Tax Journal

US tax reform: the GILTI and FDII provisions

26 July 2018

December’s US tax reform introduced many new concepts, two of which were the new areas of global intangible low taxed income (GILTI) and foreign derived intangible income (FDII). GILTI allows controlled foreign companies of US companies to earn a return on their hard assets, with any excess being potentially subject to US tax, subject to certain deductions and provisions. FDII effectively mirrors these provisions, by introducing a new regime for taxing income earned in the US in respect of intangibles for certain foreign activities. It is recommended that UK professionals advising businesses with large US operations devote time to understanding the rules and work with affected businesses to analyse their impact.

Miles Humphrey and Mark Saunderson (Deloitte) review the new areas of global intangible low taxed income and foreign derived intangible income.

US tax reform fundamentally reshaped the way in which the US taxes numerous areas. In our previous article (‘US tax reform: practical aspects’, Tax Journal, 15 June 2018), we wrote about the impact of three of the major changes that were introduced: the new base erosion and anti-abuse tax (BEAT); the enhanced interest deductibility restrictions; and the introduction of hybrid rules.

We did not examine the new global intangible low taxed income (GILTI) provisions, as their scale requires a detailed discussion. We are therefore devoting this article to GILTI, together with the closely-related provisions on foreign derived intangible income (FDII).

This article will be relevant both to US companies with UK operations and to UK companies with US operations.

The previous regime

Practitioners working in this field will be familiar with the Subpart F rules, the US’s equivalent of the UK’s controlled foreign company (CFC) rules. However, Subpart F principally targets certain flows of passive income between CFCs, and therefore many CFCs have earned income in the past that has not been subject to Subpart F.

Prior to tax reform, distributions from CFCs to the US were generally taxable on repatriation; therefore, all income earned by CFCs would ultimately be taxable in the US, with the potential for a credit for foreign taxes. However, unless Subpart F applied no US tax would arise until the point of repatriation. This was termed ‘deferral’.

The introduction of GILTI effectively ends deferral on the majority of a ...

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