GILTI Tax and IRS Form 8992: A Guide for American Expats

Written by: Josh Katz, CPA

In recent years, American expats have found themselves navigating complex tax regulations, particularly with the introduction of the Global Intangible Low-Taxed Income (GILTI) tax, IRC Section 951(a). This tax, introduced by the Tax Cuts and Jobs Act (TCJA) of 2017, aims to prevent multinational corporations from shifting profits to low-tax jurisdictions. For US citizens living abroad who own or operate businesses overseas, it’s important to understand the implications of the GILTI tax on your US taxes.

What is GILTI Tax?

GILTI, or Global Intangible Low-Taxed Income, was introduced as part of the Tax Cuts and Jobs Act (TCJA) of 2017. GILTI represents a significant shift in US international tax policy, aiming to address perceived loopholes that allowed multinational corporations to shift profits to low-tax jurisdictions and avoid US taxation.

The fundamental purpose of the GILTI tax is to prevent US shareholders of controlled foreign corporations (CFCs) from avoiding US tax by shifting income to foreign subsidiaries in low-tax or no-tax jurisdictions. Before GILTI, multinational corporations could retain earnings offshore indefinitely without incurring significant US tax liabilities. This practice, often referred to as “income stripping,” eroded the US tax base and led to calls for reform.

Who is Subject to GILTI Tax?

GILTI tax primarily impacts US shareholders of controlled foreign corporations (CFCs). The first step in determining GILTI tax liability is identifying who qualifies as a US shareholder of a controlled foreign corporation.

According to the Internal Revenue Code (IRC), a US shareholder is defined as any US person who owns, directly or indirectly, 10% or more of the total combined voting power of all classes of stock entitled to vote of a foreign corporation, or 10% or more of the total value of shares of all classes of stock of the foreign corporation.

Types of US Persons Covered

  • Individuals: US citizens, US residents (including green card holders), and individuals who meet the substantial presence test are considered US persons for tax purposes. Therefore, if these individuals own at least 10% of a foreign corporation’s voting stock or stock value, they qualify as US shareholders and may be subject to GILTI tax.
  • Domestic Corporations and Partnerships: Domestic corporations, partnerships, trusts, or estates that own at least 10% of a foreign corporation’s voting stock or stock value, are also considered US shareholders subject to GILTI tax.

Ownership Threshold

The 10% ownership threshold partially determines whether an individual or entity is subject to GILTI tax. If a US person directly or indirectly owns 10% or more of the voting power or value of a foreign corporation’s stock, they are deemed a US shareholder for GILTI purposes.

Controlled Foreign Corporation (CFC)

GILTI tax specifically targets income earned by controlled foreign corporations (CFCs). A CFC is a foreign corporation in which US shareholders collectively own more than 50% of the total combined voting power of all classes of stock entitled to vote or the total value of the stock.

GILTI Inclusion for US Shareholders

Once an individual or entity qualifies as a US shareholder of a CFC, they are required to include their share of GILTI in their taxable income for the year. This GILTI inclusion is determined based on the CFC’s net income that exceeds a deemed return on the CFC’s tangible assets (QBAI), as calculated under the GILTI rules.

Americans living abroad can also be subject to GILTI tax if they own interests in CFCs. Expats who meet the criteria for US shareholder status based on their ownership of foreign corporation stock may need to report and pay tax on their share of GILTI income.

Table of Contents

How to Calculate GILTI Tax?

Calculating GILTI tax involves several steps and specific formulas designed to determine the taxable amount of income attributable to CFCs for US shareholders. The calculation considers the CFC’s tested income, a deemed return on tangible assets (Qualified Business Asset Investment or QBAI), and various deductions to arrive at the final GILTI inclusion. Here’s an in-depth look at how the GILTI tax is calculated:

Components of GILTI Calculation

  • Determine the Net CFC Tested Income: First, calculate the income of your Controlled Foreign Corporations (CFCs), exclude the Subpart F income, income effectively connected with a US trade or business, high-taxed income excluded from Subpart F income under the high-tax exception, dividends received from a related person, and foreign oil and gas extraction income. This results in the net CFC tested income.
  • Calculate the Net Deemed Tangible Income Return: This is essentially a fixed return on the CFC’s tangible assets used to produce tested income. It’s calculated as 10% of the aggregate of the US shareholder’s pro-rata share of the QBAI of each CFC. The QBAI is the average of the aggregate of adjusted bases in tangible property, used in the production of tested income, determined at the end of each quarter of the tax year. From this amount, you subtract the interest expense allocated to the income-producing assets.
  • GILTI: The GILTI amount is the excess of the net CFC tested income over the net deemed tangible income return.

The GILTI formula can be summarized as:

GILTI = Net CFC Tested Income – (10% x QBAI – Interest Expense)

After calculating the GILTI amount, US shareholders must include this in their gross income. However, corporate US shareholders are allowed a deduction (50% deduction under the TCJA, subject to change under future legislation) and may claim foreign tax credits for 80% of the foreign taxes paid or accrued with respect to GILTI, which can reduce the US tax liability on GILTI.

It’s important to note that the calculation can get quite complex due to the various adjustments and limitations, especially regarding the allocation of expenses, deductions, and credits. The specifics can vary based on the taxpayer’s situation and changes in tax law, such as those proposed under the Biden tax plan, which suggests adjustments to the GILTI regime, including doubling the GILTI tax rate from 10.5% to 21%.

What Forms to File for GILTI?

Filing for GILTI involves specific reporting requirements for US shareholders of controlled foreign corporations. Understanding the necessary forms and documentation is essential to complying with IRS regulations and accurately reporting GILTI inclusions.

Here’s an expanded explanation of the forms required for GILTI reporting:

IRS Form 8992: GILTI Calculation and Reporting

Form 8992, officially titled “US Shareholder Calculation of Global Intangible Low-Taxed Income (GILTI),” is the primary form used to calculate and report GILTI inclusions for US shareholders of CFCs. This form is filed along with the taxpayer’s annual tax return.

IRS Form 8992 - GILTI Tax

Key Components of Form 8992

  • Identification of CFCs: Taxpayers must identify the CFCs in which they are US shareholders and provide relevant details such as name, country of incorporation, and ownership percentage.
  • GILTI Computation: The form includes sections for calculating GILTI, incorporating the CFC’s net income, Qualified Business Asset Investment (QBAI), and deemed return on QBAI.
  • GILTI Inclusion Amount: Taxpayers report the calculated GILTI inclusion amount on Form 8992, which is then carried over to the taxpayer’s main tax return (e.g., Schedule C of Form 1040 or Schedule G of Form 1120).
  • Foreign Tax Credits and Deductions: The form allows taxpayers to claim foreign tax credits or deductions related to GILTI inclusions, which can help offset US tax liabilities on foreign income.

Additional Forms and Schedules

In addition to Form 8992, taxpayers may need to file other forms and schedules depending on their specific circumstances and the complexity of their international tax situation:

  • Form 5471: This form is required for certain US persons who are officers, directors, or shareholders in certain foreign corporations, including CFCs. It provides detailed information about the foreign corporation’s activities and financials.
  • Form 1118: Taxpayers claiming foreign tax credits related to GILTI inclusions may need to file Form 1118 to calculate the foreign tax credit limitation.
  • Schedule C (Form 1040) or Schedule G (Form 1120): The GILTI inclusion amount calculated on Form 8992 is reported on the appropriate schedule of the taxpayer’s main tax return.
  • Form 8993 – Section 250 Deduction for Foreign-Derived Intangible Income (FDII) and Global Intangible Low-Taxed Income (GILTI): This form is used to claim deductions related to GILTI under Section 250 of the Internal Revenue Code. Taxpayers making a Section 962 election can use this form to calculate and claim deductions for foreign-derived intangible income (FDII) and GILTI, potentially reducing their overall tax liability on GILTI income.
IRS Form 8993

Components of Form 8993

  • FDII Calculation: Information related to computing the foreign-derived intangible income (FDII) deduction, which is designed to incentivize US corporations to engage in certain export activities.
  • GILTI Deduction: Details about the deduction available for GILTI inclusion under Section 250. This deduction helps reduce the effective tax rate on GILTI income, particularly for taxpayers electing to be taxed as domestic corporations under Section 962.

What is Section 962?

Section 962 of the US Internal Revenue Code (IRC) provides an election for individual taxpayers who are US shareholders of controlled foreign corporations (CFCs) to be taxed at corporate tax rates on certain types of income, including GILTI.

The primary purpose of Section 962 is to allow individual shareholders of CFCs to benefit from the lower corporate tax rates applicable to C corporations, particularly on income subject to Subpart F or GILTI inclusion.

Key Points of Section 962

Eligibility

To qualify for the Section 962 election, an individual must meet the following criteria:

  • Be a US citizen or resident alien.
  • Be a direct or indirect shareholder of a CFC.
  • Have received income from the CFC subject to Subpart F or GILTI inclusion.

Tax Treatment

By making a Section 962 election, the individual taxpayer is treated as if they were a domestic corporation for purposes of computing their US federal income tax liability on certain types of foreign income. This allows them to benefit from lower corporate tax rates on the specified income, the Section 250 Deduction and a foreign tax credit for the foreign corporate taxes related to the CFC income.

Tax Computation

When an individual makes a Section 962 election, they must compute their tax liability as if they were a domestic corporation. This includes applying the corporate tax rates to the specified income, considering any allowable deductions and credits.

Types of Income Covered

  • Subpart F Income: This includes certain types of passive income earned by CFCs that are currently taxable to US shareholders, regardless of whether the income is distributed.
  • GILTI: Global Intangible Low-Taxed Income is another type of income from CFCs subject to inclusion in the US shareholder’s taxable income.

Irrevocability

The Section 962 election is made on a year-by-year basis and is irrevocable for the tax year once made. Therefore, taxpayers must carefully evaluate the implications and potential benefits of the election each year.

Tax Benefits of Section 962 Election

1. Lower Tax Rates

One of the primary benefits of the Section 962 election is the ability to be taxed at lower corporate tax rates on specified foreign income. As of the time of writing, corporate tax rates are generally lower than individual tax rates, with the top corporate rate currently set at 21%. By electing to be taxed under Section 962, individual shareholders can potentially reduce their overall tax liability on GILTI and Subpart F income.

2. Tax Deferral

Under the Section 962 election, individual shareholders can defer the tax liability on undistributed earnings of the CFC until those earnings are actually distributed as dividends. This deferral benefit can provide cash flow advantages by allowing shareholders to postpone the payment of taxes on foreign earnings.

3. Foreign Tax Credit Utilization

Taxpayers making a Section 962 election can benefit from utilizing foreign tax credits at corporate tax rates. This allows them to offset US tax liabilities on foreign income with taxes paid or accrued to foreign jurisdictions, reducing the risk of double taxation and optimizing tax efficiency.

4. Simplified Tax Treatment

By electing under Section 962, individual shareholders are treated as domestic corporations to calculate their US federal income tax liability on specified foreign income. This simplifies the tax treatment of foreign earnings and aligns it more closely with the tax rules applicable to corporate shareholders.

The Section 962 election offers valuable benefits to individual US shareholders of controlled foreign corporations. However, applying Section 962 involves complex tax calculations and considerations. Taxpayers are advised to consult with qualified tax advisors to assess the suitability of the election and ensure proper compliance with IRS regulations.

When is the GILTI Tax Due?

The GILTI (Global Intangible Low-Taxed Income) tax is typically due when the taxpayer files their annual US federal income tax return. For US citizens, residents, and certain non-residents with income from controlled foreign corporations (CFCs), the GILTI tax is reported and paid on Form 1040 as part of their annual income tax return.

The due date for filing Form 1040 and any tax due is typically April 15th of the following year. However, if an extension request (Form 4868) is filed by the original due date, the deadline to file can be extended to October 15th.

Estimated Tax Payments

In addition to reporting and paying GILTI tax when filing annual tax returns, taxpayers may also be required to make estimated tax payments throughout the year if they anticipate owing a significant amount of tax on GILTI income. Estimated tax payments for GILTI are typically made quarterly and are due on specific dates throughout the tax year:

  • April 15th (for income received January 1st to March 31st)
  • June 15th (for income received April 1st to May 31st)
  • September 15th (for income received June 1st to August 31st)
  • January 15th of the following year (for income received September 1st to December 31st)

Penalties and Interest

Taxpayers should ensure timely payment of GILTI tax by the applicable due dates. Failure to properly calculate and report GILTI income can result in penalties and interest, and failure to file required forms can result in penalties of up to $10,000 per form.

The GILTI tax regime presents unique challenges and considerations for Americans with foreign corporation interests. Understanding the basics of GILTI and complying with reporting requirements are essential steps for US expats to navigate this complex area of US tax law effectively. By staying informed and seeking appropriate guidance, expats can manage their tax obligations and optimize their financial planning internationally.

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