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August 29, 2021

Discussion draft released by Senators Wyden, Brown, Warner proposes significant changes to current international tax rules

On August 25, 2021, Senate Finance Committee Chairman Ron Wyden (D-OR), along with Senators Sherrod Brown (D-OH) and Mark Warner (D-VA), issued a discussion draft of legislative text (Discussion Draft) detailing their previously released April 2021 international tax framework, which would amend the current rules on global intangible low-taxed income (GILTI), foreign-derived intangible income (FDII), the Base Erosion and Anti-Abuse Tax (BEAT), and other rules.

As discussed in more detail below, while many practical and policy details remain to be determined, the Discussion Draft proposals, if enacted would:

  1. Establish a mandatory country-by-country high-tax exclusion (HTE) system for GILTI, subpart F, and foreign branch income
  2. Potentially extend the foreign tax credit haircut (currently applicable in the GILTI context) to the subpart F and foreign branch income contexts
  3. Require certain research and experimentation (R&E) and stewardship expenses to be allocated to US-source income
  4. Modify the rules for determining BEAT liability such that certain "base erosion income" would be subject to a different, and higher, rate
  5. Leave open the possibility that certain (currently undefined) modifications to BEAT may be made to incorporate the purposes and policies of the Biden Administration's Stopping Harmful Inversions and Ending Low-Tax Developments (SHIELD) proposal
  6. Base the FDII regime on certain domestic innovation expenditures

The provisions are generally proposed to be effective for tax years beginning after the date of enactment with the notable exception of the modifications to FDII, for which no proposed effective date is provided. The senators requested comments on the draft by September 3.


1. Background

A US shareholder's GILTI inclusion is an aggregate amount derived from its pro rata share of certain items, including tested income and tested losses and a specified portion of the tangible assets of a controlled foreign corporation (CFC) (i.e., qualified business asset investment or QBAI). The determination of a US shareholder's pro rata share of each CFC's tested income and loss does not take into account the jurisdiction in which the relevant income (or loss) is earned (or incurred), thus permitting a tested loss of a CFC in one country to offset the tested income of a CFC in a different country.

Under the current rules, a credit for foreign tax credits is available to offset the US tax liability attributable to GILTI, except for a 20% haircut on deemed-paid credits under Internal Revenue Code (IRC) Section 960(d). Further, the current GILTI HTE regulations permit taxpayers to elect to exclude from a CFC's gross tested income any items subject to an effective foreign tax rate (ETR) that is greater than 90% of the highest corporate income tax rate (i.e., 18.9% based on the current 21% corporate tax rate). In determining eligibility for this election, taxpayers apply this exception at the level of each "tested unit" of a CFC.

2. Country-by-country GILTI on low-tax income

In a major but long-expected shift, the Discussion Draft would compute GILTI on a country-by-country basis that applies solely to low-tax tested income. Accordingly, IRC Section 951A would be retitled "Country-by-country global inclusion of low-tax income" (and thus still be referred to as "GILTI").

a. QBAI eliminated

The Discussion Draft would repeal the tax exemption currently available for the 10% deemed return on QBAI. As a result, a US shareholder's income inclusion under IRC Section 951A would equal net CFC tested income. The stated purpose of this change is to remove an incentive for offshore investment, but the practical impact would be that the full amount of net CFC tested income would be subject to tax under IRC Section 951A.

b. IRC Section 250 deduction lowered

The Discussion Draft would lower the IRC Section 250 deduction percentage to an unspecified amount, effectively increasing the US ETR on GILTI inclusions. As is true of many of the percentages and other amounts that the Discussion Draft does not resolve, revenue needs are likely to play a significant role in the determination of the final deduction.

c. High-tax tested income excluded

The tested income included by a US shareholder would not include high-tax tested income, which would be defined as tested income subject to an ETR greater than the effective US rate that would apply to such income if it were included under IRC Section 951A (taking into account the modified IRC Section 250 deduction). The ETR would take into account the foreign taxes paid by the tested unit after any "haircut" applied to associated credits.

For example, assume the tested income of a tested unit was subject to foreign income tax at a rate of 30%. If the top US corporate rate were 28%, and the IRC Section 250 deduction percentage were lowered to 25%, then the effective GILTI rate would be 21% (28% x 75%). If the required IRC Section 960(d) haircut for foreign income taxes properly attributable to tested income were 20%, then the ETR of the tested income after the haircut would be 24% (30% x 80%). Because the ETR of the tested unit (24%) exceeds the effective GILTI rate (21%), the tested income of the tested unit would be considered high-taxed and thus excluded from net tested income and GILTI. Moreover, no credit or deduction would be allowed for the taxes properly attributable to the excluded income.

The ETR would be determined at the tested unit level. The tested unit definition is based on the current GILTI high-tax exclusion's tested-unit definition. Specifically, with respect to a CFC, "tested unit" means (i) the CFC itself, (ii) a CFC's interest in a pass-through entity that is a tax resident of a foreign country (and certain non-taxed branches), and (iii) a branch of the CFC that gives rise to a taxable presence in the country where the branch is located. The Treasury Department would be authorized to issue regulations to address, among other things, branches of a CFC that are not subject to tax in the country where they are located.

Like the existing GILTI high-tax exclusion, same-country tested units within a CFC would be treated as a single tested unit. Unlike the current GILTI high-tax exclusion, all tested units held by CFCs within an expanded affiliated group (EAG) would then also be combined. Thus, with respect to an EAG, all CFC tested income in a single country would be combined and used to compute to a single ETR for that country. An expanded affiliated group, for this purpose, is defined by reference to an affiliated group under IRC Section 1504(a), but by determining ownership using a 50% threshold in lieu of an 80% threshold, and without exclusions for foreign corporations and insurance companies. In conjunction with IRC Section 958(b)(4) repeal, this definition would appear to have odd, and possibly unintended, results for foreign-parented multinationals. For example, all tested units of foreign subsidiaries held by a foreign parent — even those without a direct or indirect US shareholder — would appear be taken into account. But the foreign parent itself would often not be taken into account, because it would typically not be treated as a CFC under IRC Section 958(a). This selective blending of foreign tested units with no connection to the United States would not appear to be supported by any policy underlying the proposed changes to the GILTI regime and is likely unintended.

The combination of same-country tested units across CFCs whose tested units form part of the same EAG would reduce distortions of ETRs calculated for tested units residing in different CFCs that are part of the same foreign consolidated group, especially when at least one tested unit has a loss and the foreign consolidated group has an overall profit.

For example, assume a foreign consolidated group in Country A consists of CFC1 and CFC2, each of which is a tested unit before applying the aggregation rules. Assume CFC1 has pre-tax net income of $100x and CFC2 has a pre-tax loss of $40x. The Country A consolidated income of $60x is subject to a statutory tax rate of 30%, resulting in Country A tax of $18x. Under Treas. Reg. Section 1.901-2(f)(3), the $18x of tax is allocated entirely to the profitable entity (CFC1). Combining same-country tested units only within the same CFC for purposes of determining the applicability of the HTE, CFC1 (a separate tested unit) would have an ETR of only 18% (i.e., 18x/100x). On the other hand, if the same-country tested units were combined across all CFCs (as proposed in the Discussion Draft), the combined tested unit would have a 30% ETR, and thus would accurately reflect the high tax rate that is actually applied to the group's combined income.

d. Treatment of tested losses

Citing a concern that losses from typically high-tax countries may, under certain circumstances, offset income from low-tax countries and undermine the objectives of the country-by-country system, the Discussion Draft would prevent tested losses from one country from offsetting tested income in another country. Specifically, gross income of a (combined) tested unit with a tested loss would be deemed to be high-tax tested income; as a result, a net tested loss attributable to a combined tested unit from a country would be excluded from tested income and unavailable to reduce tested income inclusions of a tested unit in another country.

For example, assume a CFC organized in Country A (CFC1) had gross tested income of $5x and no deductions, and another CFC organized in Country A (CFC2) had gross tested income of $10x and allocable deductions of $20x. Under the tested unit aggregation rules, the Country A tested unit would have a $5x tested loss (=[$5x + $10x] - $20x). The Discussion Draft would effectively eliminate the Country A tested unit's net tested loss by treating the combined Country A tested unit's gross income as high-tax tested income (whether or not foreign tax was imposed on the gross income), and excluding it from tested income. Related deductions giving rise to a tested loss for CFC2 would not be allocable to tested income, preventing the net tested loss from offsetting tested income generated in any other country and by any other member of the EAG.

e. Timing issues

The Discussion Draft includes a placeholder for addressing timing issues. A section-by-section summary accompanying the Discussion Draft acknowledges that special rules would be required to address timing issues that may arise when implementing the country-by-country HTE approach to GILTI. It appears that such rules are still under consideration as the drafters consider how best to address these issues while preventing losses and foreign taxes from one country from offsetting income of another in the GILTI regime.

Under the current GILTI regime, excess GILTI credits and net tested losses cannot be carried forward. As a result, mismatches between US and foreign law often create situations in which taxpayers incur income in one year and unusable losses or credits in another year. The Discussion Draft would greatly exacerbate this problem, as tested losses would offset tested income only within the same country, and taxpayers generally would no longer have excess credits in the GILTI category.

For example, a CFC located in Country A may accrue a $100x deduction under the tax law of Country A in 2022, and that deduction would offset all $100x of its Country A taxable income. Assume further that the same deduction accrues in 2023 for US federal income tax purposes and offsets $100x of tested income in that year. For both US and foreign tax purposes, a $100x of net income arises over the course of two years. But, the lack of foreign tax credit carrybacks to offset tested income means that the CFC's US shareholders will include the $100x of tested income in income in 2022, and be unable to claim a credit for foreign tax accruing in 2023. Similar timing mismatches arise for losses. This problem could be mitigated if foreign taxes paid on tested income and tested losses could be carried back and carried forward, although it remains to be seen whether or how any future legislation will address this problem.

3. Treatment of foreign taxes paid

As would be expected, foreign taxes properly attributable to high-tax tested income would not be creditable or deductible because that income is not subject to US tax. However, taxes paid on tested income that is subject to a low rate of tax would be allocated to that tested income, and therefore creditable or deductible (unless "haircut" or otherwise limited). The exclusion of high-tax income would largely eliminate excess credits, leaving many taxpayers that currently have excess credits in a particular category with significant residual US tax liability.

In the case of tested losses, this loss aggregation rule would also impact associated taxes. That is, the taxes associated with tested losses would only be creditable (or deductible) if the loss arises in a country with overall positive income after applying the aggregation rules. Thus, in the above example, if both CFC1 and CFC2 have paid taxes in Country A, the taxes of both are creditable and taken into account when determining whether the ETR test has been met. Moreover, taxes generated by both entities are potentially available as FTCs (notwithstanding that one of the CFCs was in a tested-loss position).

The IRC Section 960(d) haircut on available FTCs, if any, is yet to be determined; the Discussion Draft clarifies that such a haircut, if included, would not exceed 20%. Further, a similar haircut would apply when calculating the ETR to determine whether the GILTI rate is exceeded, thus qualifying for the HTE. The haircut would apply prior to calculation of the ETR such that a local country ETR that may otherwise exist for a given tested unit would effectively be lower once the haircut is taken into account and, only thereafter, would a comparison be made to the GILTI rate to assess qualification for the HTE.

Subsidiaries of foreign-parented multinational corporations could claim deemed paid credits for taxes paid by a global parent company to the extent that those taxes (i) are not creditable in another jurisdiction, and (ii) were properly attributable to amounts taken into account when determining tested income or tested loss of a CFC owned directly or indirectly by the foreign parent. The summary accompanying the Discussion Draft suggests that this rule is meant to give priority to ultimate-parent countries, which are assumed to also have rules aimed at implementing minimum tax systems. It appears, however, that this credit will only be available when regulations are issued, rather than upon enactment, potentially signaling that such credits would be contingent on future developments with the OECD/G20 Inclusive Framework on BEPS (See Tax Alert 2021-1308).

4. Compliance and reporting

The Discussion Draft would require reporting of gross tested income, deductions and ETR for each tested unit for purposes of IRC Section 951A. As noted previously, the EAG for this purpose may include CFCs without an IRC Section 958(a) shareholder. Requiring this information for those tested units could result in a substantial compliance effort not currently being undertaken.


The Discussion Draft would update various subpart F mechanics to more closely align with the modified GILTI rules discussed previously. According to the summary accompanying the Discussion Draft, the only substantial differences between the GILTI HTE and the subpart F HTE after the modifications would be (i) the type of income to which each exclusion applies, and (ii) the applicable US tax rate.

The current elective subpart F high-tax exception would be replaced with a mandatory exclusion of high-tax income. Under current law, any items of foreign base company income subject to foreign tax at a rate greater than 90% of the US rate can be electively excluded from subpart F on an item-by-item basis. Under the Discussion Draft, foreign base company income with an ETR that exceeds the highest US rate would be mandatorily excluded from subpart F and tested income. Any foreign income taxes attributable to excluded high-tax income would not be allowed as a credit or deduction.

In determining the ETR of subpart F income, the tested unit and aggregation rules described previously would apply. Specifically, the ETR of subpart F income would be computed on a tested-unit-by-tested-unit basis. A tested unit would aggregate all the foreign base company income of CFCs that are within an EAG and located within a single country. To prevent cross-crediting, the ETR would be computed separately for foreign base company income in the general and passive categories.

As with GILTI, foreign taxes properly attributable to subpart F income would be haircut by a to-be-determined percentage (the Discussion Draft suggests a range of zero to 20%). This haircut would apply both for purposes of determining the ETR and the amounts deemed paid and potentially creditable. The summary accompanying the Discussion Draft suggests that the foreign-tax-credit haircut applied to subpart F and GILTI may differ. This seems only appropriate given subpart F does not enjoy an IRC Section 250 deduction while GILTI does (i.e., it is not clear from a policy perspective why subpart F ought to be subject to a foreign-tax-credit haircut if the income is subject to US tax without an offsetting IRC Section 250 deduction).

If the subpart F income of a combined tested unit were a net loss, the underlying gross income would be treated as high-tax income; as such, that income — and the related loss — would be excluded from both subpart F and tested income. Moreover, no credit or deduction would be allowed for any taxes attributable to these excluded losses.


Through the creation of a new IRC Section 139J, the Discussion Draft proposes to extend the HTE rules to income of foreign branches. High-tax foreign branch income of a US corporation would be exempt from tax, and no credit or deduction would be allowed for foreign income taxes attributable to the exempt income.

Foreign branch income would be considered high-taxed if it were subject to an ETR that exceeded the highest US rate. As with GILTI and subpart F, aggregation rules would apply, meaning all foreign branches of US corporations within an EAG would be aggregated on a country-by-country basis for purposes of determining the ETR of foreign branches in each country.

The definition of a foreign branch would be modified, both for purposes of the new high-tax exclusion and determining foreign branch category income for foreign tax credit purposes. Currently, foreign branch category income means the business profits of a US person attributable to one or more qualified business units (QBU). The Discussion Draft would remove the QBU requirement, and instead define a foreign branch as activities carried on by the taxpayer that (i) are not a tested unit of a CFC, and (ii) give rise to a taxable presence under the laws of the foreign country in which the branch is located. As a result, foreign disregarded entities with no trade or business would generally give rise to a foreign branch, in contrast to the current-law requirement that the entity conduct a foreign trade or business.

For ETR purposes, the net income of a foreign branch would be determined by reducing the branch gross income by "deductions (other than taxes) properly allocable to such income (under regulations prescribed by the Secretary)." For these purposes, it is unclear whether these deductions would include expenses of the US taxpayer incurred outside the foreign branch that would otherwise be allocatable to foreign branch category income for foreign tax credit purposes (such as R&E or interest expense). Consistent with the proposed GILTI and subpart F rules, foreign income taxes attributable to a foreign branch would be subject to a yet-to-be-determined haircut of zero to 20%, both for purposes of determining the foreign branch ETR and determining the amount of creditable taxes.

Unlike the proposed GILTI and subpart F high-tax exclusions, foreign branch losses would not be deemed high-tax and would not be exempt from taxable income. Foreign income taxes of a foreign branch with losses (determined by country and after aggregation rules) would not, however, be allowed as a foreign tax credit.

For example, assume USP, a domestic corporation, has two foreign branches in Country A, FDRE1 and FDRE2. FDRE1 has taxable income of $100x and pays $10x of foreign tax, while FDRE2 has a loss of $150x. After aggregation, the Country A foreign branch is in a net loss. The net loss would not be excluded or exempt from US taxable income, but the $10x of foreign tax paid by FDRE1 would be ineligible for a foreign tax credit. The result appears to be the same even if FDRE1 and FDRE2 were foreign branches of two different domestic corporations in separate US consolidated groups, provided they are part of the same EAG.


The Discussion Draft would modify the foreign tax credit limitation rules for the allocation and apportionment of certain R&E and stewardship expenses. To the extend R&E and stewardship activities were conducted within the US, the associated deductions would be allocated entirely to US-source income. Expenses for R&E and stewardship activities performed outside the US would be allocated and apportioned as they are under current law. This change would generally be taxpayer-favorable, as an allocation of deductions to US-source income (and thus away from foreign-source income) generally increases a taxpayer's foreign tax credit limitation. It appears this change applies solely for purposes of the foreign tax credit limitation, and not for other computations such as FDII.


The Discussion Draft would significantly increase US shareholders' residual liability on their foreign-taxed earnings. Taxpayers' ability to blend high- and low-tax foreign-source earnings would largely be eliminated, leaving US shareholders with higher residual liability on foreign earnings that are included in their income. Both the future domestic corporate rate and the effective rate on tested income remain unclear, but the higher each rate is set, the greater the increase to residual liability on foreign earnings. Moreover, the potential for significant and expanded haircuts on foreign taxes paid and deemed paid is, in fact, a potential for double tax on the same foreign income. Finally, by conforming the Subpart F rules to GILTI and adopting a high-tax exclusion for foreign branch income, the Discussion Draft would materially limit taxpayers' ability to restructure in ways that would more efficiently utilize their foreign attributes.

As was the case when the international tax rules were significantly revised in 2017, the framework set forth in the Discussion Draft would raise numerous novel questions and interact with various provisions outside of the subpart F, GILTI and foreign tax credit regimes, including IRC Sections 163(j), 245A, 267(a) and other provisions. For example, the exclusion of high-tax tested income and subpart F income would significantly increase the amount of "untaxed" earnings and profits held in CFCs, increasing the importance of determining the eligibility of those earnings and profits for the IRC Section 245A dividends-received deduction and the potential for lost credits when those earnings and profits are subject to foreign withholding taxes upon repatriation. Any number of provisions dependent on the existing international framework may be implicated, such that taxpayers should consider how these changes may impact their unique circumstances.


1. Background

Currently, IRC Section 59A(b) defines a "base erosion minimum tax amount" as the excess (if any) of 10% of "modified taxable income" over an adjusted regular tax liability amount for the tax year. The adjusted regular tax liability amount generally applies to the taxpayer's regular tax liability amount reduced (but not below zero) by all credits (including foreign tax credits) other than the research credit and 80% of certain other IRC Section 38 credits. Under IRC Section 59A(b)(2), the BEAT rate increases to 12.5% for tax years beginning after December 31, 2025. Under IRC Section 59A(b)(3), the BEAT rate is higher by one percentage point for applicable taxpayers that are banks (as defined in IRC Section 581) or registered securities dealers.

An applicable taxpayer's modified taxable income equals its taxable income for the year, determined without regard to (i) any deductions allowed (or certain reductions to gross receipts) (a base erosion tax benefit) with respect to a "base erosion payment," and (ii) the base erosion percentage of any net operating loss deduction allowed under IRC Section 172. Base erosion payments include (i) any amount paid or accrued by the taxpayer to a "foreign related party" and for which a deduction is allowed; and (ii) any amount paid or accrued by the taxpayer to a foreign related party in connection with the acquisition of depreciable (or amortizable) property.

2. Discussion Draft changes to BEAT

The Discussion Draft would modify the definition of a "base erosion minimum tax amount," so that it would equal the excess (if any) of "base erosion tax liability" over an adjusted regular tax liability for the tax year. Under the new formula, the adjusted regular tax liability amount would equal the applicable taxpayer's regular tax liability amount reduced (but not below zero) by all credits other than IRC Section 38 credits. In other words, for purposes of calculating the base erosion minimum tax amount, the regular tax liability would not be reduced by any business credits allowed under IRC Section 38, which would reduce the extent to which the BEAT diminishes those credits' value.

For purposes of this formula, the "base erosion tax liability" would equal the sum of 10% of the taxpayer's taxable income plus a yet-to-be-defined percentage of the taxpayer's "base erosion income." The summary accompanying the Discussion Draft indicates the undefined percentage will be higher than 10% (and higher than 12.5% for tax years beginning after December 31, 2025). If shown in an equation, base erosion tax liability would be:

(10% x regular taxable income) + (TBD% x base erosion income)

The Discussion Draft would define "base erosion income" as the excess of modified taxable income over taxable income. The definition of "modified taxable income" (as well as definitions of "base erosion payment," "applicable taxpayer" and "foreign related party") would remain the same.

Consistent with current IRC Section 59A(b)(2), the rate applicable to modified taxable income would increase from 10% to 12.5% for tax years beginning after December 31, 2025. The rate applicable to the new category of base erosion income would also increase as of that date, but the Discussion Draft does not specify the increased rate.

Under the Discussion Draft, the rates would be higher for applicable taxpayers that are registered securities dealers or financial institutions (described in IRC Section 582(c)(2)). Therefore, the Discussion Draft would impose higher rates not only on banks and registered securities dealers, as in the current IRC Section 59A(b)(3), but also on other financial institutions described in IRC Section 582(c)(2) (i.e., any corporation that would be a bank except for the fact it is a foreign corporation, any financial institution referenced in IRC Section 591, any small-business investment company operating under the Small Business Investment Act of 1958, and any "business development corporation").

3. Implications of BEAT changes

The Discussion Draft follows the original framework's proposal to give domestic business credits under IRC Section 38 full value, establishes a second higher-rate bracket applicable to a new category of base erosion income, and would impose higher BEAT rates on income of certain financial institutions that are not currently subject to higher BEAT rates. Although the original framework signaled a concern with how BEAT addresses foreign tax credits, the Discussion Draft does not address this issue. The Discussion Draft also leaves open the rate that would apply to base erosion income. Finally, the accompanying summary indicates that the drafters are still considering how to incorporate the concepts of SHIELD into the BEAT (without specifying which concepts).


1. Background

Under current law, IRC Section 250 generally allows a domestic corporation to deduct an amount equal to the sum of (i) 37.5% of the corporation's FDII and (ii) 50% of the corporation's GILTI inclusion amount (and any corresponding gross-up under IRC Section 78).

A domestic corporation currently determines its FDII in a tax year under a formula. The corporation derives its gross deduction eligible income (gross DEI) for the year by calculating the sum of certain items of gross income. Reducing gross DEI by allocable deductions yields the corporation's DEI. The corporation's deemed intangible income is calculated by reducing DEI by an amount determined by reference to the corporation's domestic QBAI. The corporation's FDII is the amount that bears the same ratio to deemed intangible income as the foreign-derived ratio. That ratio is the ratio of (i) the foreign-derived portion of the corporation's DEI to (ii) its DEI. The Treasury Department promulgated final regulations in July 2020 that, among other things, clarify how a domestic corporation identifies items of gross DEI that are foreign-derived.

2. Discussion Draft changes to FDII

The Discussion Draft would amend IRC Section 250, both to adjust the percentages used to calculate the IRC Section 250 deduction and to modify substantially the formula by which FDII is determined.

First, different percentages for FDII and GILTI would no longer apply to calculate the IRC Section 250 deduction. Instead, amended IRC Section 250 would specify a single percentage (presently not stipulated) that would apply equally to FDII and net CFC tested income (the successor to GILTI under amended IRC Section 951A).

Second, certain components in the current FDII formula would be replaced or eliminated. (FDII would be renamed foreign-derived innovation income.) The foreign-derived ratio would remain the same as under current law. FDII, however, would be the amount that bears the same ratio to a newly defined amount, the corporation's domestic innovation income, as the foreign-derived ratio. Domestic innovation income would be the lesser of (i) the corporation's DEI and (ii) a percentage (unspecified) of the sum of its qualified R&E expenditures and its qualified training expenditures, provided, in each case, that they are attributable to activities conducted in the United States. Qualified R&E expenditures generally would be expenditures eligible to be deducted under IRC Section 174. Qualified training expenditures generally would be expenditures for certain training provided to an employee whose remuneration from the corporation for the tax year does not exceed $82,000 (as adjusted for inflation).

Unlike the proposed effective date for the Discussion Draft's other amendments — tax years beginning after the date of enactment — the Discussion Draft leaves unspecified the effective date for the amendments to IRC Section 250.

In summary, the Discussion Draft's amendments to IRC Section 250 would have the following effects:

  • The portion of a domestic corporation's IRC Section 250 deduction attributable to its FDII would be calculated using the same percentage as would apply to calculate the portion of the deduction attributable to its net CFC tested income (the successor to GILTI).
  • A domestic corporation's FDII might be limited by the amount of certain qualified domestic expenditures, not merely by the amount of its DEI.
  • Consistent with the amendments to IRC Section 951A, QBAI would no longer be relevant for purposes of calculating FDII.
  • The final regulations promulgated in July 2020 apparently would apply insofar as they pertain to identifying foreign-derived items of gross DEI.

VIII. Overall implications

The Discussion Draft provides important details and the first draft of actual legislative text for potential changes to the international tax system proposed by Chairman Wyden and other Democrats on the Senate Finance Committee. With the short comment period for the discussion draft closing on September 3, companies wishing to comment will need to do so quickly. Beyond the comment period, companies will need to understand the impact of these provisions — including by modeling — to prepare for the potential changes to the international tax system and make sure that Congress understands the impact during the legislative process.


Contact Information
For additional information concerning this Alert, please contact:
International Tax and Transaction Services
   • Jeff Michalak, Detroit (
   • Craig Hillier, Boston (
   • Barbara Angus, Washington, DC (
   • Marjorie Rollinson, Washington, DC (
   • Colleen O’Neill, Washington, DC (
   • Martin Milner, Washington, DC (
   • Raymond Stahl, Washington, DC (
   • Arlene Fitzpatrick, Washington DC (
   • Julia Tonkovich, Washington, DC (
   • Zach Pouga Tinhaga, New York (
   • Allen Stenger, Washington, DC (
   • Jeshua Wright, Washington, DC (
   • Tanza Olyfveldt, Washington, DC (
   • Deborah Tarwasokono, Washington, DC (
   • Anna Moss, Washington, DC (