Changes Suggested for International Tax Provisions of BBB Act

THE INTERNATIONAL TAX PROVISIONS OF BBB: A REASONABLE COMPROMISE

DRAFT 11/2/21

REUVEN S. AVI-YONAH

ABSTRACT

The recently unveiled international tax provisions of the Build Back Better Act (BBB) represent a reasonable compromise. They are consistent with the OECD's Pillar Two statement, and represent a significant move toward the full implementation of the single tax principle (STP). In what follows, we will discuss the proposed changes and how they fit in with the new international tax regime.

1. INTRODUCTION

The recently unveiled international tax provisions of the Build Back Better Act (BBB) represent a reasonable compromise. They are consistent with the OECD's Pillar Two outline, and represent a significant move toward the full implementation of the single tax principle (STP). In what follows, we will discuss the proposed changes and how they fit in with the new international tax regime.

2. GILTI

Probably the most important element in BBB is the modification of the GILTI rules to raise the GILTI rate to 15% (15.8% with foreign tax credits), reduce QBAI to 5%, and apply GILTI country by country.

All of these changes are required by Pillar Two. The rate is the same as the Pillar Two minimum rate. The QBAI limit is the same as the substance carve out permitted by OECD. Country by country application is likewise required by OECD.

These changes in US law, if enacted, make it much more likely that the other G20 will enact similar changes. If all the G20 follow up on their OECD commitments, then we will be much farther along to applying the STP. Since 95% of large multinationals are headquartered in the G20, this means that they will be subject to the 15% minimum tax. That in turn should enable source countries to apply the UTPR and the STTR without worrying that a multinational can move its operations elsewhere. It is important that the GILTI FTC limit was raised to 95% because that means that source country taxes will be almost fully creditable. The 5% reduction is presumably intended to encourage MNEs not to just pay foreign taxes with no regard to the US impact.

I would have preferred the GILTI rate to be 21% and QBAI to be eliminated, as proposed by the Biden administration, but this represents a reasonable compromise position.

3. FTC LIMITS

BBB applies country by country to the regular FTC under Subpart F as well. This plus the existing baskets finally achieves the Reagan Treasury proposal from 1985 to have both per category and per country limits apply to the FTC. In a situation where most US MNEs will be in excess credits because of the reduction in the US rate to 21%, this change is essential to prevent cross-crediting (as allowed by the TCJA) and an incentive to invest in lower tax foreign jurisdictions. While 15% is lower than 21%, it is much less likely that a foreign country can grant a tax holiday to entice MNEs by the combination of Deferral (eliminated by the TCJA) and cross-crediting (eliminated by BBB).

4. FDII

I have never been a fan of FDII, and BBB only raises the rate to 15.8% (same as the GILTI rate plus 95% of FTCs). But recently there has been evidence the FDII does induce intangible migration to the US, so it looks a bit better.¹ Still, the problem that it is a blatant violation of the WTO subsidies code remains, and this can lead to trouble down the road. The fact that FDII may be working increases the incentive for foreign trading partners to sue in the WTO.

5. BEAT

BEAT has not been very successful so far in raising the kind of revenues that were expected in 2017. But there is evidence that BEAT revenue may be increasing and this will be even more true under the BBB rate increases to 18%.² BBB also fixes some important problems with BEAT by applying it eg to interest capitalized into inventory. The most important change is to make BEAT conditional on the tax rate in the other countries, which is consistent with the STP and the UTPR.

6. CORPORATE AMT

A non-international provision in BBB is the new book based corporate AMT set at 15%, for MNEs with average revenues over $1 billion. The corporate AMT applies to foreign MNEs whose US revenues exceed $100 million over three years, so it is an important backstop to BEAT as well as GILTI, and consistent with both the IIR and the UTPR.

7. INTEREST CAP

For foreign financial groups, there is a new cap on net interest expense, which is also likely to bolster the BEAT.

8. THE MISSING PIECE

The major missing piece in BBB is the lack of an anti-inversion rule. An inversion that manages to avoid 7874 will not be subject to GILTI or the anti-inversion provisions of BEAT. It will be subject to the corporate AMT, but given the incentives to invert and the consequent reduction in the global effective tax rate, BBB really should include the Biden budget anti-inversion rule (reducing the 7874 threshold to 50%, plus a managed and controlled alternative definition of corporate residency).

9. CONCLUSION

The BBB international tax provisions, while flawed like any legislation that needs to get a majority vote in Congress, represent a reasonable compromise position. They fully implement Pillar Two and are a big improvement over TCJA. They are likely to produce significant revenue and therefore help strengthen the US social safety net and combat climate change.