This article summarizes the proposed changes regarding international tax provisions of the Tax Cuts and Jobs Act (TCJA). The Build Back Better proposal will mainly affect the following areas:
- Global Intangible Low-Taxed Income (GILTI) regime;
- Subpart F regime and foreign tax credit;
- Section 250 deduction and Foreign-Derived Innovation Income (FDII); and
- BEAT and SHIELD.
Changes to the GILTI regime have been addressed in the separate article.
Changes to Subpart F and the Foreign Tax Credit
New limitations for foreign tax credit carryovers and carrybacks would apply. Also, the foreign branch income category would be repealed. Perhaps the most significant change would be the determination of the foreign tax credits on a country-by-country basis. This would be a significant limitation affecting foreign tax credits.
Changes to Section 250 Deduction and FDII
Section 250 allows a domestic corporation that has FDII to deduct a specific percentage of the excess of the corporation’s income from export sales over a fixed return on tangible depreciable assets. FDII rules operate in tandem with GILTI rules.
New rules would eliminate or reduce deemed tangible income return (DTIR) and qualified business asset investment (QBAI) from the FDII calculation. Eliminating or reducing QBAI discourages taxpayers from owning depreciable assets abroad. The proposal also adds a new element in FDII calculation, Domestic Innovation Income, which is designed to reward R&D efforts in the U.S. Many details about Domestic Innovation Income are still unknown, but the newly created term could have a great impact on the FDII calculation.
BEAT and SHIELD
BEAT is a minimum tax enacted under TCJA, mainly applicable to large multinational corporations, with a purpose to prevent generating tax benefits in connection with shifting income from the U.S. to abroad. The new international tax proposals would modify BEAT tax with a SHIELD (stopping harmful inversions and ending low-tax developments). Even though sufficient detail is not currently available to evaluate tax implications on specific taxpayers, it is likely that the changes will be significant and will need to be addressed at the appropriate time.
Schneider Downs tax professionals will continue to monitor these and future developments. Please contact Schneider Downs with any questions.
