Here We Go Again! Proposed Changes to International Tax Provisions

The House Ways and Means Committee proposed legislation that introduces many changes to International Tax Provisions.

One would think that after 2017’s TCJA sweeping International Tax reform we would get a break this time around, but alas it seems that International Tax provisions are a favored target for those looking to change up the tax code. If you’re wondering what exactly may be changed here’s a high-level summary of proposed International Tax Changes:

  • The Section 250 deduction which reduced Global Intangible Low-Taxed Income (“GILTI”) inclusions by 50% would be reduced to 37.5% for GILTI and 21.875% for Foreign Derived Intangible Income (“FDII”).
  • Introduction of a new Country by Country Application of the Foreign Tax Credit so you would no longer be able to cross credit taxes among different jurisdictions.
  • Foreign Tax Credit carryforward would be limited to 5 years down from where it currently stands as a 10-year carryforward. As well as a repeal of the Foreign Tax Credit carryback, which is currently 1 year.
  • Expansion of the Foreign Tax Credit carryover to include taxes paid on GILTI. Currently, Foreign Tax Credits allocated to GILTI income must be used in the year of the GILTI income to which they are allocated, or they are lost. Under the proposed legislation you would be allowed to carry any excess Foreign Tax Credits to later years.
  • The GILTI calculation would be done on a country-by-country basis. Currently, this is done at the shareholder level so that netting is available for losses in one country against income in the other. Under the proposed provision this netting would no longer be available.
  • GILTI tested income loss carryforward would be allowed. Under the current law if you have GILTI losses in an earlier year, these are not available to offset GILTI income in subsequent years. The proposed legislation would allow earlier year losses to reduce GILTI tested income in subsequent years.
  • In calculating GILTI, Deemed Tangible Investment Return would be 5% of Qualified Business Asset Investment (“QBAI”) instead of where it currently is at 10% of QBAI.
  • Increase in the allowable deemed paid foreign tax credit for GILTI from 80% to 95% of properly allocable taxes.
  • Section 245A deduction would only be applicable to dividends from Controlled Foreign Corporations (“CFCs”) and no longer available for dividends from Specified Foreign Corporations (“SFCs”). This would impact U.S. C Corporations that are >10% and <50% shareholders in a foreign corporation that is not a CFC.
  • A fix for the repeal of Section 958(b)(4) with modifications which still allow certain 10% U.S. shareholders to have GILTI inclusions from foreign corporations that aren’t CFCs.
  • The Base Erosion and Anti-Abuse Tax (“BEAT”) current applicable tax rate of 10% would only be applicable for tax years beginning before January 1, 2024, and would increase to 12.5% for tax years beginning before December 31, 2025. For taxable years beginning after December 31, 2025, the applicable tax rate would be 15%.

In addition, the proposals include taking certain credits into account when computing modified taxable income for the BEAT. And expanding the definition of base erosion payments to include payments to foreign related parties that are required to be capitalized in inventory and amounts paid to foreign related parties for inventory that exceeds the foreign party’s cost for the property. Exceptions are also provided for payments that are subject to U.S. tax and for payments to foreign parties that are subject to foreign taxes at an effective rate that is equal to or greater than the applicable BEAT tax rate.

Author: Calvin Yung, JD, LLM | [email protected]

Reach out to a Withum International Tax team member to understand how these changes may impact you.

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