Breakdown Of Global Intangible Low Tax Income

Breakdown Of Global Intangible Low Tax Income

The TCJA (Tax Cuts and Jobs Act) has significantly reduced the way profits of foreign companies are taxed in the United States. GILTI or "Global Intangible Low Tax Income" has been introduced as a basis for anti-flagrant erosion. This new definition of income is intended to discourage companies from using intellectual property to change their profits in the United States. However, in practice, GILTI does not work as expected. Due to interactions with applicable law, companies may be subject to US tax on GILTI, even if the effective tax rate abroad exceeds the 13.12% announced. Ideally, legislators should consider this issue. However, some debate that the Treasury Department should try to solve this problem.

Structure And Purpose Of GILTI

GILTI is a new level of foreign income that increases taxable income every year. It is a tax on profits that exceed 10% of the return on foreign assets invested in a company. GILTI is subservient to a worldwide minimum tax of between 10.5% and 13.125% per annum. GILTI is meant to reduce incentives that will change the profits of US companies by using intellectual property.

GILTI's main objective is to reduce incentives for US-based multinationals to change their results with little or no tax jurisdiction. This is done by setting a threshold for the average foreign tax rate paid by US multinationals between 10.5% and 13.125% and thereby stimulating the transfer of profits from one jurisdiction to another depending on the difference between the statutory tax rates of the countries. This difference is the tax savings that a business receives for every dollar in change. GILTI companies will compare a national rate of 21% at a rate of 10.5 to 13.125% instead of a zero rate.

The 10% qualified business asset investment (QBAI) of GILTI aims to target the delivery of higher-yielding goods, which is an indirect indicator of the return of intellectual property. This approach is aimed at targeting more mobile incomes. Also, this discourages the real return on investment, which should avoid distortions in investment decisions of multinationals in the United States. According to GILTI, the tax on foreign profits is equal to or lower than most tax rates in developed countries. This limits the incentives of US multinationals to move their headquarters out of the United States.

Does GILTI Work As Expected?

In principle, GILTI seeks to reconcile concerns about fundamental erosion and competitiveness. However, the law does not seem to work exactly as planned by Congress.

One area that has recently been the focus of attention is the treatment that GILTI offers to foreign companies with a high tax rate. For example, the Wall Street Journal has highlighted a railway company operating in the United States and Mexico. Although Mexico is a country with relatively high taxes (its income tax rate is 30%), this company was still subject to GILTI tax. Since GILTI is intended to apply only to companies with less than 13,125 debts, this is a surprise.

The reason this company terminated its tax obligations is that GILTI was built using the foreign tax credit infrastructure of the previous law. Under current legislation, foreign tax credits are subject to limitations. The limit is that the credit is based on a formula that cannot exceed the US tax liability — multiplied by the share of foreign exchange earnings divided by your worldwide income. This limitation is intended to prevent companies from using an external tax credit to offset national taxes.

The rules that are part of the limitation of the external tax credit also require that companies allocate certain domestic expenditures to foreign income. This obligation to allocate national interest expenditure to foreign exchange earnings has the effect of modifying the fraction that limits foreign credit. For example, a company, before interest and expense allocation, can earn half of its profits outside the United States. This means that foreign tax credits will be limited to half of US income tax. However, expenses can change spending outside of the United States. In foreign countries, foreign profits could thus fall, for example to 25% of total profits. Foreign tax credits would be limited to a quarter of the US tax debt, a much lower foreign credit tax.

According to GILTI, the reduction of the tax credit means that companies do not receive full credit for the fees they already pay to foreign jurisdictions. Companies with an effective tax rate above 20% may impose an additional tax burden on foreign currency earnings, even if they exceed the minimum rate of GILTI of 13.125%.


It seems that lawmakers have made a mistake in building GILTI. The distribution of expenditures in foreign tax credits was in line with the previous global tax system. However, it is less sensitive in the context of a territorial tax system that legislators have tried to evolve.

Ideally, legislators should work on legislation to revise GILTI to ensure that it works as originally intended: a minimum tax of 10.5-13.15% on Foreign capital gains. However, lawmakers have little interest in short-term jobs. Some companies also claim that the Treasury Department could solve this problem by taking additional regulatory measures. The Treasury has already published the proposed rules that have partially mitigated the impact of spending on the external tax credit compared to GILTI.

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