GILTI (Global Intangible Low-Taxed Income)

Detailed Explanation

Enacted by the Tax Cuts and Jobs Act, GILTI is an anti-deferral rule that requires US shareholders (those owning 10% or more) of Controlled Foreign Corporations to include, as ordinary income each year, their share of the CFC's net tested income that exceeds a deemed routine return on tangible business assets. That deemed return, called the net deemed tangible income return, equals 10% of the CFC's qualified business asset investment (QBAI), reduced by certain interest expense. Because most software, services, and IP-driven foreign businesses hold few tangible assets, nearly all of their profit becomes GILTI. C corporations soften the result with a Section 250 deduction and an indirect Section 960 foreign tax credit on a portion of the foreign taxes the CFC paid, producing a much lower effective rate than the headline ordinary rate. Individual US shareholders are taxed at full ordinary rates with no Section 250 deduction and no direct credit for the CFC's foreign taxes, unless they make a Section 962 election to be taxed as if they were a domestic corporation, claiming the corporate rate and the indirect foreign tax credit. GILTI is computed on Form 8992 with supporting Form 5471, and it works alongside the Subpart F regime, which captures passive and mobile income first. A foreign corporation that is both a CFC and a PFIC is taxed under these CFC rules, not the PFIC rules, for any 10% US shareholder, under the Section 1297(d) overlap rule.