Senate Democrats recently released draft legislation overhauling portions of the international tax regime which is part of the expected $3.5 trillion tax and spending package. This draft legislation gives us an idea of the direction Congress is heading in regards to international tax changes that may be included in the bill. Here is an overview of what has been proposed.
Changes to the GILTI Regime
- Refers to Global Inclusion of Low Tax Income instead of Global Intangible Low Taxed Income (GILTI)
- Eliminates deemed tangible income return and qualified business asset investment from the calculation
- Calculates GILTI on a country-by-country basis; therefore, losses from one country would not be able to offset income earned in another
- Automatically excludes “high-tax tested income” from the calculation
- Income that is not high-tax tested income would be subject to a top-up rate to bring the effective tax rate up to the GILTI rate
Changes to Subpart F and the Foreign Tax Credit
- Reduces the value of subpart F foreign tax credits – the amount of which was not included in the draft proposal
- Conforms the treatment of high-tax subpart F income with the proposed treatment of high-tax tested income
- Extends the high-tax rules to foreign branch income
- Treats research and experimentation expenses and stewardship expenses as 100% allocable to U.S. source income if attributable to U.S. activities
Changes to the §250 Deduction and Foreign Derived Intangible Income (FDII)
- FDII would now refer to Foreign-Derived Innovation Income
- Proposed reduction to the §250 Deduction for FDII and CFC testing income; the amount of reduction was not included in the draft proposal
- Similar to GILTI, the revised calculation would eliminate deemed tangible income return and qualified business asset investment from the FDII calculation
Updates to the Base Erosion Anti-Abuse Tax (BEAT) and implementation of Stopping Harmful Inversions and Ending Low-Tax Developments (SHIELD)
- BEAT liability would be 10% of modified taxable income less base erosion income plus a to be determined rate (higher than 10%) multiplied by “base erosion income”
- SHIELD would disallow deductions to domestic corporations or branches by reference to low-taxed income of entities that are members of the same financial reporting group
Many of the proposed changes included in the draft legislation are in line with items originally outlined in President Biden’s Green Book published earlier this year. Comments on the discussion draft are requested by September 3.
The above is an outline of draft legislation. We anticipate significant negotiations will occur as Congress continues to draft the entire package which could change the above items. However, we do expect to see major changes to the current international tax regime if Senate Democrats are able to pass legislation in the coming months. We will continue to keep you up to date as things develop. If you have any questions, please contact us.