FACTS ABOUT TAX
WHAT IS GILTI?
A new provision, Global Intangible Low Tax Income (GILTI), was enacted as part of the international tax changes included in the 2017 Tax Cuts and Jobs Act (TCJA). GILTI is a form of a minimum tax on all foreign active business income. The United States is the only advanced economy that applies a minimum tax to foreign active business income.
GILTI and related revisions enacted in 2017 provide a guardrail to protect the U.S. tax base against tax-motivated incentives to shift operations — and thus profits and jobs — away from the United States to lower-tax jurisdictions. While intended as a guardrail, it also applies where no income shifting from the U.S. occurs. As a result, it must be designed carefully to avoid imposing a significant disadvantage for U.S. companies relative to their foreign competitors operating in the same markets.
Treasury Secretary Janet Yellen acknowledged in a recent Senate hearing that the U.S. minimum tax regime — GILTI — is an outlier in the developed world since “most other headquarters’ jurisdictions impose no tax on the foreign earnings of their domestically-headquartered multinationals.” As foreign companies are not subject to GILTI, increasing the GILTI tax burden will reduce the global market share of U.S. companies. Because domestic employment and investment support the foreign operations of U.S. companies, shrinking the U.S. market share abroad will cause a decline in well-paying U.S. jobs at home.
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INTERNATIONAL TAX LAWS
Prior to 2018, the United States utilized a “worldwide” tax system, which generally taxed active foreign business income of U.S. companies only when remitted to the U.S. parent as a dividend. In contrast, most other developed countries (30 of the other 36 OECD countries, and all other G7 countries) have “territorial” systems that exempt 95 to 100 percent of foreign dividends from tax. As a result, foreign earnings of a company headquartered in a foreign country were effectively subject to tax only in the country where earned, while foreign earnings remitted to a U.S. parent incurred both foreign country tax and additional U.S. tax.
It became evident to many policymakers that the U.S. tax system was harming the ability of U.S. companies to compete globally. Because expansion by U.S. companies in foreign markets supports domestic employment, a reduced ability to compete in foreign markets results in fewer jobs at home. A key goal of the 2017 Tax Cuts and Jobs Act (TCJA) was to improve U.S. competitiveness and make taxes a neutral factor in companies’ decision to invest in the U.S. or abroad.
First, the TCJA revised the U.S. tax system to more closely resemble the territorial tax systems employed by most foreign countries. The TCJA also created two new provisions to operate under this system. One provision, Foreign-Derived Intangible Income (FDII), removes the prior-law tax bias against the ownership of intangible assets in the United States. The other, Global Intangible Low-Taxed Income (GILTI).), applies a U.S. minimum tax on foreign income of U.S. companies as a guardrail to protect the U.S. tax base against tax motivated incentives to shift profits away from the U.S. to lower tax jurisdictions.
Under the concept of FDII, certain income earned from sales to foreign customers is taxed at a rate of 13.125%.
GILTI applies a tax rate of 10.5%, but due to an incomplete credit for foreign tax payments, it continues to apply to income taxed up to a foreign rate of 13.125%. Various other rules that determine the allowed foreign tax credit (“expense allocation” rules) result in additional U.S. tax being collected under GILTI at higher foreign tax rates, even rates in excess of the U.S. 21% corporate tax rate.
The TCJA reforms improved the competitiveness of the United States’ tax system significantly; however, there are currently proposals that would reverse much of that progress. One such proposal would be to double the GILTI rate. This would subject U.S. companies to far higher levels of taxation than their foreign-owned competitors (which are not subject to any similar minimum tax), reducing U.S. headquarters jobs, U.S. investment, and U.S. research and development. Changes to GILTI that increase the tax burden on U.S. companies doing business abroad will harm their ability to compete with foreign companies and reduce employment at home. Such a move would fundamentally harm recovery from the economic downturn caused by the COVID-19 pandemic, and stifle economic growth and job-creating investments in the long term.
Tax fact sheets and other educational materials
FDII - Derived Intangible Income
GILTI - Global Intangible Low Tax Income
International Tax Rules
U.S Tax Competitiveness
2020 International Tax Competitiveness Index
Cross-Border Effective Average Tax Rates in Europe and G7 Countries
Evaluating President Biden's Corporate Tax Plan
U.S. Cross-Border Tax Reform and GILTI
Global Intangible Low-Taxed Income
Higher GILTI Taxes Would Help Foreign Competitors and Hurt U.S. Jobs
So-Called “Offshoring Tax” Would Impose a Tariff on Imports – But Exempt Foreign-Owned Companies
National Association of Manufacturers Study: New Tax Increases Would Cost Jobs and Stifle Investment
Estimated Impacts of Proposed Changes to GILTI Provision on U.S. Domestic Economic Activity
Pillar Two Model Rules
- PACE Letter to Members of Congress, "GILTI Letter," (Dec. 17, 2021).
- PACE Statement for the Record, "U.S. Senate Committee on Finance Hearing on “How U.S. International Tax Policy Impacts American Workers, Jobs, and Investment," (April 7, 2021).
- Bureau of Economic Analysis, “BEA: Activities of U.S. Multinational Enterprises, 2018,” (July 21, 2020).
- Andrew Lyon, “Insights on Trends in U.S. Cross-Border M&A Transactions After the Tax Cuts and Jobs Act,” Tax Notes (Oct. 26, 2020).
- U.S. Treasury Department Press Release, “UNIFIED FRAMEWORK FOR FIXING OUR BROKEN TAX CODE,” (Sept. 27, 2017).
- Report of the Committee on Ways and Means, House of Representatives, on H.R. 1,” (H.R. Rept 115-409) (Nov. 13, 2017).
- Committee On The Budget United States Senate, “Reconciliation Recommendations Pursuant to H. Con. Res. 71,” (S. Prt. 115-20) (Dec. 2017).
- Joint Committee On Taxation, “JCX-67-17: ESTIMATED BUDGET EFFECTS OF THE CONFERENCE AGREEMENT FOR H.R. 1, THE "TAX CUTS AND JOBS ACT”, (Dec. 18, 2017).
- Joint Committee On Taxation, “MACROECONOMIC ANALYSIS OF THE CONFERENCE AGREEMENT FOR H.R. 1, THE “TAX CUTS AND JOBS ACT”” (JCX-69-17) (Dec. 22, 2017).
- Prepared Floor Remarks by U.S. Senator Chuck Grassley of Iowa, Chairman, Senate Finance Committee, “Grassley on Joe Biden’s Business Tax Proposals,” (Sept. 22, 2020).
- Business Roundtable, "Do U.S. companies pay less income tax than their foreign competitors? (The answer is no.)" (June 25, 2021).
- National Association of Manufacturers, "Tax Proposals Lead to Massive Job Loss" (June 25, 2021).
- Chamber of Commerce, "Reuters is Wrong. A Higher Corporate Tax Rate Would Hurt Our Economy." (June 24, 2021).
- National Association of Manufacturers, "INPUT: U.S. Proposes Lower Global Minimum Tax Rate" (May 21, 2021).
- Wall Street Journal, "Europe Balks at Biden’s Tax Plan" (May 19, 2021).
- New York Times, "U.S. backs a 15 percent global minimum tax on big companies it tries to enlist other countries." (May 19, 2021).
- Tax Foundation, "GILTI by Country Is Not as Simple as it Seems," (May 18, 2021).
- Tax Foundation, "Effects of Proposed International Tax Changes on U.S. Multinationals," (Apr. 28, 2021).
- Business Roundtable, "Business Roundtable Survey Finds Corporate Tax Increases Would Weaken U.S. Business Expansion, Hiring, Investments, in R&D and Innovation," (Apr. 12, 2021).
- National Association of Manufacturers, "NAM Study: New Tax Increases Would Cost Jobs and Stifle Investment," (Apr. 2021)
- Tax Foundation, "CBO Study: Benefits of Biden’s $2 Trillion Infrastructure Plan Won’t Outweigh $2 Trillion Tax Hike," (Mar. 31, 2021).
- Tax Foundation, "President Biden’s Infrastructure Plan Raises Taxes on U.S. Production," (Mar. 31, 2021).
- Tax Foundation, "TCJA Is Not GILTI of Offshoring," (Mar. 18, 2021).
- U.S. Chamber of Commerce, "The 'Fair Share' Fig Leaf," (Mar. 3, 2021).
- OECD, "BEPS Addressing the Tax Challenges Arising from the Digitalisation of the Economy," (Oct. 9, 2020).
- Tax Foundation, “A Hybrid Approach: The Treatment of Foreign Profits under the Tax Cuts and Jobs Act,” (May 3, 2018).
- Tax Foundation, “What’s Up With Being GILTI?,” (Mar. 14, 2019).
- Tax Foundation, “Anti-Base Erosion Provisions and Territorial Tax Systems in OECD Countries,” (May 2, 2019).
- Tax Foundation, “U.S. Cross-border Tax Reform and the Cautionary Tale of GILTI,” (Feb. 17, 2021).
- American Action Forum, “Global Intangible Low-Taxed Income Taxation – A Primer” (Sept. 13, 2018).
- George Callas and Mark Prater, “Is GILTI Operating as Congress Intended?” Tax Notes Federal, (January 6, 2020).
- Scott Dyreng, et al. “The Effect of U.S. Tax Reform on the Tax Burdens of U.S. Domestic and Multinational Corporations,” (June 2020).
- Caroline L. Harris, U.S. Chamber of Commerce, “Preventing Changes to GILTI That Hurt Competitiveness,” (February 17, 2021).
- Douglas Holtz-Eakin, “A Preliminary Evaluation of the Tax Cuts and Jobs Act,” Testimony before the U.S. House of Representatives, Committee on Ways and Means, (March 27, 2019).
- Richard Rubin, “Tax Changes Hit Overseas Profits of Some U.S. Companies,” Wall Street Journal, (March 27, 2019).
- Kartikeya Singh & Aparna Mathur, “The impact of GILTI and FDII on the investment location choice of US multinationals,” Columbia Journal of Tax Law, Vol. 10 No. 2 (2019).
- Scott A. Hodge, "Janet Yellen's corporate minimum tax plan won't work. Why? Just look at OPEC," Fortune, (April 8, 2021).
Tax terms to know
Income earned by a corporation through the conduct of a trade or business activity (in contrast to a passive investment activity).
A foreign corporation in which more than 50% of the voting power or value of the stock is held by U.S. shareholders. Only a U.S. shareholder that owns 10% or more of the stock of the foreign corporation is included in this determination. It is shareholders in these corporations that are subject to paying tax on their GILTI income.
Income from the sale of goods and services from the U.S. to foreign customers. FDII is frequently attributable to the value of U.S.-based intangible assets such as patents, trademarks, and copyrights. FDII is taxed at a 13.125% effective rate, rising to 16.406% after 2025 under TCJA.
A category of income of U.S.-controlled foreign corporations (CFCs) that is subject to special treatment under the U.S. tax code. The U.S. tax on GILTI is intended to prevent erosion of the U.S. tax base by discouraging multinational companies from shifting their profits from easily moved assets, such as intellectual property, from the U.S. to foreign jurisdictions with tax rates below U.S. rates. GILTI is taxed at a 10.5% rate with a credit for 80 percent of foreign taxes imposed on this income. As a result, U.S. shareholders in CFCs are subject to U.S. tax on GILTI if the foreign rate is less than 13.125% (10.5 percent/80 percent). This effective rate increases to 16.4% after 2025.
The process by which a U.S. company relocates operations overseas to reduce the amount of tax it pays on its income. While changes in law have reduced the ability for companies to engage in such transactions, acquisitions of U.S. companies by foreign-based companies and initial incorporation outside the United States can achieve similar results. These transactions would increase under a high, and uncompetitive, U.S. tax rate, with adverse impacts for the U.S. jobs supported by these investments and the U.S. economy.
An intergovernmental organization with 37 member countries, founded in 1961 to stimulate economic progress and world trade. The United States and many of its peer countries — highly economically advanced countries — are members of the OECD.
Income earned in the form of interest, dividends, and similar investment income through investment activities of the taxpayer (as opposed to active income earned from the taxpayer’s conduct of a trade or business activity).
U.S. legislation enacted in 2017 that amended the Internal Revenue Code of 1986. TCJA introduced the new concepts of GILTI and FDII into corporate tax law, moving the United States more closely to a “territorial” tax system.
Under a territorial or “exemption” system, the active foreign earnings of a foreign subsidiary are not subject to tax by the home country when paid as a cash dividend to the parent corporation. Among advanced economies, 30 of the 36 other OECD member countries follow an exemption approach, including Canada, France, Germany, Italy, Japan, and the United Kingdom. The 2017 Act moved the United States to a system that more closely follows these principles. The other six OECD countries follow a worldwide approach.
Under a worldwide system of taxation, all foreign earnings of a domestic corporation are subject to tax in the home country. In practice, countries following a worldwide principle permit deferral on most forms of active foreign earnings until such income is paid to the domestic corporation. Within the 37 countries of the OECD, six countries — Chile, Colombia, Ireland, Israel, the Republic of Korea and Mexico — follow a worldwide approach, with the other nations following a territorial, or exemption, approach.