On 25 August 2021, United States (US) Senate Finance Committee Chairman Ron Wyden and Senators Sherrod Brown and Mark Warner detailed the international tax framework they released in April, focused on changes to the 2017 Tax Cuts and Jobs Act’s provisions on global intangible low-taxed income (GILTI), foreign-derived intangible income (FDII), and the base erosion and anti-abuse tax (BEAT). Newly released legislative text of the framework — the April release did not include legislative language — still leaves several policy options undetermined, including the GILTI tax rate and how the BEAT might be changed to incorporate aspects of the Biden Administration's Stop Harmful Inversions and Ending Low-Tax Developments (SHIELD) proposal. Comments are requested on the draft by 3 September.
Proposed GILTI changes would:
Repeal the exemption for qualified business asset investment (QBAI, which is intended to be roughly the value of offshore tangible assets)
Increase the GILTI rate by an unspecified amount
Use a "country-by-country" system for applying GILTI through dividing global income into two groups, low-tax and high-tax, with GILTI only applied to income from low-taxed jurisdictions, while income from high-tax jurisdictions would remain subject to tax until repatriated
High-tax income would mean an effective rate that is (after incorporating any foreign tax credit haircut) greater than the GILTI rate, and a tested loss would be treated as creating high-taxed income.
The summary of the bill said, "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. Special rules dealing with timing should operate within the architecture of the high-tax exclusion described above, and retain the country-by-country purpose that prevents losses in one country from offsetting income in another."
The bill would apply the high-tax exclusion in GILTI to subpart F and to foreign branches, and to the extent that there is a foreign tax credit haircut in GILTI (stating a range between 0 — 20%), there would be a similar haircut in subpart F. Branches that have losses are not treated as creating high-tax foreign branch income (a distinction from tested losses within GILTI).
An incentive designed to onshore research and management jobs would provide that expenses for research and experimentation and for "stewardship" would be treated as 100% allocated to US source income if those activities are conducted in the US.
The effective date proposed would be for tax years beginning after date of enactment.
FDII changes would:
Repeal the exemption for QBAI
Replace FDII's "deemed intangible income" with a new metric, "domestic innovation income," which would be research and development and worker training expenses
Equalize the yet-to-be-determined FDII and GILTI rates
BEAT changes would follow the original framework's proposal to give domestic business credits under Section 38 full value and would establish a second-rate bracket applicable to "base erosion income," which is the amount of income added to taxable income under Section 59A(c)(1) to determine the modified taxable income. Regular taxable income, excluding base erosion income, would remain subject to the 10% rate in the BEAT equation. Importantly, a summary said, "The drafters are considering the best way to incorporate into the BEAT the purposes and policies of the Stop Harmful Inversions and Ending Low-Tax Developments (SHIELD) proposal put forth by the Biden administration."
Text and a summary are attached on the GTNU link below.
For additional information with respect to this Alert, please contact the following:
Washington Council Ernst & Young, Washington, DC
Any member of the group, at +1 202 293 7474
For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.
