Dem Senators Release Additional Details on Proposed Overhaul of U.S. International Tax Legislation
Senate Finance Committee Chair Ron Wyden (D-Ore), along with Senators Sherrod Brown (D-Ohio) and Mark Warner (D-VA), on August 25 released a draft proposal that would overhaul the U.S. international tax system.
The Wyden proposal includes provisions originally presented in the plan the three senators put forth in April--the Overhauling International Taxation framework—as well as newly released details regarding proposed changes that, if enacted, would significantly modify key international tax legislation enacted as part of the 2017 Tax Cuts and Jobs Act (TCJA). Among the provisions the Democrats’ plan would modify or repeal are the global intangible low-taxed income (GILTI) rules, the base erosion and anti-abuse tax (BEAT), the foreign derived intangible income (FDII) provisions, and the associated foreign tax credit (FTC) rules.
Wyden’s plan dovetails to some extent with the Biden administration’s legislative agenda, as presented in the Treasury Department’s Green Book, a general explanation of tax proposals included in the administration's fiscal year 2022 budget submission to Congress. However, significant differences between the two plans remain.
Wyden’s tax plan would become part of a broader revenue proposal that would pay for the $3.5 trillion in spending in the budget resolution Congress approved earlier this month. (For prior coverage, view our BDO alert on the House vote on the budget resolution).
An overview of the proposed changes in the Wyden proposal, as well as a comparison to the Biden administration’s proposals as presented in the Green Book, is outlined below:
| GILTI | Wyden Proposal | Biden Administration Proposal |
| Effective for tax years of foreign corporations beginning after the date of enactment. | Effective for tax years beginning after December 31, 2021. | |
| Rename as “Country-by-Country Global Inclusion of Low-Tax Income.” | Not addressed. | |
| Repeal 10% return on qualified business asset investment (QBAI) | Repeal 10% return on QBAI. | |
| GILTI calculated on a country-by-country basis. Timing issues regarding losses generated in one year offsetting income in another year are still under consideration. | GILTI calculated on a country-by-country basis. It is expected that a jurisdiction with an aggregate tested loss will not be able to offset aggregate tested income generated by other jurisdictions; instead, there could perhaps be a net operating loss (NOL) carryover-type provision for jurisdictions that generate aggregate tested losses in a given year. | |
| High-tax exclusion calculated on a country-by-country basis. The effective tax rate (ETR) threshold would be the GILTI rate, after taking the GILTI foreign tax credit (FTC) haircut into account. A tested unit with a tested loss is also treated as creating high-tax tested income and would be excluded. | Repeal the high-tax exclusion for GILTI. | |
| Reduction of the Internal Revenue Code Section 250 deduction. The amount of the reduced deduction is still under consideration; however, the IRC Section 250 deduction for GILTI and FDII will be equalized. | Increase the effective rate on GILTI for U.S. corporations to 21% by reducing the IRC Section 250 deduction to 25%. | |
|
Subpart F
|
Effective for tax years of foreign corporations beginning after the date of enactment and to tax years of U.S. shareholders in which or with which such tax years of foreign corporations end. | Effective for tax years beginning after December 31, 2021. |
| Applies an FTC haircut, similar to GILTI. The amount of the haircut is still being considered but could be between 0% and 20%. | Not addressed. | |
| High-tax exclusion calculated on a country-by-country basis applying the same rules as the GILTI high-tax exclusion (use of tested units, aggregation rules, rules for losses, etc.). The ETR threshold would be the corporate tax rate. To prevent blending of Subpart F income and GILTI income, the passive basket income would be separate from the general basket income for purposes of the high-tax exclusion. | Repeal the high-tax exclusion for Subpart F. | |
| Foreign Branch Income | Effective for tax years beginning after the date of enactment. | Not addressed. |
| The high-tax exclusion, also calculated on a country-by-country basis, would apply to foreign branch income. Foreign branch income would be treated as “high-tax foreign branch income” if it is subject to tax at a rate greater than the U.S. corporate tax rate or the highest U.S. individual tax rate. | Not addressed. | |
| BEAT | Effective for base erosion payments paid or accrued for tax years beginning after the date of enactment. | Effective for tax years beginning after December 31, 2022. |
| Incorporation of SHIELD principles into BEAT is still under consideration. | BEAT would be replaced with a new regime-- the Stopping Harmful Inversions and Ending Low-Tax Developments (SHIELD) proposal. Under the SHIELD regime, a deduction (whether related- or unrelated-party deductions) would be disallowed when made by a domestic corporation or branch, in whole or in part, by reference to all gross payments that are made (or deemed made) to “low-taxed members.” | |
| IRC Section 38 domestic business credits are provided full value under BEAT by providing that all IRC Section 38 general business credits do not reduce regular tax liability for purposes of determining the base erosion minimum tax amount (BEMTA). | ||
| BEAT would include a second, higher rate of tax when determining the base erosion tax liability (the current rate is 10%). The rate is still under consideration. The higher rate will apply to “base erosion income,” which is the amount of income added to taxable income to determine modified taxable income (MTI). | ||
|
FDII
|
An effective date was not included. | Effective for tax years beginning after December 31, 2021. |
| The IRC Section 250 deduction for GILTI and FDII would be equalized. The amount of the deduction is still under consideration. | Repeal FDII but provide a new general business credit equal to 10% of the eligible expenses paid or incurred in connection with onshoring a U.S. trade or business, as well as disallow deductions for expenses paid or incurred in connection with offshoring a U.S. trade or business. | |
| “Deemed intangible income” would be replaced with “domestic innovation income.” | ||
| Domestic innovation income takes into account qualified research and experimental expenses that are eligible to be deducted under IRC Section 174 (conducted in the U.S.) and “qualified training expenditures.” The amounts and percentages are still under consideration. The foreign-derived ratio formula would remain unchanged. | ||
| FTC Rules | Effective for tax years beginning after the date of enactment. | Not addressed. |
| Applies an FTC haircut to GILTI, Subpart F, and foreign branch income. The exact amount of the haircut is still under consideration; however, it could be between 0% and 20%. | Not addressed. | |
| For purposes of the FTC limitation, R&E and stewardship expenses would be fully allocated to U.S.-source income if those activities are conducted in the U.S. If performed outside of the U.S., current law would apply. | Not addressed. |
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