16 May 2025 US House Ways and Means Committee approves tax reconciliation bill, including several international tax provisions
On May 14, 2025, the House Ways and Means Committee approved a nearly 400-page budget reconciliation bill encompassing the full array of tax provisions and revenue offsets meant to accompany extensions of the 2017 Tax Cuts and Jobs Act (TCJA) provisions expiring at the end of 2025. This approval came after the release of an initial bill on May 9, 2025, which mostly focused on the extensions of TCJA provisions, and the subsequent release of the present bill on May 12, 2025. Below are the key international provisions in the Bill:
Under IRC Section 951A, a US shareholder of a controlled foreign corporation (CFC) must include GILTI in gross income. GILTI is the excess of a US shareholder's net CFC tested income over its net deemed tangible income return. In determining a CFC's tested income (which is taken into account when computing a US shareholder's net CFC tested income), certain types of income (for instance, income effectively connected with a US trade or business and subpart F income) are excluded. Under IRC Section 250, for tax years beginning before January 1, 2026, a domestic corporation may deduct 50% of its GILTI, including the corresponding deemed-paid foreign taxes treated as a dividend under IRC Section 78. Unlike the full 21% corporate tax rate applied to subpart F income, the IRC Section 250 deduction results in a 10.5% effective corporate tax rate on GILTI before applying any foreign tax credits. For tax years beginning after December 31, 2025, the GILTI deduction rate decreases to 37.5%, with an effective corporate tax rate on GILTI increasing to 13.125%. The Bill would also exclude from the definition of tested income any "qualified Virgin Islands services income" with respect to a "specified [US] shareholder." Qualified Virgin Islands services income is gross services income earned in the Virgin Islands or gross income effectively connected with a trade or business in the Virgin Islands. A specified US shareholder is a US shareholder that is an (i) individual, trust, or estate; or (ii) a closely held C corporation that acquired its interest in a foreign corporation that derived qualified Virgin Islands services income before December 31, 2023. The provision on the GILTI deduction rate would be effective for tax years beginning after December 31, 2025. The provision on the exclusion of qualified Virgin Islands services income from tested income would be effective for foreign corporations' tax years beginning after the date of the Bill's enactment and to tax years of US shareholders with or within which the foreign corporations' tax years end. Similar to GILTI, for tax years beginning before January 1, 2026, a domestic corporation may deduct 37.5% of its FDII under IRC Section 250, which results in an effective corporate tax rate of 13.125% on FDII. Like GILTI, the deduction rate for FDII would decrease to 21.875% for tax years beginning after December 31, 2025, causing the effective corporate tax rate on FDII to increase to 16.406%. Generally, the deduction for FDII is available only for deemed intangible income that a domestic corporation derives from selling products or providing services to unrelated foreign persons when that product or service is for foreign use by the customer. In addition to any other income tax, for tax years beginning before January 1, 2026, an applicable taxpayer for purposes of BEAT must pay a "base erosion minimum tax amount" (BEMTA) equal to the excess (if any) of 10% of its modified taxable income over its regular tax liability as reduced by certain income tax credits. An applicable taxpayer that is a member of an affiliated group that includes a bank (as defined in IRC Section 581), or securities dealer registered under Section 15(a) of the Securities Exchange Act of 1934 is subject to a tax rate on its modified taxable income that is one percentage point higher than the generally applicable tax rate. For tax years beginning after December 31, 2025, the BEAT rate increases from 10% to 12.5% (or 13.5% for members of affiliated groups that include a bank or registered securities dealer) and the regular tax liability decreases (and the BEMTA therefore increases) by the sum of all the taxpayer's income tax credits for the tax year. The Bill would make permanent the 10% BEAT rate (or 11% for members of affiliated groups that include a bank or registered securities dealer). It would also eliminate the post-2025 scheduled change that would reduce regular tax liability (and increase the BEMTA) by the sum of all the taxpayer's income tax credits for the tax year. Other conforming amendments would also be made to reflect renumbering of certain paragraphs. IRC Section 163(j) limits the business interest expense that may be deducted in a tax year to the sum of (i) the taxpayer's business interest income, as defined in IRC Section 163(j)(6), (ii) 30% of the taxpayer's adjusted taxable income (ATI), as defined in IRC Section 163(j)(8), and (iii) the taxpayer's floor plan financing interest, as defined in IRC Section 163(j)(9). For tax years beginning before January 1, 2022, a taxpayer's ATI was based on earnings before interest, taxes, depreciation, and amortization (EBITDA). Thereafter, a taxpayer's ATI is computed with regard to any deduction allowable for depreciation, amortization, or depletion (i.e., the IRC Section 163(j) limitation is generally based on earnings before interest and taxes (EBIT)). The Bill would amend IRC Section 163(j)(8)(A)(v) to provide that ATI is again computed without regard to any deduction allowable for depreciation, amortization, or depletion (i.e., based on EBITDA). The provision would be effective for tax years beginning after December 31, 2024, and before January 1, 2030. Proposed IRC Section 899 would introduce a new regime that targets "discriminatory foreign countries" with one or more "unfair foreign taxes" by increasing various rates of tax on "applicable persons" of those countries, including individuals (other than a citizen or resident of the United States), foreign governments, foreign corporations, certain trusts, and certain foreign partnerships. The definition of "applicable person" also includes any non-publicly held foreign corporation where more than 50% of its vote or value is owned (within the meaning of IRC Section 958(a)) by applicable persons. An "unfair foreign tax" is defined as an undertaxed profits rule (UTPR), a digital services tax (DST), and a diverted profits tax (DPT). An unfair foreign tax would also include, to the extent provided by the Secretary, an extraterritorial tax, a discriminatory tax, or any other tax enacted with a public or stated purpose to be economically borne, directly or indirectly, disproportionately by US persons. For any applicable person, the Bill would require annual increases in the "specified rate of tax." The term "specified rate of tax" would generally include:
Regarding ECI of individuals, the rate increase would apply only to tax imposed on gains from the disposition of a US real property interest (USRPI). As it relates to foreign governments, the Bill would eliminate the exemption under IRC Section 892 for certain income of foreign governments that are applicable persons. The Bill would also require an increase in certain withholding taxes under IRC Sections 1441(a), 1442(a), 1445(a) and 1445(e). The tax rate increase would correspond to the "applicable number of percentage points" in effect for the relevant discriminatory foreign country during the taxpayer's tax year. The "applicable number of percentage points" generally means, with respect to any discriminatory foreign country, 5 percentage points during the first one-year period beginning on the applicable date; that amount would increase by an additional 5 percentage points for each one-year period thereafter. The Bill includes a cap on such increases so that the rate increases would not exceed the relevant statutory rate by more than 20 percentage points. Although the Bill does not refer to tax treaties, the JCT Report1 explains that if another rate of tax applies in lieu of the statutory rate of tax, "such as pursuant to a treaty obligation of the United States," the other rate would increase by the applicable number of percentage points. That is, the other rate would continue to increase by 5 percentage points every year up to the statutory rate (rather than the rate applicable in lieu of the statutory rate) plus 20 percentage points. As a result, for example, the tax rate applicable to FDAP income could increase to 50% to the extent that a country remains a discriminatory foreign country, notwithstanding a lower rate provided in an applicable US income tax treaty. Further, the Bill would modify BEAT for non-publicly held US corporations (and foreign corporations with ECI) that are more than 50% owned by vote or value (within the meaning of IRC Section 958(a)) by applicable persons. For those US corporations (and foreign corporations with ECI), BEAT would apply as if the corporation met the average annual gross receipts test under IRC Section 59A(e)(1)(B) and the base erosion percentage test under IRC Section 59A(e)(1)(C). The Bill would also modify the BEAT rules for these corporations so that the BEAT rate would increase from 10% to 12.5%, and the addback of certain tax credits would not apply. Additionally, it would eliminate several important base-erosion-payment exceptions: (i) amounts subject to withholding under IRC Sections 1441 or 1442, and (ii) amounts paid or accrued for services eligible for the services cost method (SCM) under IRC Section 482. Lastly, certain amounts that would have been treated as base erosion payments but for the fact that the taxpayer capitalized them would be treated as deductions for calculating base erosion payments and base erosion tax benefits of such corporations. The JCT Report notes that the Bill would be effective on the date of enactment. Once enacted, the proposed modifications to BEAT and the rate increases on taxes other than withholding taxes would generally apply to tax years beginning after the later of: (i) 90 days after the enactment of IRC Section 899, (ii) 180 days after the enactment of the unfair foreign tax that resulted in the country's treatment as a discriminatory foreign country, and (iii) the date that the unfair foreign tax of that country begins to apply. The rate increases on withholding taxes are proposed to apply for each calendar year that the person is an applicable person as long as the foreign country is listed as a discriminatory foreign country by the Secretary (or for certain foreign corporations or trusts that are applicable persons because their owners or beneficiaries are applicable persons, only so long as the discriminatory foreign country and its applicable date have been so listed for at least 90 days). The applicable date for a discriminatory foreign country would be the first day of the first calendar year beginning on or after the latest of
or
The applicable number of percentage points in effect for the discriminatory foreign country for the period before the applicable date would be treated as zero. If enacted, the Bill is expected to have a broad and significant impact given the definition of "applicable person" includes foreign governments, individuals (other than a citizen or resident of the United States), and various foreign entities. In addition, a non-publicly held foreign corporation, more than 50% (by vote or value) of which is (directly or indirectly) held by an applicable person, is treated as an applicable person. Therefore, such corporation, if held by an applicable person, would fall within the Bill's scope, even though the corporation may not be a tax resident of a discriminatory foreign country. Similarly, the changes to the BEAT rules would place certain taxpayers that previously fell outside of BEAT within its scope. For example, non-publicly held corporations that are more than 50% owned by applicable persons but are currently not subject to BEAT because they do not satisfy the gross receipts and base erosion percentage thresholds could be subject to significant BEAT taxes. The Bill would be partially "self-executing" for certain foreign taxes. Specifically, foreign countries with a UTPR, DST, or DPT, by definition, would be treated as having unfair foreign taxes and thus, as discriminatory foreign countries. However, the Secretary must still issue guidance to identify discriminatory foreign countries with discriminatory or extraterritorial taxes. Because the Bill includes a safe harbor for withholding taxes, the increase in withholding rates would not apply until the Secretary issued guidance listing the discriminatory foreign country with respect to which a person is an applicable person. For certain foreign corporations or trusts that are applicable persons because of their owners, rate increases on withholding taxes would not apply unless the discriminatory foreign country (and its applicable date) were listed in such guidance for 90 days or more.
Document ID: 2025-1075 | ||||||||
