International tax proposals detailed in the Treasury Green Paper – Taxation
United States: International tax proposals detailed in the Treasury Green Paper
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On May 28, 2021, the Treasury Department released its General Explanations (the “Green Book”) of the Biden Administration’s revenue proposals for fiscal year 2022. The Green Paper provides additional details on the international tax proposals that were previously included in President Biden’s “Made in America Tax Plan” (see our previous updates here and here), as well as several new proposals. The highlights of international taxation from the Green Paper are as follows:
- Increase taxes on GILTI and make other minor changes to GILTI and Subpart F rules. The proposal would increase the US tax on low-tax intangible global income (“GILTI”) of a US shareholder by:
- broaden the tax base of GILTI by removing the exemption from a return on investment of 10% of qualified business assets,
- increase the GILTI tax rate from a minimum rate of 10.5% to 21%, and
- calculation of the GILTI jurisdiction by jurisdiction.
In the case of a domestic company that is a subsidiary of a foreign parent company, the GILTI rules would take into account foreign taxes paid by the foreign parent company under a comparable overall minimum tax regime in its jurisdiction. The proposal would leave in place the 80% cap on foreign tax credits available to offset tax on GILTI, so that residual US tax on GILTI would only be avoided if the local country rate is d. ‘at least 26.25% (i.e. 21% divided by 80%).
The proposal would repeal the high tax exception for the purposes of Subpart F and GILTI. The proposal would also repeal section 904 (b) (4) (which affects the treatment, for foreign tax credit purposes, of deductions attributable to income eligible for the section 245A deduction) and extend section 265 to prohibit deductions attributable to categories of foreign gross income exempt from tax or subject to a reduced rate of US tax through a deduction (for example, income eligible for the Section 245A deduction or inclusions GILTI eligible for an article 250 deduction). In addition, the proposal would repeal GILTI’s exemption for foreign oil and gas extraction income (“FOGEI”).
These proposals would come into effect for tax years beginning after December 31, 2021.
- Repeal BEAT and replace with the SHIELD rule. The proposal would repeal the anti-abuse base erosion tax (“BEAT”). Under the proposed Stop Harmful Reversals and End Low Tax Developments (“SHIELD”) rule, a company or national branch would not be entitled to a deduction for any payment made directly ( or, in some cases, deemed to be made) to a member of its financial reporting group whose income is subject to an effective tax rate below an internationally agreed minimum rate (or, if no rate is was agreed, the GILTI minimum tax rate of 21% under the proposal). The SHIELD rule would apply to financial reporting groups with more than $ 500 million in annual global revenue (determined based on the group’s consolidated financial statements). This proposal would be in effect for tax years beginning after December 31, 2022.
- Expand Anti-Inversion Rules. The proposal would significantly expand anti-inversion rules by:
- treat a foreign corporation as a domestic corporation for U.S. tax purposes if it acquires a domestic target and, after acquisition, the former owners of the domestic target own more than 50% (rather than at least 80% depending on the current law) shares (by vote or value) of the foreign company,
- regardless of continuity of shareholders, treat a foreign corporation as a domestic corporation for US tax purposes if it acquires a domestic target and (i) immediately prior to the acquisition, the “fair market value” of the domestic target is greater at the “fair market value” of the foreign company, (ii) after the acquisition, the extended affiliate group of the foreign company is primarily managed and controlled in the United States, and (iii) this extended affiliate group has not substantial commercial activities in the country of organization of the foreign company,
- apply anti-reverse rules to the acquisition of substantially all of the U.S. business or commercial assets of a foreign partnership, and
- treat certain distributions of shares of foreign companies by a domestic company or partnership as an acquisition for the purposes of anti-reverse rules.
These proposals would apply to transactions concluded after the date of promulgation.
- Limit interest deductions for disproportionate borrowing in the United States. Under this proposal, the interest deductions of an entity that is a member of a multinational financial reporting group would be limited if the member’s net interest expense for financial reporting purposes is greater than its share. member proportional to the group’s net interest expense reported on the consolidated financial statements. Alternatively, if the member fails to justify its proportional share of the group’s net interest expense for financial reporting purposes, or so chooses, the member’s interest deduction would be limited to his or her interest income plus 10 % of its adjusted taxable income (as defined under section 163 (j)). Any interest charge not permitted under this rule via the proportional share approach or the 10% alternative would be deferred for US tax purposes. This proposal would be in effect for tax years beginning after December 31, 2021.
- Encourage taxpayers to move jobs to the United States. The proposal would allow a general trade credit to a US taxpayer equal to 10% of the qualifying expenses paid or incurred to eliminate a foreign business and start, develop or move the same business to the United States, which would result in an increase in the number of jobs. in the USA. . Conversely, a U.S. taxpayer would be denied deductions for expenses paid or incurred to wind up a U.S. business and start, develop, or move the same business out of the U.S., resulting in loss of jobs in the U.S. United. This proposal would apply to expenses paid or incurred after the date of promulgation.
- Repeal the FDII. The proposal would repeal the foreign intangible income (“FDII”) deduction, and the resulting income would be used to “encourage R&D”. This proposal would apply to taxation years beginning after December 31, 2021.
- Extend the application of section 338 (h) (16) to sales of hybrid entities. The proposal would expand the principles of section 338 (h) (16) (which generally provides that the sale of assets deemed to result from an election under section 338 is disregarded for the purposes of determining the source or character. of any element in the application of the foreign tax credit to the seller) to (i) the direct or indirect disposition of an interest in an entity that is treated as a corporation for foreign tax purposes but as a flow-through entity to United States tax purposes and (ii) a change in classification of an entity that is not recognized for foreign tax purposes (for example, a change resulting from a choice to check the box) . This proposal would apply to transactions occurring after the date of promulgation.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.
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