What Is Global intangible low taxed income?
Global intangible low-taxed income (GILTI) is a provision in U.S. international taxation law designed to ensure that U.S. shareholders pay a minimum level of tax on the foreign earnings of their controlled foreign corporations (CFCs), particularly those derived from intangible assets. Enacted as part of the Tax Cuts and Jobs Act (TCJA) of 2017, GILTI targets income that U.S. multinational corporations might otherwise shift to low-tax jurisdictions, thereby engaging in profit shifting or tax avoidance63, 64. While its name suggests a focus on intangible assets like patents and trademarks, GILTI effectively functions as a minimum tax on most foreign income of CFCs that exceeds a specified return on tangible assets61, 62.
U.S. shareholders, whether corporate or individual, who own 10% or more of a controlled foreign corporation are subject to GILTI provisions. This inclusion is an annual requirement, even if the income has not been physically repatriated to the United States59, 60.
History and Origin
Before the 2017 Tax reform brought by the TCJA, the U.S. generally taxed its corporations on their worldwide income, but allowed deferral of tax on foreign subsidiaries' active business earnings until those earnings were repatriation to the U.S. as dividends58. This system created an incentive for U.S. companies to accumulate profits offshore, especially those derived from highly mobile intangible assets, in low-tax jurisdictions to avoid U.S. corporate tax56, 57.
In response to concerns about this profit shifting and the erosion of the U.S. tax base, Congress introduced GILTI with the TCJA55. The legislation aimed to move the U.S. closer to a territorial tax system while simultaneously combating tax avoidance through anti-base erosion measures53, 54. The GILTI provision was specifically designed to discourage the offshoring of intellectual property and ensure that "supernormal" returns, often associated with intangible assets, are subject to a minimum U.S. tax, regardless of where they are earned51, 52. The Internal Revenue Service (IRS) and Treasury have since issued final regulations providing guidance on GILTI calculations and inclusions.50
Key Takeaways
- GILTI is a U.S. tax provision targeting certain low-taxed foreign income earned by controlled foreign corporations (CFCs) of U.S. shareholders.49
- It was introduced as part of the Tax Cuts and Jobs Act of 2017 to discourage profit shifting and ensure a minimum tax on foreign earnings.48
- The tax is broadly applied to foreign active business income that exceeds a deemed 10% return on the CFC's tangible assets.47
- Corporate U.S. shareholders may be eligible for a deduction of a portion of GILTI and an 80% foreign tax credit for foreign taxes paid on GILTI.45, 46
- GILTI is typically calculated annually and included in the U.S. shareholder's gross income, even if the income is not distributed.44
Formula and Calculation
The calculation of Global intangible low-taxed income involves several steps and components. The basic formula for GILTI is:42, 43
Where:
- Net CFC Tested Income represents the aggregate gross income of all CFCs of a U.S. shareholder, excluding certain types of income such as Subpart F income, income effectively connected with U.S. trade or business, and certain high-taxed income.40, 41
- QBAI (Qualified Business Asset Investment) is the aggregate average quarterly adjusted bases of specified tangible property used in the CFCs' trade or business that produces tested income.38, 39
- Interest Expense refers to certain net interest expenses that reduce the net deemed tangible income return.37
The formula essentially assumes that any income exceeding a 10% return on a CFC's tangible assets is attributable to intangible assets and thus subject to GILTI36. Once the GILTI amount is determined, corporate U.S. shareholders may deduct 50% of this amount (reducing to 37.5% after 2025) and claim a foreign tax credit for 80% of foreign taxes paid or accrued on the tested income, subject to certain limitations.34, 35
Interpreting the Global intangible low taxed income
Global intangible low-taxed income aims to capture foreign earnings that might otherwise go untaxed or lightly taxed, particularly those generated from easily movable intangible assets. From the U.S. perspective, GILTI serves as a minimum tax, ensuring that U.S. multinational corporations pay at least a certain effective tax rate on their global income, regardless of where it is earned32, 33.
For U.S. shareholders of CFCs, a GILTI inclusion means that a portion of the CFC's income is immediately taxable in the U.S., regardless of whether the profits have been distributed. This annual inclusion impacts the shareholder's overall U.S. tax liability and is a key consideration in global tax planning for multinational enterprises30, 31. The provisions aim to level the playing field between domestic and foreign investments, reducing the incentive for companies to shift profits or locate assets purely for tax advantages28, 29.
Hypothetical Example
Consider "Global Innovations Inc.," a U.S.-based technology company with a wholly-owned controlled foreign corporation (CFC) in Country X. In a given year, the CFC in Country X generates $10 million in gross income. Its allocable expenses, excluding interest, are $2 million, resulting in a net tested income of $8 million. The CFC has Qualified Business Asset Investment (QBAI) of $30 million (tangible assets like property, plant, and equipment).
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Calculate the 10% return on QBAI:
10% of $30 million (QBAI) = $3 million. -
Determine the GILTI inclusion amount:
GILTI = Net CFC Tested Income - (10% x QBAI - Interest Expense)
Assuming no interest expense for simplicity:
GILTI = $8 million (Net CFC Tested Income) - $3 million (10% of QBAI) = $5 million.
In this scenario, Global Innovations Inc. would have a GILTI inclusion of $5 million. This $5 million is considered Global intangible low-taxed income and would be subject to U.S. corporate tax, potentially at a reduced effective rate after applying the Section 250 deduction and any available foreign tax credit.
Practical Applications
Global intangible low-taxed income significantly influences the tax planning strategies of U.S. multinational corporations. It applies to U.S. shareholders with at least a 10% ownership stake in a controlled foreign corporation (CFC)27. Companies must account for GILTI when structuring their international operations, considering the tax implications of establishing or expanding foreign subsidiaries and managing their global effective tax rate26.
GILTI’s practical application extends to encouraging companies to keep high-value intangible assets within the U.S. rather than shifting them to low-tax jurisdictions. It acts as a disincentive for profit shifting that exploits differences in international tax rates. 24, 25For example, the Organization for Economic Co-operation and Development (OECD) has also been working on initiatives like the Base Erosion and Profit Shifting (BEPS) project to address similar global concerns about tax avoidance by multinational enterprises.
23## Limitations and Criticisms
Despite its intent to curb tax avoidance and ensure a minimum U.S. tax on foreign earnings, Global intangible low-taxed income has faced several criticisms. One significant limitation is the restriction on foreign tax credit utilization; generally, only 80% of foreign taxes paid on GILTI can be credited against U.S. tax liability, and these credits cannot be carried forward or backward to offset taxes in other years. This can result in residual U.S. tax, even on income already taxed at a relatively high foreign rate, potentially leading to double taxation.
20, 21, 22
Another critique involves the "high-tax exception," which can exclude income taxed at a rate of at least 18.9% (90% of the U.S. corporate rate of 21%) from GILTI. However, income taxed just below this threshold receives no relief, creating a "cliff effect" that can distort business decisions and complicate tax planning. 18, 19Some analysts argue that GILTI's complexity and its unintended consequences, such as disproportionately affecting small businesses or legitimate foreign operations, warrant further refinement. 16, 17Critics also point out that GILTI's aggregate approach to tested income can disallow profit shifting between high-tax and low-tax jurisdictions for purposes of offsetting tax, which may not always align with economic realities.
14, 15
Global intangible low-taxed income vs. Base Erosion and Anti-abuse Tax
Global intangible low-taxed income (GILTI) and Base Erosion and Anti-abuse Tax (BEAT) are both anti-base erosion provisions introduced by the TCJA, but they target different aspects of multinational corporate taxation.
GILTI specifically addresses income earned by controlled foreign corporations (CFCs) from what is deemed to be intangible assets, aiming to tax foreign profits that might otherwise be lightly taxed or untaxed in low-tax jurisdictions. 12, 13Its focus is on the income generated by foreign subsidiaries.
In contrast, BEAT targets large U.S. multinational corporations that make substantial deductible payments (such as interest, royalties, and certain service payments) to related foreign parties. 11BEAT acts as a minimum tax by disallowing a portion of these "base erosion payments," preventing companies from excessively reducing their U.S. taxable income through payments made to foreign affiliates. 10While GILTI focuses on taxing foreign income, BEAT focuses on limiting deductions for outbound payments that reduce the U.S. tax base.
9
FAQs
What is the primary purpose of GILTI?
The primary purpose of Global intangible low-taxed income is to ensure that U.S. multinational corporations pay a minimum U.S. tax on certain foreign earnings, particularly those considered to be "excess returns" from intangible assets held by their foreign subsidiaries. It aims to discourage profit shifting to low-tax jurisdictions.
7, 8### Does GILTI apply to individuals or only corporations?
Global intangible low-taxed income applies to U.S. shareholders, which can include both corporations and individuals, who own 10% or more of a controlled foreign corporation. While corporate shareholders receive a deduction and a foreign tax credit that reduces their effective GILTI rate, individuals may also be subject to the tax.
5, 6### How does GILTI interact with foreign tax credits?
U.S. corporate shareholders can generally claim a foreign tax credit for 80% of the foreign income taxes paid or accrued by their CFCs on tested income that gives rise to the GILTI inclusion. However, these credits are subject to specific limitations and cannot be carried forward or backward, which can lead to additional U.S. tax liability even if foreign taxes were paid.
3, 4### Is GILTI the same as Subpart F income?
No, GILTI is not the same as Subpart F income, although both are provisions that tax certain foreign earnings of controlled foreign corporations to U.S. shareholders on a current basis. Subpart F income primarily targets passive income (e.g., dividends, interest, royalties) and certain types of active income that are easily shifted. GILTI, on the other hand, broadly applies to active business income that exceeds a deemed routine return on tangible assets, regardless of its passive or active nature. Income that is already classified as Subpart F income is excluded from GILTI to prevent double taxation.1, 2