Global Intangible Low-Taxed Income (GILTI) and Foreign-Derived Intangible Income (FDII) are two pivotal components of the U.S. international tax system introduced under the Tax Cuts and Jobs Act (TCJA) of 2017. Designed to reduce the incentive for U.S. multinationals to shift profits to low-tax jurisdictions, these provisions have become essential considerations for corporate tax compliance and strategic planning.
This comprehensive guide will walk you through what GILTI and FDII are, how they are calculated, who they apply to, and how businesses can navigate these complex provisions to stay compliant and minimize tax liabilities.
What is GILTI?
GILTI stands for Global Intangible Low-Taxed Income. It targets U.S. shareholders of Controlled Foreign Corporations (CFCs) and imposes a minimum tax on the income earned abroad that exceeds a routine return on tangible assets.
The idea behind GILTI is to prevent the erosion of the U.S. tax base by taxing income that is considered intangible and mobile. While labeled “intangible,” the GILTI provision does not rely on the presence of actual intangible assets like patents or trademarks—it is more of a residual income rule.
Key Features of GILTI:
- Applies to U.S. shareholders of CFCs
- Calculates GILTI as the excess of net CFC tested income over a 10% deemed return on Qualified Business Asset Investment (QBAI)
- Includes a 50% deduction (Section 250) for corporate taxpayers (currently scheduled to phase down)
- Allows a partial foreign tax credit (up to 80%)
GILTI is reported on Form 8992 and flows through to the U.S. shareholder’s return, typically Form 1120 for corporations or Form 1040 for individuals owning CFC interests.
What is FDII?
FDII stands for Foreign-Derived Intangible Income. It serves as a counterpart to GILTI by incentivizing U.S. corporations to keep their intangible assets and export-related income within the U.S. Instead of penalizing foreign income, FDII rewards U.S. corporations for earning income from foreign sales and services.
Eligible corporations receive a tax deduction that effectively lowers the corporate tax rate on qualifying income to 13.125% (before scheduled increases).
Key Features of FDII:
- Applies to domestic C corporations (not individuals or partnerships)
- FDII is income earned from selling goods or services to foreign persons for foreign use
- Provides a Section 250 deduction to reduce effective tax rate on qualifying income
- FDII is reported on Form 8993
By creating a tax incentive to “onshore” intellectual property and maintain U.S.-based operations for export purposes, FDII aims to balance the global competitiveness of U.S. multinationals.
Compliance Challenges and Planning Opportunities
Both GILTI and FDII involve complex calculations and require coordination between international operations and U.S. tax reporting. Businesses must maintain meticulous documentation, reconcile financial and tax data across jurisdictions, and evaluate transfer pricing positions to ensure compliance.
Key planning opportunities include:
- Maximizing foreign tax credits to reduce GILTI exposure
- Restructuring foreign entities to manage tested income
- Evaluating Section 250 deductions annually
- Reviewing IP locations and sales channel structures for FDII benefits
Need Help with GILTI and FDII Compliance?
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Who Must File GILTI and FDII?
For GILTI:
Any U.S. person that owns 10% or more of a CFC must calculate and report GILTI. This includes individuals, partnerships, and corporations. Corporations benefit from the Section 250 deduction and partial FTC, whereas individuals are fully taxed at ordinary rates unless making a Section 962 election.
For FDII:
Only C corporations are eligible to claim the FDII deduction. Partnerships, individuals, and S corporations are not eligible.
Documentation and Risk Areas
Failing to file Forms 8992 and 8993 can lead to compliance issues, IRS scrutiny, and penalties. It’s critical to accurately define tested income, properly allocate expenses, and validate foreign use for FDII claims. This requires coordination between accounting, legal, and operational teams.
Documentation tips:
- Maintain detailed financial records by jurisdiction
- Keep evidence of foreign sales contracts and fulfillment
- Validate CFC status and ownership structure annually
- Perform reconciliation between GAAP and tax adjustments
Future of GILTI and FDII
GILTI and FDII may undergo further reforms under future U.S. tax legislation. Proposals have included increasing the effective tax rate on GILTI, eliminating the Section 250 deduction, or harmonizing U.S. rules with OECD’s global minimum tax proposals under Pillar Two.
Businesses should stay informed and prepare to adapt to changes in international tax frameworks, particularly those involving minimum tax concepts and income sourcing rules.
Why Choose PEAK BCS for International Tax Outsourcing?
PEAK BCS is a trusted partner for U.S.-based CPAs and tax firms looking to outsource international tax compliance. We bring a detailed understanding of IRS forms, cross-border tax treatment, and modern workflow management to support firms during peak season and year-round.
Our GILTI and FDII services include:
- Preparation of Forms 8992 and 8993
- International entity structure analysis
- Section 250 deduction calculations
- Year-end planning for multinational clients
Let us help you simplify compliance and focus on client relationships. Learn more at www.peakbcs.com.
Conclusion
GILTI and FDII represent a transformative shift in the U.S. approach to international taxation. While they add complexity, they also provide new avenues for strategic tax planning. Understanding the rules, optimizing structures, and maintaining solid documentation are essential for compliance and tax efficiency.
Whether you’re a business owner or a CPA managing multiple clients, partnering with an experienced offshore team like PEAK Business Consultancy Services can significantly improve accuracy, turnaround, and peace of mind.
Contact us today to explore how we can support your international tax compliance journey: www.peakbcs.com.
