What it means
Before the rule existed, a US group could hold its intellectual property in a low-tax jurisdiction, charge its operating companies large royalties, and leave the resulting profit sitting abroad indefinitely. GILTI removes the benefit of waiting by taxing the shareholder currently on most of the foreign income.
Despite the name, the calculation never asks whether the income actually came from intangible assets. Instead it uses a rough proxy.
The rule assumes a normal return on tangible business assets is 10% of their depreciated cost, a figure known as qualified business asset investment. Anything the foreign subsidiaries earn above that assumed return is treated as the intangible-driven excess and swept into the US tax net.
Because the aggregation happens across all the group's controlled foreign corporations, high-tax and low-tax subsidiaries are blended together. A profitable Irish company and a loss-making Brazilian one are netted before the charge is worked out, which is why the rule can bite even for groups paying substantial foreign tax overall.
Two reliefs soften the result for corporate shareholders. A deduction under section 250 removes half the GILTI amount from taxable income, and a credit is available for a portion of the foreign taxes already paid on that income.
Together these were designed to produce an effective US rate of around 10.5%, though the deduction percentage has been legislated to shrink over time, lifting that rate, so the current year's figures always need checking. For finance teams the practical burden is data rather than rate.
Calculating GILTI requires tested income, asset registers and foreign tax figures for every controlled foreign corporation on a US tax basis, which is often nothing like the local statutory accounts.
In practice
Real-world examples.
Example
A US software group holds its source code in a subsidiary with almost no fixed assets. With minimal qualified business asset investment, nearly all of that subsidiary's profit becomes GILTI, which is exactly the outcome the rule was designed to produce.
Example
A US manufacturer runs a heavily equipped plant abroad with $400,000,000 of qualifying assets. The deemed return of $40,000,000 shelters most of the plant's profit, so the group's GILTI charge is small despite large foreign earnings.
Example
A mid-sized distributor discovers during its first year of foreign operations that it must restate three sets of local accounts onto a US tax basis to compute tested income. The compliance cost of the calculation exceeds the tax it eventually produces.
Think of it
“GILTI taxes certain foreign income of US companies-a minimum tax on overseas earnings.
Formula
Calculation
GILTI = net tested income of the controlled foreign corporations - net deemed tangible income return, where the deemed return is 10% of qualified business asset investment less certain interest expense.
A US parent has foreign subsidiaries with combined net tested income of $10,000,000 and qualified business asset investment of $20,000,000. The deemed tangible income return is 10% x $20,000,000 = $2,000,000, so GILTI is $10,000,000 - $2,000,000 = $8,000,000.
Applying a 50% deduction leaves $8,000,000 x 50% = $4,000,000 in taxable income, and at the 21% corporate rate the US tax before credits is $4,000,000 x 21% = $840,000. That is an effective rate of $840,000 / $8,000,000 = 10.5% on the GILTI amount, before any foreign tax credit reduces it further.Case study
Seen in the real world.
The following is a fictional, illustrative case. Larkspur Instruments, an invented US maker of laboratory sensors, held its designs in a subsidiary in a low-tax jurisdiction that owned little more than an office lease. Group finance had assumed that because the profits stayed offshore to fund expansion, no US tax would arise until a dividend was paid.
The illustrative surprise came at year end, when the tax adviser calculated tested income of $9,000,000 against qualified business asset investment of only $1,000,000. The deemed tangible return of $100,000 sheltered almost nothing, leaving $8,900,000 of GILTI and an unbudgeted US charge.
In the fictional follow-up, Larkspur moved its testing equipment and calibration staff into the same subsidiary over two years, which raised its qualifying asset base and, more importantly, aligned where the profit was earned with where the real work happened.
Watch out
Common mistakes.
- Assuming GILTI only applies to income from patents or brands, when the calculation ignores the nature of the income entirely.
- Thinking foreign profits are only taxed when repatriated, which has not been true for the vast majority of controlled foreign corporation income since the rule came in.
- Treating local statutory profit as tested income, when the figure must be recomputed under US tax principles before the calculation works.
Questions
People also ask.
Does GILTI apply to individual shareholders?
It can, and individuals are treated far less kindly than corporations unless they make a specific election to be taxed more like a company.
Can foreign taxes wipe out the charge completely?
Only partly, because the credit is limited to a percentage of the foreign tax and cannot be carried forward, so residual US tax is common.
Is there a way out for genuinely high-taxed subsidiaries?
An election is available to exclude income taxed abroad above a threshold rate, but it applies group-wide and needs modelling before it is chosen.
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