The recently enacted 2017 Tax Cuts and Jobs Act contains a provision known as “GILTI”, Gross Intangible Low-Taxed Income, which may significantly impact and catch U.S. shareholders (corporations, individuals, partnerships and S Corporations) of Controlled Foreign Corporations (CFC) by surprise. GILTI effectively imposes an ordinary income tax on 10 percent or greater U.S. shareholders of CFCs. GILTI may be much more detrimental to individual taxpayers than to corporate shareholders.
In general, the GILTI rules tax a CFC’s income that is not otherwise subject to U.S. tax as Subpart F income or effectively connected income to the extent that income exceeds a notional return on the CFC’s tangible depreciable property (10 percent of the adjusted tax basis of such property).
Despite its name, GILTI is neither limited to income derived from intangible property nor is it limited to low-taxed income generated abroad. Furthermore, the GILTI rules apply higher tax rates to GILTI attributed to individuals who own CFC stock (either directly or through LLCs or S Corporations) than to corporate shareholders. In essence, the GILTI regime applies more harshly to non-C corporation U.S. shareholders of CFCs.
The GILTI provisions discourage multinational corporations from avoiding U.S. taxes by holding intangible assets (and their related income) abroad in low-tax countries. In essence, GILTI acts as a minimum tax on foreign earnings (before consideration of foreign tax credits). While the GILTI provisions apply to all taxpayers, the effect of the GILTI provisions may be much more unfavorable to individual shareholders than it will be to corporate shareholders, whether those individual shareholders directly own CFCs or own the CFCs through a pass-through entity.
Effective for tax years beginning after December 31, 2017, IRC Section 951A, Subpart F income, subjects U.S. persons owning (directly or indirectly) at least 10 percent of a CFC to current taxation on a portion of earnings and profits of the foreign corporation. GILTI includes most business income of a CFC. The new GILTI provisions subject all of a CFC’s income above routine income (defined to be the excess over 10 percent of the adjusted tax basis of the CFC’s adjusted tax basis in tangible property) to a minimum tax. The GILTI provisions result in a significantly higher tax cost to U.S. shareholders that are not C Corporations (non-C Corporation U.S. shareholders) than to U.S. shareholders that are C Corporations (C Corporation U.S. shareholders).
C Corporation U.S. shareholders are entitled to reduce GILTI by 50 percent, which are subject to a U.S. federal corporate tax rate of 21 percent, and are entitled to claim a foreign tax credit for up to 80 percent of foreign taxes paid or accrued by the CFC on the GILTI. As a result, the GILTI rules generally impose a U.S. corporate minimum tax of 10.5 percent (50 percent x 21 percent) and to the extent foreign tax credits are available to reduce the U.S. corporate tax, may result in no additional U.S. federal income tax being due.
The GILTI rules, however, impose an effective rate that is much higher for non-C Corporation U.S. shareholders. The reason for this is that non-C Corporation U.S. shareholders are not entitled to deduct 50 percent of their GILTI. As a result, 100 percent of the GILTI will be subject to an ordinary U.S. federal income tax (up to 37 percent marginal tax rate) and non-C corporation U.S. shareholders cannot generally claim a credit for foreign taxes paid or accrued by the CFC on GILTI. As a result, non-C corporation U.S. shareholders will generally be subject to U.S. federal tax on GILTI at ordinary tax rates up to 37 percent rate, plus any foreign taxes imposed on the CFC’s GILTI.
There may be potential tax planning opportunities that can be considered to reduce the overall GILTI tax burden on non-C Corporation U.S. shareholders.
For more information contact Kevin Heyde (firstname.lastname@example.org), International Tax Partner or Matt Green (email@example.com) International Tax Principal to discuss the GILTI provisions and how they may impact you or your business.