On December 15, 2017, the House-Senate Conference Committee released a revised version of the Tax Cuts and Jobs Act (the Final Bill) that is expected to be passed by the House of Representatives and Senate later this week and sent to the President for signature. The Final Bill follows passage by the House of Representatives of its version of the Tax Cuts and Jobs Act (the House Bill) on November 16, 2017, and passage by the Senate of its version of the Tax Cuts and Jobs Act (the Senate Bill) on December 2, 2017.
The Final Bill is far-reaching and, when enacted, will make significant changes to how the US taxes individuals, domestic businesses and multinational businesses. See the prior Eversheds Sutherland alerts on the House Bill, the Senate Bill and the international tax provisions in the House Bill and the Senate Bill. This alert focuses on the international tax provisions in the Final Bill, which generally follow the international tax provisions in the Senate Bill (discussed in detail in prior alerts), with certain significant differences discussed below.
See the Eversheds Sutherland Tax Reform Law blog for more information about the Final Bill.
Changes from the Senate Bill:
- Overall Corporate Rate: The Final Bill increased the corporate tax rate to 21% from the 20% rate in the Senate Bill. The Final Bill adopts the reduced rate beginning in 2018, while the reduced rate in the Senate Bill would not have applied until 2019. The Final Bill eliminates the corporate alternative minimum tax, which the Senate Bill would have retained.
- Deductions for Interest Expense: The Final Bill adopts a modified version of the general 30% limitation on interest expense contained in the Senate Bill, limiting a taxpayer’s net interest deductions to 30% of adjusted taxable income. Note, however, that the Final Bill does not include the additional limitation on interest expense of certain US taxpayers that are members of worldwide groups, versions of which were in both the House Bill and the Senate Bill.
- Foreign Dividends Received Deduction and Transition Tax: The Final Bill adopts the 100% dividends received deduction for dividends received from 10% owned foreign corporations, versions of which were in the House Bill and the Senate Bill. The one-time transition tax on previously untaxed foreign earnings of specified foreign corporations generally follows the Senate Bill but increases the applicable tax rates to 15.5% on the amount of cash and cash equivalents held by such foreign corporations and 8% on the amount in excess of the amount of cash and cash equivalents. The Final Bill also permits offsetting deficits within an affiliated group of corporations, which is consistent with the House Bill.
- Global Intangible Low-Taxed Income: The Final Bill adopts the provision imposing tax on United States shareholders’ global intangible low-taxed income (GILTI) from the Senate Bill rather than the provision from the House Bill imposing tax on foreign high return amounts.
- Foreign Derived Intangible Income: The Final Bill retains the deduction provided in the Senate Bill for foreign-derived intangible income (FDII), but does not adopt the provision from the Senate Bill that would have allowed certain intangible property to be distributed from controlled foreign corporations (CFCs) to United States shareholders without gain recognition.
- Base Erosion Anti-Abuse Tax: The Final Bill adopts the base erosion and anti-abuse tax (BEAT) provision from the Senate Bill rather than the provision from the House Bill imposing an excise tax on certain amounts paid by US taxpayers to related foreign recipients. While the Final Bill adopts the BEAT, it reduces the base erosion percentage threshold (i.e., the percentage of “base erosion payments” relative to total deductible payments) to 3%, which will have the effect of causing more taxpayers to be subject to the tax. The Final Bill also reduces the rate at which the tax applies for 2018 from 10% to 5%. For 2019 through 2025, the rate remains at 10% and then increases to 12.5% starting in 2026.
- Application of Section 956: Both the House Bill and the Senate Bill proposed the repeal of section 956 as applied to corporations, taking into account the 100% dividends received deduction. The Final Bill rejected both proposals and, therefore, section 956 will continue to be relevant for US taxpayers with CFCs.
- CFC Look-Through Rule: The Final Bill does not make the look-through rule for dividends, interest and royalties paid between related CFCs under section 954(c)(6) permanent. The look-through rule currently is set to expire at the end of 2019 and both the House Bill and the Senate Bill would have made this rule permanent.