On Friday 19 November, the U.S. House of Representatives approved a modified version of President Biden’s ‘Build Back Better’ bill, which includes several important tax provisions for international and corporation tax. These provisions would bring the U.S. tax regime into line with the recent OECD global tax deal, as well as (among other provisions for non-corporate taxpayers) provide four weeks’ paid leave for caregivers, expanded premium tax credit, a housing credit increase, a change to pension contributions, and extensions of child tax credit and refundability.
Though the bill is still to pass the Senate, we thought we’d take a look at the modified bill.
For taxes relevant to businesses, we note the following points:
- 15% minimum corporation tax: The bill would impose the OECD’s agreed minimum 15% tax on the profits of corporations reporting over $1 billion in profits to shareholders. This would also affect any corporation (except S-corporations, regulated investment companies or real estate investment trusts) which has an average annual adjusted financial statement income over $1 billion. For corporations with foreign parents, the threshold drops to £100 million.
- 1% surcharge on corporate stock buybacks: The bill places a tax equal to 1% of the fair market value of any stock that a corporation repurchases during the year, in effect for repurchases after 31 December 2021. Applicable to any domestic stock traded on an established market.
- Interest expense deduction limit: New limits to the amount of net interest expense for certain domestic corporations (and foreign corporations engaged in U.S. trade or business) that are members of an international financial reporting group. Limits the deduction to an “allowable percentage” of 110% of the corporation’s net interest expense.
- FDII and GILTI: The bill would reduce the applicable deduction percentage of foreign-derived intangible income (FDII) from 37.5% to 24.8%. Global intangible low-taxed income (GILTI) would reduce from 50% to 28.5%. These reductions result in an effective FDII rate of 15.8% and a GILTI rate of 15%. The bill also allows the FDII deduction to be taken into account for determining a net operating loss deduction. There would also be amendments to make the GILTI provisions apply on a country-by-country basis, based on controlled foreign corporation taxable units.
- Foreign tax credit limits: The bill would apply foreign tax credits on a country-by-country basis, by taxable unit – which would include the taxpayer corporation, each foreign corporation of which the taxpayer is a shareholder, interests held by the taxpayer in a passthrough entity, and any foreign branch of the taxpayer – and the bill would repeal the carryback of the foreign tax credit. These changes would be applicable to fiscal years starting after 31 December 2022.
- Country-by-Country minimum tax on foreign profits: The bill would adjust the base-erosion and anti-abuse tax regulations to gradually increase the applicable percentage from 10% to 12.5% in 2023, 15% in 2024, and 18% thereafter. Companies paying an effective foreign tax rate of 15% (or 18% after 2024) would not be subject to the tax.
- State and Local Tax (SALT) deduction: the deduction cap would increase from $10,000 to $80,000, and would run through to 2031.
In addition, the ‘Build Back Better’ bill would make commodities, foreign currencies and cryptoassets subject to the wash-sale rules, and imposes high income surcharges on estates and trusts.
There are also a variety of green energy incentives, ranging from: a tax credit to production of energy from renewable sources (including nuclear and hydrogen), credit for residential energy efficient property to run til 2033, a new investment tax credit for advanced manufacturing facilities (up to 25%), credits for purchase of qualified commercial electric vehicles, and a technology-neutral tax credit for the domestic production of clean fuels.
Though yet to be approved by the Senate and made law, these changes would have definitive effects for corporations headquartered in, or operating in, the U.S..
We will keep you advised of further developments, but you should contact our U.S. Tax Team if you have any questions.
Local Knowledge – International Coverage
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