Understanding GILTI: The Tax Law Impacting U.S. Business Owners Abroad
A tax provision initially introduced during President Donald Trump’s first term is poised for extension, stirring concern among U.S. business owners operating overseas. This provision, known as Global Intangible Low-Taxed Income (GILTI)—pronounced “guilty”—was established through the 2017 Tax Cuts and Jobs Act, aiming to curtail tax avoidance by multinationals like Google and IBM, which had been shifting profits to low-tax jurisdictions.
The Intent of GILTI
GILTI was designed to ensure that U.S. multinationals pay a minimum level of tax on the income generated from their foreign subsidiaries, compelling them to bring earnings back to the U.S. While this law aims to tackle tax evasion by large corporations, it inadvertently ensnares American business owners who operate valid businesses abroad, facing unexpected financial consequences. As legislators debate extending this provision beyond its current expiration, many U.S. expatriates confront an additional layer of complexity in managing their tax obligations.
Impact on U.S. Business Owners
For Americans managing companies overseas, compliance with GILTI often translates into unforeseen costs and an intricate filing process. Olivier Wagner, an accountant specializing in U.S. expat taxation, emphasizes that many of his clients are unaware of the tax obligations that come with establishing a business in a foreign country. For them, the law appears incongruous with their business operations.
“The U.S. tax system is unique,” Wagner notes, indicating that the U.S. taxes its citizens based on citizenship rather than residency—an anomaly that can leave American expatriates feeling unjustly penalized.
The Complexities of GILTI Regulations
GILTI applies specifically to “controlled foreign corporations” (CFCs), which are defined as foreign companies with over 50% of their shares owned by U.S. shareholders. For a business classified under this definition, any income exceeding 10% of depreciable assets is subject to GILTI taxation. The tax rates vary widely, ranging from 10.5% to 13.125% for corporations, while individual shareholders could see taxation rates soar between 10% and 37%, depending on their income levels.
This taxation structure poses a double taxation dilemma, where U.S. business owners are responsible for tax liabilities in both the U.S. and the country where their corporation operates. Many expatriates establish their businesses with a thoughtful approach to local tax regulations, only to find themselves entangled in complicated U.S. tax requirements.
The Filing Burden
Complying with GILTI necessitates a convoluted and often expensive filing process. U.S. corporations and shareholders must complete Form 8992 to report their GILTI inclusion amounts and Form 5471 to disclose ownership of a CFC. These forms involve numerous schedules, with Schedule I being crucial for determining tax liability. Even for businesses incurring losses, filings are still mandatory, placing an undue burden on American citizens abroad.
The penalties for failing to file can be steep, with fines of $10,000 for each form and a potential maximum of $50,000. As Laura Snyder, president of Stop Extraterritorial American Taxation argues, “this is a burden American citizens have that competitors do not.”
Legislative Developments and Future Outlook
Looking ahead, U.S. business owners abroad should prepare for an increase in the GILTI tax rate come next year. Proposed changes to the tax law would reduce the deduction from 50% to 37.5%, effectively raising GILTI tax rates from 10.5% to 13.125% for designated CFCs. This adjustment is part of the sprawling "One Big Beautiful Bill Act," which is currently making its way through Congress, having already passed the House of Representatives.
Amid ongoing discussions around various provisions, the GILTI logic appears to remain intact, with some Republican leaders in the Senate pressing for a voting deadline of July 4.
As these developments unfold, U.S. business owners operating outside the country will continue to grapple with the complexities of the American tax system and its implications on their businesses, often feeling stuck between compliance and financial hardship.
