Global Intangible Low-Taxed Income, known as GILTI, is a newly introduced provision that requires United States shareholders to include additional earnings, in their gross income, for income derived from controlled foreign corporations (CFC).
While the intent was to stop companies from taking advantage of low tax liabilities by holding intellectual property outside of the US, this new tax legislation will have an overarching affect for many U.S. Taxpayers, including those living in Canada, who own shares in a Canadian Company.
Background
It is a common practice for multi-national entities (MNE’s) to hold intangible intellectual property, such as patents, trademarks and similar property, in countries where there is a lower foreign tax liability.
As a result, the United States Internal Revenue Service (IRS) introduced section 951A – Global Intangible Low-Taxed Income Included in Gross Income of United States Shareholders, which sets a minimum tax for foreign earnings generated by United States shareholders.
While the provision was introduced to restrict MNE’s, the new provisions do not specify this, and instead imposes these new tax liabilities on all United State shareholders of CFCs, including US taxpayers who live abroad and own shares for companies based in their country of residence, including a number of US citizens living in Canada with investments in controlled Canadian corporations.
Will you be affected by these changes?
Prior to January 2018, United States shareholders, as defined by the IRC, included any United States citizen who owned 10% or more of “the total combined voting power of all classes of stock entitled to vote”.
In terms of GILTI, that meant, if you had 10% or more of the votes within a controlled foreign corporation, you would be subject to new tax liabilities under section 951A. If your shares were non-voting, you would not have been affected.
With the introduction of section 951A, however, additional amendments have expanded the definition of a United States shareholder to include any person that owns 10% of the value of the stock, in addition to those who own 10% or more of the votes. As a result, US shareholders with non-voting shares in a foreign corporation will now also be required to fulfill the obligations of GILTI, if those shares equal 10% or more of the value of the foreign corporation.
For U.S. citizens living in Canada, this means that you may have additional tax liabilities if you own shares in a Canadian corporation, or any corporation outside of the US, if those shares account for more than 10% of the votes or more than 10% of the value of the company.
What does GILTI mean for those affected?
If you are considered a United States Shareholder, as it applies to CFCs, you may be required to claim GILTI on your investments.
Your GILTI is calculated as follows:
GILTI Inclusion = Net CFC Tested Income – Net Deemed Tangible Income Return
Net CFC Tested Income is the CFC’s gross income, less:
- US Effectively Connected Income
- Subpart F Income or income that would be considered Subpart F Income
- Foreign Base Company Income, less allocable deductions
Generally, the Net Deemed Tangible Income Return is an amount equal to 10% of the CFC’s fixed assets that are depreciable as trade or business assets, also known as Qualified Business Asset Investment.
If you are an individual investor, your GILTI will be subject to standard foreign tax provisions. If, however, you are a US domestic corporation there are two additional provisions you will want to take note of.
- You may deduct an amount equal to 50% of your GILTI inclusion. This rate will reduce to 30% in 2026.
- You may also be entitled to a foreign tax credit; you will be allowed 80% of the standard deemed paid credit
With the introduction of GILTI it is important for you, as a US taxpayer, to review all of your investments in CFC’s to determine whether you are a United States shareholder, as defined in the IRC, and what the fixed assets to income ratio is for each CFC you have invested in.
For more information about GILTI and it’s affects, or to discuss ways to offset the affect of these new provisions, contact us today!
