Build Back Better bill: international tax provisions

New corporate alternative minimum tax – international provisions

While the Build Back Better bill (BBB) does not increase the current 21% corporate tax rate, it adds a new corporate alternative minimum tax (AMT) that imposes a 15% tax on adjusted financial statement income (AFSI) of certain corporations with a three-year average of AFSI over $1 billion. For the corporate AMT to apply to a U.S. corporation of a foreign-parented group that meets this $1 billion requirement, the U.S. group must earn an average of at least $100 million (including the income of any controlled foreign corporations (CFCs)) over the same three-year period. The BBB provides for a corporate AMT foreign tax credit which could work to reduce the net liability due under this new tax for affected taxpayers electing to credit foreign taxes paid or accrued for a given taxable year.

Additionally, with regard to U.S. shareholders of CFCs, AFSI includes the pro rata share of the CFCs’ aggregated AFSI (i.e., losses in one CFC may offset income of another CFC). Overall losses of CFCs do not reduce AFSI of a U.S. corporation, but may be carried forward and used to offset CFC income in future years for purposes of this new tax. Separately, a U.S. corporation must also include the income of any disregarded entity.

The new corporate AMT rules would be effective for taxable years beginning after Dec. 31, 2022.

Proposed revised GILTI amendments

For taxable years beginning after Dec. 31, 2022 (with a transitional rule for fiscal-year taxpayers), the BBB subjects global intangible low-taxed income (GILTI) inclusions (and any GILTI-related section 78 amounts) to a tax rate of 15% by reducing the GILTI section 250 deduction to 28.5% and maintaining the corporate tax rate at 21%. This aligns the U.S. GILTI tax rate with the global minimum effective tax rate of 15% announced by the Organization for Economic Cooperation and Development (OECD) Inclusive Framework in early October 2021 (also expected to be effective in 2023). The BBB also grants regulatory authority for guidance on making appropriate adjustments in determining tested income or tested loss if property is transferred, or amounts are paid or accrued, between related parties.

Proposed revised foreign tax credit amendments

The BBB repeals the one-year carryback of excess foreign taxes for foreign tax credit purposes while retaining an existing 10-year carryforward for separate limitation categories other than GILTI. Additionally, excess GILTI-related foreign taxes paid or accrued after Dec. 31, 2022, and before Jan. 1, 2031, can be carried forward for five succeeding taxable years. GILTI-related foreign taxes paid or accrued after Dec. 31, 2030, can be carried forward for 10 succeeding years. Separately, the BBB conforms the foreign tax credit rules applicable to previously taxed GILTI to accommodate a proposed 5% “haircut.”