You have very possibly heard of GILTI, but you may not fully understand how it works. GILTI was created in Section 951A of the US tax code by the 2017 Tax Cuts and Jobs Act, aka, Tax Reform, and involves incredibly complicated calculations and huge additional compliance burdens starting for tax year 2018, and for certain types of shareholders in foreign corporations, can dramatically increase taxes. In this article, US Global Tax explains how it works, so you can lower your tax bill, or the tax bill of your clients.
Unless a Controlled Foreign Corporation (CFC) has a large tangible asset base to apply in the calculations, most of a CFC's income will be subject to current tax even if it's all from selling of services or goods. The reason why this is true is because of the convulted way GILTI is calculated. If you are an individual with a CFC, it is critical to get an opinion on your GILTI exposure even if you have no intangible assets.
Tax Reform was sold as a simplification of the US tax code, and for US taxpayers with simpler returns, their tax filings did become simpler. However, for those with interests in corporations overseas, compliance got more complicated.
The purpose of the law was to discourage something called “base erosion.” Base erosion is basically profit shifting from something that is US taxable to something that is not taxable by the US. GILTI changes the definition of what your tax base is, making it larger, thus subject to immediate taxes, as opposed to being able to defer taxes until a later date.
Some people believed that only large corporations needed to worry about GILTI.
This myth is true with regards to BEAT, Base erosion alternative tax - BEAT only affects US corporations wiht $500 MM + in revenue. However it is a different story for GILTI. US Shareholders in foreign corporations that have a lot of a passive income will be hit the hardest. For instance, if your company has a lot of income from patent royalties that used to be US-tax deferrable, GILTI could affect you significantly.