With the 2019 tax filing season well underway, most CPAs and tax professionals probably have a good awareness of the new tax provisions in the 2017 Tax Cuts and Jobs Act (TCJA). Whether they have a good understanding of them is a whole different story. There’s no question that numerous provisions of the TCJA are mind-numbingly complex. A big piece of the TCJA was a revamp of the foreign tax credit (FTC) rules. Part of this overhaul was the addition of new income baskets. One of those is the IRC Section 951A income basket, which is for Global Intangible Low Taxed Income (GILTI).

GILTI, without going into too much detail, is a new system under the TCJA that requires U.S. shareholders of controlled foreign corporations (CFCs) to include GILTI in their income. An important part of the TCJA is the new 100% dividends received deduction for corporate shareholders of CFCs. GILTI is sort of a way to discourage U.S. corporate shareholders from setting up CFCs in low to no tax jurisdictions because then they will effectively pay no income tax with the new 100% dividends received deduction (DRD). The whole point of the 100% DRD appears to be to incentivize U.S. corporations to bring money back to the U.S. to spur economic growth at home and to make the U.S. corporate tax system more competitive with countries using a territorial tax system, where only income generated within the countries is taxed. While GILTI seems like a governmental attempt to make U.S. shareholders guilty for not setting up shop on U.S. soil, the TCJA graciously provides partial FTC relief for tax on GILTI.

Perhaps the best way to delineate how the FTC works for the GILTI basket is  to provide examples. Before that, however, it’s important to provide a definition of a new term called “tested income.” According to IRC Section 951A(c)(2)(A), tested income for a U.S. shareholder of a CFC is the U.S. shareholder’s portion of CFC gross income (excluding subpart F income, high taxed income, related party dividend income, effectively connected income, and oil/gas income) less CFC direct expenses including tax expenses. Let’s imagine that a domestic corporation called Trinkets U.S. Inc. owns 100% of two CFCs. Trinkets U.S. Inc. has tested income of $750,000 and GILTI of $500,000 via CFC 1. Trinkets U.S. Inc. also has tested income of $500,000 and GILTI of $250,000 via CFC 2. In total, both CFCs have paid $200,000 in foreign income taxes which are attributable to the total tested income of $1,250,000, and Trinkets U.S. Inc. has $120,000 of allocable expenses for purposes of the FTC calculation. The FTC calculation is as follows:

In the example above, only an 80% deemed FTC is allowable in accordance with IRC Section 960. The result is that the FTC brings the U.S. tax owed down to $0. The following example is the same as above except that Trinkets U.S. Inc. has $500,000 of allocable expenses instead of $120,000.

In this example, because the GILTI amount for FTC limitation is brought down to $0, no FTC is allowed.

While the FTC is a source of remedy for the negative effects of GILTI, it’s important for CPAs and tax professionals to realize that the FTC is limited and sometimes completely disallowed for certain taxpayers as displayed in the examples above. Another important item to note is that any excess FTCs calculated in the GILTI basket are not allowed to be carried back or forward per IRC Section 904. The FTC and the new GILTI basket rules are certainly complex, and it’s absolutely critical for CPAs and tax professionals to have a basic understanding as many corporations, other business entities, and individuals have increasingly more global operations and interests.         

 Charles Ladas, CPA, is a tax supervisor at Citrin Cooperman & Company, LLP. He is involved with a wide array of tax services for domestic and international clients. The services include tax compliance for businesses and high-net-worth individuals, tax provisions for corporations, and tax research, with an emphasis on international tax issues. Mr. Ladas is licensed in New York State and is a member of the NYSSCPA and AICPA. He is also a member of the NYSSCPA’s International Taxation Committee. He can be reached at cladas@citrincooperman.com.