Many organizations with foreign business activity or those looking to expand foreign operations would be impacted by proposed changes in President Joe Biden’s Build Back Better Act (BBBA).
The bill was passed by the US House of Representatives on November 19, 2021, and includes spending and program changes as well as several international tax provisions that could significantly impact US taxpayers with foreign operations.
Proposed changes would be effective for tax years beginning after December 31, 2022, unless otherwise modified in the final bill. The $1.7 trillion bill (HR 5376) now moves to the Senate, where it will likely undergo further debate.
The following legislation highlights are most likely to impact both foreign-owned US companies and US taxpayers with foreign operations.
BBBA proposals include:
- 15% corporate minimum tax
- Deduction limit
- Global intangible low-taxed income (GILTI) regime
- Foreign-derived intangible income (FDII)
- Foreign tax credit
- Base erosion anti-abuse tax (BEAT)
- Dividends received deduction (DRD)
- Reinstatement of code Section 958(b)(4)
15% Corporate Minimum Tax
A corporate minimum tax would be enacted for corporations reporting three-year average financial statement profit of greater than $1 billion. This would effectively reinstate an alternative minimum tax for corporations.
This proposal aligns with the Organization for Economic Cooperation and Development (OECD) agreement on October 8, 2021, that certain multinational enterprises be subject to a minimum 15% tax rate effective beginning in 2023.
Deduction Limit
The BBBA would limit interest expense deductions for certain international reporting groups to 110% of net interest expense.
Global Intangible Low-Taxed Income (GILTI) Regime
Companies would need to calculate GILTI on a country-by-country basis instead of in aggregate, which is required by current law.
The proposed changes would reduce:
- The Internal Revenue Code (IRC) Section 250 deduction for GILTI, resulting in an effective tax rate of 15%, which is up from 10.5%
- The deduction for qualified business asset investment (QBAI) exemption from 10% to 5%
- The GILTI foreign tax credit (FTC) haircut under IRC Section 960 from 20% to 5%
Under current law, FTCs can’t be carried forward to offset GILTI in a future year. The proposed changes would allow FTCs to be carried forward five years; however, carrybacks would be disallowed.
GILTI would also be exempt from FTC expense allocation rules. Currently, certain expenses of the US taxpayer must be allocated to GILTI, reducing the utilization of FTCs.
Foreign-Derived Intangible Income (FDII)
The BBBA would reduce the FDII deduction from 37.5% to 24.8% beginning after December 31, 2022, instead of the original phaseout date of after year-end 2025. This would result in an effective tax rate of 15.8%.
It would also allow the FDII deduction to increase a net operating loss, which currently isn’t possible.
Foreign Tax Credit
The BBBA would apply a country-by-country limitation instead of an income-basket limitation. The one-year carryback provision is also removed.
Base Erosion Anti-Abuse Tax (BEAT)
BEAT rates would be increased as follows:
- 10% in taxable years beginning after December 31, 2021
- 12.5% in taxable years after December 31, 2022
- 15% in any taxable year after December 31, 2023
- 18% in any taxable year after December 31, 2024
Dividends Received Deduction (DRD)
IRC Section 245A gives US corporations an exemption from dividends received from certain 10%-owned foreign corporations. The BBBA would limit the exemption to dividends from controlled foreign corporations, known as CFCs.
Reinstatement of Code Section 958(b)(4)
The BBBA would restore former IRC Section 958(b)(4), which provides that a US person isn’t treated as owning stock that’s directly owned by a non-US person for purposes of applying the downward attribution rules.
This relief would be effective retroactively to January 1, 2018, and alleviates challenging reporting issues brought about by 2017 tax reform.
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To discuss how these provisions may impact your business, contact your Moss Adams professional.