August 16, 2021
International Taxation and GILTI rules
What do you mean, guilty?! I’m an honest business person trying to grow my company!
We aren’t talking about “guilty” in a courtroom sense. In the tax realm, GILTI, Global Intangible Low-Taxed Income, is a form of alternative minimum tax for foreign income earned by your US-owned business. While there is no crime in wanting to expand your business to reach the international market, the rules regarding reporting and taxing foreign income can make a taxpayer feel handcuffed.
Foreign income reporting in itself is not a new concept. Most taxpayers with international activity or ownership are aware of the requirements of Forms 5471 and 5472. Form 5471 is required to be filed by officers, directors, or shareholders of certain foreign corporations, disclosing US ownership and the activity of a foreign entity. Form 5472 reports the activity of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business, or more simply, the foreign ownership of a US entity. GILTI is related to Form 5471.
Introduced as part of the Tax Cuts and Jobs Act, the intent of Section 951A is to discourage multinational companies from moving profits on easily moved assets, such as intellectual property, abroad to lower-taxed countries. Controlled Foreign Corporations (CFC) are defined as a foreign entity that is owned 50% or more by US shareholders. It is the income from CFCs that trigger the GILTI calculation.
While the intent of the legislation was to discourage offshore parking of profits in a lower-tax country, the application is much less straightforward. The inclusion of the term “intangible” in the title is a bit of a misnomer. The calculation takes the CFC’s total income, less 10% of the CFC’s investment in depreciable tangible assets, minus certain interest expenses. Therefore, this tax is not specific to income from intangible assets but on a deemed tangible income return from earnings and profits.
Strategic planning is important when considering the application of GILTI rules and other international tax issues. Failing to consider the implications of these rules can sometimes become an unpleasant surprise at tax time. The international tax team at Wilke & Associates can help guide you through this process and ensure that you are in compliance. Contact us for more information.
Jennifer is a Tax Manager for Wilke & Associates CPAs & Business. Jenn is not your everyday tax pro. She is a seasoned accounting and tax professional with direct experience in all areas of the balance sheet, income statement, income tax preparation, and business consulting.