FAQ: Understanding GILTI

Foreign business tax calculations have changed. U.S. persons who own foreign businesses that generate profits may find themselves heavily impacted by the new GILTI provisions. Global Intangible Low Taxed Income (GILTI) rules were introduced as part of the latest tax reform with the intent of keeping businesses from leaving the United States in search of lower-tax jurisdictions. Owners of pass-through entities, such as partnerships, S-corporations, and trusts, must also pay special attention to business earnings that may be included and taxed as income on their 2018 tax return.

What is GILTI?

In short, GILTI is a new anti-deferral regime meant to deter taxpayers from conducting high-value business activities in low-tax jurisdictions outside the U.S. GILTI intends to subject U.S. shareholders of Controlled Foreign Corporations (CFCs) to current taxation on the CFC’s net income.

Who is affected by GILTI?

U.S. shareholders (corporations or individuals) who own 10% or more of the vote or value in a CFC are subject to GILTI. If you were required to file a Form 5471 in a previous tax return, there is a good chance you will need to take into account new GILTI rules as you prepare to file your 2018 return. The main difference is, even if your earnings from a foreign corporation were not distributed, they could still be included as income for tax year 2018. This will in turn affect your income tax return estimates and extensions.

How is the GILTI income inclusion taxed?

How the additional income on your return is taxed depends on whether you file as an individual, a C-corporation, or a pass-through entity:

• For individuals: The income inclusion will be subject to standard income tax rates at the 1040 level.
• For C-corporations: The income will be subject to a 21% tax rate. However, a 50% deduction may be available – which is not available for individuals, unless they make a special election.
• For pass-through entities, such as partnerships, S-corporations, and trusts: For these business structures, taxpayers must be aware of the information provided on their Form K-1 to determine who is the ultimate beneficiary to pick up the income inclusion.

Can a foreign tax credit offset my GILTI tax?

If the CFC is structured as a C-corporation, a foreign tax credit is available. If the CFC is owned by an individual, foreign tax credits for taxes paid by the foreign corporation are not available, unless the individual makes a Section 962 election (an election by individuals to be subject to tax at corporate rates.)

We are advising our international clients to be proactive in determining whether they are subject to GILTI rules in order to estimate their tax liability early on and plan accordingly. Contact me or another member of our International Tax practice to discuss how GILTI may affect your business and what you can do to potentially lower your GILTI tax liability through proper planning.