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August 27, 2021
2021-5900

Report on recent US international tax developments 27 August 2021

In a major development this week, members of the United States (US) House of Representatives returned to Washington from its summer recess and adopted the Senate-passed FY 2022 budget resolution on 24 August. The action paves the way for a potentially US$3.5 trillion1 package of Democratic priorities addressing “human infrastructure,” paid for in part by tax increases and that can pass the Senate with a simple majority vote. The final House vote (220-212, along party lines) reflected a last minute agreement among House Democratic leadership and House Democratic moderates that called for a vote on the Senate-passed $1.2 trillion infrastructure bill by 27 September. The budget resolution includes reconciliation instructions to various committees to report provisions under their jurisdictions by 15 September, though there is no penalty for missing the deadline.

The House Ways and Means Committee will begin a markup the week of 6 September, which likely will last for a number of days. The ultimate size of the proposed $3.5 trillion reconciliation bill is unclear at this time, with the amount of investments ultimately dictating the amount of pay-fors, including tax increases. Four general areas are targeted for potential investment: healthcare, energy, care-giving and education, and low-income tax credits. Pay-fors being considered by Democrats include corporate and international tax changes, individual tax increases targeting wealthier individuals, health and climate provisions – the latter including a possible polluter import fee – and dynamic scoring, which counts the macroeconomic effects of long-term growth in revenue calculations.

The House returns from the August recess on 20 September. The Senate returns to Washington on 13 September.

Senate Finance Committee Chairman Ron Wyden and Senators Sherrod Brown and Mark Warner on 25 August released additional details regarding the international tax framework they made public in April. It focuses on changes to the 2017 Tax Cuts and Jobs Act’s provisions on Global Intangible Low-taxed Income (GILTI), Foreign-derived Intangible Income (FDII), and the Base Erosion and Anti-abuse Tax (BEAT). The newly-released legislative text of the framework leaves some areas still uncertain, however, including the GILTI tax rate. The text also does not say how the BEAT might be changed to incorporate aspects of the Biden Administration’s Stop Harmful Inversions and Ending Low-Tax Developments (SHIELD) proposal.

Proposed GILTI changes 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
  • Use a “country-by-country” system for applying GILTI through dividing global income into two groups, low-tax and high-tax, with GILTI only applied to income from low-tax jurisdictions, while income from high-tax jurisdictions would remain subject to tax until repatriated

FDII changes would:

  • Repeal the exemption for domestic QBAI
  • Replace FDII’s “deemed intangible income” with a new metric, “domestic innovation income,” which would be research and development and worker training expenses
  • Equalize the yet-to-be-determined FDII and GILTI rates

The proposed changes to BEAT would follow the original framework’s proposal to give domestic business credits under Internal Revenue Code2 Section 38 full value, and would establish a second rate bracket applicable to “base erosion income,” which is the excess of modified taxable income over taxable income. Regular taxable income, excluding base erosion income, would remain subject to the 10% rate in the BEAT equation.

The Internal Revenue Service (IRS) announced in Notice 2021-51 that it will amend the regulations under Section 1446(a) and Section 1446(f) to defer the applicability date of certain provisions by one year, to 1 January 2023. The affected provisions relate to withholding: (i) on transfers of interests in publicly traded partnerships (PTPs); (ii) on distributions made with respect to PTP interests; and (iii) by non-publicly traded partnerships on distributions to transferees who failed to withhold properly. Taxpayers may rely on the modified applicability dates immediately.

Section 1446(f) is a collection mechanism for Section 864(c)(8), which treats gain or loss from the disposition of an interest in a partnership that is engaged in a US trade or business by a nonresident alien individual or foreign corporation as effectively connected with the conduct of that US trade or business to the extent the gain or loss is allocable to the partnership's US business assets. The IRS released final regulations (TD 9926) under Section 1446(f) in October 2020. The regulations originally were supposed to apply to withholding on certain transfers and distributions on and after 1 January 2022.

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

Ernst & Young LLP (United States), International Tax and Transaction Services, Washington, DC

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Endnotes

  • Currency references in this Alert are to the US$.
  • All “Section” references are to the Internal Revenue Code of 1986, and the regulations promulgated thereunder.
 
 

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