Why GILTI and FDII Can Apply to Anyone

The Tax Cuts and Jobs Act of 2017 (TCJA) drastically changed international tax planning and structuring rules. Two notable provisions are the foreign-derived intangible income (FDII) and the global intangible low-taxed income (GILTI), which work in tandem to incentivize domestic corporations to keep their operations and intangible property in the U.S. even when serving foreign markets.

The FDII and GILTI use the “carrot and stick” approach to keep business activity and intangible property in the U.S. The FDII is the “carrot” that rewards companies for supporting operations in the U.S., and GILTI is the “stick” that taxes companies for moving their operations or intangibles overseas. The purpose of these provisions is to address concerns about domestic companies moving their profits to low-tax countries, and encourage multinational corporations to export more goods and services from the United States.

Under the FDII, eligible U.S. corporations can claim a deduction on a portion of their income derived from foreign sales or services that involve the use of certain intangible assets within the United States. FDII is provided with a special lower tax rate of 13.125 percent (as opposed to the standard 21 percent tax rate). This deduction effectively reduces the tax rate on qualifying income and makes it more tax-efficient for companies to engage in certain international transactions.

GILTI is a category of income earned abroad by U.S.-controlled foreign corporations (CFCs) subject to a minimum tax on foreign earnings. This tax means that earnings from easily moved assets, like intellectual property, owned by U.S. companies would get taxed by the U.S. regardless of where they may be located outside U.S. borders. GILTI was designed to have a tax rate between 10.5 and 13.125 percent, but companies that are not entitled to the FDII deduction may pay much higher tax rates.

The interesting, and sometimes confounding, part of these rules is that neither FDII or GILTI actually assess intangible income. Instead, the calculation is based off an arbitrary amount of income deemed to be from fixed assets, with all remaining income considered intangible. This means that GILTI can affect any business in any industry, even if there is not any intangible income. Therefore, all businesses should consider the potential harm or benefits of FDII and GILTI.

Understanding the fundamentals of these federal tax provisions imposed on the U.S.-based corporation’s foreign earnings is essential to international tax planning. If you have any questions about how the FDII and GILTI may impact your tax liability, please don’t hesitate to contact the attorneys at Hone Maxwell LLP.

Disclaimer: Hone Maxwell LLP articles and blogs are not intended as legal advice. Additional facts, facts specific to your situation or future developments may affect subjects contained herein. Seek the advice of an attorney before acting or relying upon any information herein.

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