TAX TAKE: Potential Reconsideration of the CFC Look-Through Rule/Nomination of Professor Lily Batchelder to Lead the Office of Tax Policy

Tax Alert

Those of us who thought we would have to wait until the publication of the Greenbook to get a flavor of what future international tax reforms might look like got an unexpected preview last Thursday night, when Rep. Lloyd Doggett (D-TX) and Sen. Sheldon Whitehouse (D-RI), key members of the House Ways and Means Committee and Senate Finance Committee, respectively, introduced the Stop Tax Haven Abuse Act. The bill is a veritable buffet of international tax provisions designed to increase transparency, introduce stricter reporting requirements and make substantial technical modifications to existing regimes like BEAT, subpart F, and FATCA.

Surprisingly, the bill repeals the popular CFC look-through provision. Originally enacted as part of the Tax Relief Extension Reconciliation Act of 2005, the measure passed with bipartisan support in both the House and the Senate. Most recently, of course, the provision was extended through 2025 as part of the Consolidated Appropriations Act, 2021. The policy rationale proffered in the Ways and Means Committee Report makes clear that the CFC look-through rule is meant to facilitate the redeployment of active earnings generated at the CFC level. While the nature of the payments subject to the rule might otherwise be generally characterized as passive (dividends, interest, rents, and royalties), that they are received from another CFC in whose hands the amounts paid would be neither passive (and therefore, subject to the subpart F regime) nor ECI supports exempting them from the recipient's subpart F income. In a post-TCJA world, where the GILTI regime is designed to isolate and tax a portion of a CFC's active earnings, query whether the repeal of CFC look-through will be as much of a revenue raiser as anticipated. Proposing the "simple" repeal of provisions that were of sound policy in a system of worldwide taxation with deferral should be looked at holistically, with due consideration given to interactions with the international tax framework implemented under TCJA.

This bill will be important to monitor given the key role that Congressman Doggett and Senator Whitehouse play on the tax-writing committees and the strong likelihood we will have additional tax packages considered later this year.

In Other News 

It has been confirmed that Lily Batchelder, a professor at the New York University School of Law who also served in the Obama White House and as chief tax counsel of the Senate Finance Committee, will be the administration's nominee for the Assistant Secretary of Tax Policy role at the Treasury Department. With her extensive tax policy background, Batchelder has long been rumored to be the top pick for the position, and now that staffing is complete, we can expect to see an uptick in activity – hopefully beginning with the issuance of the Greenbook in the next few weeks. #TaxTake

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