Budget approach to international tax: Go big or go home

President Joe Biden released his budget for FY 2024 on March 9 with the “General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals” (Green Book). The Green Book outlines an amped-up revival of the Build Back Better Act’s international reforms, with a number of enhancements and a concentrated focus on alignment with the Organization for Economic Cooperation and Development’s (OECD’s) Pillar 2.

Specific international tax proposals

GILTI

The Green Book proposal to change GILTI refers to global minimum tax rather than to global intangible low-taxed income, the heading used by the IRC that spawned the popular GILTI acronym. The change in nomenclature is consistent with the administration’s stated objective to align GILTI with Pillar 2, but it represents a departure from the rationale that portable intangible income is presumptively abusive, which was used to justify the passage of GILTI in the Tax Cuts and Jobs Act of 2017.

The Green Book proposal also increases the effective tax rate for corporations subject to GILTI. In aggregate, the proposal to increase the corporate tax rate to 28% and the proposal to change the deduction afforded corporate GILTI taxpayers under IRC Section 250 would increase the effective tax rate for corporations subject to GILTI from 10.5% to 21%.

The Green Book also contains several other important changes to GILTI, including:

• Eliminating the exemption for qualified business asset investment
• Eliminating the foreign oil and gas extraction income exclusion from tested income
• Decreasing the haircut to foreign tax credits from 20% to 5%
• Eliminating the high-tax exclusion from tested income (similar provision for Subpart F income)
• Moving to a country-by-country rather than a global averaging calculation
• Allowing net operating loss carryforwards by country

Foreign tax credits

The primary change to the foreign tax credit rules proposed in the Green Book is incorporating a country-by-country determination consistent with the change to GILTI. The country-by-country feature would create separate basket limitations for GILTI and income from foreign branches for each country under Section 904(d), and the adjustment under Section 904(b)(4) would be repealed. The Green Book also contains a proposal to change the application of character and source rules related to the sale of a hybrid entity that would result in limitations on the use of foreign tax credits.

Crowe observation

The multiplication of separate limitation baskets is likely to result in lost foreign tax credits and would add significant complexity to the compliance process.

In a more favorable development, the Green Book contains a proposal to allow a 10-year carryforward of foreign tax credits within a given country for GILTI purposes.

Other

Other significant international tax proposals include:

• Repealing the deduction under IRC Section 250 for foreign derived intangible income
• Repealing the base erosion anti-abuse tax (BEAT)
• Expanding the definition of an inversion transaction to include overlapping ownership of 50%, down from 80%, and eliminating the 60% test along with the addition of some per se transactions
• Limiting the foreign dividends received deduction under IRC Section 245A for dividends from noncontrolled foreign corporations
• Disallowing deductions attributable to dividends excluded under IRC Section 245A and income reduced by IRC Section 250
• Disallowing foreign stock losses to the extent attributable to income previously excluded or included at a reduced rate
• Requiring shareholders disposing of a controlled foreign corporation (CFC) interest before year-end to recognize Subpart F income
• Eliminating differences between the computation of earnings and profits and the computation of taxable income related to methods of accounting for last-in, first-out inventory; installment sales; and completed contracts
• Limiting interest deductions for U.S. members of multinational groups based on a U.S. member’s book interest in relation to the entire group's book interest in addition to existing limitations
• Expanding access to the qualified electing fund election for investors in passive foreign investment companies
• Allowing a credit for the costs of relocating offshore jobs to the U.S. and a corresponding disallowance for the costs of relocating U.S. jobs to offshore locations

Overarching policy alignment with Pillar 2

The Green Book demonstrates an express intent to align U.S. tax policy with OECD Pillar 2 initiatives by repeated references to Pillar 2 and the incorporation of Pillar 2-oriented proposals sprinkled throughout. For example, the Green Book description of the global minimum tax proposal will account for taxes paid by non-U.S. parent companies under a Pillar 2 income inclusion rule (IIR), presumably by allocating these taxes to affected CFCs and allowing U.S. companies to claim a foreign tax credit against the income on its U.S. income tax return.

Likewise, the Green Book’s proposal to move to a country-by-country calculation for GILTI is a key feature of an IIR under Pillar 2. However, unlike Pillar 2, which uses book income to calculate minimum tax, the GILTI calculation under the Green Book proposal is based on income determined under U.S. tax principles.

The Green Book also proposes the adoption of a Pillar 2-style undertaxed profits rule (UTPR) to replace BEAT. The Green Book’s UTPR denies U.S. members of a non-U.S. parented group deductions for payments to sister companies operating in low-tax jurisdictions. However, the UTPR is adjusted to account for an IIR.

Crowe observation

While it is unlikely that the Green Book proposals will be enacted during the current divided Congress, the proposals are a clear signal of the administration’s commitment to Pillar 2, as well as to protecting U.S. tax revenues from the implementation of Pillar 2 by other countries.

Looking ahead

During the current U.S. legislative stalemate, multinationals would do well to watch the developments in jurisdictions implementing Pillar 2 to see what conventions they adopt and what hurdles they encounter. For example, multinationals within the EU, whose members have begun to implement Pillar 2, have started to complain about the difficulty of administering the country-by-country calculations. How jurisdictions navigate that hurdle could give insights into what the U.S. might do.

Another important concern suggested by the EU reaction is the overwhelming administrative burden inherent in Pillar 2 calculations and complying with the requirements of evolving U.S. international tax policy. Without a doubt, country-by-country calculations, multiple disallowance provisions under U.S. tax law applying simultaneously to the same deduction, and the interrelatedness of taxing regimes and safeguards will add a huge cost to tax compliance independent of additional tax paid.

It likely will become increasingly difficult to navigate international tax planning and compliance without sophisticated, dedicated software and tech-savvy tax resources.