Why feel GILTI?
Prior to the 2017 Tax Cut and Jobs Act (TCJA), international tax planning focused on deferring U.S. tax on foreign affiliates by avoiding repatriation of earnings. Generally, as long as the profits stayed overseas, there was no U.S. tax.
TCJA altered this planning. The new Global Intangible Low-Taxed Income (GILTI) regime imposes U.S. tax on foreign earnings of certain foreign corporations whether or not the profits are repatriated to the U.S. owner. U.S. individuals and U.S. businesses that own 10% or more of a controlled foreign corporation (CFC) may be subject to this new tax. In general, GILTI is calculated each year by applying a tax rate of 10.5% on the operating income of a CFC after subtracting 10% of its tangible asset base.
How can PBMares reduce your GILT?
Minimizing GILTI is very specific to the facts and circumstances of the U.S. owners and requires a tailored plan.
1. The GILTI tax rate can be as high as 37% for individuals. A specific statutory election allows an individual to enjoy the C corporation GILTI tax rate of 10.5% with consequences. While there is short-term gain in the lower tax rate, the benefit is a timing difference. Subsequent distributions to the individual will be subject to tax. Exactly how much tax depends on many factors including if the foreign affiliate is located in a treaty country.
2. A pass-through structure may be a better selection for foreign subsidiaries. The foreign tax credit is allowed at 100% for pass-through earnings. Generally, individuals do not get any credit for foreign taxes paid on GILTI income. Corporations can claim up to 80% of the foreign income taxes attributed to the GILTI inclusion. Modeling is required to determine the best approach.
3. It’s time to revisit transfer-pricing agreements. TCJA did not change any of the technical aspects of transfer pricing. Taxpayers still need to determine arm’s length prices for related party transactions. However, TCJA changed the international tax landscape dramatically. A change in pricing within the guidelines may substantially reduce the impact of GILTI.
The GILT won’t go away! The Biden Tax Plan.
The Biden Tax Plan proposes changes in the GILTI tax calculation because the administration believes that certain provisions encourage offshoring jobs and profit. The proposal seeks to increase the GILTI tax rate from 10.5% because this is lower than the regular 21% U.S. corporate rate. Under the current regime, U.S. taxpayers have an incentive to keep earnings with foreign affiliates to enjoy this lower rate. In addition, the plan seeks to repeal the part of the GILTI calculation that allows for the subtraction of 10% of tangible assets. This removes the motivation to increase foreign asset investments.
The new framework under the Biden Tax Plan would also require the GILTI tax to be calculated on a country-by-country basis. The current law allows losses incurred in one country to be offset against income earned in another to reduce the GILTI tax.
On the plus side, the Biden framework suggests that the GILTI provisions should add an incentive to increase onshoring of research and development (R&D) jobs. Various proposals are being floated to encourage innovation to stay in the U.S.
GILTI can be expensive and the rules are complex and evolving. PBMares is ready to assist.
ABOUT THE AUTHOR(S):
Lynn M. Eller, CPA, APCIT, PFS
Director of International Tax
Lynn Eller is a leader in the firm’s international tax practice and advises businesses expanding abroad. She has prepared numerous tax returns for nonresident aliens, U.S. residents that are eligible for the foreign earned income exclusion and US residents who control foreign corporations.
