United States:
International Tax Proposals Detailed In Treasury’s Greenbook
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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
(“GILTI”) by:- 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.
- expanding the GILTI tax base by eliminating the exemption for a
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.
- treating a foreign corporation as a domestic corporation for
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.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
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