IRS Publishes GILTI Tax Forms
The IRS has published both of the forms U.S. shareholders
need to compute amounts tied to global intangible low-taxed income (GILTI). The
GILTI provisions were enacted as part of the Tax Cuts and Jobs Act (TCJA) and apply
to all U.S. persons that own at least 10 percent of a foreign corporation.
The GILTI rules operate as a worldwide backstop to the new
territorial-style provisions that provide U.S. corporate shareholders an
exemption on certain foreign-source dividends.
Policymakers recognized that the exemption for foreign-source dividends
could leave the U.S. system more vulnerable to base erosion and profit shifting
and enacted the GILTI rules to curb such behavior.
The GILTI provisions impose a minimum tax on certain
low-taxed income of foreign corporations, but allow U.S. corporate shareholders
to reduce such income with a deduction. For 2018, the deduction amount is 50%
of GILTI. The U.S. taxpayer is also allowed to take an 80% foreign tax credit.
This means the GILTI tax should only apply to foreign income with an effective
tax rate below 13.125% ((50% x 21
corporate tax rate)/80 percent foreign tax credit)).
For example, if a foreign
corporation generates $100 of GILTI, a U.S. corporate shareholder is eligible
for a $50 GILTI deduction. The $50 of net income will be subject to the U.S.
tax rate of 21% for a total tax of $10.50. If the foreign tax rate is $15, there
will be a $12 foreign tax credit (80% of $15) against the $10.50 of GILTI tax.
Thus, the U.S. tax liability after applying the credit is $0 ($12 foreign tax
credit exceeds the $10.50 of GILTI tax).
In September 2018, the Treasury Department issued proposed
regulations on the treatment of GILTI. The rules provide guidance with respect
to determining a U.S. shareholder’s pro rata share of GILTI income, relevant
aggregation rules, and the interaction of such rules with other Code sections. The
new GILTI forms and schedules issued by the IRS are consistent with the
guidance provided by the Treasury Department to date.
Form 8992, U.S. Shareholder Calculation of Global Intangible
Low-Taxed Income, includes three sections—Part I, Part II, and Schedule A. The U.S.
taxpayer begins their calculation with Schedule A. Many of the amounts on
Schedule A of Form 8992 will come directly from the taxpayer’s Form
5471-Information Return of U.S. Persons with Respect to Certain Foreign
Corporations. The GILTI provisions piggyback on the long-standing anti-abuse
regime referred to as Subpart F, which governs transactions carried out by
controlled foreign corporations.
After completing Schedule A, the U.S. taxpayer will enter all
relevant amounts onto Part I of Form 8992. If there is net income from Part I,
the taxpayer will complete Part II to determine their GILTI inclusion amount.
A U.S. corporate shareholder will enter its GILTI inclusion amount
on Form 1120, Schedule C, Line 17. A noncorporate shareholder will enter their
GILTI amount on Line 21 (Other Income) of Form 1040.
Form 8993 is used to compute the U.S. taxpayer’s GILTI
deduction. The GILTI deduction is only available to U.S. C corporations (REICs,
RITs, and S corporations are not eligible for the deduction).
The deduction form is organized into four parts. Part I is
the determination of deduction eligible income. Part II is the determination of
deemed intangible income. The taxpayer will determine deemed intangible income
by taking the deduction eligible income from Part I and subtracting 10% of their
qualified business asset investment (QBAI).
In Part III, the taxpayer computes foreign derived deduction
eligible income (FDDEI) and divides it by the deduction eligible income from
Part I to determine the foreign derived ratio. This ratio carries over to Part
IV, where the GILTI deduction is determined in coordination with the deduction
for foreign derived intangible income. The GILTI deduction amount is entered on
Schedule C of Form 1120.
The GILTI provisions are intended to penalize multinational entities that hold intangible assets abroad in low-tax foreign countries. If a U.S. taxpayer is ‘guilty’ of generating GILTI, such income will not only be ineligible for the 100-percent dividends received deduction, but it will also be subject to residual taxation by the United States.
Tara Fisher has been practicing international tax for nearly 20 years. Her professional background includes working for the U.S. Congress Joint Committee on Taxation, the national tax practice of PricewaterhouseCoopers, the University of Pittsburgh, and American University in Washington D.C. She is a licensed CPA and holds both an undergraduate and graduate degree in accounting from the University of Virginia.