GILTI: Untangling the obscure tax law impacting US business owners abroad

Legislators are debating bill that would increase costs before year's end

US shareholders and certain business owners abroad must fill out Form 8992 to be compliant with the Gilti tax law. Ahmed Issawy / The Nation

A tax law passed during US President Donald Trump's first term is set to be extended in a move that could increase additional costs for US business owners overseas.

GILTI (pronounced “guilty”), was first adopted as part of the 2017 Tax Cuts and Jobs Act to target multinationals such as Google and IBM that sought to evade taxes by shifting profits to low-income territories. Legislators are now debating a bill that would extend the provision – called Global Intangible Low-Taxed Income – beyond this year.

This could leave US business owners and shareholders who receive international income facing unexpected costs and a convoluted web of forms to remain compliant – or be hit with steep fines.

“US citizens overseas are caught in these laws, even though, as far as they're concerned, they didn't create a foreign corporation, they created a corporation in the country in which they live,” Olivier Wagner, of US expatriate service 1040 Abroad, told The National via email.

Mr Wagner, an accountant who specialises in US expat taxation, said his clients typically have “no idea” of the tax obligations they would be subject to when setting up a corporation overseas.

GILTI is similar to other idiosyncrasies of the US tax system. For example, unlike almost every other country, the US taxes people based on citizenship rather than residency.

The business's only affiliation with the United States is the citizenship of its owner

Laura Snyder,
president of Stop Extraterritorial American Taxation

And while GILTI was designed to ensure multinationals repatriate income to the US, Laura Snyder, a lawyer in Paris, said “that logic is completely inapplicable” to a business owned by an American citizen who lives and runs their business in another country.

“The business's only affiliation with the United States is the citizenship of its owner,” said Ms Snyder, president of the non-partisan group Stop Extraterritorial American Taxation.

How does Gilti work?

GILTI is a minimum tax that targets foreign earnings from intangible assets and applies only to what is known as a controlled foreign corporation (CFC). A business is considered a CFC if more than half of its shares are owned by a US shareholder who owns at least 10 per cent of that company's shares.

GILTI taxes most active earnings that exceed 10 per cent of depreciable assets, even if they are not intangible.

The GILTI tax rate for corporate shareholders ranges from 10.5 per cent to 13.125 per cent. But for individual shareholders this could range from 10 per cent to 37 per cent, as the tax rate is based on their income tax bracket.

“The US tax code penalises most non-US sources of income – your retirement income, your investments, mutual funds,” Ms Snyder said. "And it does a lot to penalise small businesses outside the United States."

But this can create a double taxation problem, whereby US business owners living abroad face tax liabilities for both the US and whichever country they established their corporation.

“They live their life overseas and create a corporation, taking into account the tax implications for the country they’re in,” Mr Wagner said.

Complicated filing

Those obligated to comply with GILTI face a complex and time-consuming filing process that can cost thousands of dollars.

US corporations and shareholders must fill out form 8992, called "US Shareholder Calculation of Global Intangible Low-Taxed Income", to report inclusion amounts to the IRS. They must also file form 5471, called "Information Return of US Persons with Respect to Certain Foreign Corporations", to register ownership of a CFC.

One of the 12 schedules in form 5471 they must complete is Schedule I, a key form to determine the filer's appropriate tax liability.

Reporting requirements then kick in and fees are incurred, even if the business is losing money. “This is a burden American citizens have that competitors do not,” Ms Snyder said.

Failure to file comes with a $10,000 penalty per form, with a maximum fine of $50,000.

What's next for GILTI?

US business owners abroad can expect the GILTI tax rate to increase from next year.

Changes to the law would adjust the deduction from 50 per cent to 37.5 per cent after December 31, effectively increasing the GILTI tax rate from 10.5 per cent to 13.125 per cent for designated CFCs.

An extension of the Gilti provision appears on page 812 of the proposed US tax bill. Photo: Screengrab / US Congress

The adjustment is one of many in the 1,000-plus page "One Big Beautiful Bill Act" that is circulating through Congress. After it passed the House of Representatives last month, it now must go through the Senate.

While legislators are debating several provisions in the bill, GILTI is likely to stay. Republican leaders in the Senate have set a deadline of July 4 for the bill to be passed.