In the early to mid-2010s, the practice by some U.S. companies of shifting income and profits to foreign subsidiaries in low-tax countries sparked widespread controversy. This legal strategy typically involved transferring income-generating intangible assets such as patents and copyrights to foreign subsidiaries, thereby deferring U.S. tax obligations until the profits were repatriated to the United States as dividends.

The Tax Cuts and Jobs Act (TCJA) of 2017 changed how these foreign earnings are taxed. Although active business income of Controlled Foreign Corporations (CFCs) is still taxed at local rates, such income is now generally exempt from the regular 21% U.S. corporate tax (provided it is not subject to CFC anti-deferral rules), even when repatriated.

This change created a potential risk: if companies transferred more assets, especially high-profit intangible assets, overseas, it could erode the U.S. tax base and reduce tax revenue.

To address this concern, Congress created a new income category in the TCJA: Global Intangible Low-Taxed Income (GILTI).

GILTI is designed to approximate income generated from intangible assets overseas and imposes U.S. tax on that income.

"Congress enacted GILTI as a CFC anti-deferral rule," Joseph Calianno (CPA, JD, LLM Tax, MBA), partner and international technical tax practice leader at BDO, told CFO Dive. "Before GILTI came along, there was and still is the Subpart F regime, which is another CFC anti-deferral rule. With the advent of GILTI, more income of CFCs is being taxed in the U.S. even if not repatriated."

How GILTI works

Raymond Wynman (CPA), managing director of the international tax practice at Global Tax Management Inc., summarized the GILTI calculation steps for CFO Dive (numerical examples are in the table at the end of the article).

Step 1

Start with the total after-tax earnings of the foreign entity. Subtract Subpart F income, Subpart F high-tax income, and U.S. source income. Subpart F income is taxed immediately in the U.S. and typically refers to passive-type income or income easily shifted from the U.S. to foreign jurisdictions. The remainder is the CFC's "tested income."

Step 2

Calculate the CFC's Qualified Business Asset Investment (QBAI), which is essentially net depreciable tangible assets. Multiply QBAI by 10%; this amount is treated as a return on tangible assets and is not subject to U.S. tax. Subtract this 10% amount from tested income to arrive at "net deemed intangible return income."

Step 3

Subtract net deemed tangible return income from tested income to arrive at GILTI before the foreign tax gross-up.

Step 4

Calculate the foreign taxes attributable to GILTI, which is the foreign tax gross-up.

Step 5

Calculate the U.S. tax on GILTI plus the foreign tax gross-up (together, "GILTI"). For tax years beginning after December 31, 2017, and before January 1, 2026, corporations are entitled to a 50% GILTI deduction. The remaining 50% is taxed at the 21% U.S. rate, with a credit for up to 80% of foreign taxes paid.

This is a high-level explanation of GILTI, but it suffices to illustrate the intent and mechanics of the rule. CFCs that invest more in tangible depreciable assets have higher QBAI and relatively less GILTI exposure than similar service and technology businesses. "Technology companies and service companies with intellectual property are actually hit harder than tangible manufacturers," Wynman said.

GILTI planning

Barret Pinto (CPA), tax director at CBIZ & MHM, told CFO Dive that corporate clients are considering various GILTI minimization options. Increasing QBAI is one possibility (there isinteresting academic research）。

on post-TCJA capital investment by multinationals). Transfer pricing analysis can determine whether a company is reporting the correct amount of CFC income. "Is there an opportunity to adjust transfer pricing to reflect certain deductions or reduce income in that jurisdiction?" Pinto asked. "Can a U.S. company move debt into CFCs to generate interest expense deductions in those foreign companies?"

Wynman advises companies to review earnings, deductions, and foreign taxes to determine whether they can use foreign tax credits to minimize GILTI. The goal is "to minimize the income inclusion by adding additional deductions or maximizing foreign taxes," he said.

One possibility is accelerating foreign taxes to use as credits. Another is increasing high-tax income. Under proposed Treasury regulations issued in June 2023, taxpayers may elect to exclude items of CFC income that are taxed at a foreign income tax rate exceeding 90% of the current 21% U.S. maximum corporate rate (i.e., 18.9%). However, Wynman advises caution in adopting this strategy until the regulations are finalized.

Calianno suggests that U.S. companies considering the acquisition of a foreign company from an unrelated party in a taxable transaction should study the possibility of making a Section 338(g) election. He said that when the election is available, once the foreign target is owned by the acquirer, its asset basis is increased for U.S. federal tax purposes (assuming asset appreciation).

This could result in increased depreciation of tangible assets and amortization of intangibles of the CFC, and reduce gain upon the sale of such assets. This could cause the CFC to generate less tested income or generate tested losses, thereby reducing GILTI exposure. "Additionally, if the QBAI basis is increased, under the GILTI calculation formula, assuming the CFC owning the QBAI generates positive tested income, the GILTI inclusion amount may be reduced," he said.

Don't overlook GILTI

Calianno said the GILTI regime has changed the international tax landscape. "U.S. multinationals with CFCs now have to spend more time determining their GILTI exposure, because in the past, with only the Subpart F regime, I think most U.S. multinationals were able to manage," he said. "Now taxpayers have to consider both Subpart F and GILTI rules. GILTI is broader, and if income is not included under Subpart F, it must be tested under GILTI rules. Therefore, more income generated by CFCs is now taxed in the U.S. through the GILTI regime, which has had a fairly significant impact."

Simplified GILTI calculation example

Assumptions:

1. CFC annual pre-tax income: $5,000,000

2. Qualified Business Asset Investment (QBAI): plant and equipment (net of depreciation) $15,000,000

Case 1: 7.5% foreign tax rate Case 2: 15% foreign tax rate
Pre-tax income $5,000,000 $5,000,000
Less: Foreign tax on $5,000,000 $375,000 $750,000
Tested income $4,625,000 $4,250,000
Net deemed tangible return income ($15,000,000 * 0.10) $1,500,000 $1,500,000
Global Intangible Low-Taxed Income (GILTI) $3,125,000 $2,750,000

Foreign tax attributable to GILTI (3,125,000/4,625,000×375,000)

or

（3,125,000/4,625,000×750,000）

 $253,378 $485,294
GILTI inclusion amount $3,378,378 $3,235,294
Less: 50% GILTI deduction ($1,689,189) ($1,617,647)
GILTI subject to U.S. tax $1,689,189 $1,617,647
U.S. tax on GILTI (21%) $354,729 $339,706
Less: Foreign tax credit attributable to GILTI × 80% $202,703 $338,235
GILTI tax due = U.S. tax - foreign credit $152,027 ($48,529)*

*Excess credits cannot be carried over or back. The author thanks Raymond Wynman (CPA) for his assistance with this example.