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October 21, 2021

Proposed tax changes in House Ways and Means Committee reconciliation bill could affect banking & capital markets companies

Proposed tax increases on corporations and high-income individuals, which were included in the budget reconciliation bill (the HW&M Proposal) passed by the House Ways and Means Committee on September 15, 2021, could affect the banking and capital markets (BCM) industry. Proposed increases to the federal corporate income tax rate and significant changes to US international tax rules would directly affect BCM companies and their clients. Increased taxes on high-income individuals, as well as changes to the estate tax and rules for various retirement plans, would primarily affect the clients of BCM companies. Proposed enhancements to tax-advantaged investing programs would create additional opportunities for BC&M companies, whether in the roles of financing, structuring and supporting these programs, or by acting as a tax equity investor.

In this Alert, EY discusses the key provisions in the HW&M Proposal that would affect BCM companies and the implications of those provisions.

Changes to corporate taxation

Change in corporate rate

The HW&M Proposal would increase the federal corporate income tax rate to 26.5%. Specifically, this rate would apply to the highest bracket of a new graduated corporate income tax rate, starting at 18% on taxable income of $400,000 or less (one of the few tax cuts in the HW&M Proposal), then 21% on income from $400,000 to $5 million, and finally 26.5% on income over $5 million. For corporations whose taxable income exceeds $10 million, the benefit of the lower rates would be effectively phased out through a top-up tax to equal the 26.5% rate on all income. Fiscal year-end institutions would be subject to a pro-rated tax rate during the first year. (For additional discussion of the effects of rate changes on fiscal-year taxpayers, see Tax Alert 2017-2201.)

The HW&M Proposal would make corresponding changes to the corporate dividends-received deduction (DRD) for corporate dividends received by a corporation that is not in an affiliated group relationship with the issuer, including a 72.5% DRD for dividends received from at least 20%-owned domestic corporations, and a 60% DRD for domestic corporation dividends that do not meet the 20-owned test.

Limitation on interest expense

The HW&M Proposal would impose a new interest expense limitation under proposed IRC Section 163(n) on the US operations of a multinational group, which is generally intended to limit interest expense deductions of a multinational group's US operations to its proportionate share of the group's overall interest expense based on the US operations proportionate share of the group's EBITDA. This provision would affect both US-headquartered companies and foreign-headquartered companies with US operations. A five-year carryforward would replace the unlimited carryforward of disallowed interest expense resulting from interest expense limitations, including both limitations under existing IRC Section 163(j) and proposed 163(n). Also, IRC Section 163(j) would no longer apply at the partnership level.

Taxable losses

The HW&M Proposal would defer taxable losses from controlled taxable liquidations of corporate stock occurring after the date of enactment. Additionally, the taxable loss rules would be modified by (1) fixing the date any loss is realized as the time of the identifiable event establishing worthlessness, (2) treating certain debt issued by a partnership as a "security" within the meaning of IRC Section 165(g)(2), and (3) providing that a loss from a worthless partnership interest is subject to the same rules as a loss on a sale of a partnership interest under IRC Section 741. The modifications would apply to tax years beginning after December 31, 2021.

The HW&M Bill would include digital assets in the constructive sale rules previously applicable to other financial assets.

Wash sales

The HW&M Proposal would expand the wash sale rules to include commodities, currencies and digital assets, which would prevent taxpayers from claiming tax losses on assets while retaining an interest in the loss asset. Digital assets are defined as any representation whose value is recorded on a cryptographically secured distribution ledger or any similar technology specified by the Treasury.

The HW&M Bill would also extend the wash sale rule to apply to purchases of replacement property by certain persons related to the taxpayer, in which case the loss would be permanently disallowed, not merely deferred.

Other provisions

Other corporate tax provisions in the HW&M Proposal include:

  • Accelerating the expansion of IRC Section 162(m) under the American Rescue Plan Act so that employers may not deduct compensation over $1m after 2021, rather than 2026, for not only the CEO, CFO, and the next three highest paid executive officers, as under current law, but also five additional covered employees
  • Delaying the requirement to amortize certain research and experimentation expenses to 2026
  • Treating sales to grantor trusts as income taxable events


The HW&M Proposal's version of the new interest expense limitation under proposed IRC Section 163(n) does not explicitly treat members of a consolidated group as a single specified domestic corporation. Similar to IRC Section 163(j), however, Treasury could choose to exercise its regulatory authority under IRC Section 1502 to clarify that new IRC Section 163(n) applies on a consolidated-group basis. The new rule could also be more significant than current rules (e.g., IRC Section 163(j)); coupled with the proposed carryforward limitation of five years, the new rule could make the deduction for interest expense in the future less certain and less valuable (despite the prospective increase to the overall tax rate).

For a more detailed analysis of the proposed corporate tax changes contained in the HW&M Proposal, please see Tax Alert 2021-9021 and Tax Alert 2021-1697.

International tax changes

Global intangible low-taxed income (GILTI)

1. Country-by-country reporting

The GILTI computation for a US shareholder would be done on a country-by-country basis, applying a 5% (as opposed to the current 10%) return on QBAI. To the extent there were unused tested losses for a country, those losses would carry forward and could potentially be utilized in future years.

2. Changes to the GILTI foreign tax credit (FTC)

In a welcome change, the current 20% haircut under IRC Section 960(d) for foreign income taxes deemed paid on GILTI inclusions (GILTI FTC) would decrease to 5% under the HW&M Proposal. Additionally, tested foreign income taxes that may be deemed paid under IRC Section 960(d) would include foreign income taxes attributable to a tested loss.

3. Country-by-country FTC limitation and repeal of foreign branch income category

In a major change, the HW&M Proposal would compute a taxpayer's FTC limitation on a country-by-country basis based on taxable units, thus preventing excess FTCs from high-tax jurisdictions from being credited against income from low-tax jurisdictions. Accordingly, the HW&M Proposal would require each separate limitation category (category), for purposes of IRC Sections 904, 907 and 960, to be applied on a per-country basis. Generally, taxpayers would take into account the aggregate income and foreign income taxes properly attributable to or otherwise allocable to taxable units that are tax residents of the same country. The HW&M Proposal would eliminate the foreign branch income category, and the remaining categories — GILTI, general and passive — would each be subject to a country-by-country application. The HW&M Proposal would therefore significantly limit the blending of high- and low-taxed income within each separate limitation category.

4. Deductions allocable to the GILTI category

The HW&M Proposal would allow only the IRC Section 250 deduction to be allocable against a taxpayer's GILTI inclusion. Therefore, none of the taxpayer's other expenses (such as interest and stewardship) could be allocated or apportioned to GILTI or reduce the GILTI FTC limitation. Expenses that otherwise would have been allocated or apportioned to the GILTI category of income are only disregarded for purposes of computing a taxpayer's GILTI foreign tax credit limitation under IRC Section 904. .

5. Repeal of current IRC Section 904(b)(4) and treatment of IRC Section 245A dividends as tax-exempt

IRC Section 904(b)(4) currently requires domestic corporations to disregard, for purposes of determining their FTC limitation, both the foreign-source portion of any dividend income from a "specified 10%-owned foreign corporation" and any deductions that are attributable to producing that income. The HW&M Proposal would repeal current IRC Section 904(b)(4) and amend IRC Section 864(e)(3) to treat IRC Section 245A-eligible dividends as "tax-exempt income" (and the corresponding portion of the foreign corporation's stock that relates to the IRC Section 245A-eligible dividend as a "tax-exempt asset") for purposes of allocating and apportioning expenses.

6. Changes to rules for claiming FTCs

The HW&M Proposal would also eliminate FTC carrybacks; for all unused FTCs, the carryforward period would be five years.

7. Implications

The BCM industry would be particularly affected by a country-by-country approach to crediting foreign taxes because (1) regulators require BCM companies to have active operations in foreign countries in which they seek to conduct business (i.e., boots on the ground), (2) the BCM industry generally operates in higher-taxed foreign jurisdictions, and (3) BCM companies are more likely to operate through branches in foreign countries for regulatory reasons. On balance, the proposed shift to a country-by-country US international tax system could prompt BCM companies to reduce the number of locations in which they operate and centralize operations to alleviate compliance and cost concerns.

Base erosion and anti-abuse tax (BEAT)

1. Rate increases and definition changes

The HW&M Proposal would increase the BEAT rate to 12.5% for tax years beginning after December 31, 2023, and 15% for tax years beginning after December 31, 2025. For certain banks and securities dealers, the rates would increase to 13.5% and 16%, respectively. The definition of a "bank" that would be subject to the higher BEAT rates would be expanded, while the base erosion percentage threshold would be lowered to include US branches of foreign banks. After 2023, the base erosion percentage threshold would be eliminated.

HW&M Proposal would also create new base erosion payments, such as certain indirect costs that are paid to a foreign related party and capitalized to inventory under IRC Section 263A. Certain payments would no longer be viewed as base eroding, such as payments on which US income tax is imposed (for example, payments on which tax is imposed under subpart F or GILTI), and payments that are subject to a sufficient rate of foreign tax. Finally, the HW&M Proposal would allow general business tax credits to offset the potential base erosion minimum tax amount.

2. Implications

The proposed changes to BEAT would be both favorable and unfavorable for taxpayers. For example, the change to IRC Section 59A(b)(1)(B) to refer simply to "regular tax liability" (unreduced by any credits) would be a favorable change for applicable taxpayers by potentially increasing the amount that would offset the applicable percentage of modified taxable income, and reduce the instances when the tax would be imposed. This change would be a welcome development for many BCM companies that serve as tax equity investors in ESG-focused tax credit deals. Additionally, it would be favorable to outbound BCM companies that generally have higher-taxed foreign earnings, and corresponding foreign tax credits, than other industries.

The addition of two new exceptions to the definition of "base erosion payment" may also permit certain payments to be excluded to the extent that either US income tax or a sufficient effective rate of foreign tax is imposed on a particular payment. How beneficial these changes would be would depend on how certain key items are ultimately defined, and how the effective rate of foreign income tax is determined for a particular payment to a foreign related party. On balance, these two changes again would be more favorable to outbound BCM companies, which may be able to exclude from the BEAT calculation payments that are made to their CFCs, This change would put them on par with inbounds, which previously benefited from the exclusion for effectively connected income (ECI).

On the less favorable side, the HW&M Proposal would remove the base erosion percentage test, which currently acts as a gating threshold (in addition to the $500M gross receipts test) to determine whether a corporation is potentially subject to BEAT. Many BCM companies have significant transactions in their third-party derivative books with deductions sufficient to enable them to fall below the threshold requiring a BEAT liability computation (i.e., generally 2% for many BCM companies). Accordingly, this change would expand the scope of taxpayers potentially subject to BEAT. The elimination of the base erosion percentage in 2024 would provide additional time for BCM companies with base erosion percentages of less than 2% or 3%, as applicable, to assess the impact of the proposed changes to existing intercompany flows.

IRC Section 871(m)

1. Definition changes and expanded scope

The HW&M Proposal would expand the definition of a dividend equivalent under IRC Section 871(m) to capture generally all income and gain arising from derivatives referencing interests in publicly traded partnerships (PTPs). The change to the definition of a dividend equivalent under IRC Section 871(m) also would apply to other partnerships to the extent provided in regulations. In the partnership space, IRC Section 871(m) currently generally only applies to embedded US-source dividends on derivatives over "covered partnerships," whether publicly traded or private, that hold significant US stocks that pay dividends.

2. Implications

BCM companies would be negatively affected from an operational and, potentially, tax perspective by the proposal to expand payments subject to IRC Section 871(m). This change would tax not only traditional fixed or determinable annual and or periodical (FDAP) income (i.e., dividends) but also interests historically treated as generating ECI, if held directly by a non-US person. As many BCM companies are US-based and already taxed in the US on a net-basis on their derivative books, the change would primarily affect their non-US derivative counterparties. From an operational perspective, however, BCM companies would be required to incorporate the changes into their withholding infrastructure.

Repeal of election for one-month deferral under IRC Section 898(c)

1. Proposed change

IRC Section 898 generally requires a CFC to use the tax year of its majority US shareholder. IRC Section 898(c)(2), however, permits a CFC, in lieu of conforming with its majority US-shareholder year, to elect a tax year beginning one month earlier than the majority US shareholder's year. This provision allows taxpayers additional time to obtain information needed to determine the items of a foreign corporation that are relevant for US tax reporting purposes.

The HW&M Proposal would repeal the one-month deferral election for CFC tax years beginning after November 30, 2021. A transition rule would require a taxpayer's first tax year beginning after November 30, 2021, to end at the same time as the first "required" year ending after that date. Therefore, CFCs with a tax year ending November 30, 2021, under a one-month deferral election, would automatically have a short tax year ending December 31, 2021.

2. Implications

The proposed repeal of the one-month deferral election under IRC Section 898(c)(2) could significantly affect BCM companies that have the election in place for their CFCs. For calendar-year taxpayers with an IRC Section 898(c)(2) election in place for its CFCs (i.e., CFC with a November 30 tax year-end for calendar-year taxpayers), the repeal, including the transition rule, would result in those CFCs having a short period from December 1, 2021 through December 31, 2021. As foreign income taxes, in most instances, accrue on December 31, 2021, these CFCs could end up with a tested loss under the GILTI regime as a result of recognizing one month of pre-tax earnings/tested income and 12 months of foreign income taxes in such short-period return. Given the interplay of the GILTI tested loss rules and the inability to credit foreign income taxes paid or accrued by a tested loss CFC, this forced transition rule could preclude the parent of a so-called IRC Section 898 CFC from claiming an FTC for foreign taxes incurred by that CFC.

Other international provisions

Other key international provisions in the HW&M Proposal would:

  • Eliminate the limitation on the IRC Section 250 deduction for taxable income
  • Decrease the rate for foreign-derived intangible income from 37.5% (13.125% effective tax rate) to 21.875% (20.7% effective tax rate) and change the definition of deduction-eligible income to exclude, inter alia, income of a kind that would be foreign personal holding company income
  • Eliminate the portfolio interest exception for individuals or corporations that own greater than 10% of the total value of the issuer
  • Reinstate IRC Section 958(b)(4) (CFC downward attribution) and add a new provision, IRC Section 951B, which would treat certain foreign corporations as "foreign controlled foreign corporations"
  • Expand IRC Section 961(c) basis adjustments for all purposes of the IRC

For a detailed analysis of the proposed international tax changes, contained in the HW&M Proposal, please see Tax Alert 2021-9023.

Individual, estate, and retirement income tax changes

Proposed changes

Some key provisions in the HW&M Proposal impacting individuals, estates and trusts would:

  • Increase the top capital gains and qualified dividend income rate to 25% (effective September 14, 2021)
  • Return the top individual income tax rate to 39.6%
  • Expand the net investment income tax to cover net income derived in the ordinary course of a trade or business for taxpayers with greater than $400k (single filer) or $500k (joint filer) in taxable income
  • Impose a 3% surtax on an individual's modified adjusted gross income in excess of $5 million
  • Extend the holding period for carried interest to five years for those making $400k of adjusted gross income (AGI)
  • Expand the wash sale and constructive sale rules
  • Make permanent the limitation on excess business losses of noncorporate taxpayers
  • Limit the maximum deduction available under IRC Section 199A for pass-throughs

Although the HW&M Proposal does not include changes to the current $10,000 SALT deduction limitation, legislators are discussing potential increases to the limitation.


Individual, estate, trust and retirement tax changes are going to be important to banks as they re-evaluate their product offerings for their customers and operationalize the changes.

For a detailed analysis of the proposed tax changes to individual, estate, and retirement contained in the HW&M Proposal, see Tax Alert 2021-1696.

Tax-advantaged investing

Electric vehicles

The HW&M Proposal would establish a refundable credit of $7,500 for electric vehicles (EVs) placed in service before 2027. A higher credit would be available for facilities operating under a union-negotiated collective bargaining agreement and using at least 50% domestic content. Retail price caps would apply for different types of vehicles. along with separate credits that would apply for used and commercial EVs. Further, the credit would gradually phase out based on AGI.

Qualified infrastructure bonds

The HW&M Proposal would create a new direct pay bond called a "qualified infrastructure bond." This is similar to the Build America Bonds that were part of the American Recovery and Reinvestment Act of 2009.

Issuers of qualified infrastructure bonds would receive a tax credit equal to an applicable percentage of the interest. The bonds would provide direct financing support for infrastructure investments made by state and local governments. The applicable percentage of the credit for interest paid on qualified bonds would be determined in the year the bond was issued as follows: 2022 through 2024 = 35%, 2025 = 32%, 2026 = 30%, 2027 and thereafter = 28%.

Housing-related credits

The HW&M Proposal would expand tax credit programs targeted towards affordable housing and economic activity in communities. It would make the new markets tax credit permanent and enhance the low-income housing and rehabilitation tax credit programs. It would also create a new tax credit program designed to encourage the rehabilitation of deteriorated homes in distressed neighborhoods.

Other provisions

Other key provisions on green energy and infrastructure in the HW&M Proposal would:

  • Extend through 2033 (with a two-year phasedown) the IRC Section 45(d) production tax credit (PTC) for electricity from renewable resources, including solar, with an increased credit for facilities that meet domestic requirements
  • Extend through 2033 (with a two-year phasedown) the IRC Section 48 energy investment tax credit (ITC), with the addition of newly eligible technologies like energy storage and dynamic glass and an increased credit for facilities that meet domestic requirements
  • Extend through 2031 several current tax incentives for clean energy
  • Introduce new credits for transmission property, zero emissions facilities, zero emissions nuclear power production, sustainable aviation fuel and clean hydrogen
  • Revive the IRC Section 48C qualified advanced energy property credit
  • Expand the definition of qualifying income for publicly traded partnerships to include income from green and renewable energy
  • Allow taxpayers to elect (the elective payment option) to be treated as having made a payment of tax equal to the value of the various credits for which they would have been otherwise eligible (e.g., the ITC under IRC Section 48, the PTC under IRC Section 45, and various credits under IRC Sections 30C, 45E, 45Q, 45W, 45X, 48C, 48D and 48E)

For details, see Tax Alert 2021-1677. Provisions not included in the HW&M Proposal include significant research tax incentives mentioned by President Biden and a carbon tax.


1. Elective payment option

The elective payment option, if enacted, would significantly affect renewable energy tax equity markets. Developers/project owners opting for elective payment would have access to the primary tax benefit from most tax credit deals without the need for tax capacity (though this election would not provide access to the value created by accelerated depreciation). This could alter the supply and demand balance in the current market, with developers/project owners obtaining access to the tax credit incentive through the elective payment option rather than tax equity, in order to avoid transaction costs and administrative burdens that come with raising tax equity.

2. BEAT and general business credits

Additional demand for tax credit investments could result from the higher corporate tax rate as well as changing the calculation of BEAT liability to allow general business credits. BCM companies that have historically invested in these deals may want to begin making contingency plans in the event deals become scarcer or the returns go down due to an increase in demand/decreased supply. This potential shrinking of available tax credits could be partially offset by the additional tax credits that would be available by changing the low-income housing tax credit, making the new markets tax credit permanent, and introducing the new neighborhood homes tax credit.


Contact Information
For additional information concerning this Alert, please contact:
Financial Services Office
Banking & Capital Markets
   • Mark Kendall (
   • Jack Burns (
   • Marco Palumbo (
   • Chris J. Housman (
   • Cody Grant (
   • Lauren Lovelace (
Tax Advantaged Investing
   • Michael Bernier (