Global Intangible Low-Taxed Income (GILTI) – Are you GILTI or not?

The Tax Cuts and Jobs Act of 2017 initiated a retreat on the federal level of taxation to mostly a territorial system under §951A stepping back from the “entire worldwide income” taxation idea. The goal initially was to tax the “low-taxed” income, but at a lower rate taking into account any foreign taxes paid. In general, the higher the foreign tax liability, the lower the United States residual tax liability. The global taxation is most certainly not exclusive to intangible property, nor is it exclusive to low-taxed income.

States bring in GILTI tax depending on how they conform to Federal law. For some states, the taxation of GILTI is more aggressive than federal taxation. It is aggressive to bring in GILTI tax under §951A, but at the same time disallowing the 50% deduction or credits for foreign taxes paid. States which use separate reporting (Alabama, Delaware, Florida, Iowa, Louisiana, Maryland, Mississippi, Missouri, New Jersey, New Mexico, Oklahoma, Tennessee, and the District of Columbia) face a constitutional challenge. Our constitution does not allow discriminatory taxation of foreign economic activity. If the state does not allow a US subsidiary in a group for taxation, it cannot include foreign subsidiaries (CFC’s) for tax purposes.

History has a way of reminding us not to violate the foreign commerce clause. Kraft Gen. Foods, Inc. v. Iowa Dept. of Revenue and Finance, 505 U.S. 71 (1992) should be remembered when dividends received deduction is allowed for domestic, but not for foreign subsidiaries. A corporation’s domicile does not necessarily establish that is engaged in either foreign or domestic commerce. More than a year after the enactment of the Tax Cuts and Jobs Act a number of states have issued little guidance to businesses, based on the way their tax codes are written. In time, as with anything new the “bugs” must be worked out.

This article is intended for general informational purposes only and does not constitute legal or tax advice.