The GILTI Effect: Tax Reform and Global Intangible Low-Taxed Income

The Global Intangible Low-taxed Income (GILTI) is a new provision, enacted as a part of the Tax Cut and Jobs Act. Mechanically, it functions as a global minimum tax and requires for all U.S. individuals and trusts who own stock in controlled foreign corporations (CFCs), directly or through LLCs or S corporations, to report its foreign income on the domestic entity's U.S. federal income tax return on a current basis.

  • Applies broadly to certain income generated by a controlled foreign corporation (CFC).
  • "U.S shareholders” (as defined in the Code) are required to include on a current basis the aggregate amount of certain income generated by its CFC(s), regardless of actual repatriation.
  • U.S. shareholders who are domestic - C corporations (other than RICs and REITs) are eligible for up to an 80 percent deemed paid foreign tax credit (FTC) and a 50 percent deduction of the current year inclusion plus the full amount of the Section 78 gross-up (subject to certain limitations).

Who does it impact?

GILTI will heavily impact any foreign business where profit is high relative to the fixed asset base.

  • Services companies
  • Procurement/Distribution companies
  • Software/Technology companies

It is effective for tax years of foreign corporations beginning after December 31, 2017. For tax years of U.S. shareholders in which or with which such tax years of foreign corporations end, the Global Intangible Low-taxed Income (GILTI) provisions set forth in Section 951A require a “U.S. shareholder” of one or more CFCs to include in income, on a current basis, its GILTI in a manner similar to subpart F income.

Eligible corporations may claim a deduction of 50% of GILTI for tax years 2018 through 2025. For tax years 2026 and later, the deduction is reduced to 37.5%.

What should companies do?

While taxpayers await further guidance from the IRS and the Treasury providing specifics on the GILTI inclusion, it is prudent for U.S. shareholders to begin assessing whether they should be subject to the GILTI inclusion. In particular, taxpayers may need to take immediate action to estimate the potential tax liability for quarterly estimated payments and financial reporting purposes.

If you would like to discuss how to the GILTI provision might affect your business, please contact us.