Build Back Better - Summary of International Tax Provisions

The latest bill before the Senate-the Build Back Better (“BBB”) bill-, is the most recent economic impact bill. After the passing of the Infrastructure Bill by the House, BBB is still on deck. The bill has not been voted on yet, but some of the provisions will significantly impact U.S. companies with foreign operations and U.S. shareholders of foreign companies. Below, we address the more substantial proposed international changes. All cited provisions are currently proposed to be effective for taxable years beginning after December 31, 2022, unless otherwise noted.

BBB has multiple provisions proposing changes to the Foreign-Derived Intangible Income (FDII) and Global Intangible Low-Taxed Income (GILTI) regimes.

The proposed bill would reduce the Sec. 250 deduction for both FDII (from 37.5% to 24.8%) and GILTI (from 50% to 28.5%). The smaller GILTI and FDII deductions would lead to greater income inclusions and likely a greater overall effective U.S. tax. GILTI and FDII deductions can now increase net operating loss carryforwards under the proposed bill.

The income inclusion under GILTI has been modified in another way under BBB. Currently, there is a deduction for the allowable net deemed tangible income return of 10% of the Controlled Foreign Corporation’s (CFC) Qualified Business Asset Investment (QBAI). The proposed provision reduces the percentage deduction to 5%. Similar to the Sec. 250 changes, this revision will lead to an increase in U.S. tax.

The provision also introduces the concept of a separate country-by-country limitation (CbC). CbC is to be applied in the determination of:

• GILTI
• CFC tested income
• Net deemed tangible income return
• QBAI
• Interest expense

BBB also modifies the deemed tax paid credit allowed to offset tax on GILTI income by reducing the 20% haircut imposed on foreign tax credits. The deemed paid credit for taxes attributable to GILTI is increased to 95% from 80%. The effective date of this provision is for taxable years beginning after December 31, 2021.

The foreign tax credit system is also modified outside of the GILTI regime under the BBB. The current law allows for a 10-year carryforward of excess foreign tax credits, and a one-year carryback. The pending legislation would eliminate the carryback entirely and limit the carry forward to five years – after which any unused foreign tax credits would be lost. Importantly, foreign tax credit determinations would be required on a country-by-country basis.

BBB further proposes changes to how foreign dividends would be treated in certain situations. The income exemption for foreign source dividends would be limited to only dividends received from CFCs. Any foreign source dividends received from any other source would no longer be eligible for the 100% exemption. Certain foreign corporations with U.S. shareholders may elect to be treated as a CFC. This provision would generally apply to distributions made after the date of enactment. The provision also modifies the determination of status as a CFC and applies special rules to foreign owned U.S. shareholders. A corporation is to be treated as a CFC only if it has direct U.S. shareholders. This provision would address the “infamous” downward attribution rules and would be effective for taxable years beginning after December 31, 2017.

Other significant provisions are as follows:

• Modifications to the Exemption for Portfolio Interest - The provision enhances the definition of a 10% shareholder, as not being eligible for the exemption. The determination of the 10% or more ownership threshold would now also refer to value of the stock of the corporation, as well as total vote. The provision would apply to obligations issued after the date of enactment.
• The scope of the Foreign Base Company Sales and Services Income provisions under subpart F would be reduced due to the change of the definition of the term “related person”.
• The Base Erosion Minimum Tax Amount and calculation of Modified Taxable Income for purpose of the Base Erosion and Anti-Abuse Tax (“BEAT”) would be modified in a way that potentially expands a taxpayer’s base to which the BEAT applies.
  
  

The intent of this summary is to provide a snapshot as to possible international changes proposed by BBB. The proposed change to the Portfolio Interest Exemption could have a profound effect on structuring, specifically in the real estate sector.

The International Tax Practice team at Citrin Cooperman can provide further details as to how these potential changes to the above tax provisions could affect you and your business.