Global Intangible Low-Taxed Income (GILTI) is a provision in the U.S. tax code that addresses the taxation of income earned by U.S. companies’ foreign subsidiaries. The 2017 Tax Cuts and Jobs Act created GILTI to prevent U.S. businesses from shifting profits to low-tax areas.
Here’s how it affects taxes:
1. Taxation of Foreign Earnings
GILTI taxes U.S. shareholders of controlled foreign corporations (CFCs) on certain income that would otherwise escape U.S. taxation. GILTI taxes U.S. companies’ foreign profits, even if they are not repatriated. The provision taxes profits above a defined routine return on a foreign subsidiary’s tangible assets.
2. How GILTI is Calculated
To calculate GILTI, U.S. shareholders first determine the total income of the foreign subsidiary and then subtract a 10% return on the subsidiary’s tangible assets (like property, plant, and equipment). The remaining income, which is seen as the income above the routine return on these assets, is considered GILTI and is subject to U.S. tax.
3. U.S. Tax Rate on GILTI
The GILTI tax rate for U.S. corporations is 10.5% (as of the TCJA, until 2025). This is lower than the regular corporate tax rate of 21%. However, companies can reduce this effective rate by utilizing foreign tax credits for taxes paid to foreign governments. The goal is to prevent double taxation by allowing foreign tax credits.
4. Foreign Tax Credit (FTC)
The foreign tax credit is key to minimizing the impact of GILTI. U.S. corporations can claim a credit for the foreign taxes they pay on income earned by their foreign subsidiaries, which helps offset U.S. taxes on GILTI. However, the credit is limited to the U.S. tax liability on the GILTI income. This means that if a company is in a high-tax jurisdiction, it can offset much of the U.S. tax liability; but in low-tax jurisdictions, the relief is more limited.
5. Impact on Multinational Companies
GILTI impacts multinational corporations in several ways:
- Increased U.S. tax liability: U.S. corporations with foreign subsidiaries must report and pay tax on GILTI, even if the income is not repatriated to the U.S. This creates a tax obligation on profits earned abroad.
- Foreign tax credits: Companies with substantial foreign taxes paid may benefit from foreign tax credits that reduce the overall U.S. tax burden, but those with operations in low-tax jurisdictions may face higher U.S. tax bills due to the limited foreign tax credit relief.
- Incentive to shift operations: Some U.S. corporations may adjust their strategies, including where to locate their tangible assets or operations, in order to reduce their GILTI exposure and lower the tax burden.
6. Impact on Smaller Companies
Smaller companies that operate internationally or have foreign subsidiaries may also face challenges under GILTI. While the rules mainly target larger multinational corporations, smaller businesses with foreign operations still need to consider how GILTI could increase their tax burden and require careful planning to manage the potential liability.
7. Long-Term Implications
GILTI is a key feature of the broader shift in U.S. international tax policy and makes the U.S. tax system more competitive while reducing the incentive to shift profits to tax havens. However, it has led to discussions about how the U.S. tax code might need further revisions to balance the interests of U.S. corporations, global tax competitiveness, and fairness.
Conclusion
GILTI impacts taxes by ensuring that U.S. corporations with foreign subsidiaries pay U.S. tax on a portion of their foreign income, even if it’s not repatriated. While it includes provisions like the foreign tax credit to reduce double taxation, it still increases the tax burden on foreign income, particularly for U.S. companies with subsidiaries in low-tax jurisdictions. Multinational corporations need to carefully plan their operations to minimize the impact of GILTI and optimize their global tax position.
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