On March 28, 2022, the U.S. Department of the Treasury released its General Explanations of the Administration’s Fiscal Year 2023 Revenue Proposals (here), also known as the “Greenbook.” The Greenbook provides detail regarding the Biden Administration’s proposals for significant new tax provisions.

It remains to be seen whether these proposals will be enacted into law. If they are enacted, they may have significant effects on multinational businesses.

The international tax highlights from the Greenbook include the following:

• Increase the Tax Rate on Global Intangible Low-Taxed Income (“GILTI”)


• The proposal would increase the corporate tax rate from 21% to 28%. The Greenbook indicates that such increase would result in a corresponding increase in the U.S. tax imposed on GILTI from a minimum rate of 10.5% to 20%. The 20% rate appears to implicitly apply the 28.5% GILTI deduction from the Build Back Better Act (“BBBA”) proposals (28% × (100% - 28.5%)). The Greenbook also seems to suggest that the GILTI rules would be modified in accordance with the BBBA proposal to calculate GILTI on a jurisdiction-by-jurisdiction basis.


• The corporate tax rate increase, along with the proportional increase in the GILTI rate, would be effective for taxable years beginning after December 31, 2022 (with a pro rata rule for fiscal year taxpayers).


• Replace the Base Erosion and Anti-Abuse Tax (“BEAT”) with an Undertaxed Profits Rule (“UTPR”)


• The BEAT was enacted in 2017 as part of the Tax Cuts and Jobs Act. The BEAT imposes a tax liability on certain large corporations that make “base erosion payments” to their foreign affiliates. The BBBA proposed to expand the application of the BEAT in an effort to encourage other countries to adopt a global minimum tax.


• On July 1, 2021, members of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (the “Inclusive Framework”) approved a statement providing a framework for reform of the international tax rules based on a two-pillar approach: “Pillar One” primarily relates to profit allocation (e.g., nexus and sourcing) and “Pillar Two” focuses on a global minimum tax to counter perceived base erosion. On October 8, 2021, the Inclusive Framework reached an agreement under Pillar Two regarding the adoption of a 15% global minimum tax applicable to large multinational groups. On December 20, 2021, the OECD published Model Rules that would implement the global minimum tax through (i) an “Income Inclusion Rule” (“IIR”) that imposes a top-up tax on a parent company to ensure that the profits of low-taxed subsidiaries in its financial reporting group are subject to the minimum rate of tax and (ii) a “UTPR” that denies deductions to (or increases the tax liability of) a subsidiary in a financial reporting group to the extent that profits of low-taxed subsidiaries in such group are not subject to an IIR.


• To better align the U.S. international tax rules with the Pillar Two Model Rules, the proposal would repeal the BEAT and replace it with a UTPR.


• The UTPR generally would apply only to financial reporting groups with global annual revenue of $850 million or more in at least two of the prior four years.


• The UTPR would not apply to income subject to an IIR that is consistent with the Pillar Two Model Rules. The Greenbook indicates that this would include income that is subject to the GILTI rules. Thus, as a general rule, the UTPR would not apply to U.S.-parented multinationals.


• The UTPR would deny deductions of domestic corporations that are a part of foreign-parented multinational groups and domestic branches of foreign corporations to the extent necessary to collect the hypothetical amount of top-up tax required for the financial reporting group to pay an effective tax rate of at least 15% in each jurisdiction in which the group has profits. The amount of the top-up tax would be determined based on a jurisdiction-by-jurisdiction computation of the group’s profit and effective tax rate consistent with the Pillar Two Model Rules. The UTPR disallowance would be reduced to reflect any top-up tax collected from members of the group by one or more other jurisdictions pursuant to a qualified UTPR in such jurisdiction.


• The UTPR’s disallowance of deductions would apply pro rata with respect to all otherwise allowable deductions (after the application of all other deduction disallowance provisions in the Internal Revenue Code). If the UTPR disallowance for a taxable year exceeds the taxpayer’s aggregate deductions for such year, then the excess is carried forward indefinitely until an equivalent amount of deductions are disallowed.


• The proposal also would add a U.S. top-up tax of up to 15% to a financial reporting group’s U.S. profit that would apply when another jurisdiction adopts a UTPR.


• The proposal promises to provide a mechanism to ensure U.S. taxpayers would continue to benefit from U.S. tax credits and other tax incentives that promote U.S. jobs and investment. However, no concrete rules for such mechanism is described in the Greenbook.


• Under the proposal, replacement of the BEAT with the UTPR would be effective for taxable years beginning after December 31, 2023.


• Provide Tax Incentives to Move Jobs into the United States


• The proposal would create a new general business credit equal to 10% of eligible expenses paid or incurred in connection with onshoring a U.S. trade or business. “Onshoring” a U.S. trade or business generally means reducing or eliminating a trade or business or line of business currently conducted outside the United States and starting up, expanding, or otherwise moving the same trade or business within the United States, to the extent that this action results in an increase in U.S. jobs.


• The proposal would also disallow deductions for expenses paid or incurred in connection with offshoring a U.S. trade or business. “Offshoring” a U.S. trade or business means reducing or eliminating a trade or business or line of business currently conducted inside the United States and starting up, expanding, or otherwise moving the same trade or business outside the United States, to the extent that this action results in a loss of U.S. jobs. The proposal also would disallow any deduction against a U.S. shareholder’s GILTI or subpart F income inclusions for expenses paid or incurred in connection with moving a U.S. trade or business offshore.
  
  
• These proposals would be effective for any expenses paid or incurred after the date of the enactment.


• Expand Access to Retroactive Qualified Electing Fund (“QEF”) Elections for Taxpayers that Own Passive Foreign Investment Company (“PFIC”) Stock


• In general, a taxpayer that owns stock in a PFIC can mitigate the adverse tax consequences of owning such stock by making a QEF election. A QEF election for a taxable year generally must be made on or before the due date for filing the taxpayer’s return for such taxable year. A taxpayer is permitted to make a retroactive QEF election only with the consent of the Commissioner of Internal Revenue, which consent will be granted only if the taxpayer relied on a qualified tax professional in failing to make a timely QEF election, granting consent would not prejudice the interests of the government, and the request for consent is made before the issue is raised on audit.


• The proposal would allow a taxpayer to make a retroactive QEF election at the time and in the manner as prescribed by Treasury regulations.


• This proposal would be effective on the date of enactment and expects Treasury regulations or other guidance to permit taxpayers to amend previously filed returns for open years.


• Expand the Definition of “Foreign Business Entity” to Include Taxable Units


• Section 6038 of the Internal Revenue Code requires a U.S. person who controls a foreign business entity (which includes a foreign corporation or foreign partnership) to report certain information with respect to such entity. The proposal would expand the definition of foreign business entity for this purpose to treat any taxable unit in a foreign jurisdiction as a “foreign business entity.” This proposal would help to effect the proposals in the BBBA to calculate GILTI, subpart F income, and foreign tax credits on a jurisdiction-by-jurisdiction basis.


• This proposal would apply to taxable years of a controlling U.S. person that begin after December 31, 2022, and to annual accounting periods of foreign business entities that end with or are within such taxable years of the controlling U.S. person.

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We continue to monitor the progress of the Greenbook proposal as well as the status of other proposed tax legislation, including the Build Back Better Act (prior alert available here), which was passed by the House in 2021 but stalled in the Senate. We expect to provide further updates as developments unfold. If you have any questions about the Greenbook proposals or any other pending legislation, please contact any of the authors of this update.

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