The US Congressional Research Service (CRS) has released an updated report (IF 11943) addressing proposed changes to the taxation of global intangible low-taxed income (GILTI) on 25 November 2024.
The updates explain that the proposed changes outlined in the 3 November 2021 version of the Build Back Better Act (H.R. 5376), were not implemented.
The treatment of income earned abroad in US-controlled foreign corporations (CFCs) has been extensively debated over the years. In the 2017 Tax Cuts and Jobs Act (P.L. 115-97), the tax treatment of foreign-source income was altered.
The prior system imposed taxes on CFCs’ income only when they paid dividends to their US owners. The system taxed in full income earned in branches and certain types of easily shifted income of CFCs, referred to as Subpart F income. CFCs are foreign incorporated firms at least 50% owned by US shareholders who hold at least 10% of the share by value or vote.
Current treatment
The Tax Cuts and Jobs Act eliminated the tax on dividends and instead imposed a lower tax on CFCs aimed at intangible income, the tax on global intangible low-taxed income, or GILTI. GILTI targeted intangible income due to concerns about profit shifting (i.e., moving income to low tax countries), because intellectual property is more easily moved than tangible property.
In calculating income for GILTI, CFCs are allowed two deductions.
- One is a deemed deduction of 10% of tangible assets (buildings and equipment, called qualified business asset investment, or QBAI). The deduction is intended to offset the normal return from tangible investments, such as factories, leaving GILTI to largely reflect the return from intangible assets, such as drug formulas, computer programmes, technology, and brand names.
- The other is a deduction of 50% on the remaining amount, so that, with the corporate tax rate of 21%, the effective tax rate is 10.5% (21% times 50%). This deduction is scheduled to fall to 37.5% after 2025, leading to an effective tax rate of 11.8125% (21% times 56.25%).
Changes in the Reconciliation Bill
The Build Back Better Act, H.R. 5376 (released 3 November 2021) considered under reconciliation, would have made several changes affecting GILTI. It would have reduced the deduction for tangible investment to 5% and the GILTI deduction to 28.5%.
With the new corporate tax rate, that would have led to an effective tax rate of 15.051% (71.5% times 21%). It would have applied the foreign tax credit on a country-by-country (or per-country) basis and would have allowed unused excess credits to be carried forward for five years through 2030, and for 10 years after that (with no carryback).
This version of H.R. 5376 was not adopted and the final legislation did not include the changes in GILTI or the increase in the corporate tax rate.
