The Treasury Department released its General Explanation of the Administration’s 2022 Revenue Proposals (the “Green Book”). Highlighted below are some of the key international tax proposals. The proposals are in the early stages of negotiations and each one could change dramatically before enactment, if enacted at all.
The proposed revisions would alter the international tax landscape. The revisions (specifically, the new Stopping Harmful Inversions and Ending Low-Tax Developments rules and further interest expense restrictions) would compound the complexity, uncertainty, and administrative burden of these proposals.
All proposed changes, if enacted, would likely take effect in taxable years beginning after December 21, 2021, unless otherwise noted.
Significant revisions would be made to the current global minimum tax regime or GILTI (global intangible low-taxed income), pursuant to Section 951A.
Qualified business asset income (QBAI) would be eliminated. The U.S. shareholder’s entire net controlled foreign corporation (CFC) tested income would be subject to U.S. tax.
The Section 250 deduction would be reduced to 25%; thereby resulting in a 21% corporate tax rate under the proposed U.S. corporate income tax rate of 28%.
A “jurisdiction by jurisdiction” calculation would replace the current law’s “global averaging“ method in calculating a U.S. shareholder’s global minimum tax. Reference would be made separately for each foreign jurisdiction in which the CFCs have operations. This new approach would also apply for foreign tax credit limitation purposes applicable to a U.S. shareholder’s GILTI inclusion.
The high- tax exception applicable to both Subpart F income and GILTI would be repealed.
The proposal would expand the reach of the Section 265 disallowance of deductions properly allocable to exempt income to income that is taxed at a preferential rate through a deduction (such as the Section 245A 100% dividends received deduction and the Section 250 deduction). The proposal does not intend to create any inferences that Section 265 would not have applied under current law in the case of income that is taxed at preferential rates via a deduction.
Inversion transactions (Section 7874) would be further curtailed, with an effective date for transactions completed after the date of enactment.
The 60% ownership test would be eliminated.
The 80% ownership test would be replaced with a greater than 50% test. Accordingly, foreign status of the acquiring corporation would only be respected if shareholder continuity is 50% or less.
The concepts of control and management in the U.S. would be determined in a subjective manner and irrespective of the level of shareholder continuity.
The Section 250 deduction for foreign derived intangible income (FDII) would be repealed.
The Base Erosion Anti-Abuse Tax (BEAT) would be replaced with the Stopping Harmful Inversions and Ending Low-Tax Developments (SHIELD) rule. SHIELD would disallow a deduction (whether related or unrelated party) by a domestic corporation or branch for amounts paid to “low-taxed members.” A low-taxed member is defined as any financial reporting group member whose income is subject to an effective tax rate below a specified minimum tax rate. The minimum tax rate will likely be equivalent to the proposed global minimum tax rate of 21%. The minimum level of effective taxation is to be determined on a jurisdiction-by–jurisdiction basis. The new rules would apply to financial reporting groups with greater than $500 million in global annual revenues. The effective date of this proposal would be for taxable years beginning after December 31, 2022.
The proposal would limit a financial reporting group member’s deduction for interest expense by reference to excess financial statement net interest expense. Following are some of the more salient points:
Excess financial statement net interest expense is defined as the member’s net interest expense for financial reporting purposes, as computed on a separate company basis, that exceeds its proportionate share of the financial reporting group’s net interest expense reported on the group’s financial statements.
A financial reporting group member can elect instead to apply section 163(j) but using a 10% limitation of adjusted taxable income rather than 30%.
Sec. 163(j) limitations would continue to apply.
When both interest disallowance provisions apply, the amount of interest disallowed would be determined by applying the provision that imposes the lower limitation.
The proposal would not apply to financial services entities. Further, the proposal would not apply to financial reporting groups that would otherwise, collectively, report less than $5 million of net interest expense on one or more U.S. income tax returns for a taxable year.
If you any questions or would like further information, please contact a member of the International Tax Services Practice.