GILTI and its relevance for Expatriates in the U.S.
One of the most significant aspects of the expat taxation domain is the concept of GILTI and the imposition of GILTI tax on the revenue of some overseas corporations. The GILTI tax has been a buzzing issue since its introduction in 2017 with the Tax and Job Cuts Act. It is vital for most US business owners to enlighten themselves about the fundamental particularities of the GILTI tax. The skillful team at Smart Accountants LLC can help you probe into the crucial regulations related to GILTI tax.
Understanding the GILTI Tax
Global Intangible Low-taxed Income (GILTI) comprises income earned by US-controlled foreign corporations (CFCs) abroad. The introduction of the GILTI Tax regime in the US happened to be the most significant feature of the Trump Tax Reforms, which marked its beginning in the tax year 2018, heralding some major changes for expatriate business owners.
The GILTI tax is an annual and immediate ordinary tax imposed on the "active" (loosely defined) business profits of a managed foreign corporation (CFC) owner. The GILTI regime supplements the Internal Revenue Code's well-established "Subpart F" laws, which usually relate to a CFC's "passive" income (such as interest, dividends, and royalties).
The recently introduced Section 951A of the Internal Revenue Code explicitly defines "global Intangible low- taxed income"– GILTI, as US shareholder's pro-rata of a controlled foreign corporation's "net CFC tested income."
Why was the GILTI Tax regime introduced?
A key feature of the Tax Reforms in the Trump regime, known as the "participation exemption," is the primary reason why the ambit of CFC anti-deferral rule expanded to accommodate active business income by the GILTI Tax regime. The feature mentioned above allowed tax-free distribution of income from a foreign corporation to its US parent. The primary goal of GILTI Tax imposition was to prevent the abusive transfer of revenue and profits by the US corporations from the US to low tax levying countries. However, several individual small business owners got trapped in the net of this revamped taxation regime. GILTI Tax rule imposition can have severe backlash, and the US owners of businesses settled abroad can suffer adverse consequences of the same. Therefore, it is highly recommended that they carefully scrutinize and analyze the tax implications upon their business ventures. However, the issues faced by the individual owners got addressed soon when the Treasury Department issued the Final Regulations on 15th July 2020.
What are some essential technicalities involved in GILTI calculation?
A non- US corporation that is owned majorly, i.e., more than 50% of it is controlled by nearly 10% of US shareholders, is known as a controlled foreign corporation or CFC. The total income generated by a CFC is its gross income minus some deductions such as expense tax and interest expenses. However, it completely excludes any income effectively connected with a US trade or business, Subpart F income, and dividends from such related persons. The procedure for calculating CFC's deemed net tangible income return is to multiply the adjusted tax basis of CFC's QBAI,i.e., "Qualified Business Asset Investment" by ten percent, which is the deemed return.
Now the question arises what does QBAI denote? So qualified business asset investment is the average of CFC's aggregate adjusted bases in the category of specified tangible property.
What are the Exceptions to the GILTI tax levy?
The GILTI tax imposed on expatriates is not as onerous and all-inclusive as it appears to be in the first instance. It has a couple of exceptions as well.
- 962 Election for Individual owners
A concise account of this exception would be that a US CFC owner can reduce their GILTI tax by 50% under the provisions of the new Section 250 of the revenue code. They can also claim up to 80 percent credit of the foreign taxes paid or accrued by the CFC on the GILTI. One can claim such an exception by filing a document called 962 Election. It is specifically designed to ensure that an individual taxpayer is not subject to higher tax rates on the income of foreign corporate entities which they directly own instead of those controlled through a US corporation indirectly. Thus, individuals who have filed 962 Election are subject to tax on the amount of the distribution that exceeds the sum of tax previously paid related to the distributions received from the foreign corporation as shareholders.
- High Tax Exception
The Final Regulations for the GILTI tax levy were issued by the US Department of Treasury and IRS in July 2020. They exempted active income from the GILTI tax if the foreign effective tax rate on such income exceeds 90% of the top US corporate tax rate. The mechanism adopted to calculate a CFC's foreign effective tax rate is known as "tested units." These tested units include the CFC, its branches, and specific other pass-through entities.
What are some integral ways to lower the GILTI tax for US entrepreneurs owning CFCs?
If you are liable to pay GILTI tax and seek to lower your obligations, you must consider some thoughtful approaches. One can establish a US C-corporation to take indirect ownership of the CFC or choose to be taxed as a domestic corporation or a disregarded business entity. There are some other techniques for small-scale individual tax owners which involve using the Foreign Earned Income Exclusion. It is highly advisable to collaborate with tax professionals to resolve your GILTI issues without feeling "GUILTY." CPA firms and accountants can even find support with Outsourcing Tax Services.
Why is there a growing need for Professional Taxation Services related to Expatriate taxes?
Due to the Expat Taxation compliance needs, the relocated individuals( people who have migrated from the US ) still got to file their taxes within the USA. There are, in fact, various disclosures and reporting requirements. With the distinct regulations within the Host and the Home countries, individuals moving from the US may find themselves in a muddle.
Most individuals need the help of honed and proficient tax professionals to cater to a great many laws and regulations falling under tricky tax matters like Expatriate Taxes. Several entities that ventured into this sphere of taxation may be unable to satisfy their clients. However, the probabilities for a fruitful practice do exist. The significant reason for the failure of most firms to tackle expat tax is the innumerable filing requirements, frequently updating credit schemes, and exclusions, which demand extensive research and dedicated learnings altogether. One must even additionally have basic knowledge about the tax treaties of the foreign country during which the client presently resides.
Thus, Expat Taxation Services to Expert CPA Firm like Smart Accountants LLC will assist you in managing your several obligations seamlessly. One also benefits from the affordability available by hiring the services from such good CPA firms.
How can Smart Accountants LLC contribute towards simplifying the procedures related to Expatriation Tax?
Smart Accountants LLC possesses an extremely honed team comprising experienced, proficient, and skilled individuals who are qualified and remain updated with all the recent developments and amendments in the field of Expat tax. Thus, such tasks which require a competent approach and prior experience in the hands of Smart Accountants LLC would be a sensible decision. It will ensure accuracy, precision, and security to your business endeavor and save you from making any wrong decision. It would be best if you hired the services extended by Smart Accountants LLC to ensure excellent guidance on matters related to Expatriation Taxation and other related issues.