The Financial Accountability and Corporate Transparency (FACT) Coalition urges Congress to advance needed international tax reforms as part of the 2021 budget reconciliation process by passing the Build Back Better Act (H.R. 5376). The international tax reforms included in the Act would decrease tax haven abuse and the offshoring of jobs, while raising revenue for the rest of the plan and furthering the recent OECD minimum global tax agreement adopted by the President and other G-20 leaders.
The following table outlines the various characteristics of key U.S. international tax regimes and shows how the Build Back Better Act would modify them, including: the Global Intangible Low-Taxed Income (GILTI) tax, the Base-Erosion and Anti-Abuse Tax (BEAT), and the Foreign-Derived Intangible Income (FDII) deduction.
This chart also provides a comparison of the Build Back Better Act to earlier proposals from President Biden and the House Ways & Means Committee, along with notes demonstrating where changes must be advanced to further the recent, historic OECD agreement to create a global minimum corporate tax.
As the below chart demonstrates, many Build Back Better changes are taxpayer favorable compared to current law, contrary to conflicting narratives. In some instances, Congress might consider strengthening current proposals consistent with President Biden’s earlier Green Book to create a fairer tax system in which U.S. multinationals bear the appropriate burden of investments that will undoubtedly benefit them. For example, the U.S. can afford to go beyond OECD minimums to raise additional revenue without fear for competitiveness, such as by raising the GILTI rate.
Nonetheless, key structural components of the Build Back Better Act do decrease the incentive for profit-shifting and offshoring by U.S. and foreign multinationals compared to current law. By advancing the Build Back Better Act now, Congress can remove these improper incentives, and, in doing, increase the competitiveness of America’s working families and domestic businesses.
Connections to the OECD agreement are noted in blue. Taxpayer favorable provisions are noted in red.
Where is the Build Back Better Act?**
GILTI Provisions
| Current Law | President Biden Proposal | W+M Draft Sept. 2021 | Build Back Better (Nov. Draft H.R. 5376) | Notes | |
| Domestic Rate | 21% | 28% | 26.50% | 21% | Taxpayer Favorable |
| Section 250 Deduction for Offshoring under GILTI | 50% (decreases to 37.5% after 2025) | 25% | 37.50% | 28.5% beginning in 2023 (delay not required under OECD) | Creating a structural preference for offshore profits (other than for demonstrable double-tax relief via foreign tax credits) encourages offshoring and profit-shifting. A smaller GILTI deduction is preferable and can raise material additional revenue. |
| GILTI rate | 10.50% | 21.00% | 16.56% | 15.02% | 15% minimum rate required for OECD compliance; yet, the GILTI rate can and should be higher to limit differences between international and domestic rates. |
| Differential between rate on domestic and foreign profits | 10.50% | 7% | 9.94% | 5.99% beginning in 2023 | Calculated on an absolute basis |
| GILTI exemption for “routine profits” (“Qualified Business Asset Investments” or “QBAI”) | “Routine profits” are exempted and deemed to be equal to 10% of foreign tangible assets | No exemption for routine profits | QBAI equal to 5% | QBAI equal to 5% | QBAI exemption creates perverse incentive to offshore asset investment and is not necessary under OECD agreement |
| GILTI Application | Aggregate (or blending) of GILTI attributes, including for QBAI, foreign tax credits, and GILTI calculation) encourages additional offshoring to higher-tax jurisdictions and profit-shifting to tax havens | Country-by-Country application | Country-by-Country application | Country-by-Country application beginning in 2023 | Required for OECD compliance, but delay is not required and should be reconsidered. |
| GILTI foreign tax credit “haircut” | 80% of foreign taxes paid are credited against GILTI tax | 80% of foreign taxes paid are credited against GILTI tax | 95% of foreign taxes are credited against GILTI tax | 95% of foreign taxes are credited against GILTI tax | Taxpayer favorable compared to current law. |
| Loss/credit carryforward in GILTI | Not allowed | Not allowed | Allowed | Allowed | Taxpayer favorable compared to current law. |
| Expense Allocation | Expenses should be allocated neutrally between foreign and domestic income | Deduction and Credits related to tax-exempt or preferred income (including GILTI) denied. | For foreign tax credit purposes, only directly allocable expenses will limit FTCs | For foreign tax credit purposes, only directly allocable expenses will limit FTCs | Taxpayer favorable compared to current law. |
| Oil & gas industry | Oil and gas industries are exempted from GILTI | Removes inappropriate foreign oil and gas exemption | Removes inappropriate foreign oil and gas exemption | Removes inappropriate foreign oil and gas exemption | Required for OECD compliance. |
| Timing | GILTI deduction decreased after 2025 | Immediate changes | Immediate changes | Delayed implementation to 2023. | Taxpayer favorable delay not required under OECD agreement. |
FDII Provisions
| Current Law | President Biden Proposal | W+M Draft Sept. 2021 | Build Back Better (Nov. Draft H.R. 5376) | Notes | |
| Section 250 Deduction for “export” income | 37.50% | Eliminate FDII | 21.88% | 24.80% | FDII remains a problematic incentive that has been identified as an improper “export subsidy” for trade purposes. |
| FDII Incentive to offshore (i.e. deemed tangible income return decreasing FDII) | 10% | 0% | 10% | 10% | This is an inappropriate incentive to offshore tangible assets within an inappropriate subsidy for export income. The overall effect is nuanced if FDII is maintained. |
| FDII Rate | 13.13% | 28% | 20.70% | 15.80% | Taxpayer favorable compared to current law after 2025 |
BEAT Provisions
| Current Law | President Biden Proposal | W+M Draft Sept. 2021 | Build Back Better (Nov. Draft H.R. 5376) | Notes | |
| BEAT Rate | • 10% until 2026 • 12.5% after | Replace with more comprehensive SHIELD (contemplating OECD rate or 21%) | • 10% until 2024 • 12.5% in 2024 and 2025 •15% after | • 10% until 2023 • 12.5% in 2023 • 15% in 2024 • 18% after | Current BEAT provides weak incentives to deter base-erosion to small pool of taxpayers; proposed revisions improve BEAT enforcement. |
| Cost of Goods Sold and Certain Other Inventory Costs | No additional Excluded from BEAT | Included | Included | Included | Addresses large (and growing) category of base-eroding payments previously excluded from BEAT |
| BEAT Pool | Average annual revenue above $500mm for last 3 years | $500 mm annual revenue (financial reporting) | Average annual revenue above $500mm for last 3 years | Average annual revenue above $500mm for last 3 years | |
| BEAT Threshold Exemption | Only corporations that make more than 3% of their total deductible payments to foreign affiliates are subject to the BEAT | NA | Exemption applies only through 2023 | Exemption applies only through 2023 | OECD Compliant |
| “Double” Tax | Ignored | Would respect OECD compliant payments | Does not apply to payments taxed at BEAT rate | Does not apply to payments taxed at lesser of BEAT rate or 15% | OECD Compliant and Taxpayer Favorable |
| Indirect Application | Does not contemplate base erosion that extends beyond initial deduction. | Contemplates “indirect” base erosion, potentially denying deductions/payments if any group member has ETR below OECD rate | Creates call for regulations to address payments or deductions that indirectly result in lower-tax payments | Creates more specific call for regulations to address payments or deductions that indirectly fund payments to second (or down-stream) foreign persons taxed less than 15% | Addresses ability to profit-shift through complicated corporate structures (and addresses current strategic tax-planning realities). |
Additional Provisions
| Current Law | President Biden Proposal | W+M Draft Sept. 2021 | Build Back Better (Nov. Draft H.R. 5376) | Notes | |
| Corporate Minimum Tax | None | 15% minimum worldwide tax on “book” income (less General Business Credits, i.e., R&D, and FTCs) for TP’s with more than $2 BN in annual revenue | None | 15% minimum tax on “book” income effectively connected to U.S. T/B (ECI) or via CFCs (less General Business Credits, i.e., R&D, and FTCs) for TP’s with more than $1 BN in worldwide annual revenue (and at least $100 M in U.S. ECI). FTCs not directly incurred subject to annual cap of 15%, with carryforward. | If the corporate minimum tax applies, other international provisions do not, making this a worldwide backstop. JCT estimations indicate that the overlap between this tax and GILTI/BEAT/FDII revisions may be “modest,” though worth understanding. |
| U.S. Interest Deduction Limitation based on Worldwide EBITDA | No formulaic limitation to prevent U.S. base erosion. | Strict interest deduction limitations based on comparative U.S. share of EBITDA to worldwide EBITDA or the inability to substantiate U.S. interest deductions | Limits U.S. interest deductions based on comparative U.S. earnings (or, EBITDA) to international EBITDA. | Substantively similar to Sept. draft (w/ a few technical differences). | This provision has a few key utilities, including to fill a gap for foreign-parented MNEs that are not be subject to the BEAT but that engage in base-eroding practices. It is also necessary in light of TP favorable expense allocation rules discussed above w/r/t GILTI. |
**The above summary does omit some very technical aspects of the current Build Back Better Act, including certain taxpayer favorable changes to Subpart F and relating to current and proposed expense allocation rules; however, the FACT Coalition can be available to discuss these issues in greater detail. This table also omits discussion of additional Internal Revenue Service funding currently contemplated as part of the Build Back Better Act, which should be considered an essential component of ensuring that implemented tax laws are enforced as intended in light of years of failing to invest in (and actively defunding) the IRS. In fact, permanent increased funding of the IRS should be separately prioritized, given the potential long-term time horizon of realizing very high returns from such an investment.
For additional reading on the need for international tax reform to improve competitiveness for America’s working families, level the playing field for domestic businesses, and deter profit-shifting see:
- Analyzing needed U.S. international tax reform within the context of the OECD global minimum corporate tax agreement: https://thefactcoalition.org/trillions-at-stake-behind-the-numbers-at-play-in-u-s-international-corporate-tax-reform/
- Analyzing how U.S. international tax reform will improve U.S. competitiveness: https://thefactcoalition.org/international-tax-policy-and-us-competitiveness/
- Analyzing the urgent need for international tax reform: https://thefactcoalition.org/fact-sheet-the-urgent-case-for-u-s-international-tax-reform/
For more comprehensive FACT analysis on earlier international tax reform proposals see:
- FACT comments on proposed international tax framework from Senate Finance Chair Wyden and Senators Warner and Brown: https://thefactcoalition.org/fact-weighs-in-on-senates-provisional-international-tax-plan-ahead-of-budget-reconciliation/
- FACT response to Sept. Ways & Means international tax proposed reforms: https://thefactcoalition.org/congress-must-strengthen-proposed-international-tax-measures-in-line-with-bidens-tax-plans/
- Comparing earlier proposed international tax reforms: https://thefactcoalition.org/fact-sheet-overview-of-us-international-corporate-tax-law/.