
Taxpayers must file their GILTI calculations with their annual tax returns by the due date, massachusetts mortgage calculator including extensions. Failure to file or filing an incorrect calculation may result in penalties and interest charges. The IRS has the authority to impose penalties for underpayment of estimated tax, failure to file, and failure to pay. Taxpayers who fail to comply with GILTI reporting requirements may also be subject to audit and possible criminal prosecution.
Taxpayers should be aware that the GILTI calculation is subject to change as the IRS issues new guidance and regulations. It is important to stay up-to-date on any changes to the law and to work with a qualified tax professional to ensure compliance with all reporting requirements.
Recent Changes and Updates to GILTI Regulations
The GILTI regulations have undergone several changes and updates in recent years. One significant update was made in 2021 when the IRS issued Rev. Proc. 2021-26, providing accounting method change procedures for taxpayers subject to the GILTI regime. These procedures allow taxpayers to change to the Alternative Depreciation System (ADS) for GILTI purposes, which may be necessary or beneficial for some taxpayers.
Another update to the GILTI regulations was made in 2023 when the Tax Cuts and Jobs Act of 2017 (TCJA) introduced the concept of global intangible low-taxed income (GILTI) rules. These rules require a 10% U.S. shareholder of a controlled foreign corporation (CFC) to include in current income their pro rata share of the CFC’s tested income, subject to certain adjustments.
More recently, the Treasury Department and the IRS issued final regulations providing guidance to determine the amount of global intangible low-taxed income included in the gross income of certain U.S. shareholders of foreign corporations, including U.S. shareholders who are members of a consolidated group. These regulations provide clarity and guidance on how to calculate GILTI for tax purposes.
It is important for taxpayers subject to GILTI regulations to stay up-to-date with any changes or updates to the regulations to ensure compliance with tax laws. Taxpayers should consult with their tax advisors to determine the best course of action for their specific situation.
Frequently Asked Questions
What are the steps to compute GILTI for a tax year?
To compute GILTI for a tax year, one must first determine the gross income of all Controlled Foreign Corporations (CFCs) owned by the taxpayer. The taxpayer must then subtract certain deductions, including deductions for interest expense and research and development expenses. The resulting amount is the “net CFC tested income.” The taxpayer must then apply a 10% deemed return on the CFCs’ qualified business asset investments (QBAI), which is then subtracted from the net CFC tested income to arrive at the GILTI inclusion amount.
How does one determine the inclusion percentage for GILTI?
The inclusion percentage for GILTI is determined by dividing the GILTI inclusion amount by the aggregate of the tested income of all CFCs owned by the taxpayer for the tax year. The inclusion percentage is then multiplied by the taxpayer’s taxable income to determine the taxpayer’s GILTI inclusion amount.
What types of income are considered in calculating GILTI?
GILTI aims at income earned from “intangible assets” such as copyrights, patents, licenses, trademarks, and other intellectual property. The calculation of GILTI also includes certain income that is treated as Subpart F income under the Internal Revenue Code, as well as certain income from related party transactions.
Can you explain the process of calculating the GILTI tax rate?
The GILTI tax rate is generally the same as the corporate tax rate, which is currently 21%. However, the GILTI tax rate can be reduced by a partial foreign tax credit, which is available to offset the U.S. tax liability on GILTI inclusion.
What is the method for calculating Foreign Tax Credit on GILTI?
The foreign tax credit on GILTI is calculated by multiplying the taxpayer’s GILTI inclusion amount by the ratio of foreign taxes paid or accrued on the tested income of the CFCs to the taxpayer’s total foreign taxes paid or accrued for the tax year.
Who qualifies as a taxpayer subject to GILTI provisions?
U.S. shareholders of CFCs are subject to GILTI provisions. A U.S. shareholder is defined as a U.S. person who owns 10% or more of the total combined voting power of all classes of stock of a foreign corporation that is a CFC.
