International Tax Basics: GILTI, BEAT, Pillar Two, and How Multinationals Are Taxed

From Worldwide to Territorial: The TCJA Shift

Before the TCJA, the United States used a worldwide tax system: US corporations were taxed on all income earned anywhere in the world, with a credit for foreign taxes paid to prevent double taxation. Foreign earnings were generally taxed only when "repatriated" (distributed as dividends to the US parent), creating a powerful incentive to accumulate earnings offshore indefinitely — the "lock-out effect" that led to an estimated $2.5+ trillion of undistributed foreign earnings before TCJA.

The TCJA moved the US to a modified territorial system: a 100% dividends-received deduction (participation exemption) exempts most foreign dividends from US tax. This eliminates the repatriation tax and the lock-out effect. However, the territorial exemption is not unlimited — GILTI, BEAT, and FDII are three separate mechanisms that modify the pure territorial result to prevent aggressive base erosion.

GILTI: Global Intangible Low-Taxed Income

GILTI (Global Intangible Low-Taxed Income) is a minimum tax on the foreign earnings of US multinationals that exceed a 10% return on tangible assets ("routine return"). The concept: income earned by foreign subsidiaries above a 10% deemed return on their tangible depreciable assets is presumed to be "intangible income" — income from IP, software, or other mobile assets that could be located anywhere — and is subject to US tax regardless of the territorial exemption.

The 50% deduction for corporations reduces the effective corporate tax rate on GILTI to 10.5% (50% × 21%) before foreign tax credits. A foreign tax credit equal to 80% of foreign taxes attributable to GILTI is available — meaning foreign jurisdictions with effective tax rates at or above 13.125% effectively eliminate GILTI exposure for most corporations.

BEAT: Base Erosion and Anti-Abuse Tax

BEAT (Base Erosion and Anti-Abuse Tax) under IRC Section 59A targets deductible payments made by large US corporations to related foreign parties — payments that would otherwise strip income from the US tax base. BEAT applies to US corporations with average annual gross receipts above $500 million that have "base erosion payments" (royalties, interest, service fees paid to foreign affiliates) exceeding 3% of total deductions.

The BEAT is a minimum tax: the company calculates its regular tax liability and also calculates a modified tax (BEAT rate × modified taxable income, where modified taxable income adds back the base erosion deductions). The company pays the higher of its regular tax or the BEAT liability. The BEAT rate is 10% (rising to 12.5% for tax years after 2025). BEAT cannot be reduced by most credits, including R&D credits — making it particularly punitive for R&D-intensive companies with significant intercompany royalty flows.

FDII: Foreign-Derived Intangible Income

FDII (Foreign-Derived Intangible Income) is the carrot in the TCJA's anti-base-erosion framework — an incentive to keep IP and income in the US rather than shifting it offshore. Corporations can deduct 37.5% (21.875% post-2025) of their FDII, reducing the effective tax rate on qualifying foreign-derived income to 13.125%. FDII is income derived from serving foreign markets that exceeds a 10% routine return on the corporation's US tangible assets — essentially intangible-type income attributable to the US that relates to foreign sales. For transfer pricing implications, see the transfer pricing guide.

Foreign Tax Credits

The foreign tax credit (FTC) prevents double taxation on income that is taxed both by a foreign jurisdiction and by the United States. The FTC equals actual foreign income taxes paid, subject to a per-basket limitation: the FTC cannot exceed US tax attributable to foreign income in each basket (passive income, general income, GILTI, etc.). Excess FTCs can be carried back 1 year and forward 10 years. Post-TCJA, the FTC rules became significantly more complex due to the interaction with GILTI (80% inclusion of GILTI FTCs), BEAT (no FTC offset), and the new basket structure.

Pillar Two: The OECD Global Minimum Tax

Pillar Two is the OECD/G20 framework, agreed in 2021 and now being enacted by over 140 countries, establishing a global minimum effective tax rate of 15% on large multinational enterprises (those with global revenues above €750 million). The mechanics:

Qualified Domestic Minimum Top-up Tax (QDMTT): Countries can levy a domestic top-up tax to bring their resident companies up to the 15% minimum, capturing the revenue themselves rather than ceding it to other jurisdictions.

Income Inclusion Rule (IIR): The parent country taxes the top-up amount — the difference between 15% and the actual effective tax rate — on income in low-tax subsidiaries, if the subsidiary's home country has not enacted a QDMTT.

Undertaxed Profits Rule (UTPR): A backstop rule allowing countries to impose top-up tax when neither the home country QDMTT nor parent IIR has collected sufficient tax.

The Pillar Two rules interact with GILTI (the US Congress is considering GILTI modifications to align with Pillar Two), FTCs (foreign taxes counting toward the 15% minimum), and existing tax treaties. For large multinationals, Pillar Two is likely the most consequential international tax development since the TCJA.

Planning Implications

The combined effect of GILTI, BEAT, FDII, and Pillar Two has significantly reduced the tax efficiency of classic IP-holding-company structures in low-tax jurisdictions. The era of large-scale profit shifting to Cayman Islands, Luxembourg, and Ireland is effectively over for large multinationals subject to Pillar Two. Planning opportunities now focus on: substance requirements (ensuring genuine economic activity in each jurisdiction), FDII benefits for US-based IP generating foreign sales, supply chain restructuring to minimise BEAT exposure, and Pillar Two compliance modelling for each jurisdiction.