The recently released “General Explanations of the Administration’s Fiscal Year 2022 Revenue Proposals” (Green Book) includes several proposals that change the existing international tax landscape. Although these proposals might be modified or even scrapped during the legislative process, it is important for taxpayers to understand these potential changes so they are prepared to take steps to minimize any negative tax impact if the proposals are enacted. Based on the lessons learned when the Tax Cuts and Jobs Act of 2017 was enacted, major changes to U.S. international tax law will require multinational businesses to review, and perhaps revise, their global structure and operations, including supply chains and intangible property.
Following is a closer look at the international tax proposals included in the Green Book:
Revise the global minimum tax regime, disallow deductions attributable to exempt income, and limit inversions
This proposal would make several changes to the existing global intangible low-taxed income (GILTI) regime and recharacterize it as a global minimum tax regime. First, the proposal would eliminate the exemption under IRC Section 951A for 10% of a controlled foreign corporation’s qualified business asset investment. Additionally, the proposal would reduce to 25% the IRC Section 250 deduction for the global minimum tax. These changes, in conjunction with the proposal to increase the corporate tax rate to 28%, would increase the effective rate on GILTI income from 10.5% to 21%. The proposal would require calculating global minimum tax on a country-by-country basis and repeal existing relief for Subpart F income and tested income subject to high rates of tax.
The proposal also would extend the application of IRC Section 265 to disallow a deduction for expenses allocable to dividends exempt from income under IRC Section 245A and GILTI to the extent it is reduced by IRC Section 250. Finally, the proposal would decrease the continuity of ownership threshold for continuing to treat an inverted company as a U.S. company from 80% to 50% and expand the definition of a tainted inversion transaction to target certain transactions in which the acquirer is smaller than the target, regardless of continuity of ownership.
This proposal generally would be effective for taxable years beginning after Dec. 31, 2021, but the provisions with respect to inversions would be effective for transactions completed after the date of enactment.