{"id":1575,"date":"2021-10-04T10:01:26","date_gmt":"2021-10-04T14:01:26","guid":{"rendered":"https:\/\/www.bowditch.com\/estateandtaxplanningblog\/?p=1575"},"modified":"2022-08-10T15:37:21","modified_gmt":"2022-08-10T19:37:21","slug":"impact-of-house-ways-and-means-tax-proposals-for-international-operations","status":"publish","type":"post","link":"https:\/\/www.bowditch.com\/estateandtaxplanningblog\/2021\/10\/04\/impact-of-house-ways-and-means-tax-proposals-for-international-operations\/","title":{"rendered":"Impact of House Ways and Means Tax Proposals for International Operations"},"content":{"rendered":"

In this final blog post on the House Ways and Means Tax Bill, we address the international tax proposals in the Bill, JCX-43-21<\/a>.\u00a0 The international tax proposals are fewer in number than the domestic and transfer tax proposals, but fundamentally change Congress\u2019s approach with the Tax Cuts and Jobs Act of 2017 to provide carrots and sticks to multi-national businesses to invest in the United States.\u00a0 Therefore, it is helpful to review the history of the Tax Cuts and Jobs Act of 2017 (the 2017 Act) to understand the impact of the current House proposals.<\/p>\n

Prior to 2017, the United States taxed U.S. multinational corporations on all income, wherever derived, at 35% corporate tax rates.\u00a0 The U.S. imposed this tax on business income earned by foreign subsidiaries generally only when the foreign subsidiary distributed such income to its U.S. parent.\u00a0 In addition, U.S. multinational corporations could offset such foreign income with credits for foreign taxes paid by the foreign subsidiary.\u00a0 Many countries outside the U.S., however, tax business income only when earned within their borders and at significantly lower rates than the U.S.\u00a0 Thus, foreign-based multi-national corporations could often operate with significantly lower effective tax costs than U.S.-based multinational corporations.\u00a0 In addition, U.S.-based multinational corporations who invested capital and jobs overseas, often in jurisdictions with lower effective tax rates, could operate with significantly lower tax costs than U.S.-based corporations with domestic operations.\u00a0 In particular, many U.S.-based multinational corporations moved intellectual property assets to low-tax jurisdictions (and related research and development jobs).\u00a0 The U.S. parent reinvested earnings from such foreign assets abroad, rather than repatriate the earnings to the U.S. to avoid U.S. corporate tax.<\/p>\n

The 2017 Act changed this competitive world landscape by cutting the U.S. corporate tax rate to 21%.\u00a0 It eliminated the U.S. corporate tax on foreign subsidiary business income. \u00a0The 2017 Act added a \u201cstick\u201d of a one-time corporate tax on U.S. corporate earnings invested overseas (at 15.5% or 8% rates, depending on whether the earnings were invested in cash or non-cash assets). \u00a0In addition, the 2017 Act introduced a 10.5% current tax on foreign subsidiary income considered to be \u201cglobal intangible low-taxed income\u201d or \u201cGILTI.\u201d GILTI is income generated by intangible assets held by foreign subsidiaries in low-tax jurisdictions.\u00a0 Under the 2017 Tax Act, the GILTI tax rate was scheduled to increase to 13.125% for taxable years starting on January 1, 2026.<\/p>\n

The 2017 Tax Cuts and Jobs Act reduced incentives for foreign multinational corporations with U.S. subsidiaries to reduce U.S. taxes with deductible-related party payments and U.S. subsidiary debt (and related interest costs).\u00a0 The 2017 Act reduced the interest expense tax deduction for U.S. corporations from 50% of adjusted taxable income to 30% of adjusted taxable income.\u00a0 In addition, the 2017 Act introduced a \u201cBase Erosion and Anti-Abuse Tax\u201d (\u201cBEAT\u201d) on certain payments to foreign related parties from large corporations with more than $500 million in gross revenue.\u00a0 The BEAT operates as a minimum tax (10% for 2019 through 2025, and 12.5% for years after 2025) on such payments to foreign-related parties.<\/p>\n

To encourage investment in U.S. industry, research, and development, the 2017 Act introduced a carrot of a lower tax rate for foreign export income, e.g., foreign sales or licenses of products or services made or provided by U.S. corporations.\u00a0 Under the 2017 Act, any U.S. corporation is taxed at a rate of 13.125% on this foreign-derived intangible income (\u201cFDII\u201d).\u00a0 The FDII tax rate is scheduled to increase to 16.406% for tax years starting on January 1, 2026.<\/p>\n

In September 2021, however, the Congressional House Ways and Means Committee introduced the following international taxation proposals that would change again the U.S. multinational corporate tax landscape.<\/p>\n