Introduction
The introduction of Global Intangible Low-Taxed Income (GILTI) under the Tax Cuts and Jobs Act of 2017 has marked a significant shift in how the U.S. government taxes the income of controlled foreign corporations (CFCs). This provision primarily affects U.S. shareholders holding significant stakes in foreign companies, including many expatriates who operate businesses overseas. This expanded discussion delves deeper into what GILTI is, its impact on U.S. expatriates, compliance requirements, and potential mitigation strategies.
What is GILTI?
GILTI was enacted to curb profit shifting to low-tax jurisdictions by imposing a minimum tax on foreign earnings. The measure targets income earned by CFCs that exceed a 10% return on the corporation’s tangible assets. It affects any U.S. person who owns 10% or more of a foreign corporation either directly, indirectly, or constructively. GILTI is calculated on an aggregate basis, which means it sums up the income and expenses of all the CFCs an individual owns before applying deductions and credits.
Calculation of GILTI
The GILTI calculation starts with the total income of CFCs minus certain deductions including depreciation on tangible assets (qualified business asset investment or QBAI). The resulting figure is the net tested income which is then reduced by 10% of the corporation’s QBAI. This final amount is included in the U.S. shareholder’s income and taxed at individual rates, albeit with the potential for partial offset through foreign tax credits. However, due to limitations on these credits under GILTI, taxpayers often face a higher effective tax rate on their foreign income.
Impact on U.S. Expats
Tax Burden on Individual Expatriates
The GILTI provisions can dramatically increase the tax obligations of U.S. expatriates. Since it applies regardless of whether profits are repatriated, it can lead to scenarios where expatriates pay taxes on income that is also taxed in the country of operation—effectively creating a scenario of double taxation. This is particularly challenging for expats in countries with lower tax rates than the U.S. or different tax structures that do not align well with GILTI’s provisions.
Strategic Financial Planning Challenges
For expatriates, GILTI complicates the financial landscape significantly. Strategic business decisions, including reinvestment and business expansion plans, must now account for the additional U.S. tax implications. Expatriates might need to reevaluate their corporate structures, financing methods, and profit repatriation strategies to navigate GILTI effectively.
Compliance Requirements
Compliance with GILTI requires thorough documentation and timely filing. U.S. shareholders of CFCs must file Form 8992 to report GILTI, alongside their regular tax returns. Additionally, because GILTI calculations can affect estimated tax payments, expatriates must adjust their quarterly tax payments to avoid underpayment penalties.
Potential Strategies to Mitigate GILTI Impact
To potentially reduce the impact of GILTI, expatriates can explore several strategies:
– High-Tax Exception: Income subject to foreign taxes at an effective rate higher than 90% of the U.S. corporate tax rate is exempt from GILTI. This can significantly alleviate the tax burden for expatriates in high-tax countries.
– Section 962 Election: Individuals can choose to be taxed as a corporation for GILTI purposes, which might allow for a more favorable tax rate and the use of foreign tax credits to reduce U.S. tax liability.
– Corporate Restructuring: Reassessing the entity structure and inter-company transactions to optimize the tax outcomes under GILTI provisions.
Conclusion
GILTI provisions add a significant layer of complexity to the tax obligations of U.S. expatriates. With proper planning and strategic financial management, it is possible to navigate these requirements effectively. Staying informed and proactive is key to managing potential liabilities and protecting your overseas investments.
Need expert guidance?
For detailed guidance on managing your GILTI liabilities, contact our COO, Anshul Goyal, our COO, at anshul@kkca.io. Anshul’s expertise in international tax will help you devise strategies that align with your financial goals.
Disclaimer
This article is provided for informational purposes only and does not constitute financial, tax, or legal advice. Readers are advised to consult a qualified professional for advice regarding their specific situation.
FAQs
1. What is GILTI and who does it affect?
GILTI, or Global Intangible Low-Taxed Income, affects U.S. shareholders of controlled foreign corporations (CFCs) by taxing their foreign income.
2. How is GILTI calculated?
GILTI is calculated by deducting 10% of the tangible asset’s depreciation from the CFC’s income, then including the remainder in the shareholder’s income.
3. Can GILTI lead to double taxation?
Yes, GILTI can lead to double taxation, especially for expatriates in countries with lower tax rates than the U.S., as it is taxed regardless of repatriation.
4. What is a Section 962 election?
A Section 962 election allows individuals to be taxed as a corporation for GILTI purposes, potentially lowering the tax rate and improving the use of foreign tax credits.
5. How can I reduce my GILTI tax?
Strategies to reduce GILTI include making a high-tax exception, restructuring corporate entities, and considering a Section 962 election.
6. What forms do I need to file for GILTI compliance?
U.S. shareholders need to file Form 8992 and possibly adjust their Form 1040 according to GILTI calculations.
7. What is the high-tax exception in GILTI?
The high-tax exception allows taxpayers to exclude income taxed at a foreign rate higher than 90% of the U.S. corporate tax rate from GILTI.
8. Does making a Section 962 election always reduce taxes?
While a Section 962 election can provide benefits, its impact depends on individual circumstances and the specific tax situation of the taxpayer.
9. Are there penalties for failing to comply with GILTI?
Yes, failure to comply with GILTI reporting and payment can result in penalties and interest on unpaid taxes.
10. Who can help with GILTI tax planning?
For expert assistance with GILTI planning and compliance, contact Anshul Goyal at anshul@kkca.io. Anshul specializes in international taxation and can help navigate complex tax rules.