RESOURCES

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.

Click to Watch Video Explainers on GILTI:

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GILTI Video

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.

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WHAT EXPERTS SAY

Joint Committee on Taxation

The net effect of the 2017 tax act is an “increase in investment in the United States, both as a result of the proposals directly affecting taxation of foreign source income of U.S. multinational corporations, and from the reduction in the after-tax cost of capital in the United States due to more general reductions in taxes on business income.”

(Joint Committee on Taxation, Macroeconomic Analysis of the Conference Agreement for H.R. 1, the “Tax Cuts and Jobs Act”, p. 7)

Treasury Sec. Janet Yellen

Treasury Secretary Janet Yellen has acknowledged the current law GILTI is more rigorous than that of other countries as “most other headquarters’ jurisdictions impose no tax on the foreign earnings of their domestically-headquartered multinationals.”

(Response to Sen. Finance Committee, “Follow-up Questions for the Record for Hon. Janet L. Yellen,” Jan. 22, 2021.)

Bureau of Economic Analysis

The most recent government data for 2018, the first year the new law was in effect, shows it was successful in encouraging U.S. job creation by U.S. multinational companies: (1) employment, value-added, and investment in plant and equipment of U.S. multinational companies grew faster in the U.S. than abroad; (2) the growth in the U.S. of these activities exceeded their 20-year averages; and (3) the growth abroad in these activities was below their 20-year averages.

(Bureau of Economic Analysis, Activities of U.S. Multinational Enterprises, 2018).

Tax fact sheets and other educational materials

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FDII - Derived Intangible Income

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GILTI - Global Intangible Low Tax Income

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International Tax Rules

 

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U.S Tax Competitiveness

 

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2020 International Tax Competitiveness Index

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Cross-Border Effective Average Tax Rates in Europe and G7 Countries

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Evaluating President Biden's Corporate Tax Plan

 

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U.S. Cross-Border Tax Reform and GILTI

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Global Intangible Low-Taxed Income
(GILTI)

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Higher GILTI Taxes Would Help Foreign Competitors and Hurt U.S. Jobs

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So-Called “Offshoring Tax” Would Impose a Tariff on Imports – But Exempt Foreign-Owned Companies

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National Association of Manufacturers Study: New Tax Increases Would Cost Jobs and Stifle Investment

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Estimated Impacts of Proposed Changes to GILTI Provision on U.S. Domestic Economic Activity

REPORTS

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.

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