Most Common GILTI Mistakes to Avoid

Most Common GILTI Mistakes to Avoid

Common GILTI Mistakes

Most Common GILTI Mistakes to Avoid: The term GILTI refers to Global Intangible Low-Taxed Income — and while the term sounds as if it refers to something very specific — that would be inaccurate, because as with many international tax laws and the IRS, the acronym does not fully represent the breadth of the law Essentially, with the introduction of the Tax Cuts and Jobs Act came the development of GILTI. The law does not apply to all foreign corporations, but rather it is generally limited to controlled foreign corporations — which also has a specific definition within the Internal Revenue Code. And, while it may be treated similar to Subpart F income — GILTI and Subpart F are not the same. There are some common mistakes that US Taxpayers make, which are typically avoidable when preparing GILTI calculations. Let’s explore some of the more common GILTI mistakes Taxpayers make:

What is a Controlled Foreign Corporation?

In order for a foreign corporation to have GILTI, the foreign corporation must be a controlled foreign corporation under Internal Revenue Code Section 957. This means that the foreign corporation is owned more than 50% by US persons — who are at least 10% shareholders in the CFC — and attribution/constructive ownership rules apply. In other words, just because Taxpayer may have ownership or interest in a foreign corporation does not mean that it is a controlled foreign corporation.

26 USC 957 Controlled Foreign Corporation (CFC)

      • (a) General rule

        • For purposes of this title, the term “controlled foreign corporation” means any foreign corporation if more than 50 percent of—

          • (1) the total combined voting power of all classes of stock of such corporation entitled to vote, or

          • (2) the total value of the stock of such corporation, is owned (within the meaning of section 958(a)), or is considered as owned by applying the rules of ownership of section 958(b), by United States shareholders on any day during the taxable year of such foreign corporation.

26 USC 951(b) – United States Shareholder

      • For purposes of this title, the term “United States shareholder” means, with respect to any foreign corporation, a United States person (as defined in section 957(c)) who owns (within the meaning of section 958(a)), or is considered as owning by applying the rules of ownership of section 958(b), 10 percent or more of the total combined voting power of all classes of stock entitled to vote of such foreign corporation, or 10 percent or more of the total value of shares of all classes of stock of such foreign corporation.

Subpart F is Distinct from GILTI (Very Common GILTI mistake)

While the idea of subpart F income is similar to GILTI — in that income is taxable in the United States even if it has not been distributed back to the United States (aka repatriated), Subpart F Income and GILTI are not the same — and a person may have both GILTI and Subpart F income from the same corporation, in the same year.

Form 8992 is Required for GILTI

GILTI calculations are prepared on Internal Revenue Service Form 8992 — whether or not a person is making a section 962 election or not. Domestic corporate shareholders will also file form 8993, and when an individual makes an election under 962 to be treated as a domestic corporation shareholder for GILTI, they may also file a form 8993 and form 1118  (The latter if they are claiming foreign tax credits paid by the foreign corporation).

50% Deduction for Individual if Making a 962 Election

Domestic corporate shareholders of controlled foreign corporations receive a 50% deduction for GILTI — which significantly reduces any potential tax consequence. Individual shareholders do not automatically get to deduct the 50% — and may only do so when they make an Internal Revenue Code section 962 election.

80% Foreign Tax Credit for Individual if Making a 962 Election

Only a domestic corporate shareholder of a controlled foreign corporation may apply the upwards of eighty percent of foreign taxes paid by the controlled foreign corporation to their US tax return. Individual shareholders cannot claim the foreign tax credits paid by foreign corporation, since they did not personally pay that tax abroad. But, if the individual shareholder makes a 962 election, they can also claim up to 80% foreign tax credit.

Only Include Taxpayer’s Pro-Rata Share Across All CFCs (Very Common GILTI mistake)

When the taxpayers computing their tested income, it is based on their pro rata share of the tested income across all of their CFCs — and not necessarily all of the tested income for the entire controlled foreign corporation — when it is owned by multiple shareholders.

Be Sure to Remove Non-GILTI Income from Taxable Income

Not all foreign income is considered GILTI — and therefore this income must be removed when the calculation when determining tested income. While there many different types of exceptions, the most common are:

  • Subpart F
  • High Taxed-Exception Income (which is similar to the high-tax exception for subpart F income but applicable to GILTI as well); and
  • Effectively Connected Income (ECI)

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