The Framework, released by Finance Chairman Wyden and Senators Brown and Warner on August 25, outlines options for making changes to US international tax provisions enacted as part of the 2017 tax reform act (the 2017 Tax Cuts and Jobs Act, or the 2017 Act). “Overhauling the international tax code is central to our efforts to restore fairness,” Wyden said in a statement on the legislation. According to the Framework, “the international tax system should focus on rewarding companies that invest in the US and its workers, stop incentivizing corporations to shift jobs and investment abroad, and ensure that big corporations are paying their fair share.” The plan largely works within the existing set of principles and regulations governing corporate taxes — a move that could ease its implementation.
Suggested changes to the global intangible low-taxed income (GILTI) tax system include:
- Repealing the deduction for qualified business asset investment (QBAI).
- Increasing the GILTI rate. The Framework states that it is an open question whether the GILTI rate should equal the US corporate tax rate or remain at a lower proportion of the US rate.
- Moving GILTI to a country-by-country system. The Framework notes a country-by-country option with the use of separate foreign tax credit baskets for each country in which a company operates. A second option noted is to divide a company’s global income into two groups: low-tax and high-tax. Income earned in locations with low tax rates can be grouped together
- Adding an incentive “to onshore research and management jobs.” The Framework suggests that “research and management expenses that actually occur in the US should be treated as entirely domestic source expenses, eliminating foreign tax credit penalties under GILTI and helping retain these activities in the US.” This is to prevent companies from paying higher taxes under GILTI when they invest in the United States.
Suggested changes to the foreign-derived intangible income (FDII) tax provision include:
- Repealing the “incentive to offshore factories” by eliminating current FDII QBAI rules that use the value of tangible assets like factories and buildings to reduce the potential FDII benefit.
- Providing an FDII benefit to companies related to “deemed innovation income” that would be based on an amount of income equal to the share of “innovation-spurring activities that occur in the US, such as research and development and worker training.”
- Equalizing the FDII and GILTI rates.
Suggested changes to the base erosion and anti-abuse tax (BEAT) provision include:
- Reforming the BEAT, the framework proposes restoring the full value of tax credits for domestic investment. To pay for this change, the proposal creates a higher, second tax bracket for income associated with base erosion.
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