In August, the Senate Finance Committee released draft legislation that would overhaul the international provisions of the Tax Cuts and Jobs ACT (TCJA). Included in these changes are alterations of the GILTI regime.
What is GILTI?
Introduced by the 2017 TCJA, Global Inclusion of Low-Tax Income (“GILTI”) is a category of income earned abroad by U.S-controlled foreign corporations (CFCs). GILTI was instituted to discourage the shifting of profits from the US to foreign subsidiaries’, which was then only taxable if the earnings were repatriated as dividends.
A U.S shareholder’s GILTI inclusion is generally defined as the excess of a US Shareholder’s aggregated “net tested income” over its net deemed tangible income return (“net DTIR”). While this calculation can be complex, for simplicity’s sake “tested income” is the corporation’s gross income less certain deductions, including income effectively connected with a US trade or business, Subpart F income, dividends received by a related person, and certain foreign oil & gas income. Net DTIR is the excess of 10% of the aggregate of the U.S. Shareholder’s pro-rata share of Qualified Business Asset Investment (QBAI), which is essentially the bases of items held abroad including buildings, machinery, or equipment.
What changes have been proposed?
The draft legislation would change the structure of GILTI in a few key ways. First, it would eliminate DTIR and QBAI from the GILTI calculation itself. US Shareholders would include in gross income their net CFC tested income, instead of GILTI as currently calculated. The elimination of QBAI would likely discourage taxpayers from owning depreciable assets abroad.
Second, GILTI would be calculated on a country-by-country bases, meaning losses incurred in one country would no longer offset income earned in another. This could be bad news for taxpayers with CFCs in multiple countries. This change would also limit the application of the Foreign Tax Credit for many taxpayers, which currently functions in tandem with GILTI.
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