Key International Tax Provisions in the Build Back Better Act
by Kristi Taylor, CPA and Kevin Stickle, CPA/MS-Tax
Net Investment Income Tax (NIIT) Expanded
Since 2013, high-income individuals have been subject to an additional 3.8% NIIT on investment income and certain business income considered passive due to the individual’s limited involvement in the business. The BBBA would expand the 3.8% NIIT to apply to all business income (including self employment income), regardless of whether the high-income individual is actively involved in the business. Unlike income tax, NIIT cannot be offset by foreign tax credits for tax paid to another country and can result in additional U.S. tax owing for high-income individuals whose gross income exceeds the thresholds below.
- Over $500,000 for joint filers
- Over $400,000 for single filers
- Over $250,000 for married couples filing separately
Increased U.S. Tax Rate on GILTI Inclusion
Under IRC section 951A, U.S. persons with an ownership interest in a U.S.-controlled foreign corporation (CFC) are subject to global intangible low-taxed income (GILTI) provisions that include a proportional share of the CFC’s current active earnings in the U.S. person’s taxable income. The GILTI provisions can result in double taxation of the CFC earnings due to a timing mismatch.
Example: a U.S. individual living is Canada is taxed in the U.S. on their share of the CFC’s earnings when earned under GILTI, and taxed again on the Canadian side in the future when the CFC pays a dividend of its accumulated earnings.
Currently, for U.S. corporations (and individuals, as long as a complex election is made), if the effective Canadian income tax on the CFC profits exceeds 13.125%, the U.S. won’t impose income tax on the current corporate earnings at the shareholder level.
The BBBA bill would change several rules regarding computation of GILTI income inclusion and the percentage of foreign corporation tax that can be used as a credit against US tax on GILTI. Ultimately, this will cause the required Canadian income tax on the CFC to be at least 15.8% before the U.S. won’t impose income tax on the current corporate earnings at the U.S. shareholder level.
Simpler Attribution of Ownership Rules Reinstated
A tax law change in 2018 removed favorable rules that prevented a U.S. person from being treated as owning stock directly owned by a non-U.S. person for the purposes of applying the “downward” attribution rules; this expanded the number of non-U.S. corporations considered to be CFCs.
This change subjected many U.S. persons with minority ownership interests in non-U.S. corporations to additional CFC disclosure reporting requirements and possible GILTI inclusions. The BBBA would restore those pre-2018 rules which provide that a U.S. person isn’t treated as owning stock that’s directly owned by a non-U.S. person for purposes of applying the downward attribution rules. This relief would be effective retroactively to January 1, 2018.
Foreign Tax Credit Changes
There are multiple proposed changes to foreign tax credits, including the following most commonly encountered provisions:
- The one-year foreign tax credit carryback would be eliminated.
- The BBBA would allow foreign tax credits on global intangible low-taxed income (GILTI) to be carried forward. This could be favorable in cases where, for example, the effective Canadian corporate income tax rate on a CFC is 27% in one year (far in excess of the 15.8% GILTI tax noted above) whereas in the following year, the effective Canadian corporate income tax rate is 10%.
- 5 year carryforward for GILTI foreign taxes paid or accrued after 12/31/2022 and before 1/1/2031.
- No change to the existing 10 year carryforward allowed for other foreign tax credits.
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Kristi Taylor, CPA
Kristi Taylor joined Larson Gross in 2007 and has deep expertise serving individuals, families and businesses with their cross-border tax and consulting needs.
Kevin Stickle, CPA/MS-Tax
Kevin Stickle has been with Larson Gross since 1998 and has been an integral part of the firm’s tax practice growth. He is the firm’s former tax director and now serves as a technical leader for the firm’s international tax service line.