How the Proposed Build Back Better Framework Affects International Tax
While the Build Back Better Framework (BBB) may not be passed in its current form, the proposed legislation has a few international changes that can make a difference in your upcoming tax liability. This bill is still in legislation, but here are a few of the major changes that we expect to see included in the final iteration of the bill.
- Global Intangible Low-Taxed Income (GILTI):
- C corporations currently allow a 50% deduction on GILTI income. The proposed changes only allow 28.5% deduction.
- Tax calculations will be conducted on a country-by-country basis. Currently, international companies are taxed globally on controlled foreign corporation (CFC) taxable income. The new legislation will split income and deductions from high- and low-income tax jurisdictions that are combined currently.
- Foreign Derived Intangible Income (FDII):
- C corporations currently allow 37.5% deduction on FDII (export sales and services). The proposed changes reduce this deduction to 28.5%.
- Foreign Tax Credit:
- This credit will start to look at foreign taxes on a country-by-country basis. Currently, income that international companies have in low-income tax jurisdictions can be used to calculate foreign tax credits that were generated from a higher income tax jurisdiction. This is no longer the case within the proposed framework, as only foreign tax generated in country ABC can be used against foreign income in country ABC.
- Taxation of Foreign Dividends:
- Currently, the IRS allows 100% Dividend Received Deduction for foreign sourced dividends received from specified 10% owned foreign corporations. The proposed regulations increase the ownership to 50% of these foreign corporations, allowing the opportunity for the IRS to tax more foreign dividends.
- Interest Expense Limitation:
- A domestic corporation that is part of an international reporting group is limited to an allowable percentage of 110% of their net interest expense. The interest expense is for the entire company, not just the U.S. Corporation, so more information will be required from the related foreign companies.
As you can see, there are big changes are on the horizon. Your company can take steps now to be better prepared for the increased burden in reporting. Ask yourself: does your current structure benefit or penalize you based on the proposed changes? If you have questions about this legislation, or any international taxation questions, our team of international tax professionals can assist you. Contact us for a free consultation. We’re here to help.