On Friday, May 9, the House Ways and Means Committee shared partial text for the tax portion of a reconciliation bill to extend the 2017 Tax Cuts and Jobs Act (TCJA) and make certain other tax reforms. The bill includes several key international tax provisions aimed at extending and modifying existing rules. Highlights include:
- Controlled Foreign Corporation (CFC) Look-Through Rule: This rule, which was set to expire at the end of 2025, is proposed to be made permanent. It allows, for instance, active income paid as a dividend by one foreign CFC to another to maintain its active character and not be recast as a passive dividend that would be deemed income (subpart F income) to the US parent.
- Foreign-Derived Intangible Income (FDII): The bill would make permanent the 37.5% deduction for FDII. FDII encourages US companies to export goods and services by effectively taxing the exports at a rate of 13.125% instead of 21%.
- Global Intangible Low-Taxed Income (GILTI): The 50% deduction for GILTI would also be made permanent. The GILTI provisions effectively tax profits of foreign subsidiaries, even if such profits are not distributed to a US shareholder, at a minimum rate of 10.5%.
- Base Erosion and Anti-Abuse Tax (BEAT): The bill would repeal the increase in the BEAT tax rate, maintaining the rate for BEAT at 10% indefinitely. BEAT imposes a tax on taxpayers that (i) have more than $500 million in gross receipts over three years and (ii) make certain payments to foreign related parties that would otherwise reduce the taxpayer's US tax base.
- Foreign Tax Credit (FTC) Limitation Baskets: Various changes are proposed to the categories used to calculate the FTC for different types of income. This ensures that foreign taxes paid on one type of income do not offset US taxes on another type of income.
- Downward Attribution: The bill would eliminate the provision enacted in 2017 that provides for downward attribution from foreign persons to US entities for determining CFC status. Since its enactment, the downward ownership attribution rules have wreaked havoc on scores of taxpayers by causing inadvertent income inclusions under subpart F of the tax code and the GILTI rules in situations in which a taxpayer did not control the foreign corporation and the corporation was not otherwise characterized as a CFC.
- FTC "Haircut": The 20% FTC "haircut" for GILTI taxes would be repealed. Under the current rules, only 80% of the foreign taxes paid on foreign income characterized as GILTI can be claimed as a credit against US taxes. If the bill passes, 100% of the foreign taxes paid on GILTI could be credited against US taxes.
These provisions are part of the broader effort to extend key elements of the TCJA and ensure competitive tax policies for American businesses operating internationally. The bill was advanced, unchanged, by the House Ways and Means Committee on May 14, and Republican lawmakers hope the full bill can advance through the House by Memorial Day.
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