In April, the Senate Finance Committee (‘Committee’) released an article highlighting changes they plan to make to the current international taxation system. It conveys an effort to begin rewarding companies that invest in the United States and its workers and slow the incentives to doing business overseas. To communicate the implications for American companies in the future, we provided a brief analysis of this initial proposal here in our blog a few days after the release.
On August 25, the Committee took the next step and unveiled their draft legislation to overhaul international taxation. The discussion draft builds on the framework released in April, providing more details to the refurbishment of three taxes that were introduced by President Trump’s 2017 tax law: Global Intangible Low-Taxed Income (GILTI), Foreign-Derived Intangible Income (FDII), and the Base Erosion and Anti-Abuse Tax (BEAT). It shows, for instance, that significant existing architecture in GILTI, FDII, and BEAT would be retained, making taxpayer compliance and administration simpler.
Most of what was discussed in the last article posted here were not modified, so our international tax attorneys outline below the key updates in the discussion draft:
The Committee proposes increasing the GILTI rate, which is currently set at just half the corporate tax rate. The low GILTI rate incentivizes multinational corporations to earn income abroad. By increasing this rate, the gap will shift between multinational corporate earnings and corporate earnings on businesses operating solely in the U.S. The new rate is still to be determined.
To end the incentive to offshore factories, the draft proposes repealing provisions that provide that global intangible low-taxed income is the excess of net controlled foreign corporations (CFC) tested income over the net deemed tangible income return. This has the effect of repealing the tax exemption for the ten percent deemed return on qualified business asset investment (QBAI) owned abroad.
Moreover, the proposal moves GILTI to a country-by-country system to reduce corporations shifting dollars to tax havens to avoid paying U.S. taxes. Through a high-tax exclusion approach, it keeps out income from countries where it is already taxed at a higher rate than GILTI, with the remaining low-tax countries subject to GILTI taxation. The discussion draft also provides the operational mechanics of the country-by-country high-tax exclusion system, including how to aggregate entities within a country using the “tested unit.
Lastly, the treatment of research and development expenses and headquarters’ costs would be adjusted to prevent companies from paying higher taxes under GILTI when they invest in the United States. Specifically, for purposes of determining the foreign tax credit limitation, expenses for research and experimentation and “stewardship” would be treated as 100 percent allocated to US source income if those activities are conducted in the US. Stewardship and research and experimentation activities performed outside the US would be treated as they are under current law.
The current system for FDII also creates an incentive for offshore factories and other assets. To end this, the Committee proposes its replacement with a new provision to reward current year innovation-spurring activities in the United States, like research and development. The current definition of deemed intangible income is replaced with “domestic innovation income.” Domestic innovation income is equal to the sum of [TBD] percent of qualified research and development expenditures plus [TBD] percent of qualified worker training expenses. To be an eligible expense in these categories, the expense must be for domestic activity. The draft also outlines the specific calculations for the new “domestic innovation income” concept. Lastly, the senators propose equalizing the FDII and GILTI rates.
To bring BEAT back to its true purpose of targeting base erosion, the Committee proposes restoring the total value of tax credits for domestic investment. To pay for this change, the proposal creates a higher, second tax bracket for income associated with base erosion; this raises revenue from the biggest base eroders and uses that revenue to support companies investing in the United States. The specific calculations for the new “base erosion income” concept are outlined in the draft.
In the August draft, the Senate Financial Committee starts to materialize its intention in repealing many of the rulings enacted by former President Trump’s 2017 tax law. By renewing these international tax procedures, corporations that have not made their fair tax payments contributing to the U.S. economy will be in the hot seat to adjust and pay what they owe. The money that this movement will generate can be put into the rotation to contribute to the economic recovery post-Covid-19 pandemic. Furthermore, these proposals focus on American workers and aim to reward corporations that work and invest continually in the United States.
Evolution Tax and Legal team are uniquely qualified to help you with your international tax plans and payments. Being dually certified in accounting and law allows us to understand the numbers and the policy and intricacies behind current international tax law. If you need help navigating the world of international tax, contact the team at Evolution Tax and Legal today.