Global Intangible Low-Taxed Income (GILTI) is a key U.S. tax provision designed to close loopholes used by multinational companies to shift profits to low-tax jurisdictions. Introduced by the Tax Cuts and Jobs Act (TCJA) in 2017, GILTI ensures that some foreign income earned by U.S. shareholders of controlled foreign corporations (CFCs) is taxed annually in the United States, regardless of whether the income is brought back to the U.S.
Background and Purpose
Before GILTI’s enactment, many U.S. businesses could defer U.S. taxes on foreign earnings and shift profits to countries with very low or zero corporate tax rates, often by holding intangible assets like patents or trademarks in these jurisdictions. GILTI targets this practice by taxing foreign income exceeding a set return on tangible assets, focusing on intangible income that is easily shifted.
The primary goal is to level the tax playing field and incentivize companies to maintain profits and jobs within the United States.
How GILTI Works
For U.S. shareholders owning 10% or more of a foreign corporation, the tax code requires annual inclusion of GILTI in their taxable income. GILTI is calculated as the foreign earnings of the CFC over a 10% return on its tangible assets. This excess is generally assumed to be from intangible assets, which are easier to move across borders for tax advantages.
U.S. shareholders must report their pro-rata share of the CFC’s GILTI on their U.S. tax returns, paying tax even if those earnings remain offshore.
Who Does GILTI Affect?
- U.S. individuals, corporations, partnerships, and S corporations owning at least 10% in a CFC.
- Multinational businesses with subsidiaries abroad.
- Investors with significant foreign ownership stakes.
Small investors with negligible foreign income typically are not impacted.
Tax Rates and Deductions
For corporations, GILTI is taxed at ordinary income rates, but with a 50% deduction under IRC Section 250, leading to an effective tax rate near 10.5% in 2025. Individual shareholders pay based on their ordinary income tax rates without this deduction unless making special elections like Section 962.
Managing GILTI Tax Liability
- Foreign Tax Credits: U.S. taxpayers can claim credits for foreign income taxes paid to reduce double taxation. For more on foreign tax credits, see Foreign Tax Credit.
- Section 962 Election: Individuals owning CFCs can elect to be taxed at corporate tax rates on GILTI, potentially lowering their tax liability.
- Asset Allocation: Increasing investment in tangible assets abroad can reduce the portion of income taxed under GILTI by boosting the routine return allowance.
- Professional Tax Advice: Given GILTI’s complexity and evolving regulations, consulting tax professionals is essential.
Common Misconceptions
- GILTI applies to all foreign income: It only applies to income exceeding a routine return on tangible assets of a CFC.
- Tax is only due on repatriated income: GILTI is taxable annually, regardless of income distribution.
- Ignoring reporting: Proper forms, such as Form 5471, must be filed to report GILTI.
Real-World Example
A U.S. software company owns a subsidiary in a country with a 5% corporate tax rate. The subsidiary earns $1 million predominantly from software licenses (intangible income). After subtracting a 10% routine return on tangible assets, the remaining income is GILTI. The U.S. parent reports and pays U.S. tax on this GILTI amount, decreasing the tax benefit of shifting profits to the low-tax country.
Summary Table: Key GILTI Facts
| Feature | Description |
|---|---|
| Who Must Report | U.S. shareholders owning ≥10% of a Controlled Foreign Corporation (CFC) |
| Income Subject to GILTI | Foreign intangible income exceeding 10% return on tangible assets |
| Tax Timing | Annually, regardless of repatriation |
| Corporate Tax Rate | ~10.5% effective after 50% deduction |
| Foreign Tax Credit | Available to offset double taxation |
| Strategic Options | Asset allocation, tax credits, Section 962 election |
Further Resources
- IRS Global Intangible Low-Taxed Income (GILTI): IRS.gov
- For detailed foreign tax credit guidance: Understanding Tax Treaties and Foreign Tax Credits
- Controlled Foreign Corporation definition and filing requirements: Controlled Foreign Corporation (CFC)
Understanding GILTI is crucial for U.S. taxpayers with foreign business interests. It ensures the U.S. tax system captures income from low-tax countries and discourages profit shifting through intangible asset placements abroad. Staying informed and consulting experts can help minimize surprises during tax seasons.