US Senate Finance Committee proposes significant technical changes to international tax provisions in budget reconciliation bill

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EY Global

13 Dec 2021
Subject Tax Alert
Categories Corporate Tax
Jurisdictions United States

Executive summary

On 11 December 2021, United States (US) Senate Finance Committee Chair Ron Wyden released updated text (pdf) of the Finance Committee's title of the Build Back Better Act (SFC Proposal). The updated text largely retains the international tax proposals from the version of the Build Back Better Act passed by the House (House Bill) (see EY Global Tax Alert, US: Latest version of Build Back Better proposal would modify international tax proposals in House Ways and Means bill, dated 10 November 2021) but includes some significant technical changes to these rules. In this Alert, EY shares its first impressions of the SFC Proposal.

Detailed discussion

Interest expense limitations

The SFC Proposal retains the basic structure of Internal Revenue Code1 Section 163(n) from the House Bill, limiting deductions for net interest expense of a specified domestic corporation (SDC) to 110% of its net interest expense multiplied by the allowable percentage. The SFC Proposal maintains the same definition of SDC and international financial reporting group (IFRG), so Section 163(n) would continue to apply to foreign and US-parented multinationals alike.

Unlike prior iterations of Section 163(n), however, the SFC Proposal would permit taxpayers to elect to alter how the SDC's allocable share of the IFRG's book net interest expense (a component of the allowable percentage) is computed. Specifically, the proposal would allow an IFRG's common parent to elect to compute its allocable share by reference to the aggregate adjusted bases of assets (except stock or partnership interests held in other group members), rather than using EBITDA.2 The adjusted basis of assets would generally be determined in the same manner as it is for other US federal income tax purposes. For a foreign-parented multinational, however, the adjusted basis would be determined for all members of the IFRG by reference to the amounts reported in the group's applicable financial statement. Once made, the election would be irrevocable for five years and could not, upon change to EBITDA, be re-elected for five years.

The SFC Proposal retains other relevant provisions of the House Bill, including the indefinite carryforward of disallowed interest expense, the coordination with Section 163(j), which would apply the more restrictive provision, and the effective date of tax years beginning after 31 December 2022.

Subpart F and GILTI

The SFC Proposal retains, with no substantive modifications, the House Bill's overhaul of the global intangible low-taxed income (GILTI) rules, which would require a US shareholder to compute its GILTI amount on a country-by-country basis, among other things. The SFC Proposal also retains the House Bill's changes to the subpart F income regime to generally limit foreign base company sales and services income rules to transactions involving a US tax resident, directly or by way of a branch or pass-through entity.

Consistent with the House Bill, the SFC Proposal would, for both GILTI and subpart F income purposes, substantially revise the Section 951 pro rata share rules to address both a change in controlled foreign corporation (CFC) ownership during the year and dividends paid by the CFC during the year. The House Bill would permissively authorize Treasury ("The Secretary may prescribe … ") under Section 951 to issue regulations that would, among other things, allow a foreign corporation to elect to close its tax year upon a change in ownership, which would alter the computation of a US shareholder's pro rata share under Section 951. The SFC Proposal would, by contrast, direct Treasury to issue those rules by requiring that the Secretary "shall" prescribe them.

The House Bill would have expanded Section 961(c), which provides for basis adjustments to lower-tier CFC stock held by an upper-tier CFC, to account for both subpart F inclusions and GILTI amounts with respect to such stock, and requiring gain recognition for previously taxed earnings and profits (PTEP) distributions that exceed the stock basis. Under the House Bill, these adjustments did not apply for other purposes. The SFC Proposal would authorize Treasury to allow those basis adjustments to apply for other purposes.

Dividends from foreign corporations

The House Bill would have limited the Section 245A deduction to dividends received from CFCs, whereas current law allows the deduction for dividends received from "specified 10%-owned foreign corporations" (STFCs). The SFC Proposal, in contrast, would permit STFCs that are not CFCs to claim a Section 245A deduction but would reduce the deduction from 100% to 65%. The SFC Proposal would retain the election, included in the House Bill, to permit foreign corporations and their US shareholders to treat foreign corporations as CFCs.

The SFC Proposal would also allow a CFC's US shareholder to claim a Section 245A deduction for its pro rata share of subpart F income that is attributable to eligible dividends received by the CFC from an STFC. Considering generally applicable exceptions from subpart F income, the deduction in most cases would equal 65% of the US shareholder's pro rata share of eligible dividends.

The House Bill would have also amended Section 1059 to require US shareholders to reduce their basis in CFC stock (and potentially recognize gain) upon receipt of CFC dividends paid from earnings and profits earned when the foreign corporation was not a CFC or did not have US shareholders. The SFC Proposal retains that rule, but would also authorize Treasury to apply similar rules to dividends that are attributable to earnings and profits of a foreign corporation that is not a CFC.

Foreign tax credits

The SFC Proposal retains, with limited technical corrections, the House Bill's modifications to the foreign tax credit (FTC) rules, including a country-by-country FTC limitation for each separate category, the repeal of the foreign branch category, a GILTI category carryforward, a limitation on the allocation of expenses to the GILTI category for purposes of the FTC limitation, and other changes.

As discussed previously, the SFC Proposal would limit the Section 245A dividends received deduction (DRD) to 65% (the applicable percentage under Section 243(a)(1) for a 20%-owned corporation of the foreign-source portion of a dividend received by a US shareholder from an SFTC that is not a CFC). Accordingly, the SFC Proposal would amend Section 245A(d) to deny a credit or deduction for foreign taxes paid or accrued with respect to the applicable percentage for which the DRD is allowed. For example, a US shareholder of an SFTC that is not a CFC could only claim a credit or deduction equal to 35% of the foreign withholding tax imposed on dividends received from that STFC.

The SFC Proposal also includes a technical correction to the covered asset disposition rules, which would extend the principles of Section 338(h)(16) to transactions treated as asset dispositions for US tax purposes but as stock dispositions (or disregarded) for foreign tax purposes. Although intended to apply solely for FTC purposes, a cross-reference in the House Bill would apply the rule for purposes of all the Code's international income tax provisions. For example, practitioners questioned whether a covered asset disposition should be treated as a stock sale for purposes of subpart F, potentially resulting in foreign personal holding company income. The SFC Proposal would correct this reference, so that the covered asset disposition rules would apply solely for purposes of Sections 901 through 909 (the foreign tax credit provisions).

Finally, the House Bill would extend the Section 960(d) "haircut" to distributions of PTEP. The SFC Proposal would amend that rule by adding an exception for PTEP distributions from US possessions.


The SFC Proposal retains the general framework of Section 59A of the House Bill but would further modify the provision as it relates to COGS and payments with respect to inventory.

Under new Section 59A(d)(5) in the House Bill, the definition of base erosion payment would be expanded to include (i) certain indirect costs that are paid or accrued by the taxpayer to a foreign related party and are required to be capitalized to inventory under Section 263A, and (ii) certain amounts paid to foreign related parties for inventory to the extent the amounts exceed specified direct and indirect costs. The SFC Proposal would treat these amounts as base erosion tax benefits, which is relevant for determining modified taxable income and the base erosion percentage.

Under current law, BEAT applies if certain thresholds are met, including a base erosion percentage test of 3% or more (2% or more for a taxpayer that is a member of an affiliated group with a domestic bank or registered securities dealer). Consistent with the House Bill, the SFC Proposal would eliminate the base erosion percentage test for tax years beginning after 31 December 2023. The House Bill, for any tax year beginning before 1 January 2024, would determine the base erosion percentage under the rules in effect before the date of the enactment of the Build Back Better Act. Thus, the base erosion percentage would be computed without regard to the changes contemplated to BEAT by the House Bill. In contrast, the SFC Proposal would, for purposes of determining the base erosion percentage for a tax year, require the taxpayer to use the definition of base erosion tax benefit in the SFC Proposal; this would make the changes to COGS and payments with respect to inventory relevant for purposes of computing the base erosion percentage for tax years beginning after 31 December 2021.

Corporate alternative minimum tax

Consistent with the House Bill, the SFC Proposal would implement a new 15% corporate alternative minimum tax based on book income for companies that report over US$1 billion in profits to shareholders. The SFC Proposal introduces new adjustments for determining a taxpayer's adjusted financial statement income (AFSI, the base to which the 15% rate would apply). Notably, taxpayers would disregard any book income, cost, or expense associated with a defined benefit plan. Instead, AFSI would only include amounts associated with defined benefit plans to the extent they are included in gross income or could be deducted for US federal income tax purposes. The SFC Proposal also provides that the AFSI of a tax-exempt entity only takes into account the taxpayer's unrelated business taxable income.

Anti-inversion rules in Section 7874

The SFC Proposal would significantly expand the anti-inversion rules in Section 7874 by reducing the applicable continuing ownership thresholds and by expanding the types of acquisitions subject to these rules (which are known as "domestic entity acquisitions"). The House Bill did not include any expansion of Section 7874.

For the continuing ownership thresholds, the SFC Proposal would treat a foreign acquiring corporation as a "surrogate foreign corporation" (potentially subjecting both the shareholders of the foreign acquiring corporation and the acquired domestic entity to adverse consequences) based on continuing ownership of more than 50% by vote or value (as compared to continuing ownership of at least 60% by vote or value under current law). It would also treat a foreign acquiring corporation as a domestic corporation based on continuing ownership of at least 65% by vote or value (as compared to at least 80% by vote or value under current law).

The SFC Proposal would also expand the definition of applicable "domestic entity acquisitions" to include an acquisition of:

  • Substantially all of the properties held directly or indirectly by a domestic corporation, or substantially all of the properties that are held directly or indirectly by a domestic corporation and constitute a trade or business

  • Substantially all of the properties held directly or indirectly by a domestic partnership, or substantially all of the properties that are held directly or indirectly by a domestic partnership and constitute a trade or business or

  • Substantially all of the properties that are held directly or indirectly by a foreign partnership and constitute a United States trade or business

Under current law, a "domestic entity acquisition" includes only the acquisition of:

  • Substantially all of the properties held directly or indirectly by a domestic corporation or

  • Substantially all of the properties constituting a trade or business of a domestic partnership

The SFC Proposal would apply to transactions completed after the date of enactment for tax years ending after 31 December 2021.

Section 958(b)(4) and downward attribution

The SFC Proposal retains the reinstatement of Section 958(b)(4), which was included in the House Bill and would prohibit downward attribution from a foreign corporation. It also retains the addition of new Section 951B, which would more narrowly allow downward attribution only for foreign-controlled US corporations.


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

Ernst & Young LLP (United States), International Tax and Transaction Services
  • Craig Hillier, Boston

  • Lee Holt, New York City

  • Bob Leonard, Chicago

  • Anna Voortman, Chicago

  • Arlene Fitzpatrick, Washington, DC

  • Martin Milner, Washington, DC

  • Anna Moss, Washington, DC

  • Colleen O’Neill, Washington, DC

  • Stephen Peng, Washington, DC

  • Joshua Ruland, Washington, DC

  • Raymond Stahl, Washington, DC

  • Julia Tonkovich, Washington, DC

  • Jane L Vukmer, Washington, DC

  • Jeshua Wright, Washington, DC

  • Joe Ryan, Chicago


For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.