New U.S. federal tax legislation in the Build Back Better Act (BBBA) would implement additional changes to the U.S. international tax provisions since the Tax Cuts and Jobs Act (TCJA) in December 2017. There were recently a couple of different draft bills under consideration in the U.S. House of Representatives. These versions have included the House Ways and Means draft bill on September 13, 2021 and the BBBA draft bill on October 28, 2021. There are differences in the various versions of the bills. The core international tax provisions in the BBBA draft bill on October 28, 2021 are discussed at a high level below.
- Global Corporate Alternative Minimum Tax – A global corporate minimum tax at a 15% corporate tax rate would apply to U.S. corporations with book net income greater than $1 billion USD. Book net income is financial accounting statement net income before adjustments for U.S. tax principles are applied to calculate U.S. federal taxable income. This U.S. federal corporate alternative minimum tax generally aligns with the global initiative of the Organization for Economic Cooperation and Development (OECD) launched in the Base Erosion Profit Shifting (BEPS) 2.0 Pilar Two Blueprint.
- Foreign Tax Credit – A country-by-country foreign tax credit system would be adopted. U.S. taxpayers would calculate the foreign tax credit limitation separately with respect to each country in which the foreign income tax liability arises. The BBBA would eliminate the separate foreign branch foreign tax credit limitation basket that was required after the TCJA in 2017. The mandatory one-year foreign tax credit limitation carryback would be eliminated. The 10-year foreign tax credit limitation carryforward and statute of limitations would continue for the general and passive foreign tax credit limitation baskets. Unutilized controlled foreign corporation (CFC) global intangible low-taxed income (GILTI) foreign tax credits could be carried forward for up to five years for foreign taxes paid or accrued after 12/31/2022 and before 1/1/2031. The GILTI foreign tax credit carryforward would be allowed for up to 10 years for foreign taxes paid or accrued after 12/31/2030. The current GILTI foreign tax credit limitation of 80% would be increased to 95% with only a 5% reduction to replace the current 20% reduction. The allocation and apportionment of expenses to the GILTI foreign tax credit limitation basket would be modified. The allocation and apportionment of expenses to the GILTI basket has the ultimate effect of decreasing the GILTI foreign tax credit that can be claimed by the U.S. taxpayer in the current tax year. Less expenses only including the GILTI IRC section 250 deduction and taxes would be allocable to the GILTI basket. However, the BBBA draft bill would give the U.S. Treasury the authority to still require the allocation and apportionment of other directly related expenses to the GILTI basket.
- IRC section 250 GILTI Deduction – The BBBA bill would reduce the current 50% IRC section 250 GILTI deduction to 28.5% for GILTI and the IRC section 78 gross up. To claim a GILTI foreign tax credit, the IRC section 78 gross up for the amount of GILTI foreign taxes is added to the taxable GILTI inclusion. The IRC section 250 deduction applies to the amount of GILTI plus the IRC section 78 gross up. The BBBA draft bill would allow the IRC section 250 deduction on GILTI without the current taxable income limitation. The BBBA draft bill would allow the IRC section 250 deduction to increase a corporate net operating loss (NOL).
- IRC section 250 Foreign Derived Intangible Income (FDII) Deduction – The BBBA draft bill would decrease the FDII deduction from the current 37.5% to 24.8%. The scope of qualifying deduction eligible income (DEI) would be limited further to include additional exclusions applicable prospectively.
- U.S. Federal Tax Rate on IRC section 951A GILTI – GILTI is currently subject to a 10.5% U.S. federal corporate income tax rate after taking into account the current 50% IRC section 250 deduction (21% x 50% IRC section 250 deduction = 10.5%). The U.S. federal tax rate on GILTI would be increased to 15% (21% x 28.5% IRC section 250 deduction = 15%). *The BBBA draft bill assumes the same 21% regular U.S. federal corporate income tax rate. The overall U.S. federal tax rate on GILTI would be 15.8% when factoring in the 5% GILTI foreign tax credit reduction.
- IRC section 245A Dividends Received Deduction (DRD) – The BBBA draft bill would allow the 100% DRD for dividends received but only from a controlled foreign corporation (CFC). A controlled foreign corporation generally is a foreign corporation that is controlled, i.e., owned more than 50% by U.S. shareholders that each own at least 10% of the vote or value. A U.S. corporate taxpayer would be able to make an election to treat a foreign corporation as a CFC in order to qualify for the IRC section 245A DRD.
- IRC section 59A Base Erosion and Anti-Abuse Tax (BEAT) – The BEAT currently applies to U.S. affiliated corporate groups that make certain base erosion payments and have had average annual gross receipts of at least $500M USD for the preceding three years. The BBBA draft bill would initially increase the BEAT rate from 10% to 12.5% for tax years beginning after 12/31/2022. The BEAT rate would also increase from 12.5% to 15% for tax years beginning after 12/31/2023. Finally, the BEAT rate would increase from 15% to 18% for tax years beginning after 12/31/2024.
For more information on the BBBA international tax provisions, please contact Alison Dougherty at (301) 222-8262 or ADougherty@aronsonllc.com.