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October 13, 2021
GILTI: Proposed Changes in the Taxation of Global Intangible
Low-Taxed Income
The treatment of income earned abroad in U.S.-controlled
would apply the foreign tax credit on a country-by-country
foreign corporations (CFCs) has been extensively debated
(or per country) basis and would allow unused excess
over the years. In the 2017 Tax Cuts and Jobs Act (P.L.
credits to be carried forward for five years.
115-97), the tax treatment of foreign source income was
altered. The prior system imposed taxes on CFCs’ income
Example of Tax Computation
only when they paid dividends to their U.S. owners. The
Table 1 provides an example of the calculation of the initial
system taxed in full income earned in branches and certain
GILTI tax before foreign tax credits for current law and
types of easily shifted income of CFCs, referred to as
under H.R. 5376 . Table 2 provides the calculation of the
Subpart F income. CFCs are foreign incorporated firms at
foreign tax credit and final tax liability.
least 50% owned by U.S. shareholders who hold at least
10% of the share by value or vote.
Table 1. Calculation of GILTI Before Foreign Tax
Credits, Assuming QBAI of $200 million
Current Treatment
(dollars in millions)
The Tax Cuts and Jobs Act eliminated the tax on dividends
and instead imposed a lower tax on CFCs aimed at
Current Law
H.R. 5376
intangible income, the tax on global intangible low-taxed
income, or GILTI. GILTI targeted intangible income due to
Income
100
100
concerns about profit shifting (i.e., moving income to low-
QBAI Deduction
20
10
tax countries), because intellectual property is more easily
moved than tangible property.
Income after QBAI
80
90
Deduction
In calculating income for GILTI, CFCs are allowed two
GILTI Deduction
40
33.75
deductions. One is a deemed deduction of 10% of tangible
assets (buildings and equipment, called qualified business
Income After GILTI
40
56.25
asset investment, or QBAI). The deduction is intended to
Deduction
offset the normal return from tangible investments, such as
Tax on GILTI
8.4
14.91
factories, leaving GILTI to largely reflect the return from
intangible assets, such as drug formulas, computer
Source: CRS calculation.
programs, technology, and brand names. The other is a
Notes: QBAI deduction is 10% under current law and 5% under H.R.
deduction of 50% on the remaining amount, so that, with
5376 . The GILTI deduction is 50% under current law and 37.5%
the corporate tax rate of 21%, the effective tax rate is 10.5%
under H.R. 5376. The corporate tax rate is 21% under current law
(21% times 50%). This deduction is scheduled to fall to
and 26.5% under H.R. 5376.
37.5% after 2025, leading to an effective tax rate of
13.125% (21% times 62.5%).
As can be seen in Table 1, all three revisions in H.R. 5376
relating to GILTI tax before foreign tax credits increase the
Taxpayers can credit foreign taxes paid, limited to the
GILTI tax. The smaller tangible deduction in H.R. 5376
amount of U.S. tax due. The limit is on an overall basis so
leaves a larger amount of GILTI. The smaller GILTI
that foreign taxes in excess of the U.S. tax in a high-tax
deduction in H.R. 5376 leaves a larger amount of income
country can be used to offset U.S. tax due in a low-tax
subject to the statutory rate, and the higher statutory rate
country. For GILTI, 80% of foreign taxes can be credited to
increases the tax.
offset GILTI tax. The general provision allowing unused
foreign tax credits to be carried back one year and carried
Calculation of final tax liability taking into account the
forward 10 years does not apply to GILTI; any excess
foreign tax credit, as illustrated in Table 2, assumes a U.S.
credits are lost.
parent has identical operations in a high-tax and a low-tax
country. The calculation requires several steps. First, only a
Changes in the Reconciliation Bill
proportional share of foreign taxes is eligible, as no foreign
The Build Back Better Act, H.R. 5376, considered under
tax credits are allowed for the excluded income under the
reconciliation, would make several changes that affect
QBAI deduction. Out of the remainder, the percentage
GILTI. It would raise the corporate tax rate to 26.5%,
allowed (80% under current law and 95% under H.R. 5376)
raising the GILTI rate. It would reduce the deduction for
is calculated. The table also illustrates the effects of
tangible investment to 5% and the GILTI deduction to
eliminating the per-country limit.
37.5% that, with the new corporate tax rate, leads to an
effective tax rate of 16.565% (62.5% times 26.5%). It
https://crsreports.congress.gov
link to page 1 link to page 2 GILTI: Proposed Changes in the Taxation of Global Intangible Low -Taxed Income
Table 2. Foreign Tax Credits and U.S. Final Tax
limit. H.R. 5376 would limit interest deducted to the share
Assuming Identical Operations in a High-Tax and
of interest that is 110% of the share of worldwide income.
Low-Tax Country
Consistent with that change, U.S. interest would no longer
(dollars in millions)
be allocated to foreign source income. The bill also
provides that no head office expenses would be allocated.
Current Law
H.R. 5376
Currently, losses in one country can be used to offset
High
Low
High
Low
income in another country. H.R. 5376 would provide a per-
Tax
Tax
Tax
Tax
country treatment for losses, and only allow losses to offset
Foreign Taxes
20
5
20
5
income in another operation in the same country. GILTI
losses cannot be carried forward; the proposal would allow
Foreign Taxes, Net
16
4
18
4.5
a one-year carryforward.
of QBAI
Share of Taxes for
12.8
3.2
17.1
4.275
Current law limits the deduction for GILTI and another
GILTI Credited
provision providing benefits for foreign derived tangible
income, or FDII (i.e., a deduction aimed at providing lower
U.S. Tax
8.4
8.4
14.91
14.91
taxes on export income reflecting intangible income by U.S.
(from Table 1)
firms), to taxable income, with no carry over for excess
Residual U.S. Tax
0
5.2
0
10.635
deductions. Under the revision, these excess deductions
could be carried forward indefinitely.
Excess Foreign Tax
4.4
0
2.19
0
Credit
Under current law, oil and gas extraction income is
Final Tax
0.8
10.635
excluded from GILTI. The proposal includes extraction
income, including production from tar sands and oil shale.
Excess Foreign Tax
—
2.19
(A special rule prevents foreign credits on oil and gas
Credits Carried
income to offset other income; that rule is unchanged.)
Forward
The revisions in 2017 provided “downward attribution”
Source: CRS Calculations and Table 1.
rules in which ownership by U.S. interests in a foreign
Notes: The share of taxes associated with GILTI that can be
subsidiary for purposes of determining CFC status could be
credited is 80% for current law and 95% for H.R. 5376. The U.S.
attributed through a foreign parent of a U.S. subsidiary. The
parent has a firm in each country with $100 mil ion of income and
scope of this provision would be reduced by applying only
$200 mil ion of QBAI.
to firms that are 50% owned by the foreign parent rather
than 10%.
As shown in Table 2, the creditable foreign taxes are
reduced by the share of income associated with the tangible
The proposal would move certain income items called
(QBAI) deduction, and then further reduced by the limits on
foreign base company sales and services from Subpart F to
the amount of foreign taxes associated with GILTI. The
GILTI. As noted earlier, Subpart F applies full taxation
available foreign tax credits are higher for H.R. 5376
(with foreign tax credits) to certain easily shifted income.
because the tangible deduction is lower and percentage of
Foreign base company income is income where neither the
foreign taxes associated with GILTI that can be credited is
customers nor the producers are located in the country.
higher. For current law, there is a residual tax in the low-tax
Income that involves transactions with related U.S. firms
country that is offset by the unused credit in the high-tax
would be retained in Subpart F whereas transactions with
country leaving a net liability of $0.8 million ($5.2 million
foreign-related firms would be in GILTI. Although tax rates
minus $4.4 million) and no unused excess credits (which
are higher in Subpart F, GILTI would now be more
could not have been carried forward in any case). For the
restrictive because of the limits on losses and foreign tax
proposal in H.R. 5376 , there is a larger tax in the low-tax
credits, and the revision is expected to raise revenue.
country and no offset from excess credits in the high-tax
country. The firm has an excess credit that can be carried
For a discussion of the overall international tax regime, see
forward for five years but only to offset tax in the high-tax
CRS Report R45186, Issues in International Corporate
country (which it might not ever be able to use).
Taxation: The 2017 Revision (P.L. 115-97), by Jane G.
Other Provisions in the Reconciliation
Gravelle and Donald J. Marples.
Bill Affecting GILTI
Jane G. Gravelle, Senior Specialist in Economic Policy
Under current law, a share of U.S. interest and head office
expenses (which are deducted against all income) is
IF11943
allocated to foreign source income for the foreign tax credit
https://crsreports.congress.gov
GILTI: Proposed Changes in the Taxation of Global Intangible Low -Taxed Income
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