Global Intangible Low Tax Income
Global Low Tax Intangible Income (GILTI) is a new tax regime under the Tax Cuts and Jobs Act (TCJA). Under this regime, United States Shareholders of Controlled Foreign Corporations (CFC) will potentially have an income inclusion based on the net earnings and profits of the CFC, less a few exceptions, which are greater than 10% of the CFC’s net depreciable assets. This income inclusion would then be taxed at ordinary rates. Since this calculation is based on the net earnings and profits of the CFC, the amount included in income of the United States Shareholder is not based on actual money received, creating the potential for a tax on income for which no money is received. While the calculation of the income inclusion is the same for all United States shareholders, there are differences in calculating the tax for an individual shareholder and a corporate shareholder.
For Individual Shareholders, there are no deductions available to offset the income inclusion. Furthermore, individual shareholders are not permitted to claim a foreign tax credit for the income tax paid by the CFC associated with the GILTI inclusion amount. This means once the income inclusion is calculated, the individual shareholder will pay tax at the ordinary rates, which currently tops out at 37%.
Unlike individual shareholders, corporate Shareholders are allowed a deduction of 50% of the GILTI income inclusion amount, with the resulting amount taxed at that flat corporate rate of 21%. This provides an effective tax rate of 10.5% on the gross income inclusion amount. In addition to the deduction, corporate shareholders are also allowed a foreign tax credit of up to 80% of the foreign taxes paid by the CFC on the GILTI inclusion amount. Depending on the income tax rate in the foreign country, the tax associated with the GILTI income inclusion could potentially be reduced to $0.
While the above is a broad overview of very detailed and complex tax law, the potential impact on your specific situation should be addressed with a qualified tax professional. Potential items to consider include:
1. Making an IRC Sec 962 election with regards to each CFC (for individual shareholders),
2. Restructuring and changing the tax classification of the CFC or other entities within the group,
3. Qualifying the earnings and profits of the CFC to fit into one of the exceptions,
4. Maximizing the foreign tax credit (for Corporate Shareholders), and
5. Creating foreign derived intangible income (FDII) (for Corporate Shareholders)