In this blog post, we will provide a comprehensive overview of the GILTI tax, who is subject to it, and how it affects multinational corporations. We will also discuss the tax rates for GILTI income, and how to comply with GILTI tax regulations. We understand that GILTI tax can be a complex topic, which is why we encourage readers to consult with a tax professional to ensure compliance with the law and to determine their specific tax liability.

WHAT IS THE GILTI TAX?
GILTI tax is a provision of the U.S. tax code that applies to U.S. taxpayers who own at least 10% of the shares of a controlled foreign corporation (CFC). The purpose of GILTI tax is to discourage profit shifting to low-tax countries by taxing the U.S. shareholder’s share of the CFC’s global intangible low-taxed income (GILTI). GILTI income is the CFC’s income from intangible assets, such as patents, trademarks, and copyrights, that is subject to a low rate of foreign tax.

HOW IS THE GILTI TAX CALCULATED?
The GILTI tax is calculated by taking the taxpayer’s net CFC tested income (which is the CFC’s gross income minus certain deductions) and reducing it by a deemed return on the CFC’s tangible assets. This deemed return is calculated as 10% of the CFC’s qualified business asset investment (QBAI), which is the CFC’s average aggregate adjusted bases in its tangible property used in its trade or business. The resulting amount is then multiplied by the GILTI tax rate, which is currently 10.5%.

It is important to note that the GILTI tax is a separate tax from the regular income tax and is calculated and reported on a taxpayer’s Form 8992 (Part of the IRS form 5471).

HOW TO AVOID PAYING THE GILTI TAX?
If the taxpayer takes the money out of the corporation as wages or dividends or if their corporate income tax rate is more than 18.9%, they may not have to pay GILTI tax.

EXPLANATION:
If a taxpayer takes money out of their Controlled Foreign Corporation (CFC) as wages or dividends, the amount distributed will reduce the CFC’s taxable income and therefore, may reduce the taxpayer’s Global Intangible Low-Taxed Income (GILTI) tax liability. This is because the GILTI tax is based on the CFC’s income, and if the taxpayer distributes the income as wages or dividends, the CFC will have less income subject to the GILTI tax. You can then exclude your wages using Foreign Earned Income Exclusion or Foreign Tax Credit.

Additionally, if the taxpayer’s CFC has a corporate tax rate that is more than 18.9%, the CFC’s income may be considered subject to high foreign taxes, which can reduce or eliminate the taxpayer’s GILTI tax liability through the foreign tax credit. The foreign tax credit allows the taxpayer to claim a credit against their U.S. tax liability for foreign income taxes paid on the same income that is subject to GILTI tax.

WHO IS SUBJECT TO GILTI TAX?
GILTI tax applies to U.S. taxpayers who are considered U.S. shareholders of a controlled foreign corporation (CFC). A U.S. shareholder is any U.S. person who owns 10% or more of the total combined voting power of all classes of stock of a foreign corporation.

WHAT IS A CONTROLLED FOREIGN CORPORATION (CFC)?
A CFC is a foreign corporation that is more than 50% owned (by vote or value) by U.S. shareholders. A CFC is considered to be “controlled” because U.S. shareholders have significant influence over its operations and financial decisions.

HOW THE 10% OWNERSHIP THRESHOLD APPLIES?
The 10% ownership threshold applies to both direct and indirect ownership. This means that if a U.S. person owns 10% or more of a foreign corporation through another corporation, partnership, trust, or other entity, they will be considered a U.S. shareholder of the CFC.

It is important for taxpayers who own shares in a foreign corporation to determine whether they meet the definition of a U.S. shareholder and whether the foreign corporation is a CFC. If a taxpayer is a U.S. shareholder of a CFC, they may be subject to GILTI tax on their share of the CFC’s GILTI income.

HOW TO COMPLY WITH GILTI TAX REGULATIONS?
To comply with GILTI tax regulations, U.S. taxpayers who are U.S. shareholders of a CFC must properly calculate and report their GILTI income on their tax return. Taxpayers should consult with a tax professional to determine their specific reporting requirements and ensure that they comply with the law.

FORMS TO FILE AND DEADLINES
Taxpayers must file Form 8992 with their individual tax return. Form 8992 is used to calculate the taxpayer’s GILTI income and to determine their GILTI tax liability. The deadline for filing Form 8992 is the same as the taxpayer’s tax return deadline, including extensions.

PENALTIES FOR NON-COMPLIANCE
Penalties for non-compliance can be severe. Taxpayers who fail to properly calculate and report their GILTI income may be subject to penalties and interest on any tax owed. Additionally, failure to file required forms, such as Form 8992, can result in penalties of up to $10,000 per form.

HOW TO COMPLY WITH GILTI TAX REGULATIONS?
Complying with the tax regulations can be complex and challenging, but it is essential for multinational corporations to avoid penalties and maintain good standing with the IRS. Here are some steps that taxpayers need to take to comply with the regulations:

Determine GILTI Taxable Income: Taxpayers must determine their GILTI taxable income, which is calculated by subtracting the deemed 10% return on Qualified Business Asset Investment (QBAI) from their total tested income.
Determine Foreign Tax Credits: Taxpayers must determine their foreign tax credits, which can be used to offset their tax liability. This involves analyzing the foreign taxes paid or accrued on the income subject to GILTI tax.
File Form 8992: Taxpayers must file Form 8992, which is used to calculate and report GILTI tax liability. This form requires detailed information on the corporation’s income, expenses, and foreign tax credits.
Review Transfer Pricing: Taxpayers should review their transfer pricing policies to ensure they are in compliance with the tax regulations. This involves analyzing intercompany transactions and ensuring that they are conducted at arm’s length.
Consult with a Tax Professional: Complying with GILTI regulations can be complicated, and it is essential to seek the advice of a tax professional. A qualified tax professional can help taxpayers navigate the rules and regulations and avoid costly mistakes.
If you need help navigating the complex regulations surrounding Global Intangible Low-Taxed Income (GILTI) tax and complying with IRS requirements, we’re here to help. Our team of experienced tax professionals can assist you in preparing and filing the necessary forms, including Form 8992, which is a schedule of Form 5471.

WRITTEN BY
Kasia Strzelczyk, EA
A certified accountant and IRS enrolled agent with over 8 years of experience working with US expats. With a deep understanding of the unique financial challenges faced by expats, Kasia is dedicated to helping clients navigate complex tax laws and regulations.

Have a question? Contact Olivier Wagner And Team.