06 Mar Exciting Update Regarding GILTI Tax
The IRS has just published proposed regulations on internal revenue code Sec. 250 and how it relates to Global Intangible Low Taxed Income (GILTI). For those unaware, the new GILTI tax created by the Tax Cuts and Jobs Act of 2017 comes into effect for tax years starting in 2018, and has a big impact on U.S. individuals owning non-U.S. corporations (controlled foreign corporations).
The way that the GILTI tax was portrayed until now was that any income (with few exceptions) that was earned by non-U.S. corporations would be looked at as if it was earned by the individual U.S shareholders. This would apply to any non-U.S. company owned more than 50% directly or indirectly by U.S. people. To help mitigate the tax burden to U.S. corporations holding foreign corporations, under Sec. 250, the IRS allowed the company to take a 50% deduction on this GILTI inclusion. However, this 50% deduction applied to U.S. corporations and not to U.S. individual taxpayers. This meant that the individual taxpayer was subject to a very harsh secondary tax without foreign tax credits to mitigate the U.S. tax. For a more in-depth analysis, see our prior posts here.
Now, according to the new Section 250 proposed regulations, an individual filing with a section 962 election would be eligible for the same 50% deduction received by a U.S. corporation. By way of introduction, the section 962 election is an annual election that allows an individual owning a non-U.S. corporation to report this income as if it was a U.S. corporation that is entitled to foreign tax credits paid by the corporation. This would mean that the GILTI income would be taxed at a flat 21% corporate rate (the 2018 U.S. corporate tax rate) rather than regular individual rates which can reach as high as 37%. When you combine the 50% Section 250 deduction and foreign tax credits, it results in a reality that as long as the foreign corporate tax paid is 13.125% or more, then the new GILTI tax will net to zero.
This new update increases the level of professionalism and diligence needed to properly report the non-U.S. corporate holdings and activity through section 962 calculations. However, it creates a very satisfying result of greatly easing the tax burden of expats living abroad.
There are still cases where one filing with a section 962 election would owe tax under the new GILTI rules, so it is important to discuss the situation and exact details with a competent CPA. As always, please feel free to get in contact with us to see how we can help you.
The writer is the manager of the Individual & Partnership Department at Philip Stein & Associates.