In the recent months, there has been much discussion on implementing changes to the current U.S. tax laws, many of the proposals impacting the 2017 Tax Cuts and Jobs Act (“TCJA”). The TCJA overhauled the U.S. international tax system by introducing new tax regimes such as the transition tax (IRC 965), the Foreign Derived Intangible Income (“FDII”) deduction (IRC 250), and the Global Intangible Low-Taxed Income (“GILTI”) (IRC 951A).
Build Back Better – International Tax Provisions
On November 19, 2021, the House voted to pass the Build Back Better bill (“BBB”) (H.R. 5376). The BBB includes proposals that would significantly change the current U.S. international tax laws. The Senate will begin working on revisions to the BBB when they reconvene after the Thanksgiving break. A final version of the BBB must be passed by both the House and Senate before it can be signed into law by President Biden.
The following summary highlights the latest proposed changes impacting U.S. international tax laws in the version of the BBB passed by the House, to be effective for taxable years beginning after December 31, 2022.
GILTI
- Section 250 deduction reduced from 50% to 28.5% while retaining the corporate income tax rate at 21%, resulting in an effective tax rate on GILTI inclusions of 15%.
- Modifications to the GILTI computation to require the computation of GILTI tested items to be performed on a country-by-country basis and would allow tested losses to be carried forward.
- When calculating the net deemed tangible income return, 5% of the qualified business asset investment (QBAI) amount will be allowed rather than the current 10%.
- GILTI foreign tax credits will be subject to a 5% haircut rather than the current 20% reduction.
FDII
- Reduction of the FDII deduction from 37.5% to 24.8%
- Exclusion of certain gains from sales of property that gave rise to rents or royalties derives in the active conduct of a trade or business.
Corporate Alternative Minimum Tax
- Proposed Corporate Alternative Minimum Tax of 15% on adjusted financial statement income of corporations with a three-year average adjusted financial statement income over $1B.
Foreign Tax Credits
- Repeal of the one-year carryback of foreign tax credits as well as permitting GILTI foreign tax credits to be carried forward.
- Modifications to the computation of foreign tax credits and limitations to be computed on a country-by-country basis.
BEAT
- The current tax rate of 10% will only be applicable for tax years beginning after Dec. 31, 2021, and before Jan. 1, 2023. Increasing to 12.5% in taxable years beginning after Dec. 31, 2022, and before Jan. 1, 2024. 15% in tax years beginning after Dec. 31, 2023, and before Jan. 1, 2025 and 18% in any tax year beginning after Dec. 31, 2024.
- The BBBA also provides for modifications in the computation of determining modified taxable income which is the basis on which the BEAT is computed.
Author: Calvin Yung | [email protected]
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If you have questions regarding any of these proposals, please reach out to your Withum advisor.
