On Aug. 25, 2021, Senate Finance Committee Chair Ron Wyden (D-OR), along with Senate Finance Committee colleagues Sherrod Brown (D-OH) and Mark Warner (D-VA), released draft legislation (Draft Legislation) to overhaul certain U.S. international tax rules.
The Draft Legislation (which was accompanied by a section-by-section summary) expands on the nine-page international tax framework the trio outlined in April (the April Framework). In a press release, Wyden said the international tax overhaul is aimed at raising revenue to pay for the Democrats’ $3.5 trillion reconciliation package, and to “encourage additional investment in our country and its workers.” The senators have asked that comments on the Draft Legislation be submitted by Sept. 3.
The Draft Legislation would retain but modify (and partly rename) major international tax provisions of the 2017 Tax Cuts and Jobs Act (TCJA), including the global intangible low-taxed income (GILTI), foreign-derived intangible income (FDII) and base erosion and anti-abuse tax (BEAT) regimes. But the Draft Legislation leaves some important questions unanswered, including how the BEAT might be changed to incorporate the purposes and policies of the Biden Administration's Stop Harmful Inversions and Ending Low-Tax Developments (SHIELD) proposal, and the tax rates that should be applied to U.S. corporate income, GILTI, FDII and the BEAT.
Similar to the April Framework, the Draft Legislation would enact three key changes to the GILTI regime:
- Repeal the exemption for qualified business asset investment (QBAI), which is intended to approximate a routine return on tangible assets held offshore.
- Increase the GILTI rate by an undetermined amount.
- Calculate GILTI on a country-by-country basis, which is intended to prevent losses incurred in one country from being used to offset income in another and to preclude excess foreign tax credits from entities in high-taxed countries from being credited against GILTI inclusions from low-tax countries.
Under the Draft Legislation, a top-up tax would apply to income earned in a foreign country that is subject to an effective rate of tax that is less than the GILTI rate. A high tax exclusion modeled on treasury regulations issued in 2020 would apply to income earned in a foreign country that is subject to a rate greater than the GILTI rate.
The section-by-section summary says that the “drafters are considering the best way to address timing issues in the country-by-country high-tax exclusion. For example, how losses in one year may impact the tax on income in a succeeding year,” suggesting that losses may be carried forward and/or carried back.
The Draft Legislation would also change the GILTI name to “country-by-country global inclusion of low-tax income,” extend the high-tax exclusion rule to Subpart F income and to foreign branches, and to the extent that there is a foreign tax credit haircut in GILTI (currently 20%), there would be a similar haircut to Subpart F income.
Consistent with the April Framework—and in contrast to Biden’s plan—the Draft Legislation would retain the FDII deduction but with the following changes:
- Rename the provision “foreign-derived innovation income.”
- Repeal the exemption for QBAI.
- Equalize the yet-to-be-determined FDII and GILTI rates.
- Replace FDII's “deemed intangible income” with a new metric, “domestic innovation income,” which would be designed to encourage spending on U.S. based research and development (R&D) and worker training.
The Draft Legislation would retain the BEAT—as opposed to Biden’s plan, which calls for repealing the BEAT and replacing it with the SHIELD—but with the following important changes:
- Account for all section 38 general business credits—such as, the R&D credit—for purposes of BEAT.
- Add a second rate bracket (in addition to the current 10% rate) for “base erosion income.” The exact percentage is yet-to-be-determined.
- Consider the best way to incorporate Biden’s SHIELD proposal into the BEAT.
We expect Congress to enact a budget reconciliation bill this fall that will contain several changes to the U.S. international tax system. As Chairman of the Senate Finance Committee, Senator Wyden will likely have a significant influence on the final form of tax legislation that Congress enacts and we believe it likely that Congress will enact one or more of the proposals in the Draft Legislation in any final reconciliation legislation.
Taxpayers that are currently or will be subject to GILTI, FDII and BEAT should discuss with their tax advisor how these proposals could affect their business activities. It is likely that one or more of these provisions will result in higher effective rates of taxation on foreign income so taxpayers should consider modeling the potential impact of these proposals to chart an appropriate course of action.