House Ways & Means Committee Releases Bill Markup on Proposed Changes to U.S. International Tax Legislation

October 2021

BY

Tiffany IppolitoSenior Manager, International Tax Services

House Ways & Means Committee Chairman Richard Neal (D-MA) on September 13 released a draft bill that would significantly change the U.S. international tax system if enacted.
 
The Ways & Means Committee bill includes proposes 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 most notable provisions the Democrats’ plan would modify 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. However, interestingly, the Ways & Means Committee bill also proposes changes to some provisions not addressed by other proposals that have been released to date, such as former IRC Section 958(b)(4) downward attribution and the IRC Section 245A dividends received deduction (DRD).
 
The Ways & Means Committee bill 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, there are significant differences between the two proposals.
 
The Ways & Means Committee bill is the first to provide marked-up legislation, and it would advance the tax elements of the Biden administration’s “Build Back Better” agenda. For a side-by-side comparison of the tax provisions included in the various proposals released to date, see BDO’s chart.
 
A high-level overview of the proposed changes in the bill, as well as a comparison to the Biden administration’s proposals as presented in the Green Book, is outlined below:
 
GILTI Ways & Means Committee Bill  Biden Administration Proposal
Effective for tax years of foreign corporations beginning after December 31, 2021, with a transition rule for fiscal-year taxpayers. Effective for tax years beginning after December 31, 2021.
Tested income would be increased by foreign oil and gas extraction income (FOGEI), which is currently excluded from tested income. Tested income would be increased by FOGEI. The definition of FOGEI and foreign oil related income (FORI) would be amended to include income derived from shale oil and tar sands activity.
Would reduce the 10% return on qualified business asset investment (QBAI) to 5%. Would repeal 10% return on QBAI.
GILTI would be calculated on a country-by-country basis. Taxpayers with an aggregate tested loss for a given country would be permitted to carry forward the loss to the succeeding tax year. GILTI would be calculated on a country-by-country basis. It is expected that a jurisdiction with an aggregate tested loss would 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.
The high-tax exclusion for GILTI is not addressed. Presumably, it would remain in force. Would repeal the high-tax exclusion for GILTI.
Would reduce the IRC Section 250 deduction from 50% to 37.5%. Based on a proposed corporate tax rate of 26.5%, the effective rate on GILTI would increase to approximately 16.6%. The IRC Section 250 taxable income limitation would also be modified to create a net operating loss when taxable income is less than the deduction. Would increase the effective rate on GILTI for US corporations to 21% by reducing the IRC Section 250 deduction to 25%.
BEAT Generally effective for tax years beginning after December 31, 2021, as outlined below. Effective for tax years beginning after December 31, 2022.
The 3% base erosion percentage threshold would be eliminated prospectively for any tax year beginning after December 31, 2023. 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 a related- or an unrelated-party deduction) 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.” A low-taxed member would include a financial reporting group member whose income is subject to an effective rate below a designated minimum rate (21% or the OECD Pillar 2 rate, which is still under negotiation but currently stands at 15%).
The applicable percentage rate would be modified as follows: for tax years beginning after December 31, 2023, and ending before January 1, 2024, the BEAT rate would be 10%.  For tax years beginning after December 31, 2021, and ending before January 1, 2026, the BEAT rate would be 12.5%.  For tax years beginning after December 31, 2025, the BEAT rate would be 15%.
Would exclude payments to a foreign entity subject to an effective tax rate (ETR) above the BEAT rate from the scope of BEAT.
The base erosion minimum tax amount (BEMTA) would be determined by taking into account FTCs and other business tax credits.
FDII 

 
Effective for tax years of foreign corporations beginning after December 31, 2021, with a transition rule for fiscal-year taxpayers. Effective for tax years beginning after December 31, 2021.
The reduction of the IRC Section 250 deduction for FDII would be accelerated from 37.5% to 21.875. Would 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.
FTC Rules Effective for tax years beginning after December 31, 2021. With respect to modifications to the carryback and carryforward rules, the proposal would apply to taxes paid or accrued in tax years beginning after December 31, 2021 (except for the foreign oil and gas income provision, which would be retroactive to tax years beginning after December 31, 2017).  With respect to the modification relating to the redetermination of foreign taxes, the proposal would be effective 60 days after the date of enactment. Effective for tax years beginning after December 31, 2021.
GILTI FTCs would be calculated on a country-by-country basis for all categories of income; however, the foreign branch category would be repealed. GILTI, as well as the foreign branch category, FTCs would be calculated on a country-by-country basis.
GILTI FTC haircut would be reduced from 20% to 5%, and foreign taxes generated by tested loss CFCs would be permitted as part of the GILTI FTC calculation. The GILTI FTC haircut is not addressed. Presumably, it would remain at 20%.
The FTC carryover provisions would be amended to provide that, for all categories of income (including GILTI), there would be no FTC carryback and the FTC carryforward period would be reduced from 10 years to five years. Additionally, excess GILTI FTCs would be permitted to be carried forward. The FTC carryover provisions (including for GILTI) are not addressed. Presumably, they would remain as currently in force.
Would repeal IRC Section 904(b)(4). Would repeal IRC Section 904(b)(4).
IRC Section 265 is not addressed. Presumably, it would remain as currently in force. Would modify IRC Section 265 to provide that any expenses allocated and apportioned to IRC Section 245A income or to income for which an IRC Section 250 deduction is claimed against GILTI are treated as if they generated tax-exempt income and would not be deductible.
Would modify the expense allocation and apportionment rules for purposes of determining the FTC to permit only the IRC Section 250 deduction to be allocable to GILTI income. Expense allocation and apportionment rules for FTCs are not addressed. Presumably, they would remain as currently in force, unless otherwise noted.
IRC Section 245A DRD Effective for distributions made after the date of enactment. IRC Section 245A is not addressed. Presumably, it would remain as currently in force, unless otherwise noted.
Would change the requirements to be eligible for an IRC Section 245A deduction from qualifying foreign-source dividends received from 10% or more owned foreign corporations to qualifying foreign-source dividends received from controlled foreign corporations. This would significantly curtail the availability of the IRC Section 245A deduction and remove the deduction for those foreign corporations that are known as “10-50 companies.”
Would expand IRC Section 1059 by treating any disqualified CFC dividend as an extraordinary dividend without regard to the shareholder’s holding period (current threshold is less than two years). This would require a US shareholder that receives a disqualified CFC dividend to reduce its basis to the extent any IRC Section 245A DRD was taken – regardless of the length of the holding period.
Downward Attribution Rules Effective date would be retroactive and apply to the last tax year of foreign corporations beginning before January 1, 2018 and each subsequent tax year of such foreign corporation, and tax years of US persons in which or with which such tax years of foreign corporations end. Former IRC Section 958(b)(4) and downward attribution rules are not addressed. Presumably, they would remain as currently in force (or repealed), unless otherwise noted.
Would reinstate IRC Section 958(b)(4), thereby providing that for purposes of IRC Section 318(a)(3) when determining attribution of ownership to a US person, such ownership will not be attributed if the stock of the foreign corporation is not owned by a US person.
Would enact new IRC Section 951B, which would apply IRC Section 951A and IRC Section 965 to foreign controlled US shareholders of a foreign controlled foreign corporation. This would essentially create a new status of foreign corporation for which US owners would have inclusions for GILTI and IRC Section 965 purposes as if the repeal of IRC Section 958(b)(4) were still in place.
Interest Expense Limitation Effective for tax years beginning after December 31, 2021. Effective for tax years beginning after December 31, 2021.
New IRC Section 163(n) would limit the interest deduction for certain domestic corporations that are part of an international reporting group. An international reporting group would be defined as a group or at least two members, one of which is foreign. The limitation would be the allowable percentage of 110% of their net interest expense. Members of certain multinational groups may be limited in deductibility of interest expense if the member has net interest expense for US tax purposes and the member’s net interest expense for financial reporting purposes exceeds the member’s proportionate share of the financial reporting group’s net interest expense reported on the group’s consolidated financial statements. Such excess would generally be disallowed.
Subpart F Generally effective for tax years beginning after December 31, 2021. Subpart F and E&P rules for CFCs are not addressed. Presumably, they would remain as currently in force, unless otherwise noted.
Limits foreign base company sales and services income to US residents and passthrough entities and branches in the US. The bill also includes some loophole closers.
Would require certain adjustments outlined in IRC Section 312 (such as LIFO inventory adjustments, installment sales and completed contract method of accounting) to be included in a CFC’s E&P calculation for purposes of calculating whether the IRC Section 952(c) Subpart F E&P limitation applies.
Domestic International Sales Corporations (DISCs) Effective for distributions made on or after December 31, 2021. The rules relating to DISCs and FSCs are not addressed. Presumably, they would remain as currently in force, unless otherwise noted.
Gains from the sale or exchange of, and distributions by, a DISC or foreign sales corporation (FSC) to a foreign shareholder are treated as effectively connected with the conduct of a trade or business conducted through a permanent establishment deemed held by the US shareholder.