The GILTI tax was implemented for tax years beginning after December 31, 2017, which means that this is the first tax season where GILTI must be considered. As the law is flushed out on actual returns, the effects are proving to be widespread to many taxpayers. However, the new regulations (details to come) and recent IRS announcements have given some assistance. It may be too late for 2018 GILTI planning, but the time is now to see if it applies and begin working on a plan for future tax years to minimize the consequences.
GILTI (Global Intangible Low-Taxed Income) was designed to prevent taxpayers from relocating intangible property outside the U.S. to low-tax jurisdictions. Nevertheless, the problem with the GILTI methodology is that it measures purported “intangible income” by looking at foreign depreciable assets v. foreign income, rather than actually measuring intangible generated income. This means that it may apply to income that is not necessarily intangible income if the foreign operations do not have substantial depreciable assets but have enough income to meet the thresholds.
GILTI applies to all U.S. shareholders that own (directly or indirectly) 10% or more of the total vote or value of a CFC (Controlled Foreign Corporation). CFC is defined as a foreign corporation that has U.S. shareholders that own (directly or indirectly) more than 50% of the voting power of all classes of its voting stock or total value of stock of a foreign corporation. Therefore, GILTI has a wide application.
The most obvious planning option is to change the ratio of foreign depreciable assets v. foreign income in order to fall out of the GILTI thresholds. However, this may not be a logistically feasible option for businesses. There is another option though for individual taxpayers. There are provisions which greatly lessen the effects of GILTI on U.S. corporations that own the CFC as opposed to individuals. Individuals can take advantage of these provisions by changing their holding structure of the CFC, but again, this may not be possible for other reasons both tax and non tax. If not, the individual may be able to make a Section 962 election, which would allow the taxpayer to have the same tax consequences on GILTI as a U.S. corporation. While this comes with many caveats and necessary analysis, because the effects can reach beyond GILTI, the IRS has confirmed some of these benefits would apply. Many taxpayers saw benefits from the 962 election during the transition tax, and once again it looks like this might be a good option to deal with another burdensome foreign tax law.
If you think GILTI may apply to you or your clients, please contact our office for a full analysis to determine how to properly report for the 2018 filing season, and to plan for the future.