TAX TAKE: International Tax Debate Heats Up on GILTI, BEAT, and FDII

Tax Alert

The international tax debate heated up last week with the release of (i) the highly-anticipated "international tax framework" from Senate Finance Committee Chairman Ron Wyden (D-OR) and Senators Sherrod Brown (D-OH) and Mark Warner (D-VA), and (ii) an unexpected report from the Biden Administration providing additional details on the Made in America Tax Plan. Although the policy objectives of both proposals are similar, they provide different options with respect to the core provisions enacted as part of the Tax Cuts and Jobs Act (global intangible low-taxed income (GILTI), base erosion and anti-abuse tax (BEAT), and foreign-derived intangible income (FDII)), with the Wyden proposal arguably more business-favorable in its approach than that of the Biden Administration.
With respect to GILTI, the Wyden proposal would repeal the qualified business asset investment (QBAI) exemption, increase the GILTI rate by an unspecified amount (noting that prior Democratic proposals have called for minimum tax rates ranging from 60 to 100 percent of the domestic corporate rate), and move to a country-by-country approach to calculating inclusion amounts. The framework offers an alternative to a strict country-by-country approach, whereby the GILTI framework would only be applied to low-tax jurisdictions, determined after having applied the GILTI high-tax exclusion regulations. Further, the framework proposes to treat U.S. research and development expenditures as entirely domestic expenses, which would mitigate the effect that the current expense allocation and apportionment rules have on the calculation of available GILTI foreign tax credits. The Biden proposal also calls for a repeal of the QBAI exemption, increases the GILTI rate to 21 percent (or 75 percent of the proposed domestic corporate rate), and moves to a country-by-country approach. With respect to the BEAT, the Wyden proposal would provide full value for domestic business credits (and potentially address the interaction of the BEAT with foreign tax credits, depending on the amount of revenue available) and introduce a tiered rate structure whereby regular taxable income would remain taxed at the 10 percent rate, but the tax imposed on base erosion payments would be increased to an unspecified amount above 10 percent. The Biden proposal, by contrast, would repeal the BEAT and replace it with the SHIELD (Stopping Harmful Inversions and Ending Low-tax Developments), which would deny tax deductions by reference to payments made to related parties that are subject to a low effective rate of tax (i.e., a full endorsement of the undertaxed payments rule approach of Pillar 2). The low tax threshold would be defined by reference to the rate agreed on in a multilateral agreement or, if no agreement is reached before the enactment of domestic legislation, the GILTI rate. Finally, with respect to FDII, the Wyden proposal would repeal the current FDII provision and replace it with a new incentive on so-called "deemed innovation income," an amount of income equal to a share of expenses for research and development and worker training in the U.S. The Wyden proposal would also equalize the FDII and GILTI rates. The Biden proposal would simply repeal FDII without a replacement, although it notes that the revenue raised would be deployed to incentivize research and development in the U.S.
As the Administration and Congressional Democrats seek to reconcile these different approaches to GILTI, BEAT, and FDII, it is hoped that policy, rather than revenue concerns, drives their analysis and that a comprehensive view of the international tax system is taken into account in determining whether any considered changes will have a beneficial impact on the competitiveness of U.S. multinational corporations and the U.S. economy generally, as it continues to recover from the COVID-19 pandemic. #TaxTake

Upcoming Speaking Engagements and Events

On April 15, Loren will participate in a Maryland State Bar Association panel discussion titled Diversity in Tax Law.

Jorge and Loren will deliver a 2021 Tax Policy Update in a webinar sponsored by the National Association of Black Accountants (NABA) and TEI Chicago on April 20. 

On April 20, Loren will present Perspectives on Tax Policy and Closing the Wealth Gap at the Perspectives on Minority Business Development Symposium.

Jorge will present a Tax Legislative Update to the Tax Executives Institute's Denver Chapter on April 21.

On May 12, Loren will present Overlay of Potential International Tax Reform and OECD Pillars I and II, a panel discussion at the ABA Virtual 2021 May Tax Meeting.

In The News

Loren commented on the likely impact of President Biden's tax plan on pharmaceutical and tech companies in Bloomberg. Loren said that the Tax Cut and Jobs Act (TCJA) "went a long way to increasing U.S. multinationals' competitiveness," and suggested that future refinements – which are inevitable – could present opportunities to build on past reforms in a more nuanced way.

Loren was quoted in The Wall Street Journal regarding President Biden's infrastructure-financing corporate tax plan which proposes an increase in the corporate tax rate from 21 percent to 28 percent. "What we want to do in any tax bill is keep U.S. multinationals competitive and of course encourage domestic activity," Loren said. "Under these proposals, I think there is just a denial of the fact that in 2021, companies operate globally."

Loren and Jorge discussed President Biden's Made in America Tax Plan which advocates for the "complete elimination" of the FDII provision in Tax Notes. "I think you have to look at this in the totality. . . . All of this is colored by the proposal to raise the corporate rate," Jorge said adding that he hoped for "more detail in the Greenbook." Loren called the proposed elimination of FDII "troubling" for companies. "If it's in response to a fear that the WTO might find it to be a prohibitive export subsidy, [the repeal is] premature," she said. "We're not there yet; the provision goes under review by the [OECD forum]. To repeal it at this point is harmful to many businesses."

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