Tax News & Views International Weekly: More International Tax Changes Coming?

Throughout the legislative process for the sweeping GOP tax bill, lawmakers have had to balance where to merely extend existing policies, and where to change them.

The bill includes new tax breaks, taken from President Trump’s campaign pledges, including a tax exemption for tips and a new deduction for seniors. It also rolls back energy tax credits enacted by the Inflation Reduction Act–although Republican senators and representatives still disagree on how far they should go.

But for most of the bill’s major items, the goal is to negate the 2017 Tax Cuts and Jobs Act’s expirations and keep the tax code as it is. This is especially true for the international provisions. While the version of the bill passed by the House of Representatives last month does include a retaliatory provision targeted at “discriminatory” foreign taxes, the bill otherwise only makes slight tweaks to the international framework put in place by the TCJA.

That may not hold true as the Senate gives the legislation a look. There’s been some talk of fine-tuning those provisions to bolster American competitiveness. As has been true for this bill all along, it’ll come down to a balance between competing priorities and limited dollars.

A bill sponsored by Sen. Thom Tillis, R-N.C., the “International Competition for American Jobs Act,” has received the most notice so far. Like H.R. 1, it would negate planned increases in the effective rates for the tax on global intangible low-taxed income, and the tax on foreign-derived intangible income–two key planks of the TCJA’s international tax regime, that both target income earned from valuable intangible assets like intellectual property. But the bill would also make changes to the GILTI tax calculation to make it more flexible and beneficial for companies, while also increasing the deduction available for FDII, which is aimed at domestic intangibles.

According to supporters of the bill, who all signed a letter of support in May, the FDII changes would make it more favorable for companies to hold valuable IP in the U.S. The bill would also negate some of the tax consequences that occur when companies unwind offshore structures to bring IP back home.

If successful, these provisions could complete what some see as the unfinished business of the TCJA. Before 2017, companies had accumulated billions of dollars in deferred offshore income, often earned through IP that was more mobile and easy to move abroad than traditional assets. The TCJA’s repatriation tax, and broad exemption for offshore earnings, was meant to encourage companies to bring those assets back to where they were originally developed. And many did–but many others kept those structures in place, wary of the potential tax consequences (and whether a future administration or Congress might change those incentives.)

The Tillis bill, which includes a plethora of other changes to international provisions of the tax code, could finally trigger a homecoming for those remaining holdouts. But it also sits alongside dozens, if not hundreds, of other proposals lawmakers are aiming to include in the tax bill. And with deficit concerns already threatening support, the room that tax writers have to add new measures could be very limited.

Noteworthy Items This Week

House Budget Reconciliation Bill’s Revenge Tax – Lee Sheppard, Tax Notes ($):

What’s this got to do with taxes? The whole base erosion and profit-shifting effort, digital services taxes, and general European dissatisfaction with the international consensus on taxation must be viewed through the lens of European mercantilism and the euro experiment. Taxation is not a walled garden. Europeans had no problem with the international consensus when their national champions — which can grow only by selling outside their small home countries — were benefiting. BEPS began when France and Germany — which routinely blow through their stability and growth pact deficit limits — decided that American multinationals weren’t paying enough corporate income tax.

Section 899 Alarms Boardrooms and Businesses, Too: CFO Briefing – Nina Trentmann, Bloomberg Tax ($):

Funds want clarity on how the retaliatory tax would operate and are considering divestment if it’s implemented, which could negatively impact the US economy, Levine, US Treasury’s former deputy assistant secretary for international affairs and tax partner at Baker McKenzie, said. He was speaking at a International Tax Law and Policy Research Network event at King’s College London.

Section 899 Could Be A Costly Tax Shift For US Borrowers – Michael Bolotin, Law360 Tax Authority ($):

If Section 899 passes the Senate and becomes law, the resulting increase in interest withholding on obligations issued pursuant to credit agreements entered into prior to its passage would generally require U.S. borrowers to gross up affected non-U.S. lenders. Consequently, U.S. taxpayers would bear the economic incidence of a tax designed to pressure foreign governments.

Parliamentarian could nix the ‘revenge tax’ increase in GOP megabill – Brian Faler, Politico:

Republicans are concerned that she will see the provision as tantamount to overriding tax treaties the U.S. has with other countries. If that’s the case, she could decide the matter belongs under the jurisdiction of the Senate Foreign Relations Committee — which would be a problem for Republicans because their reconciliation plans never mentioned that panel.

Taxing Countries That Are Targeting US Companies Isn’t ‘Revenge’ – Rep. Ron Estes, R-Kan., Bloomberg Tax:

Foreign countries have been seeking ways to pilfer our tax base under the guise of friendly global agreements for years, but their efforts have gone largely unnoticed by many outside Washington, D.C.—until now.

If countries such as France, Canada, the UK, and others are imposing extraterritorial or discriminatory tax regimes on the US, it seems only logical that our tax code should reflect this changing landscape—and, better yet, discourage these types of unfair taxes altogether.

Tax Bill’s Retaliatory Tax Won’t Sink Ship, Parliamentarian Rules – Jonathan Curry, Tax Notes ($):

Concerns had been raised that section 899 would run afoul of the Byrd rule in several ways. The rule prohibits including extraneous provisions in a budget reconciliation bill. That includes provisions outside the jurisdiction of the congressional committees that received budget reconciliation instructions. Critics argued that because the proposed retaliatory tax could override existing tax treaties, the Senate Foreign Relations Committee had jurisdiction in addition to the Senate Finance Committee.

The parliamentarian wasn’t swayed by that jurisdictional concern and greenlit the proposal for now. But that doesn’t necessarily mean it’s smooth sailing ahead for the retaliatory tax, according to Zach Moller of Third Way. “Other Byrd issues may remain once the Senate fixes their version of the policy,” he told Tax Notes.

The New Retaliation Tax, Section 899 – Adam Michel, Liberty Taxed:

The new provision also significantly expands executive taxing power. Section 899 grants extensive discretion to the Treasury secretary in determining what constitutes an “unfair” foreign tax. While explicitly including DSTs, DPTs, and UTPRs, the text also allows the Treasury to designate additional extraterritorial or discriminatory taxes, with few guardrails, beyond excluding common taxes, and no formal procedural safeguards.

The Trump administration has already signaled its willingness to wield delegated tax and trade authority with impunity, often stretching the bounds of its statutory powers. Establishing a new taxing authority with open-ended definitions would heighten global investment uncertainty and further erode trust in the US market.

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 Marksman

Debut Year:1942

Debut Publication: Smash Comics #33

Origin Story: A Polish nobleman who decided to fight the Nazi invaders using his archery skills. He also works as a spy, posing as a German major.

Superpowers: His classic archery training proves invaluable as a resistance fighter.

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.

Tax News & Views International Weekly: More International Tax Changes Coming?

We're Here to Help