Senate Finance Committee Chair Ron Wyden, D-Ore., and fellow committee members Sen. Sherrod Brown, D-Ohio, and Sen. Mark Warner, D-Va., released a draft bill
and section-by-section summary
on Aug. 25 providing key information regarding their proposed overhaul of the international tax regime.
The documents show how Senate Finance Committee Democrats envision reforming the current international tax regime as part of an upcoming reconciliation package.
The newly released proposals are largely in line with the earlier proposals contained in the less detailed “Overhauling International Taxation
” framework released in April 2021 by these same lawmakers. While there are meaningful differences in approaching the international law changes, the policy behind the proposals appears fundamentally aligned with the Biden administration’s plans.
The release of these documents follows the House passage of the Senate-passed budget resolution, which provides reconciliation instructions for spending and tax relief provisions that would be offset in part by corporate and individual tax increases. With the passage of the budget resolution, House and Senate committees can begin drafting reconciliation tax legislation. The budget resolution also set a non-binding deadline of Sept. 15 for committees to draft and report legislation, though passing this deadline in the Senate actually offers procedural advantages allowing the reconciliation bill to bypass committees. The more important date may be Sept. 27—the nonbinding deadline for the House to vote on a related infrastructure proposal. Democratic leadership is hoping to move the two bills together and use the bipartisan infrastructure bill as leverage to get moderate on board with the reconciliation bill.
While the new proposals from Wyden, Brown and Warner generally align with President Joe Biden’s tax proposals offered earlier this year, they do differ on certain key provisions. Wyden recently noted the documents represent “a starting point for conversations in the Democratic caucus on how to reform the international tax system,” and while there are significant new details, many important areas remain incomplete.
Notable proposals from the documents include:
- Enforcing a mandatory high-tax exclusion on a country-by-country basis for global intangible low-taxed income (GILTI). Notably, income that faces an effective rate that is greater than the “GILTI rate” would qualify as “high taxed” under the proposal.
- Enforcing a mandatory high-tax exclusion on a country-by-country basis for Subpart F, but only for income taxed at a rate higher than the proposed U.S. corporate rate. Under current law, certain Subpart F income items subject to tax at 18.9% or higher can be excluded.
- Eliminating the tax exemption for the deemed return from qualified business asset investment (QBAI).
- Amending the rules for allocating R&E and stewardship expenses where those activities are performed within the United States such that the amounts don’t reduce foreign-source income and the related foreign tax credits (FTC) for U.S. taxpayers.
- Updating the FTC rules to accommodate a country-by-country limitation, including accounting for timing issues like how losses in one year may impact the tax on income in a succeeding year.
- Re-evaluating whether, for GILTI purposes, creditable foreign taxes will be subject to the 20% “haircut” imposed by current law.
- Changing foreign-derived intangible income (FDII) to reward “deemed innovation income” through a deduction based on a certain percentage of specific domestic activity qualifying as R&E or qualified working training.
- Reducing the Section 250 deduction with the effect of increasing the rate of tax applicable to GILTI.
- Modifying the base erosion and anti-abuse tax (BEAT) system into a two-rate system with the addition of a second, higher rate applied to “base erosion income.”
- Allow domestic business credits under Section 38 in full when determining BEAT.
The documents leave absent notable provisions, including specifying a new GILTI tax rate—which Biden has previously proposed to double from the current rate of 10.5% to 21%. The proposal also fails to put forth any more details on proposed changes to the inversion rules, interest expense limitation rules, or Section 265 expense disallowance provisions. All three of these items were prominently featured in the Biden administration’s proposals released earlier this year.
Public comments are requested on the proposals by Sept. 3, 2021.
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