On May 28, 2021, the Treasury Department released its general explanations (the "Greenbook") of the Biden Administration's fiscal year 2022 revenue proposals. The Greenbook provides additional detail regarding the international tax proposals that were previously included in President Biden's "Made in America Tax Plan" (see our prior updates here and here), along with several new proposals. The international tax highlights from the Greenbook include the following:
- Increase Taxes on GILTI and Make Other Minor
Modifications to GILTI and Subpart F Rules. The
proposal would increase the U.S. tax imposed on a U.S.
shareholder's global intangible low-taxed income
- expanding the GILTI tax base by eliminating the exemption for a 10% return on qualified business asset investment,
- increasing the GILTI tax rate from a minimum rate of 10.5% to 21%, and
- calculating GILTI on a jurisdiction-by-jurisdiction basis.
In the case of a domestic corporation that is a subsidiary of a foreign parent corporation, the GILTI rules would take into account foreign taxes paid by the foreign parent under a comparable global minimum tax regime in its jurisdiction. The proposal would leave in place the 80% cap on foreign tax credits available to offset tax on GILTI, so residual U.S. tax on GILTI would only be avoided if the local country rate is at least 26.25% (i.e., 21% divided by 80%).
The proposal would repeal the high-tax exception for both Subpart F and GILTI purposes. The proposal would also repeal Section 904(b)(4) (which affects the treatment, for foreign tax credit purposes, of deductions allocable to income that is eligible for the Section 245A deduction) and expand Section 265 to disallow deductions allocable to classes of foreign gross income that are exempt from tax or subject to a reduced rate of U.S. tax through a deduction (for example, income that is eligible for the Section 245A deduction or GILTI inclusions eligible for a Section 250 deduction). In addition, the proposal would repeal the exemption from GILTI for foreign oil and gas extraction income ("FOGEI").
These proposals would be effective for taxable years beginning after December 31, 2021.
- Repeal BEAT and Replace with the SHIELD Rule. The proposal would repeal the base erosion anti-abuse tax ("BEAT"). Under the proposed Stopping Harmful Inversions and Ending Low-Tax Developments ("SHIELD") rule, a domestic corporation or branch would not be allowed a deduction for any payment that is directly made (or, in certain cases, deemed to be made) to a member of its financial reporting group whose income is subject to an effective tax rate below an internationally agreed global minimum rate (or, if no such rate has been agreed upon, the 21% GILTI minimum tax rate under the proposal). The SHIELD rule would apply to financial reporting groups with more than $500 million in global annual revenues (determined based on the group's consolidated financial statement). This proposal would be effective for taxable years beginning after December 31, 2022.
- Expand Anti-Inversion Rules. The proposal
would significantly expand the anti-inversion rules by:
- treating a foreign corporation as a domestic corporation for U.S. tax purposes if it acquires a domestic target and, after the acquisition, the former owners of the domestic target own more than 50% (rather than at least 80% under current law) of the stock (by vote or value) of the foreign corporation,
- regardless of shareholder continuity, treating a foreign corporation as a domestic corporation for U.S. tax purposes if it acquires a domestic target and (i) immediately before the acquisition, the "fair market value" of the domestic target is greater than the "fair market value" of the foreign corporation, (ii) after the acquisition, the foreign corporation's expanded affiliated group is primarily managed and controlled in the United States, and (iii) such expanded affiliated group does not have substantial business activities in the foreign corporation's country of organization,
- applying the anti-inversion rules to the acquisition of substantially all of the U.S. trade or business assets of a foreign partnership, and
- treating certain distributions of foreign corporate stock by a domestic corporation or partnership as an acquisition for purposes of the anti-inversion rules.
These proposals would be effective for transactions that are completed after the date of enactment.
- Limit Interest Deductions for Disproportionate Borrowing in the United States. Under this proposal, the interest deductions of an entity that is a member of a multinational financial reporting group would be limited if the member's net interest expense for financial reporting purposes is greater than the member's proportionate share of the group's net interest expense reported on the group's consolidated financial statements. Alternatively, if the member fails to substantiate its proportionate share of the group's net interest expense for financial reporting purposes, or the member so elects, the member's interest deduction would be limited to its interest income plus 10% of its adjusted taxable income (as defined under Section 163(j)). Any interest expense that is disallowed under this rule via either the proportionate share approach or the 10% alternative would be carried forward for U.S. tax purposes. This proposal would be effective for taxable years beginning after December 31, 2021.
- Incentivize Taxpayers to Move Jobs to the United States. The proposal would allow a general business credit to a U.S. taxpayer equal to 10% of the eligible expenses paid or incurred to eliminate a foreign business and start up, expand, or move the same business to the United States with a resulting increase in U.S. jobs. Conversely, a U.S. taxpayer would be denied deductions for expenses paid or incurred to eliminate a U.S. business and start up, expand, or move the same business outside the United States with a resulting loss of U.S. jobs. This proposal would be effective for expenses paid or incurred after the date of enactment.
- Repeal FDII. The proposal would repeal the deduction for foreign derived intangible income ("FDII"), and the resulting revenue would be used to "encourage R&D." This proposal would be effective for taxable years beginning after December 31, 2021.
- Expand the Application of Section 338(h)(16) to Sales of Hybrid Entities. The proposal would extend the principles of Section 338(h)(16) (which generally provides that the deemed asset sale that results from a Section 338 election is ignored for purposes of determining the source or character of any item in applying the foreign tax credit rules to the seller) to (i) the direct or indirect disposition of an interest in an entity that is treated as a corporation for foreign tax purposes but as a pass-through entity for U.S. tax purposes and (ii) a change in the classification of an entity that is not recognized for foreign tax purposes (for example, a change resulting from a check-the-box election). This proposal would be effective for transactions occurring after the date of enactment.
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