Five Reasons International Businesses Should Consider GILTI

June 2019 | Article

By Aaron Boyer

The Tax Cuts and Jobs Act brought about many changes for multinational businesses. One of the more significant changes was the application of Global Intangible Low-Taxed Income (GILTI) to foreign subsidiaries. In a previous insight, we outline the key considerations in tax reform for international businesses. This insight offers the five reasons to consider GILTI and provides an illustrative example of its impact.

Five Reasons to Consider GILTI

  1. Some individual taxpayers are seeing an increase of up to 20% in global tax liability due to GILTI.
  2. Know your options! Reviewing current ownership structures may significantly reduce global tax.
  3. Individuals electing corporate treatment under IRC 962 may mitigate the U.S. tax impact in lieu of restructuring.
  4. The GILTI calculations are complex and detailed historical information is needed. Are you/your accountant ready to take on the challenge?
  5. Final GILTI regulations are almost here and may apply retroactive to 2018! How will they impact your strategy?

Estimated Tax Liability of Foreign Structure with U.S. Individual Shareholder

For illustration purposes only. Actual results will vary based on facts and circumstances.

  Pre Reform Post Reform Notes
Type of Foreign Entity Flow Thru Corp Flow Thru Corp  
Foreign Net Income 1,000,000 1,000,000 1,000,000 1,000,000 (1)
Foreign Corporate Income Tax Rate 15% 15% 15% 15%  
Foreign Corporate Income Tax 150,000 150,000 150,000 150,000  
Foreign E&P Amount 850,000 850,000 850,000 850,000 (2)
Foreign Dividend Withholding Tax Rate 5% 5% 5% 5%  
Forign Dividen Withholding Tax 42,500 42,500 42,500 42,500  
U.S. Individual Federal Tax Rate 43.4% 23.8% 40.8% 40.8% (3)
U.S. Individual Tax Before Foreign Tax Credits 434,000 202,300 408,000 346,800  
Foreign Tax Credit 192,500 42,500 192,500 42,500  
           
Residual Individual U.S. Tax 241,500 159,800 215,500 304,300  
Total Income Tax Liability 434,000 352,300 408,000 496,800  
ETR 43.40% 35.23% 40.80% 49.68% (4)

Notes:

  1. Assumed all incomes is subject to GILTI due to very little depreciable assets.
  2. Assumed all foreign E&P is distributed annually.
  3. Assumed NIIT of 3.8% applies.
  4. Example does not illustrate IRC 962 election.

As you can see, GILTI can have a significant impact on international tax liability of an individual shareholder. A structure change may be of benefit given foreign tax credits on GILTI income. Contact your Eide Bailly professional or a member of our International Tax Team to discuss your situation.

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