The US Senate Finance Committee on 16 June released the tax and health sections of Senate Republicans' version of the House-passed budget reconciliation bill (H.R. 1). The Senate bill shares broad outlines with the House bill, including extension of expiring TCJA provisions, but also contains significant differences in the international tax area and modifications to Inflation Reduction Act energy tax credits.

Senate Majority Leader John Thune (R-SD) and other leaders spent the past week discussing and negotiating changes to the legislation with members, with floor consideration and a vote planned the week of 23 June. Senate Finance Committee Chairman Mike Crapo (R-ID) confirmed that the bill will not be marked up in committee, meaning there will be a more leadership-driven effort to modify the bill to satisfy both Republican Senators and possibly House members. The Senate bill is expected to be modified before reaching the floor for a vote.

Among the major international changes, the Senate bill would reduce the deduction for global intangible low-taxed income (GILTI) and foreign derived intangible income (FDII), thereby increasing the effective US tax rate on this income. The GILTI deduction would be 40% and the associated foreign tax credit (FTC) disallowance would be 10% (such that a foreign effective tax rate of 14% or higher would result in 0% GILTI top-up tax). The FDII deduction would be 33.34% (resulting in a federal effective tax rate of 14%). Importantly, no expenses would be apportioned to GILTI for FTC limitation purposes, and no expenses would be apportioned to reduce the FDII deduction. Instead, only directly allocable expenses would reduce the FTC limitation and deduction.

The changes to the base erosion and anti-abuse tax (BEAT) rules proposed by the Senate bill are significant. For example, the BEAT rate would increase to 14% and the base erosion percentage threshold would decrease to 2% from 3%. In addition, payments subject to an 18.9% or higher rate of foreign tax would be excluded, and certain capitalized interest would be treated as a BEAT payment.

One of the more notable — and discussed — provisions in the House bill is new IRC Section 899. Proposed IRC Section 899 would increase income tax and withholding tax rates and expand the application of the BEAT rules on certain foreign-parented groups and inbound investors resident in countries with "unfair foreign taxes." The Senate bill amends the House provision by introducing a one-year delay in the provision (e.g., generally effective 1 January 2027 for calendar year taxpayers). It would also cap the rate increases at 15% (5% per year), instead of the cap of 20% over the statutory rate in the House bill, and would apply automatically to countries that enact undertaxed profits rules (UTPRs), but not digital services taxes (DSTs). Like the House bill, the Senate bill's new IRC Section 899 could also apply when a jurisdiction has certain other extraterritorial taxes. The one-year delay in IRC Section 899 is seen as providing the US Treasury time to negotiate a solution in relation to countries with so-called unfair foreign taxes.

The Senate bill also includes various miscellaneous international tax changes, including a permanent extension of the controlled foreign corporation (CFC) look-through in IRC Section 954(c)(6) and elimination of the one-month deferral election in IRC Section 898(c). The Senate reconciliation bill would also partially repeal IRC Section 863(b) solely for FTC purposes.

Further, the Senate version would reinstate IRC Section 958(b)(4) to preclude downward attribution from a foreign person to a US person in determining CFC status, among several other international tax changes.

Like the House bill, the Senate budget bill would permanently add back depreciation and amortization for purposes of IRC Section 163(j) and would permit immediate expensing of domestic research and experimentation expenditures under IRC Section 174A.

The IRS on 17 June, issued a news release (IR-2025-69) announcing improvements to the Pre-Filing Agreement (PFA) program in an effort to provide greater certainty to large business and international taxpayers. Enhancements include a redesigned PFA landing page, step-by-step filing instructions and updated program guidance. A Tax Alert provides details.