Tax Plans Propose Changes to GILTI Rules

May 2021

BY

Michael Masciangelo, Senior Client Executive, International Tax Services | Tiffany Ippolito, Senior Manager, International Tax Services

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Two Democratic tax plans—one released by the Biden administration and the other by Democratic Senators—propose to increase the tax on “global intangible low-taxed income” of U.S. corporations, also known as GILTI. U.S. shareholders of “controlled foreign corporations” (CFCs) should monitor and plan for the potential impacts of these proposals.

The GILTI rules were introduced by the 2017 Tax Cuts and Jobs Act (TCJA). Under the existing rules, U.S. shareholders of CFCs are taxed on their pro rata share of certain CFC income, regardless of whether the income is repatriated. U.S. companies are allowed to reduce their share of CFC income by a 10% deemed return on their “qualified business asset investments” (QBAI). The net result is included in their U.S. taxable income and taxed at an effective rate of 10.5% (the effective rate is scheduled to increase to 13.125% beginning in 2026). The GILTI rules also allow for a foreign tax credit (FTC) of up to 80% of the CFC’s deemed paid foreign income taxes. 
 

Proposed changes to GILTI rules

The Biden administration’s Made in America Tax Plan (part of the administration’s American Jobs Plan) proposes significant corporate tax changes, including modifications to several international tax rules implemented as part of the TCJA. In addition, the Overhauling International Taxation framework, released by Democratic Senators Ron Wyden, Sherrod Brown and Mark Warner, also proposes changes to the U.S. international tax system. In terms of GILTI, both plans would:
  • Increase the effective tax rate on GILTI;
  • Modify the calculation of the GILTI inclusion and the allowable FTC; and
  • Eliminate the 10% QBAI reduction.

The following chart highlights the American Jobs Plan and Senate framework proposals as compared to the existing GILTI rules.
 
Provision Existing Rules (TCJA) American Jobs Plan Senate Framework
GILTI effective tax rate 10.5% (increasing to 13.125% in 2026) 21% Potentially between 60% and 100% of corporate tax rate in effect
GILTI calculation Global aggregate basis Country-by-country basis Country-by-country basis or removal of high-taxed income
10% QBAI reduction Yes No No


For more information on the GILTI proposals, see BDO’s article Tax Proposals Target GILTI Rules.
 

How BDO can help

BDO is helping multinational companies proactively anticipate and address from a strategic standpoint what might be coming in terms of the potential GILTI changes.

BDO can work with businesses to perform a comprehensive scenario analysis of the various proposals to identify tax minimization strategies and other steps that should be considered now in advance of actual legislative proposals being issued, including identifying favorable elections that can be made on 2020 tax returns.

For more information on the GILTI or other tax proposals that may affect you or your business, contact BDO.