Key Takeaways
- Unlike the House bill, the Senate’s proposed tax legislation makes some significant changes to the international tax regime.
- The Senate would stop targeting intangible income as a disincentive for avoidance.
- The change may be a reflection of the administration’s “America First’ stance.
- Key House member in tax discussions opposes some Senate changes to the "Revenge Tax."
- Countries looking to alter the global minimum tax's treatment of credits.
From the beginning, there’s been an expectation that the 2025 tax legislation would likely not affect the international tax sphere as much as the rest of the code.
No area would be completely untouched. But because Republicans are generally happy with the international tax regime put in place by the 2017 Tax Cuts and Jobs Act–and definitely don’t feel the need to conform the U.S. system with the global minimum tax being implemented across the globe–the goal was mostly to extend, not overhaul.
That’s still mostly true, but legislative text released by the Senate Finance Committee last week indicates that Republican senators are considering some changes that are much bigger than expected. Unlike the House-passed bill, which mostly tweaked rates to comply with Congressional reconciliation rules, the Senate bill altered some of the inner workings of the system. The key planks–such as the tax on global intangible low-taxed income (GILTI) and the deduction for foreign-derived intangible income (FDII)--are still there. But they’ll work in a different way, if the Senate’s language is passed into law. (And, the bill would even change their names.)
As originally conceived, GILTI and FDII are targeted at income from intangible assets, like intellectual property. Unlike physical properties, those can be easily moved and are often difficult to quantify, and can be involved in complex tax-planning transactions. Neither provision targets those assets directly, but they look for unusually high returns on tangible assets, or qualified business asset investment (QBAI). GILTI taxes offshore income through this formula with a 10.5% rate, while FDII taxes domestic income, derived through foreign sales, at 13.125%, rather than the 21% overall rate.
The Senate’s bill would take QBAI out of the formula altogether, making GILTI a somewhat simpler tax on offshore income, and FDII a tax benefit for export income. It also raises the rates to 14% for each.
This is arguably a shift from the TCJA’s original goals. The system’s premise was that physical assets are the least likely to move due to tax advantages, whereas on-paper profits can be more easily manipulated. So, tangible assets would be durable enough to serve as anchors for a system that aims at taxing income where it’s actually earned.
Democrats and other critics, however, claimed that GILTI’s incentives could encourage U.S. companies to move facilities and jobs offshore. Because GILTI applies less the more in tangible assets a taxpayer has abroad, there’s an incentive to locate as much as you can outside the United States–if you can find a rate lower than 10.5%.
The Senate bill’s changes seem to reflect a similar thinking among Republicans. By eliminating QBAI, it increases the tax consequences for companies that hold offshore assets, physical or virtual, and rewards companies that keep more at home. The change could be a move towards President Trump’s “America First” philosophy and emphasis on encouraging domestic production.
The bill includes other changes, including some long-requested by multinational companies. Through a few different fixes, it allows taxpayers to claim more foreign tax credits against GILTI taxes. And while the bill includes a rate hike, the provision overall amounts to a tax cut, according to analysis from the Joint Committee on Taxation.
As for the names, since neither provision involves intangible assets, even through a formulaic proxy, GILTI and FDII aren’t appropriate names anymore, the Finance Committee’s summary says. Now FDII will, in effect, be called Foreign-Derived Deduction Eligible Income (FDDEI), and GILTI will now be referred to with the less judgmental term Net CFC Tested Income (NCTI). If these changes come to pass, hopefully those new acronyms will roll off the tongue as easily as their predecessors.
Noteworthy Items This Week
Time Running Out for Deal on U.S. Tax System and Pillar 2 – Stephanie Soong, Tax Notes ($):
More Countries Want to Address Credits Under Global Tax, US Says – Laura Vella, Bloomberg Tax ($):
OECD Developing ‘Forum Shopping’ Deterrence Mechanism – Somesh Jha, Bloomberg Tax ($):
The aim is to ensure that once a taxpayer chooses either litigation or an out-of-court resolution with tax authorities, they stick to that path, said Dominic Vines, team leader at His Majesty’s Revenue and Customs’ transfer pricing competent authority team.
Public Domain Superhero of the Week
Every week, a new character from the Golden Age of Comics, who’s fallen out of use.
This week’s entry: The Blue Bolt
Debut Year:1940
Debut Publication: Blue Bolt Comics #1
Origin Story: A Harvard football star struck by lightning and brought back to life by mysterious mountain-dwelling scientists, who used radium deposits to bring him back to life and give him powerful abilities.
Superpowers: Like the lightning that almost killed him, he can fly and zap evildoers with bolts from his eyes.
Eide Bailly's International Tax Team and our affiliates at HLB, The Global Advisory and Accounting Network, stand ready to assist with your worldwide tax needs.
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