International tax overhaul proposals compared

| 9/2/2021
International tax overhaul proposals compared

As part of their consideration of tax proposals to include in the budget reconciliation process, on Aug. 25, Democrats on the Senate Finance Committee released a draft bill that expands on the framework released in April to overhaul the international taxation provisions in the Tax Cuts and Jobs Act of 2017 (TCJA). Unlike the proposals in the “General Explanations of the Administration’s Fiscal Year 2022 Revenue Proposals” (Green Book), which would roll back most of the TCJA’s international tax provisions, the Senate bill retains the basic architecture of the TCJA while “ensuring mega-corporations pay their fair share” and allowing for the simplification of taxpayer compliance and administration.

Following is a comparison of the key international provisions included in the Senate bill and the Green Book.
 

Senate bill

Green Book

Global inclusion of low-taxed income (GILTI) Global intangible low-taxed income (GILTI)
Repeal exemption for 10% deemed return on qualified business asset investment. Repeal exemption for 10% deemed return on qualified business asset investment.
Require GILTI to be computed on a country-by-country basis. Require GILTI to be computed on a country-by-country basis.

Mandate application of country-by-country high-tax exclusion.

  • Effective tax rate (ETR) is measured at the “tested unit” level, which includes controlled foreign corporations (CFC), foreign branches owned by a CFC, and interests in certain pass-through entities held by a CFC.
  • If a tested unit’s ETR is higher than the U.S. GILTI corporate rate, the tested unit is treated as high-taxed income and excluded from GILTI.
  • If a tested unit’s ETR is less than the U.S. GILTI corporate rate, the income is subject to a top-up tax that brings total taxes up to the GILTI rate.
  • Tested units in a single country are aggregated for a country-level ETR.
  • Tested units with losses are treated as high-taxed and excluded.
  • Foreign income taxes properly attributable to high-tax tested income are not creditable or deductible.
Eliminate the high-tax exclusion from tested income.
Commit to a foreign tax credit (FTC) haircut between 0% and 20%. No provision.
No provision.

Expand tested income to include previously excluded foreign oil and gas extraction income and foreign oil-related income.

 

Disallowance under Section 265
Disallowance under Section 265 
No provision.

Disallow deductions for expenses allocable to dividends eligible for the foreign-dividends-received deduction or to GILTI inclusions to the extent of the deduction under Section 250.

 

Subpart F Subpart F

Modify Subpart F as follows:

  • Provide for closer alignment with GILTI as it’s proposed to be amended.
  • Apply GILTI FTC haircut, if any, to Subpart F income.
  • Extend GILTI mandatory high-tax exclusion rules to Subpart F income, subject to adjustment for the U.S. corporate tax rate applicable to Subpart F income.

Eliminate the high-tax exemption with respect to Subpart F income.
Foreign-derived innovation income (FDII) Foreign-derived intangible income (FDII)

Reduce the Section 250 deduction by a yet-to-be-determined amount for GILTI and then equalize for FDII purposes.

Eliminate the Section 250 deduction for foreign-derived intangible income.

Change focus to “innovation income,” which is the lesser of either: 

  • Deduction-eligible income as defined under existing law
  • Qualified research and experimentation (R&E) expenditures under Section 174 attributable to U.S. activities plus qualified training expenditures as defined in the draft bill
     
 
Base erosion and anti-abuse tax (BEAT) Base erosion and anti-abuse tax (BEAT)

Modify BEAT as follows:

  • Retain but modify current BEAT regime.
  • Intend to incorporate the purposes and policies of the stopping harmful inversions and ending low-tax developments (SHIELD) proposal into BEAT under provisions yet to be determined.
  • Expand the provision that regular tax liability is not reduced for R&E credits to apply to all Section 38 credits.
  • Compute the tax based on 10% of regular taxable income plus a yet-to-be-determined second, higher rate applied to base erosion income.
     
Replace BEAT with a new SHIELD rule focused on disallowing deductions for regular tax rather than an alternative tax.
 
Other modifications Other modifications

Foreign branches (FB): 

  • Extend high-tax exclusion rule to FBs consistent with GILTI and Subpart F, but base exclusion trigger on individual or corporate rates depending on the taxpayer rather than exclusively corporate rates.
No provision.

FTC limitation:

  • Treat apportionment rules for R&E and “stewardship” deductions as 100% allocated to U.S. source income if those activities are conducted in the U.S.
No provision.
No provision.

FTC: Treat the sale of a foreign hybrid as a stock sale for purposes of determining source and character of income and attendant FTC limitation.
 


Looking ahead

The Senate bill is still in draft form and, as negotiations continue, might not reflect the final legislation that is enacted. In the meantime, the international tax regime remains a central focus of members of Congress as they seek to discourage offshoring of jobs and erosion of the U.S. tax base. If enacted, the measures under consideration would lead to more double taxation than under pre-TCJA law for most U.S. multinationals.

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