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Senate Tax Bill Update: 10% Additional Withholding on BEPS Payments, Increase to 12.5% After 2025



The Senate Finance Committee has posted its 515 pages of new Internal Revenue Code language for a vote within 10 days.  Relevant text passages for base erosion and profit shifting are excerpted below.

SEC. 951A. GLOBAL INTANGIBLE LOW-TAXED INCOME INCLUDED IN GROSS INCOME OF UNITED STATES SHAREHOLDERS

Under the proposal, a U.S. shareholder of any CFC must include in gross income for a taxable year its global intangible low-taxed income (“GILTI”) in a manner generally similar to inclusions of subpart F income. GILTI means, with respect to any U.S. shareholder for the shareholder’s taxable year, the excess (if any) of the shareholder’s net CFC tested income over the shareholder’s net deemed tangible income return. The shareholder’s net deemed tangible income return is an amount equal to 10 percent of the aggregate of the shareholder’s pro rata share of the qualified business asset investment (“QBAI”) of each CFC with respect to which it is a U.S. shareholder.

(a) IN GENERAL—Each person who is a United States shareholder of any controlled foreign corporation for any taxable year of such United States shareholder shall include in gross income such shareholder’s global intangible low-taxed income for such taxable year.

(b) GLOBAL INTANGIBLE LOW-TAXED INCOME

(1) IN GENERAL The term ‘global intangible low-taxed income’ means, with respect to any United States shareholder for any taxable year of such United States shareholder, the excess (if any) of –

(A) such shareholder’s net CFC tested income for such taxable year, over

(B) such shareholder’s net deemed tangible income return for such taxable year.

(2) NET DEEMED TANGIBLE INCOME RETURN

The term ‘net deemed tangible income return’ means, with respect to any United States shareholder for any taxable year, an amount equal to 10 percent of the aggregate of such shareholder’s pro rata share of the qualified business asset investment of each controlled foreign corporation with respect to which such shareholder is a United States shareholder for such taxable year (determined for each taxable year of each such controlled foreign corporation which ends in or with such taxable year of such United States shareholder).

(c) NET CFC TESTED INCOME

(1) IN GENERAL—The term ‘net CFC tested income’ means, with respect to any United States shareholder for any taxable year of such United States shareholder, the excess (if any) of—

(A) the aggregate of such shareholder’s pro rata share of the tested income of each controlled foreign corporation with respect to which such shareholder is a United States shareholder or such taxable year of  such United States shareholder (determined for each taxable year of such controlled foreign corporation which ends in or with such taxable year of such United States shareholder), over

(B) the aggregate of such shareholder’s pro rata share of the tested loss of each controlled foreign corporation with respect to which such shareholder is a United States shareholder for such taxable year of such United States shareholder (determined for each taxable year of such controlled foreign corporation which ends in or with such taxable year of such United States shareholder).

(d) QUALIFIED BUSINESS ASSET INVESTMENT—

(1) IN GENERAL—The term ‘qualified business asset investment’ means, with respect to any corporation for any taxable year of such controlled foreign corporation, the average of the aggregate of

the corporation’s adjusted bases as of the close of each quarter of such taxable year in specified tangible property —

(A) used in a trade or business of the corporation, and‘

(B) of a type with respect to which a deduction is allowable under section 167.

(2) SPECIFIED TANGIBLE PROPERTY—

(A) IN GENERAL—The term ‘specified tangible property’ means, except as provided in subparagraph (B), any tangible property used in the production of tested income.

(B) DUAL USE PROPERTY In the case of property used both in the production of tested income and income which is not tested income, such property shall be treated as specified tangible property in the same proportion that the gross income described in subsection (c)(1)(A) produced with respect to such property bears to the total gross income produced with respect to such property.

SEC. 250. FOREIGN-DERIVED INTANGIBLE INCOME AND GLOBAL INTANGIBLE LOW-TAXED INCOME

Senate Finance Committee Explanation of Text

In the case of a domestic corporation for its taxable year, the proposal allows a deduction equal to 37.5 percent of the lesser of (1) the sum of its  foreign-derived intangible income plus the amount of GILTI that is included in its gross income, or (2) its taxable income, determined without regard to this proposal. The foreign-derived intangible income of any domestic corporation is the amount which bears the same ratio to the corporation’s deemed intangible income as its foreign-derived deduction eligible income bears to its deduction eligible income.

(a) ALLOWANCE OF DEDUCTION

(1) IN GENERAL—In the case of a domestic corporation for any taxable year, there shall be allowed as a deduction an amount equal to the sum of—

(A) 37.5 percent of the foreign-derived intangible income of such domestic corporation for such taxable year, plus

(B) 50 percent of the global intangible low-taxed income amount (if any) which is included in the gross income of such domestic corporation under section 951A for such taxable year.

(b) FOREIGN-DERIVED INTANGIBLE INCOME

(1) IN GENERAL —The foreign-derived intangible income of any domestic corporation is the amount which bears the same ratio to the deemed intangible income of such corporation as—

(A) the foreign-derived deduction eligible income of such corporation, bears to

(B) the deduction eligible income of such corporation.

(2) DEEMED INTANGIBLE INCOME

(A) IN GENERAL The term ‘deemed intangible income’ means the excess (if any) of—

(i) the deduction eligible income of the domestic corporation, over

(ii) the deemed tangible income return of the corporation.

(B) DEEMED TANGIBLE INCOME RETURN The term ‘deemed tangible income return’ means, with respect to any corporation, an amount equal to 10 percent of the corporation’s qualified business asset investment (as defined in section 951A(d), determined by substituting ‘deduction eligible income’ for ‘tested income’ in paragraph (2) thereof).

(C) SPECIAL RULES WITH RESPECT TO RELATED PARTY TRANSACTIONS

(i) SALES TO RELATED PARTIES—If property is sold to a related party who is not a United States person, such sale shall not be treated as for a foreign use unless such property is sold by the related party to another person who is an unrelated party who is not a United States person and the taxpayer establishes  the satisfaction of the Secretary that such property is for a foreign use.

SEC. 14222. LIMITATIONS ON INCOME SHIFTING THROUGH INTANGIBLE PROPERTY TRANSFERS

(a) DEFINITION OF INTANGIBLE ASSET Section 936(h)(3)(B) is amended—

(vi) any goodwill, going concern value, or workforce in place (including its composition and terms and conditions (contractual or otherwise) of its employment); or

(vii) any other item the value or potential value of which is not attributable to tangible property or the services of any individual.

(b) CLARIFICATION OF ALLOWABLE VALUATION METHODS

(i) the valuation of transfers of intangible property, including intangible property transferred with other property or services, on an aggregate basis, or

(ii) the valuation of such a transfer on the basis of the realistic alternatives to such a transfer, if the Secretary determines that such basis is the most reliable means of valuation of such transfers.

SEC. 59A. TAX ON BASE EROSION PAYMENTS OF TAXPAYERS WITH SUBSTANTIAL GROSS RECEIPTS

Senate Finance Committee Explanation of Text for Tax on Base Erosion Payments

Under the proposal, an applicable taxpayer is required to pay a tax equal to the base erosion minimum tax amount for the taxable year. The base erosion minimum tax amount means, with respect to an applicable taxpayer for any taxable year, the excess of 10-percent of the modified taxable income of the taxpayer for the taxable year over an amount equal to the regular tax liability (defined in section 26(b)) of the taxpayer for the taxable year reduced (but not below zero) by the excess (if any) of credits allowed under Chapter 1 over the credit allowed under section 38 (general business credits) for the taxable year allocable to the research credit under section 41(a).

Modified taxable income means the taxable income of the taxpayer computed under Chapter 1 for the taxable year, determined without regard to any base erosion tax benefit with respect to any base erosion payment, or the base erosion percentage of any net operating loss deduction allowed under section 172 for the taxable year.

A base erosion payment generally means any amount paid or accrued by a taxpayer to a foreign person that is a related party of the taxpayer and with respect to which a deduction is allowable, including any amount paid or accrued by the taxpayer to the related party in connection with the acquisition by the taxpayer from the related party of property of a character subject to the allowance of depreciation (or amortization in lieu of depreciation). A base erosion payment also includes any amount that constitutes reductions in gross receipts of the taxpayer that is paid to or accrued by the taxpayer with respect to: (1) a surrogate foreign corporation which is a related party of the taxpayer, and (2) a foreign person that is a member of the same expanded affiliated group as the surrogate foreign corporation. A surrogate foreign corporation has the meaning given in section 7874(a)(2), but does not include a foreign corporation treated as a domestic corporation under section 7874(b).

A base erosion tax benefit means any deduction allowed with respect to a base erosion payment for the taxable year. Any base erosion tax benefit attributable to any base erosion payment on which tax is imposed by sections 871 or 881 and with respect to which tax has been deducted and withheld under sections 1441 or 1442, is not taken into account in computing modified taxable income as defined above. If the rate of tax required to be deducted and withheld under sections 1441 or 1442 with respect to any base erosion payment is reduced, the above exclusion only applies in proportion to such reduction.

(a) IMPOSITION OF TAX—There is hereby imposed on each applicable taxpayer for any taxable year a tax equal to the base erosion minimum tax amount for the taxable year. Such tax shall be in addition to any other tax imposed by this subtitle.

(b) BASE EROSION MINIMUM TAX AMOUNT

(1) IN GENERAL—Except as provided in paragraph (2), the term ‘base erosion minimum tax amount’ means, with respect to any applicable taxpayer for any taxable year, the excess (if any) of—

(A) an amount equal to 10 percent of the modified taxable income of such taxpayer for the taxable year, over

(B) an amount equal to the regular tax liability (as defined in section 26(b)) of the taxpayer for the taxable year, reduced (but not below zero) by the excess (if any) of—

(i) the credits allowed under this chapter against such regular tax liability, over

(ii) the credit allowed under section 38 for the taxable year which is properly allocable to the research credit determined under section 41(a).

(2) MODIFICATIONS FOR TAXABLE YEARS BEGINNING AFTER 2025

In the case of any taxable year beginning after December 31, 2025, paragraph (1) shall be applied—

(A) by substituting ‘12.5 percent’ for ’10 percent’ in subparagraph (A) thereof.

(d) BASE EROSION PAYMENT

(1) IN GENERAL—The term ‘base erosion payment’ means any amount paid or accrued by the taxpayer to a foreign person which is a related party of the taxpayer and with respect to which a deduction is allowable under this chapter.

(2) PURCHASE OF DEPRECIABLE PROPERTY Such term shall also include any amount paid or accrued by the taxpayer to a foreign person which is a related party of the taxpayer in connection with

the acquisition by the taxpayer from such person of property of a character subject to the allowance of depreciation (or amortization in lieu of depreciation).

(3) CERTAIN PAYMENTS TO EXPATRIATED ENTITIES

(A) IN GENERAL Such term shall also include any amount paid or accrued by the taxpayer with respect to a person described in subparagraph (B) which results in a reduction of the gross receipts of the taxpayer.

(1) IN GENERAL—The term ‘applicable taxpayer’ means, with respect to any taxable year, a taxpayer—

(A) which is a corporation other than a regulated investment company, a real estate investment trust, or an S corporation,

(B) the average annual gross receipts of which for the 3-taxable-year period ending with the preceding taxable year are at least $500,000,000, and

(C) the base erosion percentage (as determined under subsection (c)(4)) of which for the taxable year is 4 percent or higher.

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William H. Byrnes has achieved authoritative prominence with more than 20 books, treatise chapters and book supplements, 1,000 media articles, and the monthly subscriber Tax Facts Intelligence. Titles include: Lexis® Guide to FATCA Compliance, Foreign Tax and Trade Briefs, Practical Guide to U.S. Transfer Pricing, and Money Laundering, Asset Forfeiture; Recovery, and Compliance (a Global Guide). He is a principal author of the Tax Facts series. He was a Senior Manager, then Associate Director of international tax for Coopers and Lybrand, and practiced in Southern Africa, Western Europe, South East Asia, the Indian sub-continent, and the Caribbean. He has been commissioned by a number of governments on tax policy. Obtained the title of tenured law professor in 2005 at St. Thomas in Miami, and in 2008 the level of Associate Dean at Thomas Jefferson. William Byrnes pioneered online legal education in 1995, thereafter creating the first online LL.M. offered by an ABA accredited law school (International Taxation and Financial Services graduate program).

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