GILTI, net CFC tested income and foreign earnings

In this lesson you will

Explain the two accounting policies the FASB staff allows for GILTI
Describe the 2025 statutory changes to section 951A
Apply the indefinite reversal exception to foreign subsidiary outside basis differences
Place cross-border reconciling items in the correct ASU 2023-09 category

What GILTI is

The Tax Cuts and Jobs Act of 2017 added section 951A, requiring a U.S. shareholder of a controlled foreign corporation (CFC) to include its global intangible low-taxed income (GILTI) in gross income each year. As the FASB staff described it, GILTI was the excess of a shareholder's total net foreign income over a deemed return on tangible assets of 10 percent of foreign qualified business asset investment. The original law allowed a deduction of 50 percent of GILTI, limited by taxable income, and a deemed paid foreign tax credit of up to 80 percent of the related foreign taxes, with no carryforward or carryback of those credits.

The 2025 changes

Public Law 119-21, enacted July 4, 2025, amended section 951A. It replaced global intangible low-taxed income with net CFC tested income and struck the definitions of GILTI and the net deemed tangible income return. These amendments apply to taxable years beginning after December 31, 2025. For a calendar-year company, the 2026 provision is the first computed under the new rules, and the enactment date (July 4, 2025) is the date that controlled when deferred tax effects of the change were recognized.

The accounting policy election

FASB Staff Q&A Topic 740 No. 5 (January 2018) addresses whether to recognize deferred taxes for basis differences expected to reverse as GILTI. The staff concluded Topic 740 is not clear and an entity may apply either view:

Period cost. Treat the tax on GILTI as tax expense in the year it is incurred, like a special deduction. The rationale: GILTI is computed on aggregate foreign income, so no individual basis difference is the unit of account.
Deferred method. Recognize deferred taxes for basis differences expected to affect the inclusion when they reverse, as is done for Subpart F income.

The staff said the entity must disclose its policy under ASC 235-10-50-1 through 50-3. Because the 2025 law changed the inclusion, an entity should document how its elected policy applies to net CFC tested income and keep it consistent.

Outside basis differences in foreign subsidiaries

The investment in a foreign subsidiary has its own book-tax difference (the outside basis difference). Statement 109 paragraph 31(a) does not require a deferred tax liability for an excess of book over tax basis in a foreign subsidiary that is essentially permanent in duration, unless it becomes apparent the difference will reverse in the foreseeable future. This is the indefinite reversal exception in ASC 740-30-25-17.

The exception rests on management's specific plans to reinvest, and the auditor evaluates the entity's support for those plans.

When a deferred tax liability is not recognized under the exception, ASC 740-30-50-2 requires a description of the types of temporary differences and the events that would make them taxable, and the amount of the unrecognized liability for foreign subsidiaries or a statement that determination is not practicable. ASU 2023-09 removed the requirement to disclose the cumulative amount of each type of temporary difference.

Where cross-border items go in the rate reconciliation

Under ASC 740-10-50-12A, the effect of cross-border tax laws category holds incremental tax imposed by the country of domicile on income earned in foreign jurisdictions. The standard's illustration lists global intangible low-taxed income, foreign-derived intangible income and base erosion and anti-abuse tax there. A cross-border tax and its related credit in the same period may be netted. Tax imposed by foreign governments goes in foreign tax effects, disaggregated by country and nature when the 5 percent threshold is met. The rate reconciliation lesson explains the threshold.

Audit focus

Ask a tax specialist to test the inclusion computation, read the policy note against the staff Q&A, test reinvestment plans against cash forecasts and board minutes, and confirm category placement in the reconciliation.

Worked example

Rate reconciliation placement at Meridian Coatings Corp.

Meridian Coatings Corp., a U.S.-domiciled PBE, reports pretax income from continuing operations of $20,000,000. It treats its CFC inclusion as a period cost.

Statutory line: 20,000,000 x 21% = $4,200,000. Threshold: 4,200,000 x 5% = $210,000.

The tax team computes:

U.S. tax on the CFC inclusion: $840,000
Related deemed paid foreign tax credits: ($600,000)
German corporate tax on the German subsidiary's income in excess of tax at the U.S. rate on that income: $260,000

Presentation:

Effect of cross-border tax laws: the inclusion and its credit may be netted, 840,000 - 600,000 = $240,000. That is at least $210,000, so it is shown separately by nature.
Foreign tax effects: Germany's $260,000 meets the threshold, so Germany is shown as a separate jurisdiction.

If Meridian had used the deferred method, it would also carry deferred taxes for CFC basis differences expected to affect future inclusions, and changes in those deferred balances would add deferred tax expense or benefit to the cross-border category. The policy must be disclosed either way.

Self-check

Answer each question before you open the answer.

What two policies did the FASB staff accept for GILTI in Staff Q&A Topic 740 No. 5?
Show answer
Treating the tax on GILTI as a period cost in the year incurred, or recognizing deferred taxes for basis differences expected to reverse as GILTI. The entity must disclose which policy it applies.
What did Public Law 119-21 change in section 951A, and when do the changes apply?
Show answer
It replaced global intangible low-taxed income with net CFC tested income and struck the net deemed tangible income return. The amendments apply to taxable years beginning after December 31, 2025.
When does a company not record a deferred tax liability on the outside basis difference of a foreign subsidiary?
Show answer
When the excess of book over tax basis is essentially permanent in duration because of specific reinvestment plans, unless it becomes apparent the difference will reverse in the foreseeable future (Statement 109 paragraph 31(a)).
In which ASU 2023-09 category does a U.S. tax on foreign earnings belong, and where does a foreign country's own tax go?
Show answer
U.S. tax on income earned abroad goes in the effect of cross-border tax laws category. Taxes imposed by foreign governments go in foreign tax effects, broken out by country and nature when the threshold is met.

Sources

Back to the syllabus

Standards are paraphrased from the primary sources listed above; read the source before relying on a requirement. This lesson is training material, not professional advice. Report an error