Global intangible low-taxed income (GILTI) was introduced as part of the 2017 tax reform to discourage taxpayers from moving intangibles and their related income outside of the United States.
This change means there could be a significant amount of additional reporting required for those companies and individuals that own foreign subsidiaries. To prepare, additional information and new calculations will be required to account for the changes in tax law.
Following is a brief synopsis of GILTI, the definition of a foreign subsidiary’s qualified business asset investment (QBAI) deemed intangible income, and suggested documentation you can start preparing.
GILTI, the new category of Subpart F, is defined as any foreign income that exceeds 10% of a foreign subsidiary’s QBAI.
Historically, US shareholders were able to defer earnings until it was brought back as a dividend or a deemed dividend. GILTI now requires US owners of controlled foreign corporations (CFC) to bring back income—not just intangible income, which subjects it to tax in the United States on a current basis.
QBAI is the aggregate of a CFC’s quarterly average adjusted tangible property bases determined under Section 168(g), the alternative depreciation system (ADS) method. ADS generally increases the number of years over which the property is depreciated.
Deemed Intangible Income
This is defined as the foreign income that exceeds the deemed tangible income (10% of QBAI). It’s based on what’s referred to as the net CFC tested income of the foreign subsidiary, excluding other inclusion items such as Subpart F. The net CFC tested income may not necessarily be the current year earnings and profits (E&P) of the foreign subsidiary.
The analysis for determining whether the current year net income is deemed intangible income is expected to take place on an annual basis.
Historically, the depreciation calculation under ADS and the determination of current year E&P with regard to appropriate adjustments, including the analysis of deemed intangible income, haven’t been addressed for all entities.
As a result, it’s likely that additional tax compliance work will need to be performed for the 2018 tax return.
How to Prepare
Having the proper documentation available will be key to calculate a GILTI inclusion. Here are some documents to consider:
- A trial balance in functional currency under US generally accepted accounting principles
- Balance sheets for each quarter of the current year
- Fixed asset schedules maintained in ADS for each quarter of the current year
- Current year foreign tax returns or schedule of taxes paid or accrued
- Compensation accrual schedules that show what was paid within two and a half months of year-end
- Detailed schedules for all reserve and other accrual accounts shown on the balance sheet
- Intercompany and related party payment schedules for items such as dividends and interest
We’re Here to Help
For more information about how the GILTI provisions may affect you or your business, contact your Moss Adams professional or email email@example.com. You can also visit our dedicated tax reform page to learn more.