New corporate alternative minimum tax – international provisions
While the Build Back Better bill (BBB) does not increase the current 21% corporate tax rate, it adds a new corporate alternative minimum tax (AMT) that imposes a 15% tax on adjusted financial statement income (AFSI) of certain corporations with a three-year average of AFSI over $1 billion. For the corporate AMT to apply to a U.S. corporation of a foreign-parented group that meets this $1 billion requirement, the U.S. group must earn an average of at least $100 million (including the income of any controlled foreign corporations (CFCs)) over the same three-year period. The BBB provides for a corporate AMT foreign tax credit which could work to reduce the net liability due under this new tax for affected taxpayers electing to credit foreign taxes paid or accrued for a given taxable year.
Additionally, with regard to U.S. shareholders of CFCs, AFSI includes the pro rata share of the CFCs’ aggregated AFSI (i.e., losses in one CFC may offset income of another CFC). Overall losses of CFCs do not reduce AFSI of a U.S. corporation, but may be carried forward and used to offset CFC income in future years for purposes of this new tax. Separately, a U.S. corporation must also include the income of any disregarded entity.
The new corporate AMT rules would be effective for taxable years beginning after Dec. 31, 2022.
Proposed revised GILTI amendments
For taxable years beginning after Dec. 31, 2022 (with a transitional rule for fiscal-year taxpayers), the BBB subjects global intangible low-taxed income (GILTI) inclusions (and any GILTI-related section 78 amounts) to a tax rate of 15% by reducing the GILTI section 250 deduction to 28.5% and maintaining the corporate tax rate at 21%. This aligns the U.S. GILTI tax rate with the global minimum effective tax rate of 15% announced by the Organization for Economic Cooperation and Development (OECD) Inclusive Framework in early October 2021 (also expected to be effective in 2023). The BBB also grants regulatory authority for guidance on making appropriate adjustments in determining tested income or tested loss if property is transferred, or amounts are paid or accrued, between related parties.
Proposed revised foreign tax credit amendments
The BBB repeals the one-year carryback of excess foreign taxes for foreign tax credit purposes while retaining an existing 10-year carryforward for separate limitation categories other than GILTI. Additionally, excess GILTI-related foreign taxes paid or accrued after Dec. 31, 2022, and before Jan. 1, 2031, can be carried forward for five succeeding taxable years. GILTI-related foreign taxes paid or accrued after Dec. 31, 2030, can be carried forward for 10 succeeding years. Separately, the BBB conforms the foreign tax credit rules applicable to previously taxed GILTI to accommodate a proposed 5% “haircut.”
As a general matter, these provisions are effective for taxable years beginning after Dec. 31, 2022, with a transition rule provided for fiscal-year taxpayers. Certain amendments to the foreign tax redetermination and related claims provisions apply to taxable years beginning after Dec. 31, 2021.
Proposed revised FDII amendments
The BBB subjects foreign-derived intangible income (FDII) to a tax rate of 15.8% by reducing the section 250 deduction to 24.8% (again, in conjunction with a 21% corporate tax rate). Clarifying language has been added to the BBB to exclude from FDII certain gains from the sale of property giving rise to rents or royalties derived in the active conduct of a trade or business. These provisions are effective for taxable years beginning after Dec. 31, 2022 (with a transition rule for fiscal-year taxpayers).
Revised section 163(n) interest limitation carryforward and clarification
The BBB includes a revision to new section 163(n) included in draft legislation released by the House Ways and Means Committee in September 2021. By way of background, new section 163(n) broadly would limit the deduction of interest expense of certain U.S. corporate taxpayer members of an international financial reporting group relative to their proportionate share of the group’s earnings before interest, tax, depreciation and amortization.
The BBB clarifies that taxpayers subject to interest expense disallowance rules under both section 163(j) and section 163(n) can deduct the lesser of the two limitations in a taxable year and can carry forward interest expense disallowed as interest (and in the case of section 163(j)) business interest in subsequent taxable years which a change from the aforementioned draft legislation calling for a more limited five-year carryforward. These provisions are be effective for taxable years beginning after Dec. 31, 2022.
Revised proposed BEAT modifications
The base-erosion and anti-abuse tax (BEAT) rate is amended under the BBB to 10% in taxable years beginning after Dec. 31, 2021, and before Jan. 1, 2023. The rate increases to: (1) 12.5% in taxable years beginning after Dec. 31, 2022, and before Jan. 1, 2024; (2) 15% in any taxable year beginning after Dec. 31, 2023, and before Jan. 1, 2025; and (3) 18% in any taxable year beginning after Dec. 31, 2024. This is in contrast to the maximum BEAT tax rate of 15% in the draft legislation issued by the House Ways and Means committee in September 2021.
The BBB also provides that taxpayers subject to the BEAT regime would remain within scope of the rules for the next 10 succeeding taxable years after becoming subject to BEAT. The provisions are to be effective for taxable years beginning after Dec. 31, 2021 (potentially two years prior to the roughly analogous OECD base erosion and profit shifting (BEPS) provisions).
Prospective reinstatement of prohibition of downward attribution from foreign entities
The draft BBB legislation released by the House Ways and Means Committee in September would have reinstated the prohibition on downward attribution to determine CFC status retroactively to Jan. 1, 2018, and enacted new section 951B to subject certain foreign controlled U.S. shareholders of foreign CFCs to Subpart F and GILTI (with some exceptions). The BBB makes these changes effective prospectively.
Revised effective date for repeal of one-month deferral of taxable year of CFCs
The effective date for the repeal of the one-month deferral of fiscal year-end CFCs’ taxable years under section 898(c)(2) is taxable years beginning after Nov. 30, 2022. Additionally, a transition rule has been added to the BBB that appears to allocate foreign taxes that accrue in the first required taxable year between such taxable year and the prior taxable year as well as provide for the deemed consent of the Internal Revenue Service for the change to the first required taxable year.
Limitation on foreign base company sales and services income
The BBB provides for conforming amendments to proposed changes to the current Subpart F rules relating to foreign base company sales income and foreign base company services income directing that the relevant situs of a CFC for purposes of determining which sales or services implicate these Subpart F rules is the country where the CFC is tax resident (as opposed to the country under which laws the CFC is created or organized). These amendments apply to taxable years of foreign corporations beginning after Dec. 31, 2021, and to taxable years of U.S. shareholders in which or with which such taxable years of foreign corporations end.
We encourage you to reach out to your Baker Tilly advisor regarding how any of the above may impact your situation.