What is GILTI Tax?
GILTI stands for Global Intangible Low-Tax Income. It is a tax that was introduced in 2018 by the IRS on a foreign company’s net profits, when the company is based outside of the US, but owned by a US citizen. It was put in place in order to dissuade companies from moving their company’s assets outside the US to a country abroad with a lower tax rate.
What would an example look like of how this would affect a small business?
A US individual owns 100% of the shares of a company based outside of the US, and he has a net profit after all expenses are paid. This is something which must be recorded on their tax return, and thus is subject to US tax. Without the section 962 election, they could be subjected to the highest individual marginal tax rate, which can be up to 37%. However, as they are able to use the section 962 election, it means they are only subjected to the highest corporate tax rate, which is 21%. There is also the section 250 deduction which can be used to lower the tax rate further, making it as low as 10-13.25% on the net profit of the company. This significantly lower tax rate does make a big difference, especially for small business owners.
How will the new regulations affect small business owners?
Prior to these new regulations being released, the IRS were ambiguous in their desired application of the tax laws surrounding GILTI. They were clear that they wanted to tax the net profits of foreign companies owned by US citizens, and they issued draft regulations to explain how they interpreted the law. This included how they wished the taxpayers to apply the law especially with regards to reporting on their forms. However, there was uncertainty as to whether these laws applied equally to both small businesses and large corporations. The new regulations clarify that the same laws do apply to both; small businesses and large corporations are both eligible to claim the section 962 election, which allows them to get a lower tax rate.
What if a company set up abroad is already paying corporation tax to the country it is set up in, does it still have to pay the 10-13.25% to the IRS as well?
For countries such as the UK, Canada or Australia, the company does have to pay corporation tax to the country it is set up in. The home country of the company has first rights on its corporation tax. The company’s profits do still have to be declared on the US tax return, however, the corporation tax to the home country can be used as a foreign tax credit on the US tax return. This can reduce the 13.25% tax rate even further.
I want more information about GILTI Tax
Does this mean that a profitable non-US based company may not have to pay any GILTI tax because they are already paying corporation tax to the country they are located in?
It is certainly possible that a profitable non-US based company can avoid having to pay any GILTI tax in this way. If the company’s home country imposes corporation tax on the net profit of the company, and that tax is at least equal to the 21% US corporation tax, enough foreign tax credit should be available to cover the GILTI tax so that the net US tax would be zero.
What about countries such as Dubai that have completely different corporate tax rates?
In countries such as Dubai, companies do not pay corporation tax, therefore there will be no foreign tax credit available to the company. They are still eligible to claim the section 962 election and deduction, but the company will still be taxed at a rate of 10-13.25% by the IRS.
Is the best option to see a tax professional to discuss potential options or do your own research?
The vast amounts of information found on the web can be confusing, or in some cases incorrect. Often, websites have not addressed all the relevant facts, or have covered them in an ambiguous manner. As made clear above, each individual taxpayer finds themself in different situations with regards to their tax return, and the generic information found on the web may not give them the personalised advice needed in order to reduce the amount of tax paid. Therefore, it is better with a phone call to a tax professional, as when the tax rules are applied, the outcome and amount of tax paid for each individual does vary.
What if you have already filed tax returns for the 2018/2019 tax year? Can you refile them with the new regulations applied?
Yes, it is clear that it is possible to refile past tax returns for the 2018 or 2019 tax years, when GILTI tax was first applied. Businesses are allowed to prepare amended tax returns for those years, where they can apply the section 962 election, as well as the linked deduction, and have a reduced tax rate for those years. It would be useful to have a discussion with a tax professional in order to determine the appropriate options. They can help with claiming a foreign tax credit (if that is applicable), and potentially seeking a refund if tax overpayments have previously been made. This is particularly helpful for small businesses, especially in light of the current coronavirus situation.
It is clear how important it is to discuss the potential options with a professional. What is the best way in which to do that?
It is easy – go to our website, where you will find relevant links so you can either get in contact by phone or email and meet team members. From there you can set up a meeting with a professional, where they can review your individual circumstances, and they can explain how the tax law applies in your case. They will review the facts and aim to help you ensure you have the best tax position possible.
How much might this consultation, and ongoing assistance, cost?
The initial consultation with the professional is free. They will assess your individual case, and plot a potential course going forward. Depending on the work which needs to be done, we will then negotiate the best possible price for you.
Contact us at Expat US Tax to have an initial free 20-minute consultation regarding Gilti tax and ways to save you money. We are also able to file tax returns on your behalf should you need it under a pre-agreed fee that won’t be adjusted through the process.