Property Developers, Property Investors

Inland Revenue Service (IRS) Global intangible low-taxed income (GILTI) Tax

simon

Simon Misiewicz

20th October 2021

GILTI Tax

The Inland Revenue Service (IRS) Global intangible low-taxed income (GILTI) Tax is a complex subject. We are often asked to assist with expert tax accountancy advice in this area.

Regarding GILTI Tax, the GILTI tax rate and using QBAI (Qualified Business Asset Investment) to reduce GILTI tax, speaking to specialist US and UK tax advisors can help reduce or completely mitigate your tax liability.

GILTI is a category of income earned abroad by US-controlled controlled foreign corporations (CFCs) and is subject to special treatment under US tax law.

The US tax on GILTI is intended to prevent erosion of the US tax base by preventing and/or discouraging multinational companies from shifting their profits on easily moved assets, such as intellectual property (IP) rights from the US to foreign jurisdictions, with tax rates that are lower than the US.

The frequently asked questions about IRS form 5471 Global Intangible Low-Taxed Income (GILTI)

As property accountants, we are regularly asked about GILTI. We will look to answer the below questions in this Article.

“Are you paying too much tax to the IRS?”

“Should you speak to a British accountant about GILTI tax?”

“What are the basics of GILTI?”

“Who does GILTI apply to?”

“How is GILTI calculated?”

“What is the GILTI tax rate?”

“How does GILTI affect US shareholders in the UK?”

“Can I use QBAI to reduce the GILTI tax?”

“What is the Section 962 Election?”

“How can I avoid GILTI?”

“What is the GILTI High Tax Exemption?”

“What will happen to GILTI in 2022?”

Are you paying too much tax to the IRS?

Our property tax specialists help over 1,000 monthly retained UK landlords and property investors to minimise Tax whilst building their wealth.

There are many reasons why people pay far more tax than they need to.

This is because:

-They do not know what they do not know.

-They have not spoken to a tax specialist to go through their situation to see what tax reliefs are available.

-Their accountants or solicitor are not aware of the many reliefs available to their clients and are not taken advantage of.

-Tax legislation changes but either the person or their accountant/tax specialist have not been made aware.

Should you speak to a British accountant about GILTI tax?

The Tax Cuts and Jobs Act (TCJA) brought many changes to US taxpayers, including American ex-pats.

Due to TCJA, US entrepreneurs have become used to the term GILTI.

US shareholders who own at least 10% of a CFC are now taxed annually on the CFC’s GILTI.

There has been a negative impact on individual US shareholders of a CFC due to the TCJA’s treatment of individual vs corporate shareholders.

Corporate shareholders have a GILTI tax rate of 10.5% compared to US individual rates of up to 37%.

This is why US shareholders living in the UK should speak to US and UK tax advisors about how GILTI impacts US ex-pats as soon as possible.

Our team of British accountants can assist you on all matters relating to GILTI tax.

Tax when moving to the UK

How much tax will you pay in the UK? What is the remittance basis tax charge, and do you need to pay it? We will show you what taxes you need to be aware of and how to reduce them. Download today, save Tax tomorrow.

£9.95 to download

Buy Now

What are the basics of GILTI?

As property accountants serving thousands of landlords that purchase buy to let properties, we know that tax law can be confusing and complex. GILTI tax is no exception.

Before the enactment of TCJA in 2017, US businesses and individuals were subject to US income taxes on their worldwide income.

Income earned by the foreign subsidiaries of US corporations was subject to Tax only when repatriated to America as dividends.

The TCJA changed the tax rules for multinational corporations by generally exempting the earnings of foreign subsidiaries’ active businesses from US taxation, even if repatriated.

GILTI is typically foreign income earned by CFCs from intangible assets such as copyrights, trademarks and patents.

CFCs are foreign corporations in which more than 50% of the value is owned by US shareholders.

Each of these US shareholders owns 10% or more of the CFC.

This type of shareholder is liable for the Tax on GILTI, which usually applies at a rate between 10.5% and 13.125%.

If you’re a US ex-pat and are unsure how you might be affected by GILTI, speak to one of our team today.

Have a question about property investments, tax or being an expat?

There are a number of free events that will help you build investments/businesses with more comfort and move forwards with confidence.

Free

Book on a seminar

Who does GILTI apply to?

GILTI rules contained in Section 951A require a 10% US shareholder of a CFC to include in current income the shareholder’s pro-rata share of the GILTI income of the CFC.

The GILTI rules apply to C corporations, S corporations, partnerships and individuals.

The GILTI is allocated between the shareholders, who pay tax on it at their tax rates up to 37%.

GILTI is calculated on Form 8992.

GILTI came as an unwelcome surprise to many American business owners located outside of the United States in 2017, and this is why it is critical to speak to our US and UK tax advisors to minimise your tax liability.

How is GILTI calculated?

GILTI is calculated as the total active income by a US company’s foreign subsidiaries that exceed 10% of the company’s depreciable tangible property. US Income from a UK perspective is the profits made.

GILTI tax is not aimed directly at income from specific intangible assets.

It operates as a type of minimum tax on the profits of some CFCs.

GILTI taxation requires a complex calculation.

GILTI typically equals the amount of the CFC’s total income over a CFC’s net tangible income return, which equals 10% of the CFC’s investment in depreciable tangible business assets minus specific interest expense.

GILTI tax is significant for CFCs whose profits are high due to their investment in intangible fixed assets such as providing services, procurement, distribution and technology.

Special reduced foreign tax credit rules apply concerning GILTI.

The GILTI tax calculations entail challenging and detailed expense and credit allocations.

This can result in higher than 13.125% tax rates, especially where income is subject to high foreign tax rates.

We recommend that you seek expert tax advice on GILTI as soon as possible if you are an American business owner located in the UK.

What is the GILTI tax rate?

GILTI is taxed by the IRS at ordinary income tax rates of up to 37%.

How does GILTI affect US shareholders in the UK? 

GILTI affects many US ex-pats who have formed a corporation in a foreign country.

Many are already filing Form 5471 (Information Return of US Persons With Respect to Certain Foreign Corporations) with their annual US tax return.

If you’d like to discuss how GILTI tax affects your foreign corporation and ways in which you can mitigate the GILTI, speak to our US and UK tax experts today.

Can I use QBAI to reduce the GILTI Tax?

Qualified Business Asset Investment (QBAI) is the average of a tested income CFC’s aggregated adjusted bases as to the close of each quarter of a CFC’s financial year in specified tangible property.

There is a 10% allowance based on the value of your fixed assets in the company. This helps reduce the UK profits of the CFC for GILTI tax purposes.

Using QBAI to reduce GILTI Tax requires the assistance of an experienced US and UK tax advisor.

What is the Section 962 Election?

American ex-pats who registered their corporation in a low-tax jurisdiction can minimise their tax bill by making a Section 962 Election.

This means that their allocation of the corporate profits will be taxed at the US corporation tax rate but with a 50% deduction applied.

Using Section 962 Election, US taxpayers can take foreign tax credits for corporate Tax paid on their business tax profits.

When corporate profits are extracted as dividends in the future, the shareholders will have to pay US tax on them again, paying a second tax on the same profits and potentially increasing the total tax rate.

If the US ex-pat shareholder pays foreign Tax on future dividends, they can claim US tax credits to offset the US tax due on them. This can make a Section 962 Election worth considering.

These tax calculations are complex and require a detailed appraisal of each foreign business owner’s circumstances.

If you’re unsure of your position regarding GILTI and Section 962 Election, speak to one of our tax accountants today.

How can I avoid GILTI? 

There may be other options available to avoid GILTI depending on a US-expat’s situation.

This could include transferring major ownership of a foreign corporation to a trusted foreigner such as a spouse. This effectively removes the CFC entirely from the jurisdiction of US tax laws.

What is the GILTI High Tax Exemption?

One tax mitigation possibility for reducing GILTI tax is making a Section 954(b)(4) election, known as the GILTI High Tax Exemption.

This allows US ex-pats who pay foreign corporation tax rates on the profits of their foreign-registered corporation at a tax rate of more than 90% of the US corporate rate to be exempt from paying GILTI.

Many countries have corporation tax rates above 18%, so making a Section 954(b)(4) election provides American ex-pats relief from GILTI tax by the IRS.

Our US and UK tax advisors can assist you further. Please speak to one of our tax team today.

What will happen to GILTI in 2022?

The regulations seek to broaden the GILTI high-tax exception by excluding all other CFC gross income deemed high-taxed.

The effect of this may have been limited. The US corporation tax rate has historically been 35%.

The high-tax exception applied only where the effective tax rate imposed by a foreign country on the income was at least 31.5%.

Since most foreign jurisdictions had significantly lower corporate tax rates than the US, the high-tax exemption was rarely relevant.

One of the main changes of the Tax Cuts and Jobs Act (TCJA) in 2017 was to reduce the US corporate tax to 21%.

The effective rate to meet the high-taxed exemption is now just 18.9%.

This has brought CFCs to several jurisdictions within the scope of the exception, including those in the UK.

The window for US shareholders to benefit from the exception could be short-lived.

President Biden wants to increase the US corporation tax rate to 28%, which could be in effect from early 2022.

That would require a tax rate of 25.5% for an exemption.

Under the March 2021 Budget, the headline rate of corporation tax in the UK is due to increase to 25% from 01 April 2023.

The high-tax exception for UK-taxed income of CFCs could cease to be available from 2022.

US Expats in the UK: You may be interested in services to help Americans move to the UK with Tax in mind.

There are several legal matters and tax issues that you need to consider. We have also written a helpful article about people moving from the US to the UK and getting a VISA.

Enquire about our ongoing services

Book a call to discuss our property accountancy services

Get in touch

Book a paid for tax consultation

Use the code “Art25” to get 25% discount

Book now
Need advice?
Contact us now

Book a call to see how we can help you.

Consultation options.

We offer the two following options for initial consultations.

CALL OPTION ONE

Discuss our monthly retained accountancy services

This is a call to discuss our monthly retained accountancy services. This is not a tax call

  • Discuss our monthly retained accountancy services

  • Talk to use about your situation

  • Tell us what tax pains you have

  • We will look into your case and identify the right service for you

Discuss our services

CALL OPTION TWO

Pro active tax advice

(Free for clients)

Need tax advice right now? Let us identify the tax solution

  • Upload your questions in advance

  • All of our Tax Advisors collectively discuss your questions in the morning

  • One of our qualified tax advisors will provide the very best solution to you

  • We follow up with an email and a recording of the meeting

  • You and the tax advisor will clear up any remaining questions in an email exchange

Tax call from £699.95

Booking your appointment.