September 19, 2021
U.S. International Tax This Week for September 17
Ernst & Young's U.S. International Tax This Week newsletter for the week ending September 17 is now available. Prepared by Ernst & Young's International Tax Services group, this weekly update summarizes important news, cases, and other developments in international taxation.
House Ways & Means Committee Chairman Richard Neal on 13 September released tax increase proposals to partially fund the Democratic-sponsored $3.5 trillion Build Back budget reconciliation bill. Several of the proposed provisions are consistent with the earlier proposals included in the Biden Administration’s FY 2022 Budget (the “Green Book”). There are, however, several important differences between this proposal and that previous proposal, particularly with respect to tax rates imposed on certain types of income and also many significant changes in the international tax area (e.g., interest limitation rules, foreign-derived intangible income (FDII) and the Base Erosion and Anti-Abuse Tax (BEAT)).
Later in the week, the Ways & Means Committee completed two days of markups of the tax and drug pricing portion of the reconciliation bill and approved the tax title on 15 September. There was significant debate over the international tax changes, but Republican amendments to block a proposed global intangible low-taxed income (GILTI) tax increase and a reduction in the FDII deduction were defeated (provisions discussed below). No amendments were approved to the committee’s original international proposals released at the beginning of the week.
The Ways & Means proposal contains significant changes to the rules for GILTI, foreign tax credits (FTCs) and the BEAT. The committee proposal also contains many additional international tax provisions with far-reaching implications. With many important exceptions, these provisions would be effective for tax years beginning after 31 December 2021.
Among the proposed tax changes is an increase in the corporate tax rate to 26.5% and an increase in the GILTI rate. The committee’s proposal would lower the IRC Section 250 deduction percentage for GILTI from 50% to 37.5%. When combined with the proposed corporate tax rate of 26.5%, the resulting effective rate on GILTI would be 16.5625% and calculated on a country-by-country basis. Similarly, the IRC Section 250 deduction percentage for FDII would decrease from 37.5% to 21.875%, yielding an effective FDII rate of 20.7%. The rate changes would generally apply to tax years beginning after 31 December 2021, with special transition rules for fiscal-year taxpayers.
The committee proposal would determine a US shareholder's FTC limitation for all baskets on a country-by-country basis, thus preventing excess FTCs from higher-tax jurisdictions from being credited against income from lower-tax jurisdictions. The proposal would also repeal the separate limitation category for foreign branch income. The current 20% haircut under IRC Section 960(d) for foreign taxes attributable to GILTI inclusions would decrease to 5%.
The Ways & Means proposal would also significantly modify IRC Section 59A, while retaining its general framework. The proposal would increase the BEAT rate from 10% to 12.5% for tax years beginning after 31 December 2023, and before 1 January 2026; for tax years beginning after 31 December 2025, the rate would increase from 12.5% to 15%.
See EY Tax Alert 2021-9019 for an overview of the committee’s international proposals.
In terms of process, the Ways & Means bill is to be combined with reconciliation pieces from other House committees by the Budget Committee, likely next week, but plans for floor consideration have not been announced. Discussions among Democratic leaders in the House and Senate are expected over the coming weeks to determine what Democratic moderates in the Senate can support. It is therefore possible that significant changes could be made to what the committees are sending to the Budget Committee, but those will not likely come until the bill is considered by the Rules Committee, prior to being brought to the House floor.
An Internal Revenue Service official in the Large Business and International (LB&I) division this week said they are seeing a significant increase in mutual agreement cases that are over $1 billion, a trend that has magnified the challenges associated with complex case resolution. The official was quoted as saying that such large mutual agreement procedure (MAP) cases are “really difficult to handle in the dispute resolution setting” and LB&I is considering how to prevent such cases from getting into the MAP inventory.
US international tax reform: Update on recent developments (September 20)
Significant international tax changes have been proposed this year, including the Biden Administration’s Made in America Plan (as outlined in the Green Book) and a discussion draft of Senator Ron Wyden’s international tax framework, among others. Many of these changes would significantly affect the global taxation of multinational corporate groups. During this Thought Center Webcast, Ernst & Young professionals will discuss the various proposals.
Tax in the time of COVID-19: Update on legislative, economic, regulatory and IRS developments (September 24)
During this Thought Center Webcast, Ernst & Young professionals will discuss how businesses can navigate the tax policy environment and continue to effectively operate their tax function in this time of crisis and change.
US Indirect Tax Controversy: Current audit trends and outlook, including ways to manage your state tax posture (September 29)
During this Thought Center Webcast, Ernst & Young professionals will discuss recent audit trends in select states, including California, New York and Texas, and possible avenues to resolve uncertain tax positions.
Recent Tax Alerts
— Sep 16: House Ways and Means Committee Chair proposes comprehensive international tax changes for reconciliation bill (Tax Alert 2021-9023)
— Sep 14: Angola announces relaxed quarantine and COVID-19 testing requirements for fully vaccinated travelers and new exit rules for Angolan citizens and residents (Tax Alert 2021-1670)
— Sep 16: Indian Tax Tribunal rules on re-domiciliation and its impact on treaty entitlement (Tax Alert 2021-1674)
— Sep 15: Malaysia issues Pre-Budget 2022 Statement (Tax Alert 2021-1666)
— Sep 13: China implements new, stricter immigration policies for travelers from the United States, the United Kingdom, Spain, France and Malaysia (Tax Alert 2021-1662)
— Sep 10: Japan provides update on COVID-19 tax measures (Tax Alert 2021-1638)
Canada & Latin America
— Sep 14: Authorized travelers may now enter Argentina via the province of Mendoza (Tax Alert 2021-1671)
— Sep 10: Mexico's President submits 2022 economic proposal to Congress (Tax Alert 2021-1643)
— Sep 16: New passport requirement discussed for EU, EEA and Swiss nationals traveling to the UK as of October 1 (Tax Alert 2021-1680)
— Sep 13: United Kingdom publishes roadmap for reforming its immigration sponsorship program (Tax Alert 2021-1663)
— Sep 10: Poland proposes new revenue-based minimum tax for corporate taxpayers (Tax Alert 2021-1639)
— Sep 14: New Zealand proposes changes to GST invoicing requirements (Tax Alert 2021-1661)
— Sep 14: New Zealand proposes changes to Goods and Services Tax (Tax Alert 2021-1660)
IRS Weekly Wrap-Up
Internal Revenue Bulletin
| ||2021-38||Internal Revenue Bulletin of September 20, 2021|
Ernst & Young Client Portal, the leading source for news, analysis, and reference materials for corporate tax professionals, has a variety of content of interest to international tax practitioners, including:
— EY/Passport. EY/Passport is your guide to planning ventures in the global economy, offering a wealth of tax and business knowledge on more than 150 countries.
Because the matters covered herein are complicated, U.S. International Tax This Week should not be regarded as offering a complete explanation and should not be used for making decisions. Any decision concerning matters covered herein should be reviewed with a qualified tax advisor.