May 2, 2023

GILTI Component of the 2024 Greenbook Proposals

By Danielle Kelley, Manager, Tax & Business Services

GILTI Component of the 2024 Greenbook Proposals International Tax

The US Treasury’s recent release of the “Green Book: General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals” has once again stirred discussion on how it addresses Global Intangible Low-Taxed Income. Income from Controlled Foreign Corporations (“CFCs”) may be subject to taxation under various tax regimes. One example is the Global Intangible Low-Taxed Income (“GILTI”) regime. GILTI, unless an exception applies, is intended to immediately tax all or a portion of a CFC’s income, even if no distributions are made. The GILTI calculation rules are complex and would be modified under the Greenbook Proposals.

Under the current GILTI calculations, net losses from certain entities may reduce the net income from other entities in the current year for the GILTI calculation. Note that the location of incorporation of the entities is not a factor in determining the ability to net income and losses between eligible entities. Still, for gains and losses to be netted, they must come from current year activities of the various entities. In addition, the overall income subject to inclusion under GILTI may be reduced by a 10% return on tangible depreciable assets known as Qualified Business Asset Investments (“QBAI”). In general, QBAI reduced GILTI inclusions to U.S. shareholders where the CFCs own tangible, depreciable assets. Corporations, by default, and individuals who make a 962 election, may further deduct 50% of the income pick-up through the Section 250 deduction, which is a statutorily given deduction that generally results in a 10.5% U.S. effective federal income tax rate on GILTI income. Furthermore, current-year foreign tax credits (subject to limitation rules) from income entities may reduce GILTI-related income from other entities. Exemptions (such as the High Tax Exception) for entities that pay at least 90% of the US corporate income tax rate of 21% are also available to be excluded from income for GILTI purposes.

Under the proposed legislation, the GILTI inclusion would be calculated for each foreign jurisdiction in which the CFCs have operations without the ability to net income, losses, or foreign tax credits between entities that were incorporated in different jurisdictions. Therefore, taxpayers would no longer be able to offset gains from one CFC with losses from another CFC if the entities producing the gains and losses were incorporated in different jurisdictions. Other changes include the elimination of the QBAI exemption for tangible, depreciable assets, the reduction of the Section 250 deduction from 50% to 25%, and the elimination of the High Tax Exception election. Two favorable changes include the ability to carryforward previous year losses to offset current year GILTI and carryforward Foreign Tax Credits within a single jurisdiction.

According to commentators, the changes proposed by the Administration have little chance of getting through a divided Congress. Either way, navigating the global tax landscape continues to become more complex. If you have any questions about this latest news or want to discuss your strategy to address the evolving tax landscape, contact Marcum today.