US House bill adds detail, moderation to corporate tax reform plans

By Doug Connolly, MNE Tax

Legislative corporate and international tax proposals to fund the Democrats’ budget reconciliation bill unveiled September 12 by House Ways and Means Committee Chairman Richard Neal (D-Mass.) contain the most comprehensive legislative language to date for Democratic tax reform plans.

Whereas the Biden Administration had proposed repealing significant portions of the Republicans’ 2017 tax reform, the House proposals largely retain but modify the 2017 provisions, while tempering Biden’s proposed corporate tax increases.

Together with Biden’s proposals released in May and the parallel Senate proposal released last month by Finance Committee Chairman Ron Wyden (D-Ore.), Democrats now have in place three key frameworks for honing the finer details of the tax reform that they seek to enact this fall.

Corporate tax rate increase for large corporations

The plan would increase the top corporate income tax rate to 26.5%, but that rate would apply only to income in excess of USD 5 million. The current 21% rate would continue to apply to corporate income in amounts between USD 400,000 and USD 5 million. A new reduced 18% rate would apply to corporate income up to USD 400,000. Corporations earning more than USD 10 million would be phased out of the graduated rate for the initial USD 5 million in income.

Biden had initially sought a 28% rate that would split the difference between the 21% corporate tax rate enacted by the Republicans in 2017 and the 35% rate in effect before then. The opening bid by Neal represents a slight concession to moderates, tempering the rate increase for large corporations, while adding a new tax cut for smaller corporations.

Tax on foreign earnings: GILTI, FDII, QBAI

The rate for global intangible low-taxed income (GILTI), which operates as a minimum tax on foreign earnings of US corporations, would increase to 16.5625% under the plan. This would be implemented by reducing the Internal Revenue Code (IRC) section 250 deduction from 50% to 37.5%. Thus, a 37.5% deduction would apply to the proposed 26.5% rate, producing the net 16.5625% rate. Currently, a 50% deduction applies to the 21% corporate tax rate, resulting in a 10.5% GILTI rate.

The GILTI proposal from the House marks another moderation of Biden’s plan. The Administration had proposed a 21% rate for GILTI, and both Treasury Secretary Janet Yellen and numerous congressional Democrats in recent days have reiterated their support for the 21% rate. Although less than what many Democrats seek, the House’s proposed rate would still be slightly more than the global minimum tax rate of 15% agreed under OECD-led negotiations (although that rate could still be negotiated higher).

In addition, the House plan would move GILTI to country-by-country calculation, as proposed by Biden and stipulated in the OECD-led international deal. Currently, US corporations can blend income from different jurisdictions when calculating GILTI. Country-by-country calculation is intended to prevent corporations from avoiding the minimum tax by blending income in low-tax jurisdictions with income from high-tax jurisdictions, but it carries with it more burdensome calculations for corporations. The recent Senate plan proposed an exclusion for certain income subject to relatively high effective tax rates.

Unlike the Biden plan and Senate plan, the House plan does not propose to eliminate the exclusion for qualified business asset income (QBAI). However, it would reduce the exclusion from 10% to 5%, except for certain returns in US territories.

The plan would also reduce the IRC 250 deduction for foreign-derived intangible income (FDII) to 21.875%, resulting in a 20.7% FDII rate. Biden had proposed repealing the deduction for FDII, while the Senate plan would retain but retool it.

Base erosion and anti-abuse tax

The House plan would also retain the base erosion and anti-abuse tax (BEAT), while accelerating and expanding the increase in the BEAT rate. BEAT applies an additional tax to certain large corporations that make a significant amount of base eroding payments to related foreign entities. As enacted by the 2017 Tax Cuts and Jobs Act, a 10% rate applies under BEAT, with the rate scheduled to increase to 12.5% for tax years beginning in 2026.

Under the House proposal, the increase in the BEAT rate to 12.5% would be moved up two years to 2024. For tax years beginning in 2026, the rate would further increase to 15%. Taxpayers would be able to take tax credits into account in computing BEAT.

The Biden Administration has been critical of BEAT and had proposed repealing it entirely, suggesting instead replacing it with an alternative proposed “stopping harmful inversions and ending low-tax developments” (SHIELD) rule. Like the House plan, the Senate plan also declined to adopt Biden’s SHIELD proposal, opting instead for a revision of BEAT.

Foreign tax credit determinations on country-by-country basis

Companies would also have to determine foreign tax credits on a country-by-country basis for purposes of IRC 904, IRC 907, and IRC 960 under the House plan. This determination would require assigning each item of income and loss to a “taxable unit” of the company that is tax resident of a country or has a taxable presence in a country through a branch. Taxable units would include controlled foreign corporations, branches, and interests in pass-through entities that are residents of other countries.

In addition, the plan would limit carryforwards of excess foreign tax credit limitations to the next five years (rather than 10) and repeal carrybacks of excess foreign tax credit limitations.

Interest expense limitation for international financial reporting groups

Certain domestics corporations that are members of international financial reporting groups would face new limits on interest deductibility under the House plan. New Internal Revenue Code section 163(n) would limit interest deductions for such companies to an “allowable percentage” of 110% of net interest expense – with the allowable percentage calculated as the ratio of the corporation’s allocable share of the group’s net interest expense over the corporation’s reported net interest expense. 

Other international provisions

The plan would also modify foreign tax credit rules applicable to certain taxpayers receiving specific economic benefits, increase the deemed paid credit for taxes attributable to GILTI, and amend the participation exemption for foreign portions of dividends from certain 10-percent owned corporations.

Furthermore, additional international proposals in the House plan would repeal the election for a one-month deferral in determining the tax year of specified foreign corporations, limit foreign base company sales and services income, and expand the definition of “foreign oil-related income” to include oil shale and tar sands.