GILTI

Definition

GILTI, or Global Intangible Low-Taxed Income, is a provision in the U.S. tax code that targets income earned by foreign subsidiaries of U.S. corporations which exceeds a certain threshold. It was introduced as part of the Tax Cuts and Jobs Act of 2017 to discourage companies from shifting profits to low-tax jurisdictions and promote repatriation of foreign earnings. GILTI essentially imposes a minimum tax on foreign income, influencing corporate tax strategies and the location of intangible assets.

5 Must Know Facts For Your Next Test

1. GILTI applies to U.S. shareholders of controlled foreign corporations (CFCs) and is calculated based on the CFC's net income minus a fixed return on tangible assets.
2. The effective tax rate on GILTI is generally lower than the regular corporate tax rate, leading to strategic planning around how income is classified.
3. To mitigate double taxation, U.S. corporations can claim a Foreign Tax Credit for taxes paid on GILTI, but there are limitations on how much can be claimed.
4. GILTI has been criticized for its complexity and for potentially discouraging investment in foreign operations due to the implications of minimum taxation.
5. As part of the broader international tax landscape, GILTI interacts with other provisions such as BEAT (Base Erosion and Anti-Abuse Tax) to influence corporate tax planning.

Review Questions

• How does GILTI impact U.S. corporations' decisions regarding foreign investments?
  • GILTI affects how U.S. corporations approach foreign investments by imposing a minimum tax on certain foreign income, which can alter profit repatriation strategies. Companies might reconsider where to locate their intangible assets and how to structure their foreign subsidiaries in response to the potential tax implications of GILTI. This provision encourages businesses to evaluate their global operations more carefully, weighing the costs and benefits of operating in lower-tax jurisdictions against the GILTI liability they may incur.
• Discuss the relationship between GILTI and Subpart F income in terms of U.S. taxation.
  • GILTI and Subpart F income are both mechanisms through which the U.S. taxes foreign income earned by controlled foreign corporations (CFCs). While Subpart F targets specific types of passive income and certain transactions, GILTI encompasses a broader range of income exceeding a baseline return on tangible assets. This means that while Subpart F may lead to immediate taxation upon earning, GILTI introduces a minimum tax requirement that can affect companies' overall foreign income strategies and compliance obligations.
• Evaluate the effectiveness of GILTI in achieving its intended goals of discouraging profit shifting and promoting repatriation of earnings.
  • The effectiveness of GILTI in discouraging profit shifting and promoting repatriation can be seen through mixed outcomes. On one hand, it has raised awareness among corporations about their foreign income taxation and encouraged some repatriation efforts. On the other hand, its complexity may lead to continued aggressive tax planning strategies by firms seeking to minimize their GILTI exposure. Additionally, while GILTI aims to level the playing field by imposing a minimum tax, companies might still find ways to exploit loopholes or restructure operations to mitigate its impact, suggesting that further reforms may be necessary for optimal effectiveness.

Related terms

Territorial Tax System: A system where countries only tax the income earned within their borders, often leading to reduced taxation for foreign earnings.

Foreign Tax Credit: A tax credit that allows U.S. taxpayers to reduce their tax liability by the amount of foreign taxes paid, preventing double taxation.

Subpart F Income: Income earned by a controlled foreign corporation that is subject to U.S. taxation regardless of whether it is repatriated to the U.S.