Introduction to GILTI Inclusion
The Global Intangible Low-Taxed Income (GILTI) inclusion is a US tax provision that requires certain US taxpayers to include in their gross income certain types of foreign earnings. This provision was introduced as part of the Tax Cuts and Jobs Act (TCJA) in 2017, with the aim of discouraging US companies from shifting profits to low-tax jurisdictions.
GILTI applies to US shareholders of controlled foreign corporations (CFCs), which are foreign corporations where US shareholders own, directly or indirectly, more than 50% of the corporation's stock. The inclusion is calculated based on the CFC's net tested income, which includes certain types of income such as active business income, but excludes certain types of income such as foreign oil and gas extraction income.
How GILTI Inclusion is Calculated
The calculation of GILTI inclusion involves several steps, including determining the net tested income of the CFC, calculating the deemed intangible income, and applying the 80% foreign tax credit. The net tested income is calculated by subtracting from the CFC's gross income certain deductions and adjustments, such as depreciation and amortization.
The deemed intangible income is calculated as the excess of the net tested income over a 10% return on the CFC's qualified business asset investment (QBAI). The GILTI inclusion is then calculated as the deemed intangible income, subject to an 80% foreign tax credit, which allows US taxpayers to claim a credit for foreign taxes paid on the included income.
Impact of GILTI Inclusion on US Taxpayers
The GILTI inclusion has significant implications for US taxpayers with foreign earnings, as it can result in additional US tax liability. US taxpayers may be required to include in their gross income certain types of foreign earnings that were previously not subject to US tax, which can increase their US tax liability.
However, the GILTI inclusion also provides certain benefits, such as the ability to claim an 80% foreign tax credit, which can reduce the US tax liability on the included income. US taxpayers may also be able to reduce their GILTI inclusion by increasing their QBAI, which can reduce the deemed intangible income.
Compliance and Planning Considerations
US taxpayers with foreign earnings must comply with the GILTI inclusion rules, which requires them to file certain tax forms and schedules, such as Form 8992 and Schedule I-1. US taxpayers must also maintain certain records and documentation to support their GILTI inclusion calculation, such as records of the CFC's net tested income and QBAI.
US taxpayers may also need to consider planning strategies to minimize their GILTI inclusion, such as increasing their QBAI, reducing their net tested income, or claiming foreign tax credits. US taxpayers should consult with a tax professional to ensure compliance with the GILTI inclusion rules and to develop a tax planning strategy that minimizes their US tax liability.
Conclusion and Future Developments
The GILTI inclusion is a complex and evolving area of US tax law, and US taxpayers with foreign earnings must stay informed about the latest developments and changes. The GILTI inclusion has significant implications for US taxpayers, and failure to comply with the rules can result in additional US tax liability and penalties.
US taxpayers should consult with a tax professional to ensure compliance with the GILTI inclusion rules and to develop a tax planning strategy that minimizes their US tax liability. As the US tax laws and regulations continue to evolve, US taxpayers must stay informed about the latest developments and changes to ensure compliance and minimize their tax liability.
Frequently Asked Questions
What is the purpose of the GILTI inclusion?
The GILTI inclusion is designed to discourage US companies from shifting profits to low-tax jurisdictions and to ensure that US taxpayers pay tax on their foreign earnings.
Who is subject to the GILTI inclusion?
US shareholders of controlled foreign corporations (CFCs) are subject to the GILTI inclusion, which includes individuals, corporations, and partnerships.
How is the GILTI inclusion calculated?
The GILTI inclusion is calculated based on the CFC's net tested income, which includes certain types of income such as active business income, and the deemed intangible income, which is calculated as the excess of the net tested income over a 10% return on the CFC's QBAI.
Can I claim a foreign tax credit for GILTI inclusion?
Yes, US taxpayers can claim an 80% foreign tax credit for the GILTI inclusion, which can reduce the US tax liability on the included income.
What are the compliance requirements for GILTI inclusion?
US taxpayers must file certain tax forms and schedules, such as Form 8992 and Schedule I-1, and maintain records and documentation to support their GILTI inclusion calculation.
How can I minimize my GILTI inclusion?
US taxpayers can minimize their GILTI inclusion by increasing their QBAI, reducing their net tested income, or claiming foreign tax credits, and should consult with a tax professional to develop a tax planning strategy.