What is the TCJA tax on global intangible low-taxed income and how does it work? (2024)

Before the 2017 Tax Cuts and Jobs Act (TCJA), the United States generally taxed its firms and residents on their worldwide income. However, US firms could defer the tax on foreign subsidiaries’ active business earnings until those earnings were repatriated to the United States as dividends. After the TCJA, the United States generally exempts earnings from active businesses of US firms’ foreign subsidiaries, even if the earnings are repatriated. (The United States still taxes the income from passive investments of foreign subsidiaries.)

But Congress worried that completely exempting US multinationals’ foreign earnings might exacerbate the incentive to shift profits to low-tax jurisdictions abroad. So, in the 2017 tax bill, Congress added a new 10.5 percent minimum tax on global intangible low-taxed income (GILTI) to discourage such profit shifting. GILTI is intended to approximate the income from intangible assets (such as patents, trademarks, and copyrights) held abroad. Congress considered intangible assets highly mobile—and sought to discourage US firms from shifting these assets offshore.

More specifically, a US business must include GILTI in its gross income annually. GILTI is calculated as the total active income earned by a US firm’s foreign affiliates that exceeds 10 percent of the firm’s depreciable tangible property. A corporation (but not other businesses) can generally deduct 50 percent of k GILTI and claim a foreign tax credit for 80 percent of foreign taxes paid or accrued on GILTI. Thus, if the foreign tax rate is zero, the effective US tax rate on GILTI will be 10.5 percent (half of the regular 21 percent corporate rate because of the 50 percent deduction). If the foreign tax rate is 13.125 percent or higher, there will be no US tax after the 80 percent credit for foreign taxes. After 2025, the deduction will fall to 37.5 percent of GILTI, raising the effective rate to 13.125 percent and removing any US tax, after the 80 percent credit, only if the foreign tax rate is 16.406% or higher.

For example, suppose a US corporation is the sole shareholder of a foreign corporation with a manufacturing plant in Ireland, which has a 12.5 percent tax rate. Suppose the plant cost $100 million to construct, and the foreign income is $30 million (after properly allocating expenses). The corporation would calculate GILTI of $20 million (total foreign income minus 10 percent of $100 million of depreciable assets). The US tax on GILTI would be $2.1 million before credits for foreign taxes (half of the $20 million of GILTI times the 21 percent corporate tax rate), and the net US tax after credits would be $0.1 million ($2.1 million−$2 million credit for Irish taxes). In practice, the calculations are much more complicated, as US corporations may have multiple operations abroad—and how to properly allocate expenses among them is unclear.

In its Fiscal 2024 budget, the Biden Administration is proposing to substantially increase the taxation of foreign-source income of US-resident multinational corporations through three main provisions. First, it would eliminate the deduction for 10 percent of depreciable assets, making returns on both tangible and intangible assets subject to tax. Second, it would reduce the deduction for GILTI from 50 to 25 percent. In combination with another proposal to increase the corporate tax rate to 28 percent, this cut in the deduction would increase the GILTI tax rate from 10.5 percent to 21 percent (75 percent of 28 percent). Third, it would require companies to compute foreign tax credits on a country by country basis, thereby eliminating the ability of companies to use credits for taxes paid in high-tax foreign countries to offset US taxes on income earned in low-tax countries. At the same time, it would allow companies to claim credit for 95 percent of foreign taxes instead of 80 percent.

In the previous example, this means that GILTI income would be equal to the $30 million of profits from the plant in Ireland. The US tax on that income before credits would be $6.30 (21 percent of 30). The Irish tax on the $30 of income would be $3.75 and the foreign tax credit would be $3.56 (95 percent of $3.75), making the US income tax net of credits equal to $2.74 million.

Updated January 2024