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September 13, 2021

FIRST IMPRESSIONS | Tax plan in House Ways & Means reconciliation bill offers new details on international tax proposals

Today, the House Ways and Means Committee released the tax portion of its reconciliation bill (HW&M proposal) and a section-by-section summary of the tax proposals. As with President Biden's Green Book issued in May and Senate Finance Committee Chair Ron Wyden's proposal introduced last month, the HW&M proposal contains significant changes to the rules for global intangible low-taxed income (GILTI), foreign tax credits (FTC) and the Base Erosion and Anti-Abuse Tax (BEAT). Additionally, the HW&M proposal contains many additional provisions with far-reaching implications. With important exceptions, most of these provisions would be effective for tax years beginning after December 31, 2021.

In this Alert, EY shares its first impressions of the HW&M international tax proposals.

Rate changes

The HW&M 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%. Similarly, the IRC Section 250 deduction percentage for foreign-derived intangible income (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 December 31, 2021, with special transition rules for fiscal-year taxpayers.


The HW&M proposal would require a US shareholder to compute its GILTI inclusion on a country-by-country basis by aggregating the items (e.g., net CFC tested income, qualified business asset investment (QBAI), etc.) of taxable units within a single foreign country and computing a separate GILTI amount for each country. Consequently, tested losses in one country would not be allowed to reduce the GILTI inclusion attributable to tested income in another country. However, the HW&M proposal would allow tested losses to be carried forward to the succeeding tax year and offset that year's taxable income, if any.

Other notable changes to the GILTI regime include adding foreign oil and gas extraction income (FOGEI) into tested income and reducing a US shareholder's net deemed tangible return from 10% to 5% of QBAI (except for US possessions like Puerto Rico, whose return would remain 10%).

Foreign tax credit limitation

The HW&M proposal would determine a US shareholder's FTC limitation for all baskets on a country-by-country basis, thus preventing excess FTCs from high-tax jurisdictions from being credited against income from low-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%. When combined with the changes to the US corporate rate and the reduced IRC Section 250 deduction percentage, taxpayers would need to pay an effective foreign tax rate of 17.43% in any given country to avoid paying residual US tax on GILTI inclusions from that country. Any excess FTCs, including excess GILTI FTCs, would be carried forward five years, with no carryback. This contrasts with current law, which prohibits any carryover for GILTI FTCs, while allowing a 10-year carryforward and 1-year carryback for non-GILTI FTCs.

For purposes of determining foreign-source taxable income, only the IRC Section 250 deduction would be allocable to GILTI inclusions; none of the taxpayer's other expenses (such as interest and stewardship) would be allocable to the GILTI basket or reduce the GILTI FTC limitation.

Covered asset dispositions

The HW&M proposal would extend the principles of IRC Section 338(h)(16) to transactions treated as an asset disposition for US tax purposes but as a stock disposition (or disregarded) for foreign tax purposes. Consequently, the source and character of any item resulting from a covered asset disposition would be determined for FTC purposes as if the seller had sold or exchanged stock (determined without regard to IRC Section 1248).

Subpart F and pro rata share

Foreign base company sales and services income currently taxed as subpart F income would be taxed as GILTI tested income unless the transaction involves a US resident, directly or by way of a branch or pass-through. The pro rata share rules in IRC Section 951 would also be substantially revised to provide more detailed rules addressing both a change in CFC ownership during year and dividends paid by the CFC during the year. Specifically, the pro rata share of subpart F income would no longer be determined on the last day of the tax year in which the foreign corporation is a CFC. Instead, the pro rata share would change to potentially cause an inclusion when the US shareholder does not own shares at the end of the year and, more precisely, reduce inclusions only when dividends during the year are subject to tax. The provision generally would apply prospectively but retroactively for distributions occurring after December 31, 2017.

Interest expense limitations

The HW&M proposal includes a new limitation on interest deductibility for domestic corporations that are members of an international financial reporting group. The proposal is similar to one proposed, but not enacted, under the Tax Cuts and Jobs Act of 2017, and is generally intended to limit the interest expense of a multinational group's US operations to its proportionate share of the group's overall interest expense. The US share of the group's interest would generally be determined by comparing a domestic corporation's earnings before interest, taxes, depreciation, depletion and amortization (EBITDA) to the worldwide group's EBITDA. Unlike President Biden's Green Book, proposed IRC Section 163(n) would appear to apply to both US and non-US based multinationals.

Beyond the proposed IRC Section 163(n), the HW&M proposal would modify the existing IRC Section 163(j) limitation to apply at the partner, rather than partnership, level. Additionally, a newly proposed IRC Section 163(o) would limit the carryover period for amounts disallowed under IRC Sections 163(n) or 163(j) to five years. For these purposes, interest would be allowed as a deduction on a first-in, first-out basis.

Dividends from foreign corporations

The HW&M proposal would limit the IRC Section 245A deduction to dividends received from CFCs, whereas current law allows the deduction for dividends received from "specified 10%-owned foreign corporations." The proposal would apply to distributions made after enactment. US shareholders of a foreign corporation could jointly elect, however, to treat a foreign corporation as a CFC, potentially allowing dividends from otherwise non-CFCs to be eligible for the IRC Section 245A deduction. Such an election would subject the US shareholders to GILTI and subpart F inclusions from the foreign corporation.

The HW&M proposal would also authorize Treasury to deny the IRC Section 245A deduction for dividends paid out of earnings generated in (i) certain related-party "gap period" transactions, or (ii) related-party stock transfers that reduced a US shareholder's pro rata share of subpart F or tested income. This authority would apply retroactively to distributions made after December 31, 2017.

Additionally, the HW&M proposal would amend IRC Section 1059 to require US shareholders to reduce their basis in CFC stock (and potentially recognize gain) upon receipt of CFC dividends paid out of earnings and profits earned (or attributable to gain on property that accrued) during a "disqualified period." A disqualified period would be any period during which the foreign corporation was not a CFC or did not have US shareholders.


The HW&M proposal would retain FDII but reduce the IRC Section 250 deduction percentage. Additionally, the proposal would make certain changes to the definition of deduction-eligible income (DEI), an FDII input. DEI would exclude income that would be foreign personal holding company income if earned by a CFC. The revised definition would be retroactively effective to tax years beginning after December 31, 2017.


The HW&M proposal would significantly modify IRC Section 59A while retaining its general framework. Specifically, the proposal would increase the BEAT rate from 10% to 12.5% for tax years beginning after December 31, 2023, and before January 1, 2026; for tax years beginning after December 31, 2025, the rate would increase from 12.5% to 15%. Additionally, the base erosion percentage threshold would be eliminated prospectively for any tax year beginning after December 31, 2023.

The HW&M proposal 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 regular tax liability for the tax year. Thus, tax credits would be taken into account when determining the base erosion minimum tax.

The proposal would treat certain payments with respect to inventory as base erosion payments and therefore exclude them from the calculation of COGS for purposes of determining modified taxable income. The expanded definition of base erosion payment would generally include certain indirect costs that are paid or accrued by the taxpayer to a foreign related party and are required to be capitalized to inventory under IRC Section 263A. Furthermore, the expanded definition would include certain amounts paid to foreign related parties for inventory to the extent the amounts exceed specified direct and indirect costs incurred by the related party and attributable to the property.

The HW&M proposal would provide an exception from treatment as a "base erosion payment" for payments subject to an effective rate of foreign income tax that equals or exceeds the applicable BEAT rate (currently 10% and 12.5% for tax years after December 31, 2023). The HW&M proposal would also provide an exception from treatment as a "base erosion payment" for payments that are subject to US income tax.

Other issues

Other notable international tax elements of the HW&M proposal include the following:

  • Reinstating IRC Section 958(b)(4) to prohibit downward attribution from a foreign corporation, retroactive to December 31, 2017, and adding new IRC Section 951B to more narrowly allow downward attribution only to foreign-controlled US corporations
  • Repealing the one-month deferral election under IRC Section 898(c)(2) for foreign corporations with tax years beginning after November 30, 2021
  • Delaying the effective date of mandatory capitalization of research and experimental expenditures to tax years beginning after December 31, 2025
  • Clarifying that gains from or distributions by a DISC or FSC to a foreign shareholder are treated as effectively connected with a trade or business of a permanent establishment
  • Retroactively removing the application of the IRC Section 78 gross up to IRS Section 960(b)
  • Revising IRC Section 905(c) to broaden the scope of an FTC and shorten the time to elect to claim it
  • Expanding IRC Section 382(d) to cover carryovers of GILTI net tested losses when ownership changes


While prospects for both the reconciliation bill in general and the country-by-country approach in the HW&M proposal may be unclear, the HW&M proposal offers important details of potential changes that were not included in the Green Book or in Senator Wyden's discussion. Many of these provisions would be retroactive to years beginning after December 31, 2017.


Contact Information
For additional information concerning this Alert, please contact:
International Tax and Transaction Services
   • Jeff Michalak (
   • Craig Hillier (
   • Colleen O’Neill (
   • Lee Holt (
   • Arlene Fitzpatrick (
   • Martin Milner (
   • Jeshua Wright (