Update: GILTI tax
Last year we provided an early update that all US shareholders of Controlled Foreign Corporations (CFC) would have a new and additional minimum tax (GILTI) on foreign earnings. At that time, much of the framework was still to be determined. Now that proposed regulations have been announced, it is important to review these changes and how they will affect tax filings.
This new minimum tax on foreign earnings of a CFC will be assessed on Global Intangible Low-Taxed Income (GILTI). The calculation of the tax on GILTI is complex. However, the highlights of this new tax are:
- The GILTI calculation starts with the foreign corporation’s gross income (excluding effectively connected income (ECI), Subpart F income, and other income that qualifies for specified exceptions to Subpart F income). This amount is then reduced by the CFC’s deductions, including taxes.
- The remainder is reduced by a deemed 10 percent return on the historic tax basis of depreciable tangible property (minus any relevant interest expense).
- This becomes the GILTI amount that the US shareholder must pick up as income.
- For individuals, this will be taxed at the individual’s marginal rate for the year.
- US corporate shareholders can reduce the amount of the GILTI inclusion by 50 percent and may claim a foreign tax credit of up to 80 percent of the foreign taxes incurred during the year.
- Although individual shareholders of a CFC cannot normally claim a foreign tax credit for taxes paid by the foreign corporation, they can elect to be taxed as a corporation on the GILTI income, which would allow them to claim the foreign tax credit.
- We are waiting on additional guidance from the Department of Treasury as to whether individuals will be allowed the deduction of 50 percent on the GILTI inclusion. Such guidance could mitigate any additional amount of tax due on the GILTI amount.
This new tax will require additional analysis on an ongoing basis. The IRS has drafted entirely new forms, which will need to be reviewed and filed, and has made significant revisions to existing forms.
Although initial regulations have now been provided by the IRS, there are several relevant provisions for which regulations are still outstanding or in need of clarification.
We will continue to monitor correspondence from the IRS (including new regulations) regarding this new tax. In the meantime, if you require additional clarification or guidance, please call us on +44 20 7357 8220 or email me.