A GILTI (Global Intangible Low-Taxed Income) 951A Overview

GILTI (Global Intangible Low-Taxed Income) 

GILTI refers to Global Intangible Low-Taxed Income. It was introduced as part of The Tax Cuts And Jobs Act.  The idea behind GILTI is that when income is earned overseas in a controlled foreign corporation (which means more than 50% is owned by US Persons) unless it is exempt then GILTI income may still be taxable even though it has not been distributed. The US Governments concern is the taxpayers are hoarding money overseas and then using planning and avoidance tricks and maneuvers to avoid US taxation on that money. The GILTI tax regime is very complicated with several exceptions, exclusions, limitations, and elections – which make it even more complicated, especially for taxpayers who may simply have a small business overseas such as a Canadian Corporation or Sociedad Anonima. The purpose of this summary is to go through the basics of whether or not you may have to file GILTI – and how it works.

951A (in Pertinent Part)

• • • (a) In general

      • Each person who is a United States shareholder of any controlled foreign corporation for any taxable year of such United States shareholder shall include in gross income such shareholder’s global intangible low-taxed income for such taxable year.

    • (b) Global intangible low-taxed income For purposes of this section—

      • (1) In general

        • The term “global intangible low-taxed income” means, with respect to any United States shareholder for any taxable year of such United States shareholder, the excess (if any) of— (A)such shareholder’s net CFC tested income for such taxable year, over (B)such shareholder’s net deemed tangible income return for such taxable year.

Subpart F Income is Different than GILTI

While Subpart F income operates kind of, sort of like GILTI –  it is not the same. Subpart F income dates back more than 50-years ago and generally, involves passive types of income in which the US government was concerned that foreign income generated from passive means was being rerouted through corporate loans (which loans were later forgiven) in order to avoid the very high US tax rate at that time

. The two main similarities between GILTI and Subpart F Income are:

• • • Taxation on non-distributed income; and

    • High-Taxed Income Exception (90% tax rate)

Controlled Foreign Corporation (CFC)

A controlled foreign corporation is a specific type of foreign corporation in which US persons own more than 50% of the foreign corporation — with each shareholder having at least a 10% share — attribution/constructive ownership rules apply. Therefore, if US Persons own 49% — or even 50% — of a foreign corporation, then it is not a controlled foreign corporation and therefore these rules would not apply.

Less than 10% Ownership

In reviewing the code you will find that there has to be at least a 10% ownership vote or value of the controlled foreign corporation. That is because in order for there to be a controlled foreign corporation not only must US persons on more than 50%, but each shareholder must have at least a 10% share.

What is Excluded from Gross Income?

Well the majority of income is included in order to determine the gross tested income which is used to calculate GILTI, are some exclusions, including:

• • • U.S. source income effectively connected with the conduct of a trade or business by the CFC in the U.S. (otherwise known as “ECI”);

    • Gross income taken into account in determining the CFC’s subpart F income;

    • Gross income excluded from the CFC’s foreign base company income (“FBCI”) and insurance income by reason of the high-tax exception in IRC 954(b)(4);

    • Dividends received from a related person; and

    • Foreign oil and gas extraction income (“FOGEI”).

Not Limited to E&P (Earnings & Profit)

When dealing with Subpart F Income, it is primarily limited to earnings and profit — but that is not the same with GILTI. Unless the income is excluded, generally all income that is not Subpart F income is included in the GILTI calculation. So for example, if a US taxpayer may have originally been from Canada and has a Canadian corporation that operates as a law firm, with all of the money being generated from services provided in Canada — then a good chunk, if not all of that income will be considered GILTI.

Foreign Tax Credits

When there is a domestic corporation shareholder, then there are general deductions such as foreign tax credits — up to a certain value. At the end of the day, the domestic shareholder (and individuals making a Section 962 Election) may avoid most if not all of the GILTI Tax.

Individual Election Under 962

An individual is not entitled to the same 50% deduction and Foreign Tax Credits that a corporation is entitled to. Therefore, in order to even the playing field, regulations were finalized that permit a US individual to elect to be treated as a shareholder under Internal Revenue Code section 962 — and take the same deductions that a corporate shareholder of a controlled foreign corporation would take. Noting, that the election cannot be made per controlled foreign corporation, but rather across all controlled foreign corporations.

High-Taxed Exception

As provided by the IRS: 

• • • The 2019 proposed regulations apply the high-tax exclusion set forth in section 951A(c)(2)(A)(i)(III) (the “GILTI high-tax exclusion”), on an elective basis, to certain high-taxed income of a controlled foreign corporation (as defined in section 957) (“CFC”) regardless of whether the income would otherwise be foreign base company income (as defined in section 954) (“FBCI”) or insurance income (as defined in section 953). See proposed §1.951A-2(c)(6). The final regulations retain the basic approach and structure of the 2019 proposed regulations, with certain revisions. This Summary of Comments and Explanation of Revisions discusses those revisions as well as comments received.

Form 5471 & GILTI

When a person has GILTI, there are multiple forms they may have to file for reporting purposes and they may want to consult with a Board-Certified Tax Law Specialist. Some of the common forms include:

• • • Form 5471

    • Form 8992

    • Form 8993

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