Build Back Better Act – Key international tax provisions




On Oct. 28, 2021, President Joe Biden released a new framework for his Build Back Better agenda, which includes approximately $1.75 trillion of investments to combat climate change and expand health care coverage, affordable housing, universal preschool and childcare. A few hours later, the House Rules Committee released a revised draft of the Build Back Better Act (BBBA) that seems to follow much of President Biden’s framework. 

The revised BBBA contains a slew of tax changes to pay for the climate and social spending package, including a major investment in the Internal Revenue Service (IRS) to crack down on tax evasion, a new surcharge on high-income individuals and trusts, expansion of the net investment income tax, a new corporate alternative minimum tax and an overhaul of the international provisions introduced by the Tax Cuts and Jobs Act (TCJA).

This alert provides an overview of some of the key provisions of the revised BBBA affecting multinational corporations. For a discussion of the revised BBBA provisions affecting high-income earners and wealthy individuals, see Build Back Better Act – What is in and what is out?

Key provisions affecting multinational corporations

  • Alternative minimum tax on large corporations. The revised BBBA drops the proposal to increase the top corporate income tax rate from 21% to 26.5%. In its place, the revised BBBA introduces a new corporate alternative minimum tax which would impose a 15% minimum tax on the adjusted financial statement (book) income of corporations (other than S corporations, regulated investment companies and real estate investment trusts) that report an average of more than $1 billion of adjusted financial statement income over a three-year period. U.S. corporations that are subsidiaries of international financial reporting groups must also have income in excess of $100 million to be subject to this tax. The proposal would be effective for tax years beginning after Dec. 31, 2022.
  • New business interest expense limitation. The revised BBBA would add a new section 163(n) to further limit interest deductions of U.S. corporations that are members of an international financial reporting group where the U.S. corporation’s share of the worldwide interest expense exceeds 110% of its actual interest expense. The U.S. corporation’s share would be measured by its EBIDTA as compared to worldwide EBITDA. Section 163(n) would apply to tax years beginning after Dec. 31, 2022.
  • Modifications to FDII and GILTI deduction. The revised BBBA would reduce the section 250 deduction for foreign-derived intangible income (FDII) from 37.5% to 24.8%, and the section 250 deduction for global intangible low-taxed income (GILTI) from 50% to 28.5%. These changes result in a 15.8% effective tax rate on FDII and a 15% rate on GILTI. However, factoring in the 5% haircut on GILTI foreign tax credits (discussed below), this provision yields an effective tax rate on GILTI income of 15.8%. 

The revised BBBA would also remove the existing taxable income limitation on the section 250 deduction and instead permit the section 250 deduction to be taken into account in determining a taxpayer’s net operating losses (NOLs).

These changes would be effective for tax years beginning after Dec. 31, 2022; however, a transition rule is provided for tax years that include but do not end on Dec. 31, 2022.

  • Modifications to GILTI. Under the revised BBBA, GILTI would be calculated on a country-by-country basis and the deemed tangible return on qualified business asset investment (QBAI) excluded from tested income would be reduced from 10% to 5% (this reduction, however, would not apply to controlled foreign corporations (CFCs) located within a U.S. territory). The revised BBBA would also allow tested losses to be carried forward and eliminate the exception from tested income for foreign oil and gas extraction income (FOGEI).

Further, the revised BBBA would reduce the haircut on foreign tax credits related to GILTI income from 20% to 5% and any excess foreign tax credits in the GILTI basket could be a carryforward for five years. When measuring foreign source income in the GILTI basket, no U.S. group expenses other than the section 250 deduction, state, local or foreign income tax imposed with respect to the inclusions, and any other deductions that Treasury determines are directly allocable to such income would have to be allocated to the GILTI basket. Any expenses that otherwise would have been allocable to the GILTI basket instead would be allocable to U.S. source income.

These changes would be effective for tax years of foreign corporations beginning after Dec. 31, 2022.

  • Modifications to foreign tax credit rules. The revised BBBA would amend section 904 to require making foreign tax credit determinations on a country-by-country basis for purposes of sections 904, 907 and 960. The provision generally assigns each item of income and loss to a taxable unit of the taxpayer that is a tax resident of a foreign country (or, in the case of a branch, has a taxable presence in such country) and aggregates all taxable units that are subject to tax in the same country. The revised BBBA would also repeal the foreign branch income basket and the one-year foreign tax credit carryback would no longer be permitted. These changes would be effective for tax years beginning after Dec. 31, 2022.
  • Modifications to BEAT. The revised BBBA would amend the base erosion and anti-abuse tax (BEAT) rate to 10% for 2022, then phasing up to 18% in 2025. In addition, under the provision, the base erosion minimum tax amount would be determined by taking tax credits into account.

The revised BBBA would amend section 59A(c) so that modified taxable income would be computed (1) without regard to base erosion tax benefits, (2) without adjusting the basis of inventory property due to base erosion payments, (3) by determining NOLs without regard to any deduction that is a base erosion tax benefit and (4) by making other adjustments under rules similar to the rules applicable to the alternative minimum tax.

The revised BBBA would also amend the definition of base erosion payments to include amounts paid to a foreign related party that are required to be capitalized in inventory under section 263A, as well as amounts paid to a foreign related party for inventory that exceed the costs of the property to the foreign related party. A safe harbor would be available to deem base erosion payments attributable to indirect costs of foreign related parties as 20% of the amount paid to the related party. 

Further, the revised BBBA would provide an exception for payments subject to U.S. tax, and for payments to foreign parties if the taxpayer establishes that such amount was subject to an effective rate of foreign tax not less than the applicable BEAT rate. The revised BBBA would also limit the exception to the BEAT for taxpayers with a low base erosion percentage to taxable years beginning before Jan. 1, 2024. Finally, the revised BBBA would provide that a taxpayer (and its successor) remains subject to BEAT for the next 10 years after it becomes subject to BEAT (regardless of any decrease in gross receipts).

These changes would be effective for tax years beginning after Dec. 31, 2021.

  • Repeal of election for one-month deferral in tax year of SFCs. The revised BBBA would repeal section 898(c)(2), which allows a specified foreign corporation (SFC) to elect a tax year beginning one month earlier than the majority U.S. shareholder year. This change would be effective for tax years of SFCs beginning after Nov. 30, 2022.
  • Downward attribution. The revised BBBA would reinstate former section 958(b)(4) (repealed under the TCJA), to provide that a U.S. person is not treated as owning stock that is directly owned by a non-U.S. person when applying the downward attribution rules. This change would be effective for tax years of foreign corporations beginning after the date of enactment.
  • Dividends from foreign corporations. The revised BBBA would amend section 245A so that the section 245A dividends received deduction (DRD) would apply only to dividends received from CFCs; dividends received from specified 10%-owned foreign corporations would no longer be eligible for the DRD. This change would apply to distributions made after the date of enactment.
  • Treat certain section 245A-eligible dividends from CFCs as extraordinary dividends. Section 1059 generally requires a U.S. corporate shareholder that receives an extraordinary dividend from a CFC to reduce its basis in the stock of the distributing CFC by the nontaxed portion of the dividend; to the extent that the nontaxed portion exceeds basis, the U.S. corporation is required to recognize gain. An extraordinary dividend is any dividend the amount of which equals or exceeds 5% of the basis in preferred stock or 10% of the basis in common stock. The nontaxed portion is the amount excluded from gross income by virtue of a DRD (e.g., section 245A). U.S. corporate shareholders are generally not subject to section 1059 if they have held the stock of the distributing CFC for more than two years at the time of the dividend announcement date.

The revised BBBA would add new section 1059(g), providing that any disqualified CFC dividend is treated as an extraordinary dividend without regard to the period the U.S. corporate shareholder held the stock to which such dividend relates. Disqualified CFC dividend is defined as any dividend paid by a CFC if such dividend is attributable to earnings and profits that were earned while such foreign corporation was not a CFC or are attributable to disqualified CFC dividends, received by a CFC from another CFC. This provision would apply to dividends paid after the date of enactment.


The tax provisions described in this alert are still subject to negotiation and changes are likely in any finally enacted bill. The Senate has yet to consider the bill and it may change once it arrives in the Senate. However, multinational corporations should act now and contact their tax advisors to better understand how the above proposals may affect their tax obligations.

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This article was written by Adam Chesman and originally appeared on 2021-11-05.
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