Senate Finance Committee Releases Updated Text of Build Back Better Act Tax Measures

December 2021

BY

Todd SimmensManaging Partner, National Tax Policy and Legislation Technical Practice Leader

Senate Finance Committee Chairman Ron Wyden (D – Ore.) on December 11 released an updated text of the tax provisions in the Build Back Better Act (H.R. 5376) passed by the House of Representatives on November 19.  According to a committee release, the updated text contains both substantive changes and technical corrections.

Describing the Democrats’ package as “historic,” Wyden explained that the Finance Committee had made “targeted improvements” to the Build Back Better Act, and asserted that the package is fully paid for “by ensuring profitable mega-corporations and [the] wealthiest Americans pay their fair share.”

The updated bill comes in at 1180 pages, with the tax-related provisions starting on page 275.

While the committee’s draft is a placeholder issued to satisfy technical requirements, it does include some significant changes to the version of the bill passed by the House, H.R. 5376. For example, the committee’s draft does not include the House-passed increase in the Internal Revenue Code (IRC) Section 164(b) limitation on the deduction for state and local taxes from the current $10,000 to $80,000 ($40,000 for married taxpayers filing separately and for trusts and estates) through 2031. The committee’s draft instead includes the phrase “Placeholder for compromise on deduction for state and local taxes” under the relevant section.

The omission of the SALT cap provision may indicate that the Senate has not yet come up with a compromise on this issue, which may be crucial for passage of the bill in the House.

The Senate Finance Committee’s text also modifies the new rules introduced in the House bill regarding a limitation under new IRC Section 163(n) designed to limit interest deductions for domestic corporations that are members of an international financial reporting group. Under this provision, the interest deduction is limited to an allowable percentage of 110% of the net interest expense reported on the group’s applicable financial statement. A domestic corporation’s allowable percentage means the ratio of that corporation’s allocable share of the group’s reported net interest expense over the corporation’s reported net interest expense, and the allocable share of the group’s reported net interest expense is determined on the basis of that corporation’s share of the group’s total EBITDA (earnings before interest, taxes, depreciation, and amortization as reported on the group’s applicable financial statement).

The new rules under IRC Section 163(n) target multinational groups whose U.S. interest payments are out of proportion to their U.S. operations’ share of their global business.

The Senate Finance Committee’s version allows companies to make an election to use an asset-based test as an alternate method – other than EBITDA—to determine their allocable share of the group’s net interest expense.

The Senate Finance Committee’s text would also modify the existing Section 7874 anti-inversion rules as follows:
  • Change the stock ownership test for treating an acquiring foreign corporation as a domestic corporation from 80% to 65%;
  • Lower the stock ownership threshold for having a surrogate foreign corporation from 60% to 50%;
  • When determining whether a “substantially all” acquisition exists, the threshold for testing would be expanded by looking at acquisitions of all properties of a domestic corporation or domestic partnership or by looking at properties constituting a trade or business; and
  • Potentially subjecting acquisitions of substantially all of a foreign partnership’s properties that are effectively connected with a U.S. trade or business to the inversion rules.

The committee text does not include Wyden’s own proposal of a so-called “billionaires’ tax,” which would mark to market annually some investments assets of taxpayers with assets over $1 billion or income of more than $100 million for three consecutive years, with tax paid on any unrealized gain. (For prior coverage, see BDO’s “Details of Proposed Corporate Minimum Tax and Billionaires’ Tax Released.”) The proposal, which Wyden unveiled on October 27, is not included in the House bill.
 

Next Steps

The Wyden release is likely the first step in Senate consideration of the Build Back Better Act.  If the full Senate takes action on its version of the bill, it would then return to the House, which would be expected to vote on the Senate’s version of the bill, after which it would head to the President for signature.  While there is still time this calendar year for Senate action, there are few remaining 2021 legislative days.

Stay tuned to BDO for more details. Visit BDO’s Tax Policy Watch to stay up to date on this and other tax legislative developments.