Tax planning is one of the most crucial factors that one must never overlook. Furthermore, it is one of the things that one can never ignore if they are earning. At one point in life, we all have to pay the tax.
Furthermore, tax planning is about analyzing the financial situation or plan from a tax perspective. The fundamental and vital motive of tax planning is to ensure tax efficiency, reduce tax liabilities, and maximize the capability to contribute to retirement plans.
If we talk about the U.S., then there are many tax strategies in the state that one can adopt. GILTI tax is one of the concepts that one needs to be understood by the citizens of the U.S. for efficient tax planning. If you are still unaware of GILTI, then here, you can get a glimpse of what it means and how it affects different sectors across the Nation.
What Is GILTI And How It Relates To Tax Planning?
GILTI or Global intangible low-taxed income is a new concept added to the Tax Code by the Jobs Act and Tax Cut. It creates a new category of foreign income, which eventually gets added to corporate taxable income each year. Furthermore, it significantly alters the landscape of international tax.
It’s added by Pub. L. 115-97 (TCJA or tax reform) considerably broadens the scope of foreign earnings that, earlier to tax reform, had been subject to present U.S. taxation. It works as a global maximum tax. Here are some of the critical features of GILTI:
“U.S. shareholders” as per the CODE have to include on a current basis the aggregate amount of certain income produced by its CFC(s), irrespective of actual repatriation.
It generally applies to individual income produced by a controlled foreign corporation (CFC).
The U.S. shareholders who are domestic – C corporations (other than RICs and REITs) are eligible for up to 80% deemed paid foreign tax credit (FTC). Furthermore, they are also allowed for a 50% deduction of the present year inclusion and the entire section 78 gross-up.
Impacts of GILTI
Tax planning is one of the crucial factors for business persons. For a successful business, learning tax strategies is pivotal. The GILTI tax has a massive impact on foreign business where the overall profit is high relative to the stable asset base.
- Distribution companies/Procurement
- Services companies
- Technology companies /Software
Structure and Purpose of GILTI
One can also define GILTI as a new category of foreign income, which is added to taxable business income every year. Furthermore, it is a tax on earnings that surpass a 10% return on a firm’s invested foreign assets.
GILTI is subject to an international minimum tax of between 10.5 and 13.125% on a yearly basis. It is made-up to reduce the incentive to shift the company’s profits out of the United States by using intellectual property. Furthermore, it is one of the vital to understanding GILTI to build tax strategies.
Reducing the incentive for U.S.-based multinational businesses to shift profits out of the United States into low- or zero-tax jurisdictions, is the primary purpose of GILTI. The firms subject to GILTI have to compare a 21% national rate with a 10.5 to 13.125% rate rather than a zero rate.
Furthermore, the 10% capable corporate asset investment (QBAI) exemption in GILTI attempts to target the provision at properties that return above-normal returns, which is a proxy for the returns to intellectual possessions.
Tax Planning Tips To Lower GILTI
1. Increase QBAI
If you are interested in tax planning, then one of the best ways to avoid GILTI is by increasing QBAI (Qualified Business Asset Investments). One can go with a few ways to do this. For instance, you can buy equipment that has been leased earlier.
Here, the only downside is that just because someone is a shareholder in a Controlled Foreign Corporation, does not mean that they can control the company to implement this strategy.
2. Characterize GILTI as Subpart F
One can elect to covert GILTI to subpart F income. D.O. not get confused over Subpart F try to understand a little about international taxation. Although Subpart F is something that would avoid GILTI can be so bad that it can make Subpart F seem better.
3. Avoid CFC Or U.S. Shareholder Status
One of the easiest ways to cut down GILTI is by solely avoiding either CFC status or U.S. shareholder status. GILTI tax reform has changed the meaning of what it means to have CFC status, and that is a problem here. So, by adjusting the ownership levels with Non-US owners, one can find a great way out. The only downside that one might face here is that you need to watch those attribution rules, and is not practicable for many people.