Tax reform proposals could significantly impact US international tax rules

Overview

Today the Senate Budget Committee approved the Senate version of the ‘Tax Cuts and Jobs Act’ by a 12 to 11 vote. This sets up full Senate review of the approved bill, and the Senate could vote on the bill later this week.

The Senate Finance bill’s international tax provisions are generally similar to the House bill regarding the transition to a new territorial tax regime, the imposition of a ‘toll tax,’ the elimination of the indirect foreign tax credit, the modification of the current subpart F anti-deferral provisions and rules regarding sourcing income from export sales of inventory, and the repeal of provisions related to investments in US property under Section 956.

The Senate Finance bill, however, significantly differs from the House bill due to the introduction of a new tax on ‘global intangible low-taxed income’ and a minimum ‘base erosion and anti-abuse tax’ imposed on certain payments by a US corporation to a foreign related entity.

With a few key exceptions, the Senate Finance bill’s provisions would generally impact both US and foreign corporations in tax years ending after 2017.

The takeaway

The Senate Finance bill would significantly change many fundamental aspects of US international taxation. Recapping some of the important highlights of the Senate Finance bill:

• The bill provides for a 100-percent DRD for foreign-source dividends from specified 10-percent owned foreign corporations.
• Imposes a one-time ‘toll tax’ on pre-effective date foreign E&P taxed at 10 percent on cash and cash equivalents
• and 5 percent on all other E&P.
• Makes permanent the CFC look-through provision under Section 954(c)(6).
• Expands the stock attribution rule for purposes of determining whether a foreign corporation is treated as a CFC.
• Adds a new GILTI income inclusion for US shareholders.
• Adds a BEAT tax related to certain deductible intercompany payments.
• Adds a deduction for US taxpayers for a portion of the income considered to be derived from the sale of property to a foreign person for use outside the United States, and services rendered for any person, or with respect to property, located outside the United States.
• Imposes new rules related to limiting interest expense deduction.

Some of these changes could impose significant additional burdens on both US and foreign taxpayers. Companies should endeavor to understand the proposals as the bill could quickly become the template for tax reform in Congress. Taxpayers should also consider participating in the legislative process by commenting on specific proposals that might affect their business and industry.