OBBBA Changes to GILTI

The global intangible low-taxed income (“GILTI”) regime was an attempt by Congress to use the Internal Revenue Code to encourage U.S. multinational corporations to increase investments in the United States. This article discusses the relevant tax changes enacted by the One Big Beautiful Bill Act (“OBBBA”) to GILTI.

What Exactly is the GILTI Tax Regime?

GILTI was enacted as part of the 2017 Tax Cuts and Jobs Act and the GILTI regime  can be found in Internal Revenue Code Section 951A. The Tax Cuts and Jobs Act required a U.S. shareholder of a CFC to include in income its global intangible low-taxed income or GILTI. The GILTI tax is meant to discourage businesses from avoiding federal taxes by holding intangible assets such as software patents or other intellectual property outside the United States in tax haven countries. GILTI created no additional marginal tax rates. Instead, GILTI expands the definition of what items of offshore income are taxable. Think about it like this, Subpart F of the Internal Revenue Code subjects passive income earned outside the United States to taxation. The GILTI provisions do the same. However, instead of taxing foreign passive income, GILTI subjects certain items of income known as “intangible income” to tax.

The GILTI tax regime was designed to end the tax deferral treatment of “intangible income” and subjects “U.S. shareholders” of CFCs, defined as U.S. persons owning at least 10 percent of the vote or value of a specific foreign corporation. A U.S. shareholder’s GILTI is calculated as the shareholder’s “net CFC tested income” less “net deemed tangible income return” determined for the tax year. GILTI is assessed on a “United States shareholder” of any CFC for any taxable year of such United States shareholder that receives intangible low-taxed income for such year. See IRC Section 951A(a). A CFC is defined as a foreign corporation in which 50 percent of: 1) the total combined voting power of all classes of stock of such corporation entitled to vote, or 2) the total value of the stock of such corporation is owned (within the meaning of Section 958(a), or is considered as owned by applying the rules of ownership of Section 958(b) during any day of the taxable year of such foreign corporation. See IRC Section 957(a).

A “United States shareholder” can be defined as a “U.S. person” (Section 7701(a)(1) of the Internal Revenue Code defines a “U.S. person” to include an individual, trust, estate, partnership, or corporation) who owns (within the meaning of Section 958(a)), or is considered as owning by applying the rules of ownership of Section 958(b), 10 percent or more of the total combined voting stock entitled to vote of such foreign corporation, or 10 percent or more of the total value of shares of all classes of stock of such foreign corporation. See IRC Section 951(b).

Calculating the GILTI Taxable Amount

So how is GILTI computed? As a general rule, GILTI is determined by first calculating a deemed return on the CFC’s tangible assets. The first part of the GILTI formula is a calculation called the net CFC tested income. The net CFC tested income is the excess of the aggregate of a tested income of each CFC held by a U.S. shareholder (The tested gross income of a CFC excludes Subpart F income, effectively connected income, income excluded from foreign base company income or insurance income by reason of high-tax exception, dividends received from a related person, and foreign gas and oil income less deductions allocable to such gross income). This amount is taken over the aggregate of the shareholder’s pro rata share of a tested loss of each CFC (The tested loss is the excess of deductions allocable to the CFCs’ disregarding tested income exceptions over the amount of gross income).

Next, the net deemed tangible investment income must be determined. The net deemed tangible investment income is 10 percent of a shareholder’s pro rata share of the Qualified Business Asset Investment Income or (“QBAI”) for each CFC, less the amount of interest expense taken into consideration of the CFC tested income. The QBAI is the adjusted basis of a CFC’s depreciable assets used to generate GILTI. To determine QBAI, “specified tangible property” must be identified that produced the tested income of a CFC. These assets must be depreciable. See IRC Section 951A(d)(1)(B). The adjusted basis for each asset must be computed, quarterly and averaged annually. See IRC Section 951A(d)(1). Once the QBAI is determined, specified interest expenses are subtracted from QBAI. See Treas. Reg. Section 1.951A-1(c)(3)(ii).

Section 250 Deduction

The Tax Cuts and Jobs Act reduced the corporate federal income tax rates from 35% to 21%. U.S. corporate shareholders (and individual shareholders making an election under Section 962) received a 50% deduction on GILTI inclusions that reduced the federal tax on GILTI inclusions to 10.5%.

GILTI Foreign Tax Credits

For foreign tax credits applicable to GILTI income, there was an 80% limitation. Thus, any amount includible in the gross income of a domestic corporate shareholder (or individual making a 962 election) under GILTI shall be deemed to have paid foreign income taxes equal to 80% of the product of such inclusion.

OBBBA Changes to GILTI

The OBBBA made significant changes to GILTI. For starters, OBBBA changed the term “GILTI” to “net CFC tested income.”  Beginning after December 31, 2025, the following changes will take place in regards to how net CFC tested income is taxed:

1. As discussed above, GILTI currently permits a deduction equal to 10% of QBAI. Beginning on January 1, 2026, the QBAI deduction will no longer be available to reduce GILTI inclusions. The OBBBA changes to Section 951A will likely increase the net CFC tested income base.
2. Section 250 deductions against GILTI will be reduced from 50% to 40%. This will result in an increase in the elective tax rate of CFC tested income from 10.5% to 12.6% beginning on January 1, 2026.
3. The OBBBA added Section 904(b)(5) to the Internal Revenue Code. Section 904 no longer specifically allocates interest and research and development (“R&D”) expenses to foreign Section 951A income. This change to the foreign tax credit rules will permit some multinational corporations the ability to allocate additional deductions to U.S.-source income. The impact of this change to Section 951A will vary based on the U.S. taxpayer.

Anthony Diosdi is an  international tax attorney at Diosdi & Liu, LLP. Anthony focuses his practice on providing tax planning domestic and international tax planning for multinational companies, closely held businesses, and individuals. In addition to providing tax planning advice, Anthony Diosdi frequently represents taxpayers nationally in controversies before the Internal Revenue Service, United States Tax Court, United States Court of Federal Claims, Federal District Courts, and the Circuit Courts of Appeal. In addition, Anthony Diosdi has written numerous articles on international tax planning and frequently provides continuing educational programs to tax professionals. Anthony Diosdi is a member of the California and Florida bars. He can be reached at 415-318-3990 or adiosdi@sftaxcounsel.com.

This article is not legal or tax advice. If you are in need of legal or tax advice, you should immediately consult a licensed attorney.