Build Back Better Act - US Tax Reform Proposals
Main tax-writing committee of the US House includes revenue raising tax proposals in the Build Back Better Act in significant step forward.
Main tax-writing committee of the US House includes revenue raising tax proposals in the..
Last week the US House Ways and Means Committee, the main tax-writing committee of the House, released a draft of its proposed tax legislation (the ‘Build Back Better Act’). The release followed a series of publications related to the self-executing rule that has the effect of adopting the $3.5 trillion budget resolution previously passed by the US Senate. The $3.5 trillion in new spending is expected to enhance areas such as education, childcare, dependent care, green energy/climate change, affordable housing, and healthcare and is to be at least partially paid for with new tax increases. Although the Build Back Better Act is not yet law, we recommend that organisations consider the implications of the proposals now and assess what communication is required with key stakeholders, including a potential update in autumn board meetings. We’re expecting forthcoming developments throughout the autumn, so it will be important to track these closely.
Three key revenue raisers from the Build Back Better Act that may impact cross-border transactions with the US, particularly in the corporate space, include:
- increasing the US Federal corporate income tax rate from 21 percent, with a graduated rate structure, to a maximum rate of 26.5 percent;
- increasing the headline rate applicable to a US domestic corporation on foreign-derived intangible income from 13.125 percent to 20.7 percent; and
- limiting the interest deduction of certain US domestic corporations (or a foreign corporation engaged in a US trade or business) that are part of an international financial reporting group to 110 percent of the taxpayer’s proportionate share of the group’s net interest expense.
In addition to the above, the legislative text includes notable changes to the Base Erosion Anti-Abuse Tax (BEAT) and Global Intangible Low-Taxed Income (GILTI) rules, some of which intersect and coordinate with the OECD’s ongoing work to introduce a framework for a global minimum tax rate of at least 15 percent.
Looking first at the good news around BEAT, the proposals would provide a critical carve out for payments to foreign parties where such payments are subject to an effective rate of foreign tax not less than the applicable BEAT rate. This change would bring the US rules more in line with the OECD and prior Biden Administration proposals around the SHIELD (Stopping Harmful Inversions and Ending Low-Tax Developments). The proposals seek to raise additional revenue by increasing the BEAT rate to 12.5 percent and then 15 percent for tax years beginning after 2023 and 2025, respectively, and eliminating the base erosion percentage test in 2024.
With respect to GILTI, the proposals would increase the headline rate to approximately 16.5 percent and implement a country-by-country inclusion rule which would bring the US more in line with the OECD. The proposals would further tighten the GILTI rules by reducing the exemption for deemed returns to qualified business asset investment from 10 percent to 5 percent. Other noteworthy changes that will potentially provide taxpayers some relief include permitting the carryover of a net tested loss to subsequent years, allowing the potential to offset future tested income derived from the same country, and reducing the foreign tax credit hair cut applicable to GILTI from 20 percent to 5 percent.
A full report that includes deeper analysis and observations regarding all areas, including international, individual and pass-through changes has been published by KPMG in the US.
Further, there is a way to go in terms of the debate and it’s likely to evolve over the coming months. If you would be interested in discussing the US tax changes and how they may impact your business structure, please speak to your usual KPMG contact.