The July 4th tax act did more than just extend international tax provisions, but experts shared that they view the changes as “tweaks” that improve on existing law.
Scott Dyreng, an accounting professor and associate dean at Duke University, told Checkpoint he thinks the changes to the international provisions will “make them hopefully work a little bit better” and “create fewer distortions.” But whereas the international tax regime “totally changed” under the 2017 Tax Cuts and Jobs Act, said Dyreng, the recent tax act (P.L. 119-21) just makes “tweaks to that regime.”
“The big regime change now is not happening so much in the U.S. as it is happening with all the companies around the world cooperating with the OECD’s [Organization for Economic Co-operation and Development] Base Erosion and Profit Shifting project,” Dyreng added.
And Deloitte Tax Partner Michael Layden said, based on his conversations with companies as the bill was debated and ultimately signed, most viewed the new provisions “favorably.”
Key Changes in the Tax Act
Among the changes in the act, formerly called the One Big Beautiful Bill, are changes to the global intangible low-taxed income (GILTI), foreign-derived intangible income (FDII) rates, and the base erosion and anti-abuse tax (BEAT). Layden summed up key changes to international provisions during a Deloitte briefing.
GILTI
GILTI – now referred to as net CFC tested income – is a minimum tax applied to a controlled foreign corporation’s (CFC) earnings from assets like copyrights, patents, and trademarks. Put into place under the 2017 Tax Cuts and Jobs Act, GILTI was intended to discourage companies from shifting intangible assets to low-tax jurisdictions. Under the TCJA, GILTI was subject to a 10.5% minimum tax. However, in calculating GILTI, CFCs were allowed a deduction for 10% of tangible assets (minus interest costs).
The effective tax rate on net CFC tested income, formerly GILTI, is 14% under the tax act, said Layden. “While the GITLI headline rate was previously lower than that, the effective rate taxpayers had on their GILTI income was often much higher,” Layden explained.
He attributes the lower effective rate to new act’s elimination of “the allocation of expenses to tested income” and “the haircut of 20% of foreign taxes.” But the new act also did away with the “deemed tangible income return, which means that companies will likely have a larger percentage of the income included in the U.S.,” Layden added.
FDII
FDII – now called foreign-derived deduction eligible income – is intended to encourage companies to keep profits in the U.S. A “carrot” companion to GILTI, FDII allows taxpayers a deduction based on domestic intangible income derived from abroad. Deemed intangible income for FDII purposes includes income in excess of 10% of tangible depreciable assets.
The effective rate for FDII under the new act is also 14%, said Layden, “providing a parity with the net CFC tested income rules.” The act eliminated the deemed tangible income return for FDII purposes, as well, said Layden. And it also reduced the allocation of expenses to deduction eligible income.
BEAT
The new act made less significant changes to the base erosion and anti-abuse tax, or BEAT. Under the TCJA, generally, BEAT imposes a 10% minimum tax on corporations with at least $500 million in average annual gross receipts over the past three tax years, and that make over 3% of total deductible payments to foreign affiliates.
Under the act, “the effective rate on BEAT went up by 0.5% to 10.5%,” said Layden. “It was scheduled to go up to 12.5% in 2026,” he added, so “generally … that half percentage point increase is viewed as favorable.”
Section 899
One provision that did not make it into the new act is the so-called revenge tax under proposed Section 899. The Senate Finance Committee summary described Section 899 as protecting against “unfair foreign taxes” by “imposing increased rates of tax on certain affected taxpayers connected to the offending foreign country.”
But Section 899 was dropped from legislative text at the last minute, in exchange for the G7 countries’ statement that the OECD’s Pillar Two taxes would not apply to U.S. multinationals, Layden explained. The statement “sets up this side-by-side system for U.S. multinationals,” he added. But “there’s a lot of technical and political issues that are going to need to be worked out over the next year or so” during OECD rule drafting.
Predicted Impacts
Dyreng told Checkpoint that his “guess” is the international tax changes “will have a little bit of an effect on multinational companies.” But to him, “it’s not dramatic, it’s not drastic. It’s, like, at the margin.”
And the changes bring the U.S. “a little more closely aligned with what the OECD might be willing to accept” as part of the Pillar 2 Base Erosion and Profit Shifting framework, said Dyreng. As these new international provisions “become compatible” with the OECD global minimum tax initiative, the “huge distortionary role” of taxes “diminishes,” he added.
“They still won’t be perfectly compatible,” said Dyreng, but the new GILTI provisions are “closer to something that might be compatible.” And that means that the U.S. may not be required to adopt a new law “in order to play in the Base Erosion and Profit Shifting project.”
As far as whether the changes will cut down on tax avoidance, Dyreng emphasized that it matters how you define avoidance. “If a company is following the law and doing all the things that the law says, then it’s not avoiding tax at all – it’s just complying with tax rules.”
But avoidance could also mean “doing things that you wouldn’t have done in the absence of tax incentives,” he explained, such as “moving all your income to Ireland.” Under that definition, tax avoidance “is concentrated – not entirely, but mostly – in the relatively few companies who have extremely valuable intangible assets,” Dyreng said. And that’s “tech and pharma” where what “generates income can be held in a filing cabinet in any country in the world and can be moved at the click of a button.”
“The really, really big tech companies that make a lot of profits are the ones that are accounting for the majority of tax avoidance,” according to Dyreng. “Something like 60% or 70% of the income that gets shifted out of the U.S. to low-tax foreign countries comes from, like, 10 companies,” he added.
Dyreng’s prediction is that the new tax act “will make it so that more of that income becomes subjective to tax.”
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