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The Draft of the International Tax Overhaul: Where is Captain America?

Shawn P. Wolf

Tax Blog Image On August 25, 2021, Senate Finance Committee Chair Ron Wyden, D-Ore., and fellow Senate Finance Committee Democrats Sherrod Brown of Ohio and Mark R. Warner of Virginia released draft legislation, and a related summary, relating to the U.S. international tax regime (the “Draft Legislation”). Previously, these same Senators introduced a general framework of concepts (the "Framework") entitled: Overhauling International Taxation: A framework to invest in the American people by ensuring multinational corporations pay their fair share.

As a background, keep in mind that the 2017 Tax Cuts and Jobs Act’s international tax changes were substantial, particularly as it relates to controlled foreign corporations ("CFCs")1. The following non-exclusive list of changes were implemented:

  • The so-called "transition tax" of Sec. 965 and the related changes to the Foreign Tax Credit system (especially Sec. 902) and to the Dividends Received Deduction (Sec. 245A);
  • Global Intangible Low Tax Income ("GILTI");
  • Foreign Derived Intangible Income ("FDII");
  • The special rules of Sec. 250;
  • The Base Erosion and Anti-Abuse tax ("BEAT"); and
  • The reduction of the U.S. corporate tax rate to 21%.

The authors of the Framework characterized the 2017 changes as: "a complex mess that created new incentives to ship jobs overseas" and legislation that was "a massive giveaway to big corporations, was crafted behind closed doors, and rushed through Congress." What was proposed in the Framework was intended to limit this, and the Draft Legislation follows what was put forward in the Framework to a great extent. The modifications proposed in the Draft Legislation include:

Country-by-country global inclusion of low-tax income (“CxC GILTI”).

The CFC rules would be modified such that:

  • CxC GILTI will not use the 10% deemed return on qualified business asset investment (i.e., the amount that could be deferred under GILTI). This change addresses the perceived incentive for manufacturers to move to remain abroad.
  • CxC GILTI provides for a country-by-country system applied to GILTI. The Draft Legislation effectively treats operations in separate countries (whether through subsidiary CFCs, foreign branches, and certain pass-through entities) as separate entities for purposes of applying the CxC GILTI rules; however, operations in the same country may be aggregated. The intended effect of this is the avoidance of utilizing income and losses in high and low tax jurisdictions in a manner that was perceived as giving entities the ability to manipulate the GILTI system.
  • CxC GILTI will exempt “high-tax tested income” from being subject to the inclusion rule. Income will be treated as “high-tax tested income” if it is subject to an effective tax rate (after incorporating the impact of any so-called “foreign tax credit haircut”) of greater than the GILTI rate.


  • This is mostly consistent with the overall Framework and certainly adds more details.
  • This could make avoiding CxC GILTI on low-tax county income much more difficult and thereby achieve the goal of either paying tax outside (at a rate presumably equal to the CxC GILTI rate in another country) or inside the U.S. as a result of either CxC GILTI or shifting income back to the U.S.
  • It is interesting to note that the tax rate applicable for the “high-tax tested income” will end up being a function of other Congressional negotiation as to corporate tax rates.
  • Also interesting is the Draft Legislation’s issuance with parts of the proposed law left blank or otherwise subject to change.
    • The Draft Legislation did not address certain timing issues in CxC GILTI. This leaves open, at this point, how such things as net operating losses might impact the CxC GILTI calculation on a carry-forward basis.
    • CxC GILTI appears to maintain the “foreign tax credit haircut” under GILTI; however, the Draft Legislation does not specifically answer if this will remain at the current 20% or if it will be reduced (possibly to 0).
    • What does this mean for viable enactment any time soon?
  • How does this impact the high net worth U.S. taxpayer (U.S. citizen or U.S. income tax resident) operating a significant closely held business outside of the United States that is a CFC?
  • What about the OECD pillar scheme? What about the U.S. / EU discussions and agreement on the concept of a global minimum corporate tax? How do these concepts fit into this going forward?

Modifications to the CFC / subpart F income.

The CFC rules would be modified such that:

  • The Draft Legislation applies the modified “foreign tax credit haircut” (i.e., currently 20%, but is an open issue under the Draft Legislation) under CxC GILTI to subpart F income.
  • The Draft Legislation applies the country by country high-tax exclusion methodology under CxC GILTI to subpart F income.


  • This arguably brings CxC GILTI and subpart F more into parity.
  • The Draft Legislation, unfortunately, does not provide a fix to the Section 958(b)(4) repeal. Downward attribution has created confusion as to what constitutes a CFC in the context of the high net worth U.S. taxpayer operating a significant closely held business outside of the United States. This leaves open questions relating to:
    •  How this applies to the Portfolio Debt Interest Exemption.
    • How to plan for a U.S. person inheriting structures from non-U.S. persons.
  • Again, how does this impact the high net worth U.S. taxpayer operating a significant closely held business outside of the United States?

Exclusion of high-tax income of foreign branches for U.S. taxpayers.

  • The Draft Legislation would create new Section 139J, which would treat income of a foreign branch as excluded from gross income if it is subject to a foreign tax at an effective tax rate greater than the maximum rate for U.S. corporations or individuals. Rules similar to the CxC GILTI country-by-country system are applicable to this calculation.


  • This is an interesting provision that makes operating in another jurisdiction much simpler.
  • Why is there a distinction between a branch (100% owned entity) and a partnership (e.g., where the U.S. person owns 99%)?
  • Why is the tax rate written as greater than (why not equal to or greater than)?
  • Is “use a branch” Congress’ answer for high net worth U.S. taxpayer operating a significant closely held business outside of the United States?

Allocation of research and experimental and stewardship expenses.

  • The interaction of the GILTI regime with the foreign tax credit limitation can create some interesting issues in the context of expense apportionment. A prime example given in the Framework is taxes owed under GILTI increase when a corporation invests in research and development in the U.S. or expands a U.S. headquarters office.
  • The Draft Legislation would, for purposes of determining the foreign tax credit limitation, treat expenses for research and experimentation and for “stewardship” as 100% allocated to U.S. source income if those activities are conducted in the United States.


  • This is consistent with what the Framework intended to do. This helps with the ability of CFCs using foreign tax credits by allocating expense to U.S. income and not foreign (increasing foreign income in the equation).

Modifications to deductions for foreign-derived innovation income and net CFC tested income.

  • The Section 250 deduction2 for net CFC tested income (i.e., income earned under GILTI) and for foreign-derived innovation income (formerly foreign-derived intangible income) would be reduced. Like other parts of the Draft Legislation, the amount of this decrease is not yet determined.
  • Foreign-derived intangible income is replaced by foreign-derived innovation income (so the acronym stays “FDII”). Conceptually, domestic innovation income is an amount equal to the sum of [a yet to be defined] percent of qualified research and development expenditures plus [a yet to be defined] percent of qualified worker training expenses. To be a qualified expense in these categories, the expense must be for domestic activity.


  • It seems logical that the Section 250 rate is undefined as the amount of the necessary reduction to meet the “high tax policy goals” is a function of the corporate tax rates and the “foreign tax credit haircut”.
  • How will the corporate tax rate changes, foreign tax credit changes and Section 250 changes impact the high net worth U.S. taxpayer operating a significant closely held business outside of the United States? Will Section 962 elections give the right result?
  • Will the new FDII really drive more domestic based innovation?
  • Yet again, with undefined amounts in the Draft Legislation, how will this impact the legislative process?

Modification to tax on the BEAT.

  • Tax credits that support investment and opportunity in the U.S. (under Section 38) are provided full value for purposes of applying the BEAT.
  • A second, higher rate of [a yet to be defined] percent is added to BEAT system.


  • This is on point with the Framework.
  • As noted in the Framework, the higher rate of tax is designed to offset the tax revenue lost by giving the full Section 38 credits.
  • Again, how will the undefined amounts impact this legislation?
  • President Biden’s Made in America Tax Plan would repeal it and replace it with SHIELD.


  • Avengers …. ASSEMBLE!
  • No, wait, not that S.H.I.E.L.D.
  • The Draft Legislation does not provide for President Biden’s SHIELD plan.
  • SHIELD is the acronym for Stopping Harmful Inversions and Ending Low-tax Developments.
  • SHIELD would operate by referencing the effective tax rate of the foreign payee, and if that tax rate is below a certain specified level, then the deduction relating to the payment would be denied under U.S. tax law.
  • The effective tax rate that would avoid SHIELD would be set in a multilateral agreement. If the SHIELD were to be implemented before a multilateral agreement is reached, then the effective tax rate would be a set rate (possibly the GILTI high tax rate, possibly 21% or possibly the new U.S. corporate rate).


  • Will we still see SHIELD?
  • How will this play into the OECD concepts?


The long-awaited Draft Legislation has been released and Captain America … errrr SHIELD … is not part of it. Nevertheless, the potential impact of the Draft Legislation may be far reaching and have a significant impact on how U.S. corporations and U.S. individual taxpayers do business abroad. One concerning aspect of the Draft Legislation is that there are aspects of the law that have been left undefined and, therefore, it becomes impossible to know exactly how this will apply. Possibly even more disconcerting is the fact that this same uncertainty makes it very difficult to predict when, if ever, this will be enacted.

Please contact us if you want to discuss the Draft Legislation as applicable to your situation.

1 A CFC is, generally, any foreign corporation in which more than 50 percent of the total combined voting power of all classes of stock entitled to vote is owned directly, indirectly, or constructively by U.S. shareholders on any day during the taxable year of such foreign corporation or more than 50% of the total value of the stock is owned directly, indirectly or constructively by U.S. shareholders [as defined in Section 951(b)] on any day during the taxable year of the corporation. The rules of attribution applicable for this purpose can have very broad application (including through family, business entities, and trusts and estates) and need to be reviewed under each set of facts.
2Currently a 50% deduction, resulting in an effective tax rate of 10.5%. Making a “high tax” under the current rules (taking into consideration the 20% foreign tax credit “haircut”) 13.125%.

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