On February 19, we hosted the third part in our “Confiscation Tax” series of webinars, this time looking at the US tax reform’s GILTI provision.
The US’s Tax Cuts and Jobs Act (TCJA) of 2017 introduced a wide array of new and relatively complex rules to the American tax code. One of these is the tax provision on Global Intangible Low-Taxed Income (GILTI), which requires a US shareholder of any Controlled Foreign Corporation (CFC) to include its pro rata share of GILTI in its annual reportable Gross Income. This specific tax applies to the GILTI of 10% or greater US taxpayer shareholders of a CFC.
In case you missed it, we now have the full transcript available for you to download and read at your own convenience.
Also, if you have any follow-up questions for our panel, please make sure to submit them below. We’re sure they’d be happy to help you out.
SUBMIT FOLLOW-UP QUESTIONS
A special thanks to John Richardson, Lawyer, Citizenship Solutions, Toronto, Canada and Dr. Karen Alpert, Finance Lecturer, University of Queensland Business School, Australia, for shedding plenty of light on this controversial and highly complex piece of US tax law.
For now, here are some of the event’s main highlights!
What is GILTI?
Karen Alpert: “GILTI stands for Global Intangible Low-Taxed Income. But that’s really a misnomer because it’s not really measuring intangible income at all. There’s no identification, let’s look at this dollar and see how you earned it, did you earn it by selling intangible assets, licensing software that was developed in the US or anything like that, there’s no tracing. They just generally say, “Ok, 10% of your fixed assets is tangible income and everything else must be intangible,” which is an overly broad definition of intangible income because it ignores a lot of tangible assets that generate income such as inventory and land.”
“Then the low-taxed part of the name. Well, it doesn’t exclude high-taxed income, so the way they get at the headline 13,125% minimum tax that they are imposing on the worldwide income of US-related corporations is through this combination of a 50% deduction and disallowance of a portion but less than 50% of the foreign tax credits. But if you’re an individual, you’re going to find that it could be worse if there’s some kind of allocated expenses, etc., but in the best case, an individual with a corporation that pays anything less than 26.25% in foreign taxes is going to end up having a US tax liability through GILTI. And that’s higher than the US corporate tax rate of 21% so I don’t know where low-taxed comes into it.”
John Richardson: “It should simply be called the Global Tax Act. If there’s any connection to the US, we get to tax it first.”
What kinds of individuals need to fear that they might be accused of being “GILTI”?
Karen Alpert: “First of all, you have to be a US shareholder of a controlled foreign corporation. And if you are a US shareholder, if you are some sort of a US person and that’s a US citizen, Green Card holder, or other US entity, and you own more than 10% of a foreign corporation…But you must really be careful about whether you own that 10% because there’s attribution rules to attribute to you ownership of shares owned by related parties… So just owning 10% is not enough. Then, once you take those US shareholders, which are the US persons that own more than 10%, if you add all those US shareholders up and you get more than 50% of the corporation, then you have a controlled foreign corporation.”
What exactly does Section 951A (GILTI) do?
Karen Alpert: “951A GILTI is a major change in how the US is taxing active business income. Before, under the old rules, everyone planned by creating a corporation where they lived, they could defer their active business income and retain it inside, use the retained earnings to grow the business or save for retirement, or both at the same time. But now that deferral is severely limited or almost impossible. It’s also a problem. They have really complicated the foreign tax credit computation by making a separate basket for GILTI, as well as foreign branches. But that won’t affect individuals. But GILTI is a separate basket so you have to get the foreign taxes paid into that basket to be able to use them to offset US tax.”
“What they are doing is they are saying that they are going to take your income, everything the company has earned that has not already been taxed by the US, and call that tested income. And then subtract from that what we’re going to deem your tangible income to be 10% of your net appreciable assets and that’s your GILTI to start with. And we measure that for each CFC and most US individuals are going to have just one CFC so they will avoid the really complex parts of these regulations that have been coming out. Most of them are about complex aggregation rules. If you’re a corporation, you get to deduct 50% of that and, if you’re a corporation, you also get to say that that CFC of mine already paid tax on that income and I will use that as foreign tax credit.”
Download the full transcript HERE.