GILTI - Global Intangible Low-Taxed Income - What is it?
GILTI was introduced as part of the Tax Cuts and Jobs Act (TCJA), that we have previously discussed.
GILTI is specifically designed to end, or at least curb the transfer pricing tax headlines which have hit the news in recent years. Its target is intangible income of Controlled Foreign Corporations (CFCs).
Despite an overall aim of simplifying the US tax system under TCJA, GILTI is one of the areas where it has become much more complex. To calculate GILTI involves very complicated calculations, involving huge amounts of information, and consideration of tangible and intangible assets.
A more specific target of GILTI is “base erosion”. Broadly speaking, this is the tactic of shifting profits from one tax jurisdiction to another, through intangible assets. For example, when a head office (based in a low tax country) charges very high amounts to its subsidiaries for use of its branding. This way, the subsidiaries make little to no profit (and thus pay little tax), and the large profits are recorded in the low tax country. GILTI begins to include this passive income (the royalties paid) from the intangible asset (the branding) in the taxable base income of the CFC.
A brief reminder on what a CFC actually is:
CFC – A foreign company owned 50% or greater, by 5 or less US shareholders
US Shareholder - A U.S person owns directly, indirectly, or constructively 10 percent or more of the total combined voting power of all classes of stock entitled to vote in a foreign corporation.
Now, for the shareholders of foreign corporations with significant amounts of passive income (this could be any NZ or AU business), a large tax liability could result. This affects even small or medium sized Australian or New Zealand businesses. Specifically, those with royalty or patent income are most likely to be affected by this new legislation.
Unlike Section 965, GILTI isn’t a new type of tax, or special tax rate. Instead, it simply expands on the concept of what is taxable income. Whilst these forms of income were previously covered in some form by Subpart F, they now fall under a broadened tax base.
As part of the tax calculations, we take into account the tangible asset base of a CFC. For companies that do not have a large tangible asset base, there is a large likelihood of being impacted by this new tax. A very generalised summary of this is a tax on any income more than 10% of the CFC’s qualified business asset investment (QBAI).
It is important to remember, GILTI impacts the shareholders of the CFC, which means it comes down to individual tax returns (of the shareholders). This is the same as the section 965 transition tax.
If you are a US citizen with a shareholding in a CFC and have further questions, call us today on +64 9 373 2949, or +61 2 9221 7130.