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March 31, 2022

FY2023 Budget includes new details on international tax proposals

In its FY2023 explanation of the Biden Administration's revenue proposals (Budget), the United States (US) Treasury offers several new international tax proposals that build upon the Build Back Better Act (BBBA), which was passed by the US House of Representatives in November 2021 but stalled in the US Senate. (For discussion of the BBBA's international provisions, see Tax Alert 2021-2040.) The Budget treats the BBBA as enacted, with its revenue estimates scored against the BBBA as the baseline.

The Budget's international tax proposals would:

  • Raise the corporate income tax rate to 28% — and thereby raise the effective rate on global intangible low-taxed income (GILTI) to 20%
  • Replace the Base Erosion Anti-abuse Tax (BEAT) with an "undertaxed profits rule" (UTPR) that is consistent with the UTPR described in the Pillar Two Model Rules developed by the Organisation for Economic Co-operation and Development (OECD)
  • Create a new general business credit equal to 10% of eligible expenses incurred when onshoring a trade or business to the United States
  • Disallow deductions for expenses incurred when moving a US trade or business offshore
  • Permit taxpayers to retroactively elect, in certain circumstances, to treat a passive foreign investment company (PFIC) as a qualified electing fund (QEF) without IRS consent
  • Require IRC Section 6038 reporting for each foreign "taxable unit" to facilitate the BBBA's proposals for country-by-country GILTI and foreign tax credit (FTC) rules

The proposals have various effective dates. The corporate tax rate increase would apply to tax years beginning after December 31, 2022, with a blended rate for any tax year that begins before that date but still ends in 2023. The proposal to replace BEAT with the UTPR would be effective for tax years beginning after December 31, 2023. The onshoring and offshoring rules, as well as the expanded PFIC QEF election, would generally apply as of the date of enactment. Finally, expanded IRC Section 6038 reporting would apply to tax years of a controlling US person beginning after December 31, 2022, and to annual accounting periods of foreign business entities ending with or within those tax years.

In this Alert, EY shares its insights on the FY23 Budget.

Detailed discussion

Increased corporate and GILTI rates

The Budget would raise the corporate tax rate to 28% from the BBBA baseline (and current) rate of 21%. Early drafts and policy outlines of the BBBA included a similar rate increase, which was later dropped following opposition from Senator Kyrsten Sinema (D-AZ). The House-passed BBBA then included a 15% corporate alternative minimum tax (CAMT), largely viewed as a substitute for the corporate rate increase from a revenue perspective. Thus, the FY23 Budget would increase the corporate rate while maintaining the CAMT from the BBBA.

The Budget would also increase the GILTI rate to 20%. This is the product of the 28% corporate rate and the BBBA's GILTI deduction of 28.5% under IRC Section 250 (28% x 0.715, or 20.02%). The GILTI rate could increase to 21.07% after applying the BBBA's 5% haircut to GILTI FTCs (20.02% / 0.95). For comparison, the GILTI rate under current law is 10.5%, or 13.125% after the 20% GILTI FTC haircut, for tax years beginning before December 31, 2025.

The corporate and GILTI rate increases would apply to tax years beginning after 31 December 2022. For an earlier tax year ending after December 31, 2022, a blended corporate rate would apply equal to 21% plus 7% multiplied by the portion of the tax year that takes place in the 2023 calendar year.

Replacement of BEAT with UTPR

The Budget would repeal the BEAT and replace it with a UTPR that is consistent with the Pillar Two Model Rules, which include the UTPR and the Income Inclusion Rule (IIR).

The technical aspects of the Budget's UTPR proposal align closely with those in the Pillar Two Model Rules published on December 20, 2021. The Model Rules followed the comprehensive agreement reached by the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting on October 8, 2021 (Pillar Two agreement).

Under the Budget, both domestic corporations that are part of a foreign-parented multinational group and domestic branches of foreign corporations would be denied US tax deductions to the extent necessary to collect the hypothetical top-up tax required for the financial reporting group to pay an effective tax rate of at least 15% in each foreign jurisdiction in which the group has profits (UTPR Top-up Tax). For this purpose, a "financial reporting group" would be any group of business entities that prepares consolidated financial statements (i.e., statements determined in accordance with US GAAP, IFRS, or other methods authorized under regulations) and includes at least one domestic entity or domestic branch and at least one foreign entity or foreign branch.

For example, assume that a financial reporting group has $1,000x of profits in a foreign jurisdiction with no corporate income tax, that no tangible assets or payroll are located in that foreign jurisdiction, and that no other entities are located in jurisdictions with a UTPR. The UTPR Top-up Tax amount in that jurisdiction would be $150x. If the top-up tax were not collected under GILTI, a qualified domestic minimum top-up tax, or an IIR implemented by a foreign jurisdiction, a deduction disallowance of $536x (i.e., the top-up tax amount of $150x divided by the US corporate income tax rate of 28%) would apply to a domestic corporation or domestic branch that is a member of the group.

As contemplated in the Pillar Two Model Rules, both US-parented and foreign-parented multinationals operating in low-tax jurisdictions (with financial reporting groups' global annual revenue of $850 million or more in at least two of the prior four years) would fall within the UTPR's scope. The Budget explicitly states, however, that the UTPR would not apply to income that is subject to an IIR that is consistent with the Pillar Two Model Rules, including income subject to GILTI; as such, the UTPR would generally not apply to US-parented multinationals. Because the Budget assumes adoption of the BBBA reforms to GILTI, this aspect of the proposal makes clear that the Administration believes that a revised GILTI would be a qualifying IIR that conforms to Pillar Two.

In addition, the Budget notes that the UTPR would "primarily" apply to foreign-parented multinational groups, and "would generally not apply to US-parented multinationals." Additionally, the UTPR would not apply to (i) a group's profit in a jurisdiction if the three-year average of the group's revenue in the jurisdiction is less than $11.5 million and the three-year average of the group's profit in the jurisdiction is less than $1.15 million; and (ii) a group with operations in no more than five jurisdictions outside of the group's primary jurisdiction, provided the book value of the group's tangible assets in those jurisdictions is less than $57 million (this second exception would expire five years after the first day of the first year in which the UTPR otherwise would apply). These monetary thresholds are consistent with the euro-based thresholds in the Pillar Two Model Rules, except translated to dollars. The Budget notes that Treasury would be authorized to adjust dollar thresholds to reflect currency fluctuations relative to euros.

The amount of UTPR Top-up Tax would be determined based on a jurisdiction-by-jurisdiction computation of the group's profit and effective tax rate, taking into account all income taxes, including the new CAMT that is included in BBBA.1 Although not explicitly stated in the Budget, income taxes presumably would include the adjustments described in the Pillar Two Model Rules, including for deferred tax expenses. The computation of profit and the effective tax rate for a jurisdiction would be based on the group's consolidated financial statements, with certain specified adjustments (e.g., rules to address temporary and permanent book-to-tax differences). For purposes of this calculation, the group's profit for a jurisdiction would be reduced by 5% of the book value of tangible assets and payroll for that jurisdiction.

During an initial nine-year transition period, the exclusion would start at 7.8% of the book value of tangible assets and 9.8% of payroll, and decline over the period to 5% for each. The transition period is described as 9 instead of 10 years, and the initial year percentages would be 7.8% and 9.8%, instead of 8% and 10% (as described in the Model Rules). The lower percentages are due to the UTPR proposal's 2024 effective date, which is one year after the beginning of the transition period described in the Pillar Two Model Rules, which is 2023.

A coordination rule would apply, which would allocate the amount of UTPR Top-up Tax among all of the jurisdictions where the financial reporting group operates, provided those jurisdictions have adopted a UTPR consistent with the Pillar Two Model Rules (a QUTPR). Specifically, the percentage of top-up tax allocated to the United States would be determined by the following formula:

The UTPR deduction disallowance would apply only after the applying the Code's other deduction disallowances (e.g., IRC Section 163(j)), and would apply pro rata to all other allowable deductions. To the extent that the UTPR disallowance for a tax year exceeds the aggregate deductions otherwise allowable to the taxpayer for that year, the excess would be carried forward indefinitely until an equivalent amount of deductions is disallowed in future years. If a prior-year UTPR disallowance has not resulted in additional cash tax liability equal to the prior year's US allocation of UTPR Top-up Tax (e.g., because the US entity was in a loss position), the proposal would not allocate additional UTPR Top-up Tax to the United States (and would instead allocate the tax to other jurisdictions) until the prior-year UTPR Top-up Tax amount had been fully collected.

The Budget also includes a domestic minimum top-up tax that would apply to preclude the imposition of UTPR by other countries. This top-up tax would equal the excess of (a) 15% of the financial reporting group's US profit (determined using the same rules as under the UTPR to determine the group's profit for a jurisdiction), over (b) all the group's income tax paid or accrued with respect to US profits (including federal and state incomes taxes, CAMT, and creditable foreign income taxes incurred with respect to US profits). Although not clearly stated in the Budget, these income taxes presumably would include a broader set of amounts, including the adjustments for deferred tax expenses.

Finally, the Budget states, without any further detail, that "the proposal would also ensure that taxpayers continue to benefit from tax credits and other tax incentives that promote US jobs and investment" whenever another jurisdiction adopts the UTPR.

Consistent with the OECD Pillar Two proposal, the Budget's UTPR proposal would take effect in 2024.

Onshoring and offshoring rules

The Budget would create a new general business credit for onshoring expenses, while disallowing deductions for offshoring expenses. In each case, the relevant expenses are solely those incurred in relocating a trade or business to or from the United States, respectively, and do not include capital expenditures or costs for severance pay and similar assistance to displaced workers.

The onshoring credit would equal 10% of relevant expenses incurred when onshoring a trade or business to the United States. The Budget states that "onshoring" means reducing or eliminating a trade or business conducted outside the United States and starting, expanding, or otherwise moving the same trade or business within the United States, provided US jobs increase. A US taxpayer may claim the credit, though the US taxpayer or its foreign affiliate may incur eligible expenses. If a US territory were to newly adopt a substantially similar credit, the Budget would require the US Treasury to compensate the territory for the amount provided under its own credit.

The offshoring rule would disallow deductions for relevant expenses incurred when offshoring a trade or business from the United States. "Offshoring" for this purpose means reducing or eliminating a trade or business conducted inside the United States and starting, expanding, or otherwise moving the same trade or business outside the United States, provided US jobs decrease. The Budget states that a US shareholder could not deduct an offshoring expense against its subpart F or GILTI inclusion, implying that a CFC or a US person could incur the relevant expense.

The onshoring and offshoring rules would apply to expenses paid or incurred after the date of enactment.

Retroactive QEF elections

The Budget would permit a taxpayer to retroactively elect to treat a PFIC as a QEF without IRS consent, in certain circumstances. This expanded availability of retroactive QEF elections is intended to encourage more QEF elections and reduce the costs and burdens of current law on taxpayers and the IRS alike.

A US person that owns stock in a PFIC is generally taxed on excess distributions, with an additional tax determined by reference to the interest rates that apply to tax underpayments. When making a QEF election, the taxpayer currently includes its pro rata share of the PFIC's ordinary earnings and net capital gain. If a QEF election is in place for the entire holding period in which the foreign corporation is a PFIC, then the PFIC excess-distribution regime does not apply, and capital gain treatment can be preserved on sale. However, failure to make a timely QEF election renders gain on disposed PFIC stock an excess distribution. While retroactive QEF elections are permissible, IRS consent is required under a special consent procedure.

The Budget permits a retroactive QEF election without consent at a time and manner prescribed by regulations and "in cases that do not prejudice the U.S. government." The Budget provides the example of a taxpayer that owned a PFIC in tax years that are closed to assessment, but would nonetheless need to obtain IRS consent and pay outstanding tax liabilities as if a timely QEF election had been made. Treasury could also have authority to allow partnerships and other non-individual taxpayers to make retroactive QEF elections "in appropriate circumstances."

The proposal would be effective on the date of enactment. Further, the Budget states an intent that Treasury issue regulations or guidance that would permit taxpayers to amend previously filed returns for open years.

IRC Section 6038 reporting for foreign taxable units

The Budget would expand the scope of IRC Section 6038 to require information reporting on a "taxable unit" basis to facilitate the BBBA's adoption of country-by-country GILTI and FTC regimes, and would impose penalties for failure to report. In effect, this would require separate reporting at the level of any foreign disregarded entity (DRE) or foreign branch, if located in a country outside of where its owner is tax resident.

Under current law, IRC Section 6038 requires a US person to report on any "foreign business entity," defined as a foreign corporation or a foreign partnership, that the US person controls. The Budget states that it would expand the definition of "foreign business entity" for this purpose to include any taxable unit in a foreign jurisdiction. Under the BBBA, a taxable unit generally includes (1) the taxpayer (i.e., US person), (2) a foreign corporation in which the taxpayer is a US shareholder, and (3) a pass-through entity or a branch that has a tax residence or creates a taxable presence in a country that differs from the country of its owner's tax residence. For purposes of IRC Section 6038 reporting, a branch taxable unit or DRE taxable unit would adopt the annual accounting period of its owner, except as otherwise provided by the Treasury.

The Budget would also authorize Treasury to treat a US person that is a resident in a foreign jurisdiction as a resident of the United States for purposes of identifying taxable units subject to IRC Section 6038 reporting.

These proposals would apply to tax years of a controlling US person beginning after December 31, 2022, and to annual accounting periods of foreign business entities ending with or within those tax years.


The FY23 Budget indicates the Biden Administration's expectation to proceed with the proposals in last year's BBBA, which passed the House but has not passed the Senate. There are important additions, however. Most importantly, the Budget's proposal to increase the corporate (and thus GILTI) rate would be expected to pose additional tax liabilities on taxpayers on top of increases expected from the BBBA's move toward country-by-country GILTI and FTC regimes, among other BBBA changes. These increases are also in addition to the CAMT, which some had viewed as a substitute for the rate increases; a higher corporate rate could, however, reduce the likelihood that some taxpayers are subject to the CAMT.

Aside from the rate increases and the BEAT and UTPR proposals (discussed later), the Budget's incremental changes to international tax provisions are more limited. Taxpayers looking to restructure their global operations may have significant interest in the onshoring and offshoring rules, though the scope of each proposal is uncertain, pending further word from the Administration or draft legislative text. Separately, increased access to retroactive QEF elections would also be a welcome proposal for affected taxpayers. Expanded IRC Section 6038 reporting could also impose additional administrative burdens on taxpayers, along with the burdens of the country-by-country GILTI and FTC regimes. However, taxpayers must already report foreign DREs and foreign branches on Form 8858; as such, the more significant change that would result from the proposal may be extending IRC Section 6038 penalties and the IRC 6501 statute of limitations to reporting for foreign DREs and foreign branches controlled by a US person.

Because it maintains the BBBA proposals, the Budget does not propose to repeal the deduction for foreign-derived intangible income (FDII). This contrasts with President Biden's FY2022 Budget, released in May 2021, proposing to repeal FDII in its entirety. This may have implications on the current review of FDII by the OECD's Forum on Harmful Tax Practices (FHTP), which is assessing whether FDII is considered a harmful tax practice. The FHTP previously stated in August 2021, based on last year's Budget, that the FDII regime is "in the process of being eliminated" and that "[t]he United States has committed to abolish this regime." The elimination of this from the Budget raises the question of whether the FHTP will look to revisit the review of FDII.

The Budget also does not propose changing the anti-inversion rules of IRC Section 7874, which the House-passed BBBA did not propose to amend. Senate Finance Committee drafts, as well as the Administration's FY22 Budget, proposed expanding the scope of transactions that are "domestic entity acquisitions" and reducing the IRC Section 7874 ownership percentage thresholds, among other changes. The Administration has not communicated that it intends to drop these proposals altogether, so they could re-emerge in later policy outlines or draft texts.

Last, but not least, the Budget proposes to replace BEAT with the UTPR. The proposal would conform the US rules to the Pillar Two agreement, a clear sign of the Administration's support for implementing Pillar Two around the world.

The proposal reveals that the Administration is sensitive to two of the main criticisms of the Pillar Two agreement arising from the business community as well as members of Congress. The Budget's proposed adoption of a domestic minimum tax appears to respond to criticism that a foreign government's adoption of the IIR and UTPR would result in foreign countries gaining tax revenue that arises from US profits — a domestic minimum tax would instead tax those profits in the United States first and preclude application of the IIR and UTPR by other countries.

Critics also note that adopting a minimum tax on US profits under Pillar Two would eliminate certain job-creating incentives (particularly those arising from general business credits, which are nonrefundable credits and treated less favorably than refundable credits for Pillar Two purposes). Although the Budget alludes to the possibility of rules that would allow US taxpayers to benefit from "US tax credits and other tax incentives that promote US jobs and investment," no further details are provided. The United States would presumably have to balance the desire to preserve certain tax incentives without them triggering the types of low-tax outcomes that the United States is seeking to end under Pillar Two.

While technically consistent with the Pillar Two Model Rules, the proposal raises numerous issues, including the following:

  • The US adoption of the Pillar Two Model Rules would require numerous and novel changes to the Code. In particular, the proposal would require the use of financial accounting principles (similar to the CAMT, which is presumed adopted as part of the BBBA, although with very different adjustments) to determine the taxable base, as well as rules for determining foreign taxes that fundamentally differ from the existing US FTC rules. In particular, the Budget would require deferred taxes to be considered in the computation of foreign taxes, and also allow for a broader scope of foreign taxes to be treated as income taxes, which is noteworthy in light of recent final Treasury FTC regulations that significantly narrow the definition of a foreign income tax.
  • The Budget's proposal to adopt the UTPR as well as a domestic minimum top-up tax consistent with Pillar Two raises the question of whether Treasury will eventually seek to adopt the Pillar Two version of the IIR, which relies on the same rules as the UTPR and domestic minimum top-up tax, either as a substitute for, or in addition to, GILTI.
  • Whether the UTPR would apply to cost of goods sold (COGS), or some portion thereof, is unclear. The Pillar Two Model Rules describe the rule as allowing countries to deny deductions for all "otherwise deductible expenses," and appears to leave it to individual countries to decide whether to apply this to COGS. In the United States, there may be legal constraints on disallowing all COGS; the BBBA changes to the BEAT would disallow certain indirect costs capitalized into COGS but not direct costs.
  • It appears the UTPR disallowance (as applied both by US as well as foreign entities) would still apply to a US entity's low-taxed foreign branches (including foreign disregarded entities held directly by US entities), since foreign branches are not subject to GILTI and also do not appear to be included in the domestic minimum top-up tax. While the effective tax rate of those branches would include US taxes paid by the US owner, this may not always result in an effective tax rate above the Pillar Two minimum rate due to, for example, FTC blending.
  • The proposal contemplates authorizing Treasury to determine if other countries' IIR or UTPR is "qualified." It is unclear whether this determination will be linked with a multilateral review process or be made unilaterally by Treasury.

Finally, the proposal is estimated to raise $243 billion over 10 years, making it one of the largest revenue raisers in the Budget. The estimate, however, assumes that other countries do not adopt IIRs, UTPR, or QDMTTs. In reality, the expected revenue will be significantly lower once other countries adopt their own Pillar Two rules.


Contact Information
For additional information concerning this Alert, please contact:
Ernst & Young LLP (United States), International Tax and Transaction Services
   • Jeff Michalak, Detroit (
   • Craig Hillier, Boston (
   • Colleen O’Neill, Washington, DC (
   • Barbara Angus, Washington, DC (
   • Martin Milner, Washington, DC (
   • Arlene Fitzpatrick, Washington, DC (
   • Julia Tonkovich, Washington, DC (
   • Zach Pouga Tinhaga, New York (
   • Jason Yen, Washington, DC (
   • Adam Becker, Washington, DC (
   • Anna Moss, Washington, DC (
   • Jee Park, Washington, DC (


1 It appears that the Administration views the CAMT, which applies to a worldwide group (and thus includes income of foreign affiliates), as a domestic tax that would be partially pushed down to various foreign affiliates for purposes of measuring their effective tax rate under Pillar Two.