The Tax Cuts and Jobs Act brought about many changes for multinational businesses. One of the more significant changes was the application of Global Intangible Low-Taxed Income (GILTI) to foreign subsidiaries. In a previous insight, we outline the key considerations in tax reform for international businesses. This insight offers the five reasons to consider GILTI and provides an illustrative example of its impact.
Five Reasons to Consider GILTI
- Some individual taxpayers are seeing an increase of up to 20% in global tax liability due to GILTI.
- Know your options! Reviewing current ownership structures may significantly reduce global tax.
- Individuals electing corporate treatment under IRC 962 may mitigate the U.S. tax impact in lieu of restructuring.
- The GILTI calculations are complex and detailed historical information is needed. Are you/your accountant ready to take on the challenge?
- Final GILTI regulations are almost here and may apply retroactive to 2018! How will they impact your strategy?
Estimated Tax Liability of Foreign Structure with U.S. Individual Shareholder
For illustration purposes only. Actual results will vary based on facts and circumstances.
Pre Reform | Post Reform | Notes | |||
Type of Foreign Entity | Flow Thru | Corp | Flow Thru | Corp | |
Foreign Net Income | 1,000,000 | 1,000,000 | 1,000,000 | 1,000,000 | (1) |
Foreign Corporate Income Tax Rate | 15% | 15% | 15% | 15% | |
Foreign Corporate Income Tax | 150,000 | 150,000 | 150,000 | 150,000 | |
Foreign E&P Amount | 850,000 | 850,000 | 850,000 | 850,000 | (2) |
Foreign Dividend Withholding Tax Rate | 5% | 5% | 5% | 5% | |
Forign Dividen Withholding Tax | 42,500 | 42,500 | 42,500 | 42,500 | |
U.S. Individual Federal Tax Rate | 43.4% | 23.8% | 40.8% | 40.8% | (3) |
U.S. Individual Tax Before Foreign Tax Credits | 434,000 | 202,300 | 408,000 | 346,800 | |
Foreign Tax Credit | 192,500 | 42,500 | 192,500 | 42,500 | |
Residual Individual U.S. Tax | 241,500 | 159,800 | 215,500 | 304,300 | |
Total Income Tax Liability | 434,000 | 352,300 | 408,000 | 496,800 | |
ETR | 43.40% | 35.23% | 40.80% | 49.68% | (4) |
Notes:
- Assumed all incomes is subject to GILTI due to very little depreciable assets.
- Assumed all foreign E&P is distributed annually.
- Assumed NIIT of 3.8% applies.
- Example does not illustrate IRC 962 election.
As you can see, GILTI can have a significant impact on international tax liability of an individual shareholder. A structure change may be of benefit given foreign tax credits on GILTI income.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.