The TCJA’s treatment of so-called intangible income has created the most dramatic change to the U.S. international tax system in in its entire history.
Whereas, income earned through foreign corporations was generally not subject to U.S. income tax until actually repatriated, now all such income and related assets are subject to rigorous testing on a quarterly basis. Global Intangible Low-Taxed Income (“GILTI”) is essentially any intangible income earned by a Controlled Foreign Corporation (“CFC”) that isn’t already subject to U.S. income tax by the subpart provisions, whether low-taxed or not. A particularly unique aspect of the GILTI provision is that the overall inclusion amount is determined at the U.S. Shareholder level by aggregating amounts of all CFCs within the U.S. shareholders’ chain of ownership.
This GILTI income is immediately subject to U.S income tax and sheltered a deduction equal to 50% of the inclusion. And, domestic corporations are allowed an indirect foreign tax credit equal to 80% of the otherwise allowable indirect foreign tax credit. In theory, if the GILTI income is subject to a foreign effective rate of tax of at least 13.125%, there will not be any incremental tax on that income. The FTC of 13.125% x 80% = 10.5%, which is equal to 50% of the corporate income tax rate applicable to GILTI, considering the 50% GILTI deduction.
On a positive note, IRC Section 250 allows a 37.5% deduction for foreign-derived intangible income (“FDII”) earned by domestic corporations, thereby reducing the effective rate of U.S. corporate income tax on FDII from 21% to 13.125%.(21% x (1-37.5%)). So, whether the intangible income is GILTI or FDII, it will be subject to an effective rate of corporate tax of 13.125%.
Forte has well-developed processes for efficiently implementing the GILTI/FDII provisions utilizing VantagePoint, its proprietary software.