What’s the Deal With International Tax Reform?


Who Pays International Corporate Taxes?

  • U.S. corporations with foreign subsidiaries they control (controlled foreign corporations, or CFCs) pay taxes on 1) subpart F income and 2) Global Intangible Low-Taxed Income (GILTI)

    • More on the difference between the two below

  • The IRS lacks public, post-TCJA data on the total number of U.S. CFCs, but in tax year 2016 reported there were 16,225 U.S. corporation returns with 95,374 CFCs
    • There were 6.6 million total U.S. corporations in the same year (2016; note the vast majority of those were S corporations), so only a tiny fraction (0.2%) of U.S. corporations have CFCs

  • An even smaller portion of U.S. corporations paid taxes on GILTI in 2018, the first year GILTI was in effect; according to IRS data from tax year 2018, there were 9,127 U.S. parent corporations with 83,632 CFCs that had GILTI

What’s Subpart F Income, What’s GILTI Income, and What’s the Difference?

  • Joshua Ashman and Nathan Mintz of Expat Tax Professionals LLC wrote a helpful shorthand on the main difference between subpart F and GILTI in The Tax Adviser:

    • “The most fundamental distinction between the definitions of Subpart F income and GILTI is this — Subpart F income is defined initially by what it includes, while GILTI is defined initially by what it excludes.”

  • Subpart F income is mostly passive income earned by a U.S. CFC, including (but not limited to):

    • Dividend, interest, royalty, rent, and annuity income
    • Commodities transaction income
    • Foreign currency gains
    • Income from issuing or reinsuring insurance contracts
    • Certain foreign base company sales and service income, if the income is derived from sales or services made to a related party (i.e., parties controlled by the same business)
  • GILTI is intended to represent U.S. CFC earnings from highly-mobile, highly-profitable intangible assets (such as “goodwill, contracts, formulas, licenses, patents, registered trademarks, franchises, covenants not to compete”); GILTI does so by:

    • Having corporations calculate net CFC income across all foreign subsidiaries, after excluding 1) income “effectively connected” to the conduct of a trade or business, 2) subpart F income, 3) certain highly-taxed income, 4) dividends from related persons, and 5) foreign oil and gas extraction income (FOGEI); and then
    • Subjecting any remaining net CFC income to GILTI taxation, after exempting 10% of the value of the CFC’s share of tangible property (the qualified business asset investment, or QBAI, substance-based carveout)
  • For more, see this JCT explainer

What is the Tax Rate?

  • Subpart F income is taxed at regular U.S. rates (21% for C corporations, and up to 37% for S corporation shareholders passing through business income to their individual return), after accounting for foreign tax credits

  • GILTI is taxed at preferential U.S. rates (between 10.5% and 13.125%) until 2025, and will be taxed at higher, but still preferential, U.S. rates (between 13.125% and 16.4%) after 2025

    • This preferential rate is achieved by allowing a 50% deduction on GILTI relative to the statutory U.S. corporate tax rate (21%)

  • The below chart demonstrates how GILTI might work for a U.S. corporation with a subsidiary in one country with a 10% effective tax rate (below GILTI minimum); we assume the corporation has $100 million in net CFC tested income:


  • Under this simple calculation, a U.S. CFC with $100 million in net income (in a foreign country with a 10% corporate tax rate) would pay an additional $920,000 to the U.S. in top-up taxes

  • Because the U.S. only credits 80% of foreign taxes paid under GILTI (the so-called foreign tax credit, or FTC, haircut), the effective tax rate of the U.S. CFC actually ends up being 2.3 percentage points higher than the GILTI minimum - 12.8%

    • In other words, this corporation with $85 million in GILTI is paying $2.3 million more in taxes as a result of the FTC haircut

  • In practice, U.S. corporations with multiple CFCs across the world have the opportunity to blend their foreign taxes paid, meaning obligations in a high-tax country can offset GILTI liabilities in a low-tax country

  • Table II illustrates this dynamic with a simple calculation, for a U.S. corporation with two CFCs, each with $100 million in net CFC tested income; one CFC pays an effective tax rate of 10% on their $100 million in net income, but the other CFC pays an effective tax rate of 25% on their $100 million in net income:

  • This corporation would not owe any top-up U.S. tax on GILTI, since the combined foreign tax obligations of the corporation on its two controlled subsidiaries exceeds the 10.5% GITLI minimum (even after accounting for the FTC haircut)
  • For simplicity’s sake, the above tables omit additional calculations a corporation must make relative to complex expense allocation rules; in practice, this limits the use of FTCs even further and raises GILTI liability; see a helpful explainer from Tax Foundation here

What is the FDII Deduction?

  • TCJA also provided a 37.5% deduction for U.S. companies’ income derived from exports but attributable to U.S.-based intangible assets (the foreign-derived intangible income, or FDII, deduction)

    • The 37.5% deduction means, in practice, that companies pay an effective tax rate of 13.125% on FDII (21% - (37.5% * 21%))
    • The 37.5% deduction is reduced to 21.875% starting in 2026, meaning the effective tax rate on FDII will rise from 13.125% to 16.4%
  • JCT estimated in December 2017 that the deduction would reduce tax revenues by $63.8 billion over a decade

  • In tax year 2018, 4,018 corporate tax returns reported $143.3 billion in FDII

    • 3,909 of those corporations (97.2%) took FDII deductions, totaling $52.5 billion

How Much Does the Government Collect in International Corporate Taxes?

  • When TCJA passed in 2017, the Joint Committee on Taxation estimated that GILTI would raise tax revenues by $112.4 billion over a decade, since GILTI was a new tax being introduced

    • The chart below demonstrates the year-by-year impact; the annual impact begins to rise sharply in fiscal year (FY) 2026 in part because, after calendar year 2025, the GILTI rate is effectively raised (from 10.5%-13.125% to 13.125%-16.4%)

What Are the Biden Administration Proposals Affecting International Taxes?

  • President Biden has proposed major changes to the international tax regime in the Treasury Department’s FY 2022 Green Book, including:

    • Doubling the GILTI rate, from 10.5%-13.125% to 21%-26.25%
    • Repealing the QBAI substance-based carve-out
    • Requiring companies to calculate GILTI liability on a country-by-country basis, rather than allowing them to blend foreign taxes owed and paid on a global basis
    • Repealing FDII
  • Tax Foundation modeled these proposals and found they would increase taxes on GILTI significantly, by $466.4 billion over a decade

  • The below chart shows Tax Foundation’s scores for President Biden’s GILTI and FDII changes

    • Note: Tax Foundation estimates revenue increases relative to a baseline; i.e., a $37.4 billion tax increase in FY 2022 means GILTI taxes are $37.4 billion higher than they are relative to a baseline (not $37.4 billion total)

What Are the Wyden Proposals Affecting International Taxes?

  • Senate Finance Committee Chair Ron Wyden has proposed several changes to the international tax regime, including:

    • Raising the GILTI rate to an unspecified amount
    • Repealing the QBAI substance-based carve-out
    • Requiring companies to calculate GILTI liability on a country-by-country basis, rather than allowing them to blend foreign taxes owed and paid on a global basis, but excluding highly-taxed income from GILTI
    • Possibly repealing the FTC haircut, but possibly maintaining an FTC haircut up to 20% (the current law amount)
    • Replacing FDII with a new deduction, foreign derived innovation income, which shifts the focus of FDII from the returns on U.S.-based intangible income to the returns on U.S.-based R&D and working training expenses
  • A chart below summarizes the differences between the Biden and Wyden proposals, along with a current-law summary of various provisions and what the global tax agreement (“Pillar Two”) has envisioned for certain policies

Where Can I Find Additional Resources?