Reform taxation of foreign fossil fuel income
This proposal would expand the definition of tested income for GILTI to include previously excluded foreign oil and gas extraction income and foreign oil-related income and expand the definitions of each type of activity to include income derived from shale oil and tar sands activity for taxable years beginning after Dec. 31, 2021.
Repeal the deduction of foreign-derived intangible income (FDII)
This proposal would repeal the deduction under IRC Section 250 for FDII for taxable years beginning after Dec. 31, 2021.
Replace the base erosion anti-abuse tax (BEAT) with the stopping harmful inversions and ending low-tax developments (SHIELD) rule
This proposal would replace BEAT with a new rule called SHIELD. SHIELD would focus on disallowing deductions directly to related parties in low-tax jurisdictions and disallowing a portion of other related-party payments based on a ratio of all payments to low-taxed related parties. The provision would affect costs like cost of goods sold, which are not deductions. The low-taxed determination would be based on an anticipated minimum tax rate that the U.S. hopes will be agreed to under Pillar Two of the Organisation for Economic Co-operation and Development’s (OECD’s) base erosion and profit-sharing action plan. Along with many other base erosion and profit sharing subscribers, the Group of Seven has agreed to a 15% global minimum tax rate. The minimum tax rate would be 21% if the proposal is enacted before the OECD adopts a minimum tax rate. The proposal would be effective for taxable years beginning after Dec. 31, 2022.
Limit foreign tax credits from sales of hybrid entities
The proposal would apply the principles of IRC Section 338(h)(16) to determine the source and character of any item recognized in connection with direct or indirect disposition of an interest in a specified hybrid entity and to a change in the classification of an entity that is not recognized for foreign tax purposes. A specified hybrid entity is a corporation for foreign tax purposes that is treated as a partnership or disregarded entity for U.S. tax purposes. The proposal would not change the determination of taxable income. Rather, for U.S. tax purposes, the proposal would determine the source and character of the gain on the sale of a hybrid entity as if the entity was a corporation and the seller sold stock. Consequently, this provision would prevent the computation of ordinary income or capital gain based on the sale of assets when selling a hybrid entity and instead would treat the collective sale of assets as a sale of stock. Treating the collective sale of assets as a stock sale likely would result in reduced foreign tax credits for most taxpayers.
The proposal would be effective for transactions occurring after the date of enactment.
Restrict deductions of excessive interest of members of financial reporting groups for disproportionate borrowing in the U.S.
This proposal would limit the amount of a U.S. member’s net interest expense for U.S. tax purposes when a consolidated group member’s net interest expense per books (under U.S. GAAP) exceeds its proportionate share of the group’s net interest expense per its consolidated financial statements. This limitation would be in addition to limitations under existing IRC Section 163(j).
The proposal would be effective for taxable years beginning after Dec. 31, 2021.
Provide tax incentives for locating jobs and business activity in the U.S. and remove tax deductions for shipping jobs overseas
This proposal would create a general business credit of 10% of eligible expenses incurred to onshore a U.S. trade or business. The proposal also would disallow deductions for expenses incurred to move jobs offshore. Under the proposal, onshoring or offshoring would be dependent on reducing or eliminating a trade or business in one jurisdiction and starting it up or expanding it in another. Expenses disallowed or that serve as a base for the credit would be limited to relocation costs and exclude capital expenditures or severance.
The proposal would be effective for expenses paid or incurred after the date of enactment.
Looking ahead
The Biden administration’s Green Book includes international tax proposals that, if enacted, would significantly increase tax on U.S.-based multinationals. The proposed changes include targeting a minimum 21% tax rate on global income and disallowing U.S. expenses attributable to global income to the extent the income is reduced under IRC Section 250, which potentially would drive the effective rate on global income much higher. Additionally, the hidden costs of tax planning in an uncertain environment and the disproportionate increase in compliance costs to accommodate new rules like a country-by-country calculation of global minimum tax and foreign tax credits would place a much greater financial toll on taxpayers than the additional tax revenue raised for the U.S. Department of the Treasury.
