What GILTI tax? Does it have a full form? Yes, it does. GILTI is an acronym for Global Intangible Low-Tax Income. This was created in section 951A of the US tax code by the 2017 tax cuts and jobs act which we can call it tax reform.
Is it complicated tax reform? Yes, it involves complicated calculations and huge additional burdens which started from the year 2018, and for a certain type of shareholders, which drastically increased taxes.
Generally, GILTI is taxed at a corporate tax rate of 21%Under this tax reform, certain C corporation US shareholders can deduct 50% of their GILTI, which results in a 10.5% reduction i.e almost halves of the effective tax rate.
How to enroll for the reduced 10.5% GILTI tax rate
When it comes to enrolling or qualification for the low 10.5% tax rate then don’t you think there will be some requirements or conditions? Yes, you’re right. They are quite similar to previous tax deferral, this low tax GILTI rate only applies to international businesses that do not engage in US trade or business.
Suppose let’s take a scenario If you an office or warehouse in the US through which you run your daily work operations. So by this, you will have a US presence and thus you cannot advantage of the 10.5% GILTI tax rate.
On the other side, let’s say if an amazon seller is using direct shipping or business. These businesses have only an online presence by which they can easily qualify for the low GILTI tax rate.
There is no change in dividend tax rates i.e they remain the same 0%, 15%, and 20% which completely depends on your personal income tax bar. As you must be knowing that earning are distributed to the shareholder.
Do non-c corporations have to pay a Higher GILTI tax?
Yes GILTI tax is higher for non-c corporations i.e individuals and trusts who own CFC stock and is not linked to C-corporation shareholders.
Earlier, a US person has to pay tax only on the income which they earned through a foreign corporation. But, after switching to new rules, if a US person i.e who is not a C-corporation has a 10% shareholder part of the foreign income on their personal tax return, this increase to a whopping tax of 37%.
How to enroll for reduced GILTI tax as a non-c corporation
Ok, this is different cases where owning shares in a CFC either directly or through an LLC corporation exposes any individual for a higher tax rate than owning them the same from a C corp.
But, here is the catch, A non-C corporation US shareholder of a foreign company can take small steps so as to reduce the tax rate –
Treating section 962
Under the section 962 election, it allows individuals to take them and treat them as a corporation which would lower your tax rate to 21%. For individual, 10.5% is not yet applicable.
By owning CFCs through a C corporation
Yes, by owning CFCs through a C corporation, it allows the foreign company to take advantage fo the lower tax rates.
These are 2 ways by which you can apply for reduced GILTI tax reforms. However, there is a small difference as being an individual you have to pay more as compared to the C-corporation with GILTI.
To whom does the GILTI tax impact?
When it comes to impact then GILTI tax reform has affected foreign businesses. The tax has added more money where a business is making more money internationally. It has affected businesses where profit is relatively high as compared to the fixed asset base.
The industries which are mainly affected by the impact of GILTI tax are –
- Services companies
- Software/tech companies
- Procurement/Distribution companies
This new GILTI tax reform has made some significant changes in the taxation of the businesses. It mainly added new tax on any foreign income that an international company earns. GILTI captures high-return intangible income which affects the working of US firms. To make the best of this new tax reform you must check your organization structure with your financial experts and plan your workings accordingly.