Features of Global Intangible Low-Taxed Income (GILTI)

Intellectual property (IP) rights, from the United States to foreign jurisdictions that have tax rates that are lower than those in the United States to stop the erosion of the tax base in the United States. With certain exemptions that apply when these types of earnings are achieved through the operation of active businesses. Before the Tax Cuts and Jobs Act (TCJA) was passed in 2017, companies and people in the United States were required to pay income taxes to the United States on all of their income, regardless of where it originated. However, U.S. firms were only required to pay taxes on the international earnings of their foreign subsidiaries when such earnings were distributed as dividends in the United States.

The Tax Cuts and Jobs Act (TCJA) altered the tax regulations that apply to multinational organizations by providing a broad exemption from U.S. corporate taxes for the profits of foreign subsidiaries' active enterprises, even if the revenues were repatriated. When calculating it, a general rule of thumb is to determine the taxable income (or loss) of a CFC as if the CFC were a person in the United States. After that, the following is what is taken away:

• Earnings of CFC that may be directly attributed to activities conducted inside the United States of America
• Revenue that would otherwise be considered subpart F revenue
• Income is not considered income under subpart F because it falls under an exemption for income already subject to a high tax rate.
• Dividends from related parties
• Revenue from the extraction of oil and gas

Tax Cuts and Jobs Act

Even though the Tax Cuts and Jobs Act (TCJA) reduced the top corporate income tax rate from 35 percent to a flat rate of 21 percent beginning in 2018, the corporation tax rate in the United States is still higher than the rate in many other nations. And certain tax havens, such as Jersey, Guernsey, and the Isle of Man, usually did not charge any corporation tax at all, with only a few low-rate exceptions for specific types of revenue derived from real estate, natural resources, and financial services.

Compared to establishing ownership of a valuable patent in the United States, establishing ownership of that patent in a foreign company located in a country with a lower tax rate or no tax at all might result in significant tax savings for a multinational corporation. The Tax Cuts and Jobs Act (TCJA) included provisions.

Intangible Assets

GILTI refers to the foreign income produced by CFCs through intangible assets like copyrights, trademarks, and patents. This kind of revenue is considered to be derived from outside the country. CFCs, also known as controlled foreign companies, are corporations based outside the United States in which U.S. shareholders possess more than 50 percent of the vote or value and individually own at least 10 percent of the CFC.

The GILTI Tax: An Explanation of Its Operation

It is not the revenue from particular intangible assets that is the primary focus of the tax on GILTI; rather, it is designed to function as a type of minimum tax on the profits generated by certain CFCs. It is necessary to do a complicated computation to calculate the percentage of a CFC's revenue corresponding to GILTI.

This formula, in effect, offers an exemption from the corporation tax in the United States for a return of 10 percent on the physical investments made by CFCs. The portion of a CFC's earnings over the exemption level represents income from investments in intangible assets, also known as more mobile assets. It is subject to taxation under the GILTI regime. Consequently, the tax on GILTI is especially relevant for CFCs whose earnings are high in proportion to their investment in physical or fixed assets, such as the provision of services, transportation, procurement, distribution, technology, and software. To the GILTI, additional regulations apply regarding the decreased foreign tax credit.

GILTI Methodology

The GILTI methodology requires rigorous and comprehensive cost and credit allocations, and it has the potential to produce tax rates that are greater than 13.125 percent, especially in situations in which income is subject to high tax rates in other countries. High tax rates imposed by the United States on money are subject to high tax rates in other countries.

Revenue of a Foreign Firm

The "subpart F income" of a CFC is the most important part of a CFC's overall revenue. The element of that income is presently subject to taxation for every U.S. shareholder who owns at least 10 percent of the CFC, either directly or indirectly. With certain exemptions that apply when these types of earnings are achieved through the operation of active businesses. However, U.S. firms were only required to pay taxes on the international earnings of their foreign subsidiaries when such earnings were distributed as dividends in the United States. Earnings from insurance policies written in a nation other than the one in which a CFC was incorporated.