Senate Finance Democrats, Treasury Secretary Yellen call for international tax policy changes

In detail
Senate Finance Democrats’ Framework for “overhauling international taxation”

The Framework released today by Finance Chairman Wyden and Senators Brown and Warner outlines options for making changes to US international tax provisions enacted as part of the 2017 tax reform act (the 2017 Act). According to the Framework, "[t]he international tax system should focus on rewarding companies that invest in the U.S. and its workers, stop incentivizing corporations to shift jobs and investment abroad, and ensure that big corporations are paying their fair share."

The Framework provides high-level recommendations and options for addressing international tax provisions of the 2017 Act but does not provide detailed proposals or specific tax rates. The Framework notes some options that differ from the administration’s proposals and also addresses some specific concerns that were identified by Chairman Wyden during a March 25 Finance Committee hearing. For more on the Finance hearing, see our WNTS Insight.

Suggested changes to the global intangible low-taxed income (GILTI) tax system include:

• Repealing the deduction for qualified business asset investment (QBAI), as proposed by the Biden administration. The Framework describes QBAI as an “irrational incentive” to “earn tax-free income by putting tangible assets [such as factories, machinery, and buildings] abroad.”
• Increasing the GILTI rate. The Framework states that it is an open question whether the GILTI rate should equal the US corporate tax rate or remain at a lower proportion of the US rate (e.g., 75% as proposed by the Biden administration). According to the Framework, the GILTI rate should depend on corresponding decisions on other issues, including the US corporate rate and other international reforms. It also is noted that prior Democratic proposals have suggested taxing foreign earnings at a rate between 60% and 100% of the US corporate tax rate.

Note: For reference, after accounting for the 80-percent limit on foreign tax credits, the current 13.125% GILTI rate is 62.5% of the regular rate and is scheduled to increase to 78.125% of the regular rate after 2025.

• Moving GILTI to a country-by-country system. The Framework notes a country-by-country option with the use of separate foreign tax credit baskets for each country in which a company operates. A second option noted is to divide a company’s global income into two groups: low-tax and high-tax. It also is suggested that the Treasury Department could implement reforms in this area by revisiting guidance issued by the Trump administration and providing a “mandatory high-tax exception” to “target offshore tax haven abuse by multinational corporations.”
• Adding an incentive “to onshore research and management jobs.” The Framework suggests that “research and management expenses that actually occur in the US should be treated as entirely domestic source expenses, eliminating foreign tax credit penalties under GILTI and helping retain these activities in the US.”

Suggested changes to the foreign-derived intangible income (FDII) tax provision include:

• Repealing the “incentive to offshore factories” by eliminating current FDII QBAI rules that use the value of tangible assets like factories and buildings to reduce the potential FDII benefit. The Framework states that “just like GILTI, a company is better off under FDII if it moves its factories or puts new investment abroad.” Instead of repealing FDII entirely as proposed by the Biden administration, the Framework calls for this change as a first step towards improving the provision.
• Providing an FDII benefit to companies related to “deemed innovation income” that would be based on an amount of income equal to the share of “innovation-spurring activities that occur in the US, such as research and development and worker training.”

Observation: Companies will want to pay close attention to how innovation expenses are defined since that will determine whether these changes enhance or erode their current benefit. Calculating FDII based on a formula that considers the amount of R&D and worker training “innovation” expenses could negatively affect companies whose current FDII benefits are attributable to a broader definition of intangible income-generating activities.

• Equalizing the FDII and GILTI rates.

Suggested changes to the base erosion and anti-abuse tax (BEAT) provision include:

• Reforming the BEAT, rather than repealing it as proposed by the Biden administration. The Framework states that the BEAT should be modified to provide “full value to domestic business tax credits.” The Framework calls for increasing the BEAT rate on base erosion payments to make up for any improvements that cost revenue. “In combination with the restoration of value for domestic business credits, this increased tax on companies that are doing the most to erode the US tax base will be used to support companies that are investing in the US.”

As noted above, Chairman Wyden has requested that comments and feedback on international tax changes discussed in the Framework paper be sent to InternationalTax@finance.senate.gov no later than April 23.

Observation: Chairman Wyden’s request for comments by April 23 on potential international tax law changes highlights the fact that White House officials and Democratic Congressional leaders are preparing to move quickly this year on President Biden’s economic proposals.

The takeaway

Companies should be evaluating and modeling the potential effect of President Biden’s infrastructure and tax increase proposals as well as options for tax law changes being offered by key members of Congress. Companies should be communicating with policy makers about how specific proposals may affect their employees, job creation, and investments in the United States.  

For more information

For more on President Biden’s recent infrastructure and corporate tax increase proposals, see our WNTS Insight.

For the Framework paper released by Finance Chairman Wyden and Senators Brown and Warner, click here.