Jen: This is the PKF Texas Entrepreneur’s Playbook. I’m Jen Lemanski and I’m back again with Frank Landreneau, one of our International Tax Directors. Frank, welcome back to the Playbook.

Frank: Thanks, Jen. It’s great to be back.

Jen: Last time we talked about the GILTI tax. Remind our viewers, if they didn’t watch last time, what does it stand for?

Frank: What GILTI stands for – it’s an acronym for Global Intangible Low Tax Income, and the whole idea is that some level of foreign earnings should be taxed on a current basis in the U.S.

Jen: How does GILTI actually work?

Frank: First of all, you take a look at the foreign corporations’ earnings in its totality. And then, there are a bunch of carve outs, which you take a look at, and then that is the income that would be subject to the GILTI tax.

In theory, it’s supposed to work where a routine return, a normal operating return from normal operations, would be not taxed under GILTI. Any return so called “excess returns,” this would be returns earned through the fact that you’ve got special processes, intellectual property – that type of thing would be subject to the GILTI tax. That’s where the name comes from. There’s a lot of gyrations and calculations needed to get to that amount.

Jen: Are there particular industries that are impacted by this more so than others?

Frank: That’s a great question. Because of the way the Congress decided to spell out this legislation, it’s a mechanical test in how the computation works. Industries with very little or few fixed assets, such as service industries or distributing companies, would be hit more hard than manufacturing companies.

Jen: Would this be something that a company would consider maybe restructuring to a different structure?

Frank: There are some planning ideas. One thought would be for companies that are owned by individuals outright, or what’s common in the U.S. is ownership through pass through entities. Those entities are thinking perhaps putting a domestic corporate blocker entity between the individual owner and the form corporation. There’s some special considerations that are beneficial if you do that structure.

Jen: And does this take in effect already, because of the new tax reform?

Frank: Absolutely. It took effect technically from January 1, because the legislature was signed into law back in December.

Jen: Perfect. Well, we’ll get you back to talking a little bit more about some international tax reform.

Frank: Thank you. There’s plenty to talk about it.

Jen: All right, great. To learn more about other international topics, visit pkftexas.com/internationaldesk. This has been another Thought Leader Production brought to you by PKF Texas The Entrepreneur’s Playbook. Tune in next week for another chapter.

Jen: This is the PKF Texas Entrepreneur’s Playbook.  I’m Jen Lemanski, and I’m back again with Frank Landreneau, one of our international tax directors. Frank, welcome back to the Playbook.

Frank: Thank you. It’s great to be back.

Jen: So last time we had you here, you were talking a little bit about tax reform, how it impacts international companies. There’s a territorial tax system now. What is that?

Frank: That’s right. With tax reform we’ve replaced the worldwide tax system with what really is called a quasi-territorial tax system. And what that means is that while corporate shareholders can get dividends from specified core corporations tax free, there still are some hurdles that they have to go through such as dealing with this so-called GILTI tax that’s now in the law.

Jen: GILTI. So, I assume that’s not like “guilty,” but it’s probably an acronym?

Frank: It is, guilty as changed. It’s an acronym for Global Intangible Low Taxed Income, and the idea is that corporations will be taxed on foreign earnings when they operate in low tax jurisdictions.

Jen: So, what happens if they operate in high tax jurisdictions? Will they be taxed in that?

Frank: That’s actually a great question, because the name is deceiving that you’d only be taxed in lox tax jurisdictions. The interesting thing is that for corporate tax payers, they may still pay some tax if they’re in high tax jurisdictions, because of the fact that there’s certain business expense rules and you can only offset this GILTI income tax against 80% of foreign tax credits. So, you never really know where you end up. Now, for individuals, you don’t get this type of treatment for corporations, so that the actual tax bite is higher.

Jen: Okay, well I definitely have some more questions. We’ll get you back to talk a little bit more about the GILTI tax next time. Does that sound good?

Frank: Sounds great. Thank you.

Jen: Perfect, thank you. To learn more about other international topics, visit PKFTexas.com/internationaldesk. This has been another Thought Leader production brought to you by PKF Texas The Entrepreneur’s Playbook.