The U.S. House of Representatives Committee on Rules has published information on the latest version of bill H.R. 5376 - the Build Back Better Act, including the complete text of the bill and a section-by-section summary. This includes the revised package of tax measures announced by the Biden administration on 28 October to pay for the investments included in the revised framework for the Build Back Better Act. The main corporate tax measures are summarized by the Committee on Ways and Means in "Subtitle G — Responsibility Funding Our Priorities", which includes the following:
SUBPART A – CORPORATE TAX RATE
Section 138101. Corporate Alternative Minimum Tax
The corporate alternative minimum tax (AMT) proposal would impose a 15 percent minimum tax on adjusted financial statement income for corporations with such income in excess of $1 billion. Under the proposal, an applicable corporation's minimum tax would be equal to the amount by which the tentative minimum tax exceeds the corporation's regular tax for the year. Tentative minimum tax is determined by applying a 15 percent tax rate to the adjusted financial statement income of the corporation for the taxable year (after taking into account the AMT foreign tax credit and the financial statement net operating losses).
For these purposes, adjusted financial statement income (AFSI) is the net income or loss of the taxpayer stated on the taxpayer's applicable financial statement with certain modifications. Generally an applicable financial statement is a corporation's form 10-K filed with the Securities and Exchange Commission, an audited financial statement, or other similar financial statement.
Certain adjustments are made to the income on a taxpayer's applicable financial statement to determine AFSI, including adjustments to: (1) align the period covered to the taxpayer's taxable year, (2) disregard any federal or foreign taxes taken into account, and (3) disregard certain direct-pay tax credits provided in the Clean Energy for America Act received by the taxpayer. Under regulations, the Secretary shall provide adjustments to: (1) prevent the omission or duplication of any item, (2) appropriately address corporate reorganizations and similar transactions, and (3) address the effect of these provisions on partnerships with income taken into account under the corporate AMT. Adjustments are also made with respect to certain cooperatives and Alaska Native Corporations, and to provide consistent treatment with respect to mortgage servicing income of a corporation other than a regulated investment company.
In general, an applicable corporation is any corporation (other than an S corporation, regulated investment company, or a real estate investment trust) with three-year average annual AFSI in excess of $1 billion. To determine whether a corporation has met this requirement, corporations under common control are aggregated. In the case of foreign-parented corporations, the $1 billion three-year average annual AFSI requirement is determined by aggregating the AFSI for all members of the international financial reporting group in which the applicable corporation is a member. As such, both U.S.-parented and foreign-parented corporations are tested on their global income for purposes of this $1 billion requirement.
If the international financial reporting group of a foreign-parented corporation meets this $1 billion requirement, a corporation that is a member of that group is not treated as an applicable corporation unless it also meets the requirement for the AFSI of the U.S. group. Under this requirement, in the same three-year period, the average annual AFSI of the U.S. group must be $100 million or more. For purposes of determining the U.S. group's AFSI, all members under common control are aggregated, except the AFSI of a foreign corporation under common control is only included if the income is effectively connected to a U.S. trade or business or the foreign corporation is a controlled foreign corporation (CFC). Generally, this means that for a foreign-parented corporation, there is a global income requirement of $1 billion and a U.S.-related income requirement of $100 million (including the income of any CFCs).
Once a corporation is determined to be an applicable corporation, it remains an applicable corporation unless, as a result of an ownership change or a consistent reduction in AFSI below the applicable thresholds, the Secretary determines that it would not be appropriate to continue to treat such corporation as an applicable corporation.
Special rules apply in the case of related corporations included on a consolidated financial statement, and in the case of taxpayers filing a consolidated return. In addition, the AFSI of a corporation is required to include income from dividends and certain other amounts required to be included by such corporation for tax purposes. In the case of a U.S. shareholder of a CFC, AFSI includes the pro rata share of the AFSI of such CFC. The AFSI of CFCs are aggregated globally, and losses in one CFC may offset income of another CFC. Overall losses of CFCs may not reduce AFSI of a U.S. corporation, but may be carried forward and used to offset CFC income in future years. An applicable corporation must also include the income of any disregarded entity.
Similar to the rules under regular corporate income tax, AFSI may be reduced by financial statement net operating losses, not to exceed 80 percent of AFSI determined before taking into account such net operating losses. For this purpose, financial statement net operating losses are determined by taking into account adjusted financial statement losses for taxable years ending after December 31, 2019.
Tentative minimum tax may be reduced by a corporate AMT foreign tax credit, which applies for foreign income taxes that are paid or accrued (for federal income tax purposes) and taken into account on an applicable financial statement. Foreign income taxes paid or accrued by CFCs are subject to a single global limitation equal to 15 percent of the net aggregate AFSI of all CFCs. Foreign income taxes paid or accrued by a domestic corporation, such as withholding taxes or the taxes paid on income of a foreign branch, are not subject to a limitation. Excess foreign tax credits may be carried forward for five years.
Similar to the current rules applicable for general business credits of a corporation (such as R&D, clean energy, and housing tax credits), general business credits may generally offset up to approximately 75 percent of the sum of a corporation's normal income tax and alternative minimum tax.
Similar to the AMT tax credit under pre-2018 corporate AMT and the AMT currently in effect for individuals, corporations would be eligible to claim a tax credit for AMT paid in prior years against normal income tax, to the extent normal tax exceeds the tentative minimum tax for such taxable year.
The proposal would be effective for taxable years beginning after December 31, 2022.
Section 138102. Excise Tax on Repurchase of Corporate Stock.
The provision imposes a 1 percent excise tax on publicly traded US corporation for the value of any of its stock that is repurchased by the corporation during the taxable year. The term repurchase means a redemption within the meaning of section 317(b) with regard to the stock of such corporation, and any other economically similar transaction as determined by the Secretary of Treasury.
The amount of repurchases subject to the tax is reduced by the value of any new issuance to the public and stock issued to the employees of the corporation.
A subsidiary of a publicly traded US corporation that performs the buyback for its parent or a US subsidiary of a foreign corporation that buys back its parent's stock is subject to the excise tax. The provision excludes certain repurchases from the excise tax to the extent: 1) the repurchase is part of a tax-free reorganization; 2) the repurchased stock or its value is contributed to an employee pension plan, ESOP, or similar plan; 3) the total amount of stock repurchases within the year is less than $1 million; 4) the purchase is by a dealer in securities in the ordinary course of business; 5) the repurchase is treated as a dividend; and 6) the repurchase is by a RIC or REIT.
The provision provides authority for Treasury to issue guidance necessary or appropriate to administer and to prevent the avoidance of the purposes of this section.
The provision applies to repurchases of stock after December 31, 2021.
SUBPART B – INTEREST EXPENSE OF INTERNATIONAL FINANCIAL REPORTING GROUPS
Section 138111. Limitation on Deduction of Interest Expense.
This provision adds section 163(n) to limit the interest deduction of certain domestic corporations that are members in an international financial reporting group to an allowable percentage of 110% of the net interest expense. A domestic corporation's allowable percentage means the ratio of such corporation's allocable share of the group's net interest expense over such corporation's reported net interest expense. A domestic corporation's allocable share of the group's net interest expense is the portion of such expense which bears the same ratio to the total group expense as the corporation's EBITDA bears to the group's total EBITDA.
This interest limitation applies only to domestic corporations whose average excess interest expense over interest includible over a three year period exceeds $12,000,000. The limitation does not apply to any small business exempted under section 163(j)(3). Nor does the limitation apply to any S corporation, real estate investment trust, or regulated investment company. This provision also modifies section 163(j)(4), which applies the limitation on deductibility of business interest under section 163(j) to partnerships and S corporations. Under the provision, section 163(j) generally will apply to a partner or shareholder, rather than to the partnership or S corporation as an entity.
This provision also adds section 163(o), which allows the carryforward of interest expense disallowed by reason of both subsection (j)(1) and (n)(1). A taxpayer subject to both 163(j) and 163(n) is eligible to deduct only the lesser of the two limitations in a taxable year. Interest not allowed will be carried forward and treated as business interest in subsequent taxable years. The amendments made by this section apply to taxable years beginning after December 31, 2022.
SUBPART C – OUTBOUND INTERNATIONAL PROVISIONS
Section 138121. Modifications to Deduction for Foreign-Derived Intangible Income and Global Intangible Low-Taxed Income
This provision reduces the section 250 deduction with respect to both FDII (to 24.8%) and GILTI (to 28.5%). This yields a 15% GILTI rate and a 15.8% FDII rate. If the section 250 deduction with respect to GILTI or FDII exceeds taxable income, the excess is allowed as a deduction, which will increase the net operating loss for the taxable year. A transition rule is provided for taxable years that include but do not end on December 31, 2022. Amendments related to the section 250 deductions for GILTI and FDII are effective for taxable years beginning after December 31, 2022.
Section 138122. Repeal of Election for 1-Month Deferral in Determination of Taxable Year of Specified Foreign Corporations.
This provision strikes section 898(c)(2), which previously allowed the choice of a taxable year beginning 1 month earlier than the majority U.S. shareholder year. The amendments made by this section apply to taxable years of specified foreign corporations beginning after November 30, 2022.
Section 138123. Modifications of Foreign Tax Credit Rules Applicable to Certain Taxpayers Receiving Specific Economic Benefits.
Dual capacity taxpayers are U.S. companies that are both subject to levy in, and receive certain benefits from, a foreign country or possession of the United States. To ensure dual capacity taxpayers cannot claim foreign tax credits for payments that are not deemed to be income taxes, this section provides that any amount paid by a dual capacity taxpayer to a foreign country will not be considered a tax to the extent it exceeds the generally applicable income tax of that country. A generally applicable income tax means an income tax which is generally imposed under the laws of a foreign country on income derived from the conduct of trade or business within such country, and has substantial applicability to persons who are not dual capacity taxpayers and to citizens or residents of that country. The amendments made by this section apply to taxes paid or accrued after December 31, 2021.
Section 138124. Modifications to Foreign Tax Credit Limitations.
This provision amends section 904 to require foreign tax credit determinations on a country-by-country basis for purposes of sections 904, 907, and 960. These foreign tax credit computations entail assigning each item of income and loss to a taxable unit of the taxpayer which is a tax resident of a country (or, in the case of a branch, has a taxable presence in such country). Taxable units of the taxpayer are: (1) the person that is the taxpayer, (2) controlled foreign corporations, (3) interests held by the taxpayer or any controlled foreign corporations in a passthrough entity if such pass-through entity is a tax resident of a country other than the country of the taxpayer or the CFC, and (4) each branch the activities of which are carried on by the taxpayer or any CFC, and which give rise to a taxable presence in the country where it is located. Additionally, this provision repeals the foreign branch income basket.
The provision repeals the limitation on foreign tax credit carryforwards for GILTI category income. The provision limits the carryforward of excess foreign tax credit limitation with respect to the GILTI basket to five succeeding taxable years for taxes paid or accrued in taxable years beginning after December 31, 2022 and before January 1, 2031. With respect to all baskets, the carryback of foreign tax credits is repealed (compared with 1 year carryback under current law).
The provision amends section 904(b) such that, for the purpose of determining the foreign tax credit limitation with respect to the GILTI basket, the taxpayer's foreign source income is determined by allocating only such deductions that are directly allocable to such income, including the section 250 deduction for GILTI and taxes attributable to the section 250 deduction. Expenses that otherwise would be allocated to GILTI category income are allocated to income from sources within the United States.
The provision amends section 904(b) such that in the case of any covered asset dispositions, the principle of section 338(h)(16) shall apply in determining the source and character of any item for purposes of this part. A covered asset disposition means any transaction which, inter alia, is treated as a disposition of stock of a corporation for purposes of the tax laws of the relevant foreign country.
The rules related to covered asset dispositions apply to dispositions after the date of enactment. The other amendments made by this section apply to taxable years beginning after December 31, 2022.
Section 138125. Foreign Oil Related Income to Include Oil Shale and Tar Sands.
This provision expands the definition of foreign oil related income in section 907(c)(2)(A) to include oil shale or tar sands in addition to oil and gas wells. The amendments made by this section apply to taxable years beginning after December 31, 2021.
Section 138126. Modifications to Inclusion of Global Intangible Low-Taxed Income.
Currently a global blending regime, this provision amends section 951A to provide for country-by-country application of the GILTI regime. Under the provision, a United States shareholder's global intangible low-taxed income (GILTI) is the sum of the amounts of GILTI determined separately with respect to each country in which any CFC taxable unit of the United States shareholder is a tax resident. Other items and amounts including net CFC tested income, net deemed tangible income return, qualified business asset investment (QBAI), and interest expense shall be determined on a country-by-country basis as well. The definition of CFC taxable unit is found in new section 904(e)(2)(B).
The provision amends section 951A(c) to provide for carryover of country-specific net CFC tested loss to the succeeding taxable year.
The provision changes the amount of allowable net deemed tangible income return by replacing 10% of QBAI with 5% of QBAI. This reduction does not apply to CFC taxable units in the territories of the United States.
Currently, tested income and tested loss of a CFC are determined without regard to any foreign oil and gas extraction income (FOGEI) and any deductions properly allocable to it. This provision now includes FOGEI and related deductions in the determination of tested income and tested loss. The amendments made by this section apply to taxable years of foreign corporations beginning after December 31, 2022, and to taxable years of United States shareholders in which or with which such taxable years of foreign corporations end.
Section 138127. Modifications to Determination of Deemed Paid Credit for Taxes Properly Attributable to Tested Income.
This provision substantially reduces the 20% haircut on foreign tax credits by amending section 960(d)(1) by increasing from 80% to 95% the deemed paid credit for taxes attributable to GILTI (80% to 100% in the case of taxes paid or accrued to U.S. territories). The provision also ensures that a corporation is treated as a controlled foreign corporation only if it has direct United States shareholders, and applies special rules to foreign owned United States shareholders. The amendments made by this section apply to taxable years of foreign corporations beginning after December 31, 2022, and to taxable years of United States shareholders in which or with which such taxable years of foreign corporations end.
Section 138128. Deduction for Foreign Source Portion of Dividends Limited to Controlled Foreign Corporations, etc.
Currently, section 245A provides a 100% participation exemption for foreign portions of any dividends received from a specified 10-percent owned foreign corporation, even in cases where the foreign corporation is not a controlled foreign corporation (and therefore not subject to subpart F and GILTI regimes). This provision amends section 245A so that the exemption applies to foreign portions of dividends received only from controlled foreign corporations. This provision also provides an election to be treated as a controlled foreign corporation for certain foreign corporations with United States shareholders. These amendments apply to distributions made after date of enactment and to taxable years of foreign corporations beginning after date of enactment (and taxable years of United States persons in which or with which the taxable years of foreign corporations end).
Section 138129. Limitation on Foreign Base Company Sales and Services Income.
The provision limits Foreign Base Company Sales and Services Income to residents of the United States and passthrough entities and branches in the United States. This provision applies to taxable years beginning after December 31, 2021. This provision also closes loopholes that cause shareholders of a controlled foreign corporation to avoid tax on some income from their controlled foreign corporations. The amendments made by this section apply to distributions occurring after, or taxable years of foreign corporations beginning after, December 31, 2021.
SUBPART D – INBOUND INTERNATIONAL PROVISIONS
Section 138131. Modifications to Base Erosion and Anti-Abuse Tax.
This provision makes several modifications to the Base Erosion and Anti-Abuse Tax (BEAT). First, the BEAT rate in section 59A(b)(1)(A) is amended to 10% in taxable years beginning after December 31, 2021, and before January 1, 2023; to 12.5% in taxable years beginning after December 31, 2022, and before January 1, 2024; 15% in any taxable year beginning after December 31, 2023 and before January 1, 2025; and 18% in any taxable year beginning after December 31, 2024. Second, the base erosion minimum tax amount is to be determined taking into account tax credits.
The provision modifies the rules in 59A(c) for determining modified taxable income. Modified taxable income means taxable income computed without regard to base erosion tax benefits; without adjusting the basis of inventory property due to base erosion payments; by determining net operating losses without regard to any deduction which is a base erosion tax benefit; and according to other adjustments under rules similar to the rules applicable to the alternative minimum tax. Base erosion payments are amended to include amounts paid to a foreign related party that are required to be capitalized in inventory under section 263A, as well as amounts paid to a foreign related party for inventory which exceed the costs of the property to the foreign related party. A safe harbor is available to deem base erosion payments attributable to indirect costs of foreign related parties as 20 percent of the amount paid to the related party.
The provision provides an exception for payments subject to U.S. tax, and for payments to foreign parties if the taxpayer establishes that such amount was subject to an effective rate of foreign tax not less than the applicable BEAT rate. The provision also limits the exception to the provision for taxpayers with a low base erosion percentage to taxable years beginning before January 1, 2024. The provision further provides that an applicable taxpayer remains an applicable taxpayer for the next ten succeeding calendar years after it is an applicable taxpayer. The provision is effective for taxable years beginning after December 31, 2021.