Spring 2018 issue of Horizons

Global Intangible Low Taxed Income An exception to the territorial system of taxation is a new category of foreign income called Global Intangible Low Taxed Income (GILTI). If a U.S. taxpayer owns certain types of foreign corporations, there may be a U.S. minimum tax imposed on net income over a routine or ordinary return. The GILTI tax is intended to catch “mobile income” tax structures that allowed some multinational corporations to pay low to no taxes on offshore earnings. But in realty, GILTI throws a much wider net in the international waters. Lowering the corporate rate from 35% to 21% presumably reduces the incentives to shift profits outside the United States. The GILTI provision reflects a concern that the change to a territorial system could increase income-shifting strategies to low to no tax jurisdictions because any shifted profits could be permanently exempt from U.S. tax. The inclusion of GILTI in a U.S. shareholder’s income is intended to reduce income migration strategies by ensuring that controlled foreign corporations’ (CFC) earnings (those considered to be “non-routine”) are subject to a minimum amount of U.S. tax. The calculation for GILTI is based on a company’s qualified business asset investment (QBAI). QBAI are assets used by the taxpayer that are depreciable and do not include intangible property (i.e. patents, trademarks or other amortized assets). Income in excess of 10% of QBAI is “deemed intangible income.” For example, if a CFC has $100,000 of adjusted depreciable assets basis, then any earnings above $10,000 would be a GILTI inclusion.

We last saw a repatriation similar to this in 2004 under President George W. Bush, with the main difference being that the 2004 repatriation was optional.

It is called a deemed repatriation because the tax applies to most taxpayers. Whether or not cash is remitted to the U.S., the tax is assessed on accumulated post-1986 foreign earnings not previously taxed by the U.S. All post-1986 earnings held offshore in foreign corporations will be taxed at a rate of 15.5% if these earnings are held in the form of cash or cash equivalents. Earnings in excess of the cash and cash equivalent amount will be taxed at 8%. This change is enacted with the hope that money currently held off-shore in foreign jurisdictions by multinational companies will be brought back to the U.S. and redeployed. A further hope is that this cash will be used primarily as a source for new domestic investment by these multinational companies, creating new jobs and infrastructure. We last saw a repatriation similar to this in 2004 under President George W. Bush, with the main difference being that the 2004 repatriation was optional. While the 2004 ‘tax holiday’ did result in a big injection of money back into the U.S. economy with around $300+ billion brought back, it did not yield the anticipated results. Large portions of the money repatriated were instead used for stock repurchases and as distributions to company shareholders. With the current state of the economy at record highs, there is a possibility to see a different result this time around with more direct investment into infrastructure and job creation. Nonetheless, the economy should see an influx of cash that it would not have without the transition tax.

∙ GILTI threshold = Assets ($100,000) x 10%

∙ GILTI = Earnings above $10,000

Tax Reform: Diving into International Waters

16