Dodging GILTI Bullet
Many taxpayers with foreign subsidiaries are faced with significant tax liabilities and compliance burdens due to the newly enacted section 951A GILTI tax (Global Intangible Low-Taxed Income tax). For those of you who are not familiar with the GILTI tax regime, we will talk how the provision may impact the US taxpayers with foreign subsidiaries and some of the planning options that should be considered.
GILTI is a new category of foreign income that must be added to the US taxpayers’ taxable income each year effective January 1, 2018. In a nutshell, it is a tax on foreign subsidiaries’ earnings that exceeds 10 percent return on their investment in hard assets (such as fixed assets used for operation). Under the GILTI tax regime, foreign subsidiaries’ income in excess of their 10% return on hard asset investment is considered as income attributable to the US intangibles, and US tax is imposed on such excess income each year.
Large, sophisticated multinational corporations served by big accounting firms already have been taking steps and utilized planning opportunities to avoid or minimize tax bills associated with the GILTI. For example, Qualcomm recorded approximately $570 million of tax benefit in Q4 2017 by implementing certain restructures to avoid GILTI and BEAT (Base Erosion & Anti-abuse Tax) taxes.
There are various strategies and planning ideas to avoid or reduce GILTI tax: check-the-box election, section 78 gross up with deemed paid foreign tax credit, section 962 election for individual taxpayers, transfer pricing planning, sourcing foreign income to subsidiaries with substantial hard asset, and ownership restructure to disqualify as controlled foreign corporation.
Taxpayers with concerns related to GILTI tax should consult with their tax advisors and explore some of the strategies mentioned above.