The latest proposals include changes to the GILTI, FDII, and BEAT regimes (which also incorporates concepts from President Biden’s administration’s proposed SHIELD rules, as well as changes to the foreign tax credit (“FTC”) expense allocation rules. The highlights from the discussion draft are summarized below.
The discussion draft retains the proposed elimination of qualified business asset investment (“QBAI”) from the GILTI computation which generally applies as a reduction to CFC tested income (net of tested interest expense in excess of tested interest income). The discussion draft also proposes to compute GILTI on a country-by-country basis where tested losses in one jurisdiction may not reduce tested income in another jurisdiction.
In addition, high-tax tested income will be excluded from GILTI tested income where it is subject to an effective tax rate that is high than the GILTI tax rate, after considering GILTI FTCs. Per prior proposals, the 20% haircut on GILTI FTCs was slated to be eliminated which continues to be contemplated in the discussion draft. For purposes of qualifying as high-tax tested income, the “tested units” in the same foreign country are aggregated to compute the effective tax rate on income in that jurisdiction. A “tested unit” refers to a controlled foreign corporation (“CFC”) or foreign branch. Where high-tax tested income is excluded from tested income, foreign taxes associated with that tested income will not be creditable or deductible by the taxpayer. Also, tested losses will be treated as creating high-tax tested income and will be excluded from the GILTI computation, no longer reducing a taxpayer’s total net tested income.
Under the Tax Cuts and Jobs Act of 2017, “FDII” referred to the “Foreign Derived Intangible Income” regime. Under the latest proposal, FDII would refer to “Foreign-Derived Innovation Income”. The proposed revised FDII regime would equalize the FDII and GILTI tax rates and replace the incentive to have foreign sales with an incentive for innovation activities in the United States, such as research and development (“R&D”) and certain training activities. The proposed revised FDII regime would also eliminate a U.S corporation’s QBAI from the FDII computation. The new FDII computation would require “domestic innovation income” to be multiplied by the “foreign-derived ratio”. While the foreign deduction ratio is unchanged from the current law, domestic innovation income would be the lesser of deduction eligible income or a percentage of the sum of qualified R&D expenses and qualified training expenses.
To overhaul the BEAT, the senate finance committee has proposed to allow the full value of General Business Credits under Section 38 when computing the Base Erosion Minimum Tax Amount so that none of these credits would reduce the taxpayer’s regular tax liability when computing a taxpayer’s base erosion minimum tax amount. In addition, the proposed BEAT rules include a second higher tax bracket applicable to base erosion income.
The proposed rules also include a reference to incorporate concepts from the proposed Stopping Harmful Inversions and Ending Low-Tax Developments rules (“SHIELD”) into the BEAT. The SHIELD was proposed by President Biden’s Administration to target profit shifting to low-tax jurisdictions and is applicable to any financial reporting group that includes at least one U.S. corporation or U.S. branch with effectively connected income and global annual revenues over $500 million.
The proposed changes also provide that R&D and corporate stewardship expenses will be allocated only to U.S. sourced income when those activities are conducted within the United States. Under the current rules, R&D and stewardship expenses are required to be allocated or apportioned to foreign source income where sales are made or gross income is earned in a foreign country, even if all of the R&D costs are incurred in the United States. This change will allow corporate taxpayers increased foreign sourced income for FTC utilization.
Author: Calvin Yung, JD, LLM | email@example.com