Global Tax Alert (News from Americas Tax Center) | 6 March 2014

US Ways and Means Committee Chairman reformulates international tax reform proposals

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On 26 February 2014, US House Ways and Means Committee Chairman Dave Camp released a long-awaited comprehensive tax reform discussion draft (Camp Proposal or Proposal). The Tax Reform Act of 2014 would reform all areas of the Internal Revenue Code, including reducing the top corporate tax rate to 25%, reducing or restricting many corporate tax deductions and preferences, and substantially reforming the international tax provisions. The Joint Committee on Taxation’s (JCT) revenue estimates and technical explanations (No. 1 and No. 2) for the Camp Proposal also were released on the same day. This Alert focuses on the proposed changes to the international tax provisions affecting US multinational corporations and inbound investors to the United States.

The international tax elements of the Camp Proposal include provisions similar to provisions included in the international tax reform discussion draft released by Chairman Camp in October 2011 (2011 Discussion Draft), with some significant modifications and some new additions, in particular new provisions affecting inbound investors. The international tax sections also include some provisions similar to provisions included in the international tax reform staff discussion draft released in November 2013 by then Chairman of the Senate Finance Committee Max Baucus and other proposals previously introduced in Congress.

A list of the international provisions is below:

  • A 95% dividend exemption system
  • Limitation on losses with respect to dispositions of certain foreign corporations and recapture of losses in branch incorporation transactions
  • Transition rule deemed inclusion of deferred foreign earnings at bifurcated tax rates, with an effective tax rate of 8.75% for earnings invested in cash, cash equivalents and other short term assets and an effective tax rate of 3.5% for other earnings
  • CFC (controlled foreign corporation) look-through rule made permanent
  • Foreign tax credits under section 902 repealed and foreign tax credits under section 960 calculated on a current year basis
  • Foreign tax credit limit calculated using only directly attributable expenses
  • Two basket foreign tax credit system based on mobile income and active income
  • Inventory sales income sourced based on place of production activities
  • New foreign effective tax rate thresholds for subpart F inclusions
  • Full or partial exemption to foreign base company sales income
  • Subpart F de minimis exception inflation adjusted
  • Active financing exception extended and modified
  • Subpart F inclusion for withdrawal of previously excluded foreign shipping income repealed
  • Deemed intangible income treated as subpart F inclusion and deemed foreign intangible income subject to reduced tax rate
  • Limits on deductions for excess interest
  • Limits on deductions for foreign affiliate reinsurance
  • Taxation of passenger cruise income of foreign persons
  • Restriction of insurance business exception for passive foreign investment company purposes
  • Section 163(j) earnings stripping rules tightened
  • Treaty benefits for deductible payments to a related person subject to condition that foreign parent is also eligible for US treaty benefits

Implications

The release of the Camp Proposal represents a significant development in the tax reform debate. The details of this comprehensive plan, together with the JCT staff revenue estimates, serve to highlight the difficult choices that would be required in any base-broadening, rate-reducing income tax reform.

The international tax provisions in the Camp Proposal would make dramatic changes in key elements of the US international tax regime. Some of the provisions in the Proposal are similar to provisions that were included in the 2011 Discussion Draft, but several of such provisions reflect significant modifications. Companies should review the international tax provisions and the broader Camp Proposal to evaluate the implications for their business and consider opportunities to participate in the ongoing debate on international tax reform.

For additional information with respect to this Alert, please contact the following:

Ernst & Young LLP, International Tax Services, Washington, DC
  • Barbara Angus
    +1 202 327 5824
    barbara.angus@ey.com
  • Yuelin Lee
    +1 202 327 6378
    yuelin.lee@ey.com
  • Andreia Leite Verissimo
    +1 202 327 6034
    andreia.leiteverissimo@ey.com
  • Maria Martinez
    +1 202 327 8055
    maria.martinez@ey.com
Ernst & Young LLP, International Tax Services, New York
  • Katherine Loda
    +1 212 773 6634
    katherine.loda@ey.com
  • Benjamin Orenstein
    +1 212 773 4485
    benjamin.orenstein@ey.com
  • Beate Erwin
    +1 212 773 9578
    beate.erwin@ey.com

EYG no. CM4230