International Tax Proposals under the 2024 Federal Budget

The Biden administration has released its budget proposal for fiscal year 2024. The proposal aims to decrease the federal deficit by roughly $3 trillion within the next decade. To achieve this, taxes will be raised on high-net-worth individuals and large corporations.

The proposed budget entails a 7% increase in the U.S. corporate income tax rate, from 21% to 28%. The ordinary tax rate for top individuals will also increase from 37% to 39.6%. Changes in international tax rules will be implemented, which will increase the tax rate on foreign earnings of U.S. multinational corporations. Furthermore, the corporate stock repurchase excise tax will move up from 1% to 4%, which was part of the Inflation Reduction Act of 2022.

The White House has also released the "Green Book," or General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposal. It provides an in-depth analysis and detailed estimates from the Treasury Department for the administration’s revenue proposals.

The 2024 budget and Green Book incorporate measures originally proposed in the 2022 and 2023 Green Books, as well as the American Jobs Plan, and some new provisions that, if enacted, would significantly modify the U.S. international tax rules. An overview of the proposed changes is outlined below.

Global Intangible Low-Taxed Income (GILTI)

The administration’s proposals would make several changes to the GILTI regime:

• The net deemed tangible income return (the qualified business asset investment (QBAI) exemption), would be eliminated, so that a U.S. shareholder’s entire net controlled foreign corporation (CFC) tested income would be subject to U.S. tax.
• The Section 250 deduction would be reduced to 25%, generally increasing the U.S. effective rate on GILTI inclusions to 21% (assuming the U.S. corporate rate is changed to 28%).
• The global averaging method for computing the GILTI inclusion would be replaced with a jurisdiction-by-jurisdiction method. (A similar jurisdiction-by-jurisdiction method would apply to foreign branch income.) Under this method, a separate foreign tax credit (FTC) limitation would be computed for each jurisdiction, thus preventing the crediting of foreign income taxes paid to high-tax jurisdictions from reducing U.S. residual tax on income earned in lower-tax jurisdictions.
• The FTC reduction would be cut from 20% to 5%.
• Net operating losses (NOLs) would be allowed to be carried forward within a single jurisdiction.
• Excess FTCs would be allowed to be carried forward for 10 years within a single jurisdiction.
• The high-tax exception for subpart F income and the cross reference to that provision in the GILTI regulations would be repealed.
• A domestic corporation that is a member of a foreign-parented group would account for any foreign taxes paid by the foreign parent under an income inclusion rule with respect to CFC income that would otherwise be part of the domestic corporation’s GILTI inclusion. This would be done in a manner consistent with the Pillar Two model rules on global minimum taxation and would apply on a jurisdiction-by-jurisdiction basis.

The reduction in the Section 250 deduction to 25% would be effective for taxable years beginning after December 31, 2022. The other changes impacting GILTI (and foreign branch income) would be effective for taxable years beginning after December 31, 2023.

Section 245A Deduction

The section 245A dividends received deduction (DRD) would be limited to dividends distributed either by CFCs or by qualified foreign corporations, which would include corporations incorporated in a territorial possession of the United States and certain corporations eligible for the benefits of a comprehensive income tax treaty. A U.S. shareholder would receive a DRD equal to 65% of the foreign-source dividends received from a qualified foreign corporation that is not a CFC if the U.S. shareholder owns at least 20% of the stock (by vote and value) of the qualified foreign corporation. If a U.S. shareholder owns less than 20% (by vote or value) of the stock of a qualified foreign corporation that is not a CFC, the U.S. shareholder would receive a DRD equal to 50% of the foreign-source dividends received. The DRD would remain unchanged for dividends received from CFCs.

The proposal would be effective for distributions after the date of enactment.

Deductions Allocable to Exempt Income

The proposal would expand the application of Section 265 to disallow deductions allocable to a class of foreign gross income that is exempt from tax or taxed at a preferential rate through a deduction (for example, GILTI inclusion with respect to which a Section 250 deduction is permitted or dividends eligible for the Section 245A deduction). Section 904(b)(4), which disregards for purposes of the FTC limitation deductions allocable to income attributable to foreign stock other than GILTI or subpart F income inclusions, would be repealed.

The proposal would be effective for taxable years beginning after December 31, 2023.

Inversions

The administration’s proposals would make the following changes to the inversion rules:

• The definition of an inversion transaction would be broadened by replacing the 80% test with a greater-than-50% test and eliminating the 60% test.
• Regardless of the level of shareholder continuity, an inversion transaction would occur if (a) immediately prior to the acquisition, the fair market value of the domestic entity is greater than the fair market value of the foreign acquiring corporation, (b) after the acquisition the expanded affiliated group is primarily managed and controlled in the United States, and (c) the expanded affiliated group does not conduct substantial business activities in the country in which the foreign acquiring corporation is created or organized.
• The scope of an acquisition for purposes of Section 7874 would be expanded to include a direct or indirect acquisition of substantially all the assets constituting a trade or business of a domestic corporation, substantially all the assets of a domestic partnership, or substantially all the U.S. trade or business assets of a foreign partnership.
• A distribution of stock of a foreign corporation by a domestic corporation or a partnership that represents either substantially all the assets or substantially all the assets constituting a trade or business of the distributing corporation or partnership would be treated as a direct or indirect acquisition of substantially all the assets or trade or business assets, respectively, of the distributing corporation or partnership.

The Secretary of the Treasury would be granted regulatory authority to exempt some internal restructurings involving partnerships from the application of Section 7874 and to define a trade or business for purposes of Section 7874.

The proposal would be effective for transactions that are completed after the date of enactment.

Losses on Stock Attributable to Foreign Income Taxed at a Reduced Rate

For purposes of determining loss on a U.S. shareholder’s disposition of stock of a foreign corporation, the basis in stock of the foreign corporation would be reduced (but not below zero) by the sum of (a) the Section 245A DRDs allowed to the U.S. shareholder with respect to the stock, (b) the deductions for GILTI inclusions that are attributable to the stock, and (c) the deductions for income inclusions under the Section 965 transition tax that are attributable to the stock.

The proposal would apply to dispositions occurring on or after the date of enactment (regardless of whether the deductions under Section 250 or 965(c) were claimed in taxable years prior to that date).

Expanded Definition of Foreign Business Entity

Effective for tax years of a controlling U.S. person that begin after December 31, 2023, and to annual accounting periods of foreign business entities that end with or are within such taxable years of the controlling U.S. person, the administration’s proposal would expand the definition of foreign business entity by treating any taxable unit in a foreign jurisdiction as a “foreign business entity” for purposes of Section 6038. Therefore, information would be required to be reported separately with respect to each taxable unit, and penalties would apply separately for failures to report with respect to each taxable unit. Additionally, the annual accounting period for a taxable unit that is a branch or disregarded entity is the annual accounting period of its owner.

BEAT and UTPR

The administration’s proposal would repeal the current base erosion and anti-abuse tax (BEAT) provisions and replace them with an undertaxed payments rule (UTPR), which is intended to be similar to the UTPR under the OECD Pillar Two model rules and would apply to foreign-parented multinationals operating in low-tax jurisdictions with financial reporting groups that have global annual revenue of $850 million or more in at least two of the prior four years. The proposal includes several de minimis exclusions that could apply to a financial reporting group. Additionally, when another jurisdiction adopts a UTPR, a domestic minimum top-up tax would be applied in an attempt to protect U.S. revenues from the imposition of a UTPR by other countries.

Under the proposed UTPR, domestic corporations that are part of a foreign-parented multinational group, as well as domestic branches of foreign corporations, would be disallowed U.S. deductions in an amount determined by reference to low-taxed income of foreign entities and foreign branches that are members of the same financial reporting group (including the common parent of the financial reporting group). However, the UTPR would not apply to income subject to an income inclusion rule that is consistent with the Pillar Two Model Rules, which would include income that is subject to GILTI (as proposed).

The UTPR generally would not apply to U.S.-parented multinationals. Specifically, domestic group members would be disallowed U.S. tax deductions to the extent necessary to collect the hypothetical amount of top-up tax required for the financial reporting group to pay an effective tax rate of at least 15% in each foreign jurisdiction in which the group has profits. The amount of the top-up tax would be determined based on a jurisdiction-by-jurisdiction computation of the group’s profit and effective tax rate, with certain specified adjustments and consistent with the Pillar Two model rules, which would take into account all income taxes, including the corporate alternative minimum tax. Additionally, the computation of a group’s profit for a jurisdiction would be reduced by 5% of the book value of tangible assets and payroll with respect to the jurisdiction. The top-up amount would be allocated among all of the jurisdictions where the financial reporting group operates that have adopted a UTPR consistent with the Pillar Two model rules.

This proposal would be effective for tax years beginning after December 31, 2024.

Repeal of Foreign-Derived Intangible Income

The Section 250 deduction allowable to domestic corporations on their FDII would be repealed. The repeal would be effective for taxable years beginning after December 31, 2023.

Allocation of Subpart F Income and GILTI Between Seller and Buyer of CFC Stock

Section 951(a)(2)(B) reduces a U.S. shareholder’s pro rata share of subpart F income and tested income when a dividend was paid to the shareholder’s predecessor during the year of sale. The dividend may be eligible for the section 245A DRD if received by a corporate U.S. shareholder. As a result, only a portion of the CFC’s subpart F income or tested income attributable to a share of stock would be included in income even if the share was owned by U.S. shareholders for the entire year. Regulations under Section 245A deny the section 245A DRD with respect to the dividend when a U.S. shareholder owns more than 50% of the stock of the CFC. However, the Section 245A regulations do not address all cases, such as when the dividend is received by a non-controlling shareholder.

The administration’s proposal would modify the existing pro rata share rules to require a U.S. shareholder of a CFC that owns, directly or indirectly, a share of stock of the CFC for part of the CFC’s taxable year, but not on the last day during the year the corporation was a CFC (relevant date), to include in gross income a portion of the foreign corporation’s subpart F income allocable to the portion of the year during which it was a CFC. That portion of subpart F income would equal the portion of the CFC’s current year earnings and profits paid as non-taxed current dividends on the share while it was a CFC. A non-taxed current dividend is the portion of a dividend paid out of current year earnings and profits that, without regard to the proposal, either (a) is paid to a U.S. shareholder and would qualify for a DRD, or (b) to the extent prescribed by the Secretary, is paid to an upper-tier CFC. The remaining portion of a CFC’s subpart F income that is allocable to the portion of the year during which it was a CFC would be allocated to a U.S. shareholder that owns a share of stock of the CFC on the last relevant day.

The proposal would similarly revise the pro rata share rules for determining a U.S. shareholder’s GILTI inclusion with respect to a CFC.

The proposal would apply to taxable years of foreign corporation beginning after the date of enactment and to taxable years of U.S. shareholders in which or with which such taxable years of foreign corporations end.

Calculation of CFC E&P

Under current law, in calculating current-year E&P, a CFC does not take into account three special accounting concepts - LIFO, installment sales and the completed contract method of accounting. However, for purposes of subpart F (Section 952(c)(3)), a CFC takes into account these special accounting concept. Thus, a CFC’s current year E&P is generally lower for subpart F purposes than it is for other purposes. Under the administration’s proposal, the E&P of a CFC would be determined for all purposes by taking into account LIFO, installment sales and the completed contract method of accounting.

The provision would be effective for taxable years of foreign corporations ending on or after December 31, 2023, and for taxable years of U.S. shareholders in which or with which such taxable years of the foreign corporations end.

Limitation of FTC from Sales of Hybrid Entities

Section 338(h)(16) provides that, subject to certain exceptions, the deemed asset sale resulting from a Section 338 election is generally ignored in determining the source or character of any item for purposes of applying the FTC rules to the seller. Under this rule, any gain recognized by the seller is treated as gain from the sale of the stock of the target for purposes of applying the FTC rules.

The administration’s proposal would apply the principles of Section 338(h)(16) to determine the source and character of any item recognized in connection with a direct or indirect disposition of an interest in in an entity that is treated as a corporation for foreign tax purposes but as a partnership or a disregarded entity for U.S. tax purposes (a specified hybrid entity) and to a change in the classification of an entity that is not recognized for foreign tax purposes (for example, due to an election under the entity classification regulations). Thus, for purposes of applying the FTC rules, the source and character of any item resulting from the disposition of the interest in the specified hybrid entity, or change in entity classification, would be determined based on the source and character of an item of gain or loss that the seller would have on the sale or exchange of stock (determined without regard to Section 1248).

The proposal would be effective for transactions occurring after the date of enactment.

Restrict Deductions of Excessive Interest of Members of Financial Reporting Groups

Effective for taxable years beginning after December 31, 2023, the administration has proposed that a deduction for interest expense of a member of a financial reporting group (defined below) generally would be limited if the member has net interest expense for U.S. tax purposes and the member’s net interest expense for financial reporting purposes (computed on a separate company basis) exceeds the member’s proportionate share of the financial reporting group’s net interest expense reported on the group’s consolidated financial statements. A member’s proportionate share of the financial reporting group’s net interest expense would be based on the member’s proportionate share of the group’s earnings reflected in the financial reporting group’s consolidated financial statements. A financial reporting group is a multinational group that prepares consolidated financial statements in accordance with U.S. GAAP, IFRS, or other method identified by the Secretary under regulations.

If a financial reporting group member fails to substantiate its proportionate share of the group’s net interest expense for financial reporting purposes, or a member so elects, the member’s interest deduction would be limited to the member’s interest income plus 10% of the member’s adjusted taxable income (as defined under Section 163(j)).

Disallowed interest would be carried forward indefinitely. Excess limitation would be carried forward for three years. Section 163(j) would continue to apply.

The proposed rules would not apply to financial services entities or financial reporting groups that would otherwise report less than $5 million of net interest expense, in the aggregate, on one or more U.S. income tax returns for a taxable year.

Payments Substituting for Partnership Effectively Connected Income (ECI) Treated as U.S.-Source Dividends

Effective for taxable years starting after December 31, 2023, the administration has proposed treating the portion of a payment on a derivate financial instrument (including a securities loan or sale-and-repurchase agreement) that is contingent on income or gain from a publicly traded partnership or other partnership specified by the Secretary or her delegates as a dividend equivalent, to the extent that the related income or gain would have been treated as ECI if the taxpayer held the underlying partnership interest.

Retroactive Qualified Electing Fund (QEF) Elections

Section 1295(b)(2) would be modified to permit a QEF election by the taxpayer as allowed by the underlying regulations. Taxpayers would be eligible to make a retroactive QEF election without requesting consent as long as it does not prejudice the U.S. government. The Treasury is also given authority to allow a retroactive QEF election for partnerships or other non-individual taxpayers in certain circumstances.

This proposal would be effective on the date of enactment. It is intended that regulations or other guidance would permit taxpayers to amend previously filed returns for open years.

Reform of Taxation of Fossil Fuel Income

The exemption from tested income for foreign oil and gas extraction income (FOGEI) of a CFC would be repealed. Moreover, the definition of FOGEI and foreign oil related income (presently included in tested income) would be amended to include income derived from shale oil and tar sands activity. Special rules would be provided for dual capacity taxpayers.

The proposal would be effective for taxable years beginning after December 31, 2023.

Tax Credit for Onshoring Jobs to the U.S.

Effective for expenses paid or incurred after the date of enactment, the administration’s proposal would introduce a new business credit for onshoring.

The proposal, which is substantially similar to the proposal included in the administration’s prior budget proposals, would provide a new general business credit equal to 10% of the eligible expenses paid or incurred in connection with onshoring a U.S. trade or business (limited to expenses associated with the relocation of the trade or business and would not include capital expenditures, costs for severance pay or other assistance to displaced workers). Onshoring a U.S. trade or business is defined as reducing or eliminating a trade, business or line of business currently conducted outside the U.S. and starting up, expanding or otherwise moving the same trade or business to a location within the U.S., to the extent that this action results in an increase in U.S. jobs.

Tax Deduction Disallowance for Offshoring Jobs

Also effective for expenses paid or incurred after the date of enactment, the administration’s proposal would include a disallowance of deductions for offshoring jobs.

Specifically, to reduce the tax benefits associated with a U.S. company moving jobs outside the U.S., the proposal would disallow deductions for expenses paid or incurred in connection with offshoring a U.S. trade or business (limited to expenses associated with the relocation of the trade or business and would not include capital expenditures, costs for severance pay or other assistance to displaced workers). Offshoring a U.S. trade or business means reducing or eliminating a trade, business, or a line of business currently conducted inside the U.S. and starting up, expanding or otherwise moving the same trade or business outside the U.S., to the extent the action results in a loss of U.S. jobs. Additionally, no deduction would be allowed against a U.S. shareholder’s GILTI or subpart F income inclusions for any expenses paid or incurred in connection with moving a U.S. trade or business outside the U.S.

Insights

The administration’s 2024 budget and Green Book provide important details regarding the anticipated changes to the U.S. international tax landscape. It remains to be seen whether these proposed changes will be enacted as outlined or if additional changes will be made. However, multinational companies can start modeling now the impact these changes may have on their operations and tentatively planning to mitigate any anticipated impact.

The administrations proposed budget plans are defined in these additional articles:

1. Corporate and Business Tax Provisions under the 2024 Federal Budget
2. Partnership Tax Provisions under the 2024 Federal Budget
3. Individual, Estate and Gift Taxes under the 2024 Federal Budget

For more information contact Amanda Mooney or our tax team.