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GILTI is a new term many expat taxpayers are getting familiar with. The year 2019 has brought many tax reforms, including the Tax Cut and the Jobs Act. The changes include tax rates modifications and other reforms. There are also changes in child tax credits, standard deduction, deductions for medical, charity, and state and local taxes. U.S. taxpayers experience several challenges in tackling these tax reform changes, hence the GILTI feeling. Read further to find out more about GILTI and the practical ways you can do to adapt to these changes.

GILTI and How It Affects the American Expats

GILTI stands for Global Intangible Low-Taxed Income. The main aim of this new tax provision is to help combat the offshoring intangible assets. This applies to those U.S. shareholders who own 10% or more of a Controlled Foreign Corporation or CFC. A foreign corporation with U.S. shareholders holding more than 50% of the corporation’s value is considered a CFC.

If you are already an expat who already form a CFC or is forming one, you will be affected with GILTI. This is besides accomplishing form 5471 of the Information Return of U.S. Persons related to Certain Foreign Corporations. The following four scenarios will help you identify how GILTI applies to you and how you will be taxed on your foreign corporations.

Scenario 1: An American expat businessman who started a U.S. C-corporation and placed the foreign corporation shares inside the U.S. corporation

U.S. C-corporations are still under the GILTI tax. But, there’s a chance of cutting the GILTI tax in half due to Section 250 deduction of 50% included in the GILTI gross income. Another way to offset the GILTI tax is to take advantage of up to 80% foreign tax credit from the international corporate taxes.

There is also a chance that such provisions could offset the whole GILTI tax or at least a large part of it. The amount depends on the tax rate of a foreign country.

The only need is the C-corporation that you formed had incurred legal fees and formation costs which you paid. This is besides the tax requirements which you are required to report annually. Also, when you want to distribute dividends from your foreign corporation, the U.S. parent corporation should be the one to pay it. The U.S. corporation wouldividellocate the payment to you. The result would be many taxation layers. Foreign corporations earning millions may find this strategy meaningful. Small foreign corporations owned by a single U.S. expat are advised to use Section 962 election or the disregarded entity election option.

Scenario 2: An American expat entrepreneur who is filing a Form 8832. The businessman will also file Schedule C and Form 8858 yearly because Form 8832 will be treated as a Disregarded Entity. The expat entrepreneur, under the Totalization Agreement, also claims exemption from U.S. self-employment tax.

U.S. shareholders who own 100% of a CFC and living offshore in are qualified for this approach. As long as the country has a Totalization Agreement with the United States. This method can also help lessen the GILTI tax. Form 8858 will report the disregarded information from the foreign entity. You can choose to be taxed as a disregarded entity. Your income will be reported as self-employment on Schedule C. Doing so would mean that the income is taxed at individual tax rates (up to 37%). The same income will also be taxed at 15.3% tax rates.

The advantage of reporting the income on Schedule C is that you can use the Foreign Earned Income Exclusion to lessen the Schedule C income taxability. The value of which is up to $103,900 for each person for 2018.

To offset any of your U.S. income taxes in the Schedule C earnings, you can use the Foreign Tax Credit. The only disadvantage to reporting on Schedule C as a disregarded entity is the self-employment tax of 15.3%. If you want to remove this tax, you can claim an exemption from the U.S. social security taxes by attaching a statement and a Certificate of Coverage. These documents should be filed together with your tax return each year. The Totalization Agreement between your foreign country and the United States makes this approach possible.

Scenario 3: An American expat businessman who files Form 5471 and chooses to make Section 962 to be taxed as a corporation

There is a possible option to make a Section 962 election for this approach. In this scenario, an individual can pay the GILTI tax like an individual is a U.S. corporation. Choosing this option would mean you agree to pay the GILTI fee each year at the corporate rate of 21%.

There are benefits to this option. Having a 21% tax rate is lower than a 37% tax rate, and is thereby more preferable. Another benefit would be using a foreign tax credit of up to 80% of the paid foreign corporate taxes to offset the GILTI tax. This could offset the U.S. tax on GILTI or a significant part of it, depending on the tax rate of the foreign country.

The disadvantage of this option is when you take dividends from the company. Since these dividends are not considered as PTI, the dividends will be taxable on your tax. The result would be two tiers of taxation for you. The two tiers are the GILTI tax at 21% corporate rates (Section 962; can be offset by foreign tax credits) and the 15% tax on the qualified dividends. There is a possibility of being able to take a Foreign Tax Credit to offset the U.S. tax on the dividend income. After receiving dividends from the foreign entity, you are required to pay the international taxes in a foreign country. This potentially offsets the full amount of U.S. tax on the depends. Again, the amount depends on the foreign tax rate.

Many expat taxpayers would choose this alternative due to its benefits. First, there is a lowered tax rate on GILTI. Then, there’s the ability to use both paid corporate and personal foreign taxes for foreign tax credits.

Scenario 4: An American expat businessman who files Form 5471 and pays the highest marginal rate

Choosing this alternative would mean that the GILTI income from the foreign entity will be taxed at ordinary rates. Filing Form 5471 also entails paying the GILTI tax each year the highest individual marginal rate of up to 37% in the U.S. tax bracket (in 2018). Your taxable income determines the changing marginal tax rate every year. All your foreign earnings will be considered as PTI (Previously Taxed Income) when your foreign entity’s income will be taxed under GILTI. Upon taking dividends from the foreign company, the entity would no be subject to taxation again.

When you actually take the dividends from the company, the foreign entity’s income is then a non-taxable dividend income. As it is earned at your U.S. individual tax rates, the foreign entity’s income is also taxed annually.

There is one disadvantage to this approach. You cannot consider as Foreign Tax Credit the foreign corporate taxes you will be paying each year in the foreign country. The result is a possible subjection of the same earnings to double taxation.