United States (US) House Ways and Means Committee Chairman Richard Neal on 13 September released tax increase proposals to partially fund the Democratic-sponsored US$3.5 trillion Build Back budget reconciliation bill. Several of the proposed provisions are consistent with the earlier proposals included in the Biden Administration’s FY 2022 Budget (i.e., the “Green Book”). There are, however, several important differences between this proposal and that previous proposal, particularly with respect to tax rates imposed on certain types of income and also many significant changes in the international tax area (e.g., interest limitation rules, foreign-derived intangible income (FDII) and the Base Erosion and Anti-Abuse Tax (BEAT)).

Later in the week, the Ways and Means Committee completed two days of markups of the tax and drug pricing portion of the reconciliation bill and approved the tax title on 15 September. There was significant debate over the international tax changes, but Republican amendments to block a proposed global intangible low-taxed income (GILTI) tax increase and a reduction in the FDII deduction were defeated (provisions discussed below). No amendments were approved to the committee’s original international proposals released at the beginning of the week.

The Ways and Means proposal contains significant changes to the rules for GILTI, foreign tax credits (FTCs) and the BEAT. The committee proposal also contains many additional international tax provisions with far-reaching implications. With many important exceptions, these provisions would be effective for tax years beginning after 31 December 2021.

Among the proposed tax changes is an increase in the corporate tax rate to 26.5% and an increase in the GILTI rate. The committee’s proposal would lower the Internal Revenue Code¹ Section 250 deduction percentage for GILTI from 50% to 37.5%. When combined with the proposed corporate tax rate of 26.5%, the resulting effective rate on GILTI would be 16.5625% and calculated on a country-by-country basis. Similarly, the Section 250 deduction percentage for FDII would decrease from 37.5% to 21.875%, yielding an effective FDII rate of 20.7%. The rate changes would generally apply to tax years beginning after 31 December 2021, with special transition rules for fiscal-year taxpayers.

The committee proposal would determine a US shareholder's FTC limitation for all baskets on a country-by-country basis, thus preventing excess FTCs from higher-tax jurisdictions from being credited against income from lower-tax jurisdictions. The proposal would also repeal the separate limitation category for foreign branch income. The current 20% haircut under Section 960(d) for foreign taxes attributable to GILTI inclusions would decrease to 5%.

The Ways and Means proposal would also significantly modify Section 59A, while retaining its general framework. The proposal would increase the BEAT rate from 10% to 12.5% for tax years beginning after 31 December 2023, and before 1 January 2026; for tax years beginning after 31 December 2025, the rate would increase from 12.5% to 15%.

See EY Global Tax Alert, US: Tax plan in House Ways & Means reconciliation bill offers new details on international tax proposals, dated 14 September 2021 for an overview of the committee’s international proposals.

In terms of process, the Ways and Means bill is to be combined with reconciliation pieces from other House committees by the Budget Committee, likely next week, but plans for floor consideration have not been announced. Discussions among Democratic leaders in the House and Senate are expected over the coming weeks to determine what Democratic moderates in the Senate can support. It is therefore possible that significant changes could be made to what the committees are sending to the Budget Committee, but those will not likely come until the bill is considered by the Rules Committee, prior to being brought to the House floor.

An Internal Revenue Service official in the Large Business and International (LB&I) division this week said they are seeing a significant increase in mutual agreement cases that are over US$1 billion, a trend that has magnified the challenges associated with complex case resolution. The official was quoted as saying that such large mutual agreement procedure (MAP) cases are “really difficult to handle in the dispute resolution setting” and LB&I is considering how to prevent such cases from getting into the MAP inventory.

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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

• Arlene Fitzpatrick | arlene.fitzpatrick@ey.com
• Joshua Ruland | joshua.ruland@ey.com

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Endnotes

1. All “Section” references are to the Internal Revenue Code of 1986, and the regulations promulgated thereunder.