Senate Finance Committee Chairman Ron Wyden (D-OR) and Finance Members Sherrod Brown (D-OH) and Senator Mark Warner (D-VA) today released discussion draft legislation (the ‘Discussion Draft’) and a six-page, section-by-section staff description (the ‘Description’) on international tax reform proposals. The Discussion Draft builds on concepts set forth in a framework outline of proposals for overhauling international taxation that was released by Chairman Wyden, Senator Brown and Senator Warner on April 5, 2021.
The Discussion Draft and the Description provide additional insight into how Chairman Wyden and Finance Committee Democrats may propose to change current international tax provisions related to global intangible low-taxed income (GILTI), foreign-derived intangible income (FDII), the base erosion and anti-abuse tax (BEAT), and subpart F in general. Public comments are requested by September 3, 2021.
Chairman Wyden’s release of the Discussion Draft follows House approval on August 24 of a Senate-passed budget resolution that provides reconciliation instructions for spending and tax relief provisions that would be offset in part by corporate and individual tax increases. With passage of the budget resolution, House and Senate committees, including the House Ways and Means and Senate Finance Committees, can begin drafting reconciliation legislation. The budget resolution sets a non-binding deadline of September 15 for committees to draft and report legislation for further action in the House and Senate.
Action item: The House and Senate tax committees are preparing to act on legislation that likely would increase corporate and individual tax rates and make significant changes to current international tax rules, along with other changes to current tax law. Stakeholders should continue to communicate with policy makers on the potential effects of tax increase proposals on their employees, job creation, and investments in the United States and abroad.
Senate Finance Chairman Wyden is preparing for action on a reconciliation bill in his committee with today’s release of the Discussion Draft. Recent approval by both the House and Senate of an FY 2022 budget resolution with reconciliation instructions provides the procedural protections needed to enact a significant spending and tax bill with only Democratic votes over the expected opposition of Congressional Republicans.
Observation: While the budget resolution sets a non-binding deadline of September 15 for the House and Senate committees to report legislation for further action in both chambers, it is unclear whether the Ways and Means Committee and the Finance Committee, will be able to report legislation acceptable to both moderate and progressive Democrats in both chambers in such a short period of time.
The Discussion Draft released today by Finance Chairman Wyden generally aligns with several of the international tax proposals offered earlier this year by President Biden to pay for a variety of spending priorities, but meaningfully differs from the administration’s approach on some specific provisions. In a press release, Chairman Wyden described the Discussion Draft as a starting point for conversations in the Democratic caucus on how to reform the international tax system and noted that additional international tax policies are also under consideration.
Chairman Wyden has stated that decisions on rates and overall revenue to be raised will be made by the full Democratic caucus. For example, the Discussion Draft does not specify a new GILTI tax rate, which President Biden has proposed to increase to 21% along with his proposal to increase the US corporate tax rate to 28%. The April 5 Framework stated that it was 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). The Framework noted that prior Democratic proposals had suggested taxing foreign earnings at a rate between 60% and 100% of the US corporate tax rate.
Observation: It is not yet clear how the effective tax rate will be calculated as the Discussion Draft does not state a specific formula. Under current rules, the formula would be the tested unit's after-haircut percentage of allocable taxes, divided by the tested unit's tested income grossed up for the numerator. However, the effective tax rate could be calculated by taking the after-haircut percentage of allocable taxes and dividing it by the local country's pre-tax taxable income; or the after-haircut percentage of allocable taxes could be divided by the tested unit's tested income less allocable shareholder expenses, grossed up for the numerator. Moreover, the effective tax rate calculation could take into account prior-year losses, measured under US tax principles or local tax principles, or could be determined as an average over a period of time.
The Discussion Draft would make significant changes to the FTC system by:
Observation: The Discussion Draft contains no provision related to interest expense, indicating interest would continue to be allocated and apportioned as under current law.
The Discussion Draft includes several amendments to the FDII regime, including some name changes. The Discussion Draft would propose to:
Observation: The Discussion Draft does not provide an effective date for the amendments to be made to the Section 250 deduction and the FDII regime.
The Discussion Draft would retain the BEAT (instead of repealing it in favor of the Stopping Harmful Inversions and Ending Low-Tax Developments (SHIELD), as proposed in President Biden’s proposals), with important changes:
The amendments made to Section 59A would apply to tax years beginning after the enactment date of the proposals in the Discussion Draft.
Observation: As noted above, the drafters continue to consider the best way to incorporate the Biden Administration's SHIELD proposal; however, the Biden Administration’s proposal would have a delayed effective date, as opposed to the immediate effective date set forth in the Discussion Draft, because several important details on the application of SHIELD are not known. For example, it is unclear how broadly 'payment' would be defined in this context.