With the House of Representative's narrow passage of the budget resolution the Senate had endorsed the week before, the prospect for passing significant tax provisions via the reconciliation process became much more likely last Tuesday evening. The very next day, Senators Wyden, Warner, and Brown released draft legislative text along with a section-by-section summary of their preferred modifications to the international tax regime. While the text largely hews to what was proposed in their white paper released earlier this year, several details – including key percentages regarding the rates for global inclusion of low-tax income (GILTI) and base erosion and anti-abuse tax (BEAT), as well as possible foreign tax credit haircuts – are missing. For example, there is no draft legislative text regarding the Stopping Harmful Inversions and Ending Low-Tax Developments (SHIELD) provision, although the section-by-section summary indicates continued interest in the provision. Moreover, there is no reference to payments made to recipients in high-tax jurisdictions being excluded from BEAT calculations (which would make the provision more closely align to the undertaxed payments rule under Pillar 2), nor is there any modification to the current law exclusion of related party payments attributable to the cost of goods sold (COGS).
As previewed in the white paper, the discussion draft sets forth a new articulation of the foreign-derived intangible income (FDII) deduction, whereby the concept of "foreign derived innovation income" is tied to section 174 (research and experimental) expenditures and worker training-type expenses. In addition, the GILTI modifications reflect the promised repeal of qualified business asset investment (QBAI), as well as the calculation of the net tested income inclusion on a country-by-country basis, which is only partially consistent with the income inclusion rule under Pillar 2, which allows for a QBAI-like exemption via its substance-based carveout concept.
There are also changes that were not previewed in the white paper and do not align with any of the proposed modifications outlined in the Administration's Green Book, including the potential for a haircut to the foreign tax credits arising from taxes properly attributable to foreign branch and subpart F income, as well as distributions of previously taxed earnings and profits (PTEP), and a reimagining of the high-tax exclusion under subpart F - whereby the threshold for high-tax income is increased to the full U.S. rate and the effective rate of tax is calculated separately for general and passive income, respectively. The draft also extends the high-tax exclusion to foreign branch income, with features that generally seek to align it with the reimagined high-tax exclusion in the subpart F context. The drafters ask for comments by September 3 and they will surely get them.
Putting aside the technical aspects of the draft for a moment, what does its unveiling this early in the process really mean? Chairman Neal has promised full committee markup of a tax bill within mere days, saying that activity will begin the week of September 6. Some have posited that because the Senate Finance Committee is evenly split between Democrats and Republicans, Chairman Wyden will forgo a committee markup in an effort to avoid the bill getting stuck there. Even in a reconciliation context, that is permissible – and that would explain the release of draft legislative text this early. While the party line is that Democrats hope to have both the reconciliation bill and the bipartisan infrastructure bill (recall that in exchange for cooperation from the moderate "Group of Nine" Democrats in the House, Speaker Pelosi promised a vote on the infrastructure bill by September 27) passed by the end of next month, to say that timeline is aggressive is an understatement. We will preview the looming deadlines in September alone and game out the possibilities in next week's edition. In the meantime, start writing those comment letters and be wary of simply opposing provisions that are unpalatable. Instead, consider alternatives to what's been proposed and offer suggested legislative text. The train has already left the station and it's likely to become a runaway. #TaxTake
Upcoming Speaking Engagements and Events
Loren will speak at the 2021 WITA Virtual Intensive Trade Seminar on a panel titled, "International Tax and Trade," on September 13.
On September 21, Marc will speak at the 2021 ICI Tax Accounting Conference on a panel titled, "Biden Administration's Legislative and Regulatory Agenda."
On September 23, Loren and fellow Member Kevin Kenworthy will provide a Litigation Update at API's 86th Annual Federal Tax Forum.
Marc will speak at the 56th Annual Southern Federal Virtual Tax Institute on a panel titled, "The 2021 Legislative Landscape: Evaluating Actual and Potential Changes," on October 25.
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