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United States (US) Senate Finance Committee Chairman Ron Wyden and Senators Sherrod Brown and Mark Warner on 5 April released “Overhauling International Taxation: A framework to invest in the American people by ensuring multinational corporations pay their fair share,” which focuses on changes to the 2017 Tax Cuts and Job’s Act (TCJA) international provisions on global intangible low-taxed income (GILTI), foreign-derived intangible income (FDII), and the base erosion and anti-abuse tax (BEAT).

The framework aims to “reboot the international tax system” to better “focus on rewarding companies that invest in the U.S. and its workers, stop incentivizing corporations to shift jobs and investment abroad, and ensure that big corporations are paying their fair share.” The nine-page document leaves several policy options undetermined, does not include legislative language, and in some ways suggests alternative approaches to the Made in America Tax Plan’s international changes proposed by President Biden on 31 March, which also leave many details unspecified.

Proposed GILTI changes under the framework would:

• Repeal the exemption for qualified business asset investment (QBAI, which is intended to be roughly the value of offshore tangible assets)

• Increase the GILTI rate by an unspecified amount. The framework poses the question of whether the GILTI rate should equal the corporate tax rate, creating a worldwide tax system, or should be a percentage of the corporate rate. The framework adds that the rate could “depend heavily on corresponding decisions regarding the U.S. corporate rate, base stripping protections, and other potential incentives or disincentives for U.S. and foreign investment”

• Use a “country-by-country” system for applying GILTI, perhaps through either:

  • Expanding the existing system for foreign tax credits with the use of foreign tax credit baskets determined by jurisdiction

  • Dividing global income into two buckets—low-tax and high-tax buckets with GILTI only applied to income from low-tax jurisdictions; the rate for the low-tax bucket remains open. If this path is chosen, the framework notes that the Trump Administration’s final regulations creating a high-tax election under the GILTI rules provide a ready-made framework for a two-bucket approach, albeit one that would be mandatory rather than voluntary

A new “incentive to onshore research and management jobs” called for under the framework would provide relief from US expense allocation rules that currently impact the GILTI foreign tax credits – “expenses for research and management that actually occur in the U.S. should be treated as entirely domestic expenses, eliminating foreign tax credit penalties under GILTI and helping retain these activities in the U.S.”

FDII changes would “repair” the current rules by:

• Repealing the exemption for QBAI

• Replacing FDII’s “deemed intangible income” with a new metric, “deemed innovation income,” which would be an “amount of income equal to a share of expenses for innovation-spurring activities that occur in the U.S., such as research and development and worker training”

• Equalizing the FDII and GILTI rates (which seems at odds with a GILTI rate that could potentially match the corporate income tax rate). It’s notable that the Administration would repeal the FDII rules

BEAT changes call for more effectively penalizing base erosion through a second rate bracket such that “regular taxable income would still be subject to a 10% rate, while base erosion payments would be subject to a higher rate.” The value of domestic tax credits that currently increase BEAT exposure would be restored and a similar proposal for the loss of value in foreign tax credits could be addressed with an increased BEAT rate.

In contrast, the Biden Administration has called for repealing the BEAT and replacing it with a new anti-base erosion regime more akin to the undertaxed payment rule being developed by the Organisation for Economic Co-operation and Development as a backstop to its global minimum tax regime.

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For additional information with respect to this Alert, please contact the following:

Washington Council Ernst & Young, Washington, DC

• Any member of the group, at +1 202 293 7474