Overview
Title
To amend the Internal Revenue Code of 1986 to modify the treatment of foreign corporations, and for other purposes.
ELI5 AI
The bill wants to make sure big companies from other countries pay taxes just like companies in the United States, by changing how much tax they pay based on their income and stopping certain old rules that let them pay less.
Summary AI
The “Corporate Tax Dodging Prevention Act” aims to amend the Internal Revenue Code to adjust how taxes apply to foreign corporations and to ensure that foreign and domestic income are taxed equally. The bill proposes a progressive corporate tax rate, modifies rules for tax credits and deductions, and addresses issues with inverted corporations and corporate tax residency. Additionally, it seeks to repeal existing provisions that allowed for deductions related to foreign-derived intangible income, with most changes intended to take effect after December 31, 2024.
Published
Keywords AI
Sources
Bill Statistics
Size
Language
Complexity
AnalysisAI
General Summary of the Bill
The proposed legislation aims to amend the Internal Revenue Code of 1986 to modify how foreign corporations are treated for tax purposes. Scheduled to begin implementation in 2024, the bill introduces numerous changes affecting corporate taxation both domestically and internationally. Notably, it proposes to alter tax rates, redefine corporate residency criteria, adjust foreign tax credits, and revise tax benefits for multinational corporations. The objectives appear to focus on curbing tax avoidance strategies, especially by multinational corporations, by bringing more foreign income into the orbit of U.S. taxation and discouraging corporate inversions.
Summary of Significant Issues
One of the key concerns with the bill is its complexity, particularly the language used in sections addressing tax rates on both domestic and foreign income. Terms like "subpart F income" and "pass-through entities" could lead to misunderstandings and compliance challenges for businesses. Furthermore, the changes to the base erosion and anti-abuse tax—raising the rate and reducing the threshold of applicable taxpayers—might have a notable impact on smaller entities, particularly due to the lack of a clear rationale for these adjustments.
Another significant issue is the lack of clarity regarding the treatment of foreign corporations that are managed and controlled within the United States. The criteria for managerial control are not explicitly defined, which could lead to legal complexities and disputes. Additionally, retrospective application of certain provisions, such as those for inverted corporations, raises concerns about fairness and could lead to challenges or controversy.
Impact on the Public Broadly
The bill has significant implications for both domestic businesses and foreign corporations operating in the United States. On a broad scale, tightening the tax obligations for multinational corporations might result in higher tax revenues for the government, potentially funding public services and infrastructure without raising individual income tax rates. However, these adjustments could also lead to increased operational costs for companies, potentially impacting product prices and employment if businesses choose to pass on these costs to consumers or restructure to mitigate tax liabilities.
Impact on Specific Stakeholders
Multinational Corporations: These entities may face increased complexity in tax compliance and potential reductions in after-tax profits due to higher tax rates and reduced benefits like foreign-derived intangible income deductions. Corporations with significant foreign operations or intricate international structures are especially likely to be affected.
Smaller Businesses: With the application threshold for certain taxes lowered significantly, smaller businesses might find themselves newly subject to taxes previously designed to target larger corporations. This could necessitate additional resources to navigate the complex compliance landscape or strategic restructuring to remain competitive.
Tax Professionals and Accountants: There will likely be increased demand for tax advisors given the complexity and comprehensive nature of the new rules. Professionals will need to thoroughly understand the bill's provisions to guide businesses in their tax planning and compliance efforts effectively.
Government and Regulatory Bodies: The bill requires changes in enforcement and regulatory measures, demanding more resources to ensure compliance. The definition and enforcement of new corporate residency criteria and international financial reporting regulations will specifically challenge regulatory bodies in maintaining oversight.
In sum, while the bill seeks to reduce tax avoidance and increase fairness in the corporate tax system, it introduces numerous complexities that could have varying effects on businesses of different sizes and structures. The broader economic impact will depend largely on how corporations adapt to these changes and the effectiveness of legislative and judicial clarifications issued in response to any ambiguities or disputes that arise.
Financial Assessment
The "Corporate Tax Dodging Prevention Act" includes a range of financial references and allocations, primarily focused on altering tax rates and deductions rather than direct spending or appropriations. Here's an analysis of how these financial elements play into the broader context of the bill and the issues it may present:
Progressive Corporate Tax Rate
The bill proposes a progressive corporate tax rate structure. This structure includes:
- 15% on taxable income up to $50,000.
- 25% on taxable income between $50,000 and $75,000.
- 34% on taxable income between $75,000 and $10,000,000.
- 35% on taxable income exceeding $10,000,000.
Additionally, for corporations with taxable income over $100,000, the tax is increased by the lesser of 5% of the excess or $11,750. For those exceeding $15,000,000, there's an additional 3% increase, capped at $100,000. These changes intend to increase tax payments by corporations based on their income brackets.
Base Erosion and Anti-Abuse Tax Modifications
The bill accelerates the base erosion and anti-abuse tax (BEAT) rate from 10% to 12.5%. Furthermore, it lowers the threshold for what constitutes an "applicable taxpayer" from $500,000,000 to $25,000,000. These changes could affect smaller entities significantly and have been noted as problematic due to the lack of clear rationale for the considerable reduction in the financial threshold. The rapid implementation might catch businesses unprepared, especially those close to the new, lower threshold.
Treatment of Foreign Corporations and Assets
Section 8 of the bill outlines how certain foreign corporations will be treated as domestic if they have aggregate gross assets of $50,000,000 or more and are managed within the United States. However, if these corporations do not regularly trade on a securities market and have assets below this threshold, they can be exempted, potentially leading to complexities in determining their tax liabilities based on asset values.
International Financial Reporting Groups
For domestic corporations in international financial reporting groups, the allowable deduction for interest is capped by complex calculations involving the corporation’s share compared to the group’s reported net interest expense. This includes considerations for entities with average annual gross receipts exceeding $25,000,000. These intricate rules underline the issue of compliance complexity highlighted in the issues section.
Repeal of Foreign-Derived Intangible Income Deduction
The bill seeks to repeal the section 250 deduction related to foreign-derived intangible income. This could adversely impact businesses that benefit from this deduction by increasing their taxable income, potentially leading to a higher tax liability without the compensatory relief they previously enjoyed.
Overall Financial Implications
While the bill does not involve direct appropriations, it significantly influences how corporations financially interact with tax structures. It emphasizes increased tax compliance costs and liabilities, particularly for multinational corporations. The financial changes, particularly those involving increased tax rates and decreased thresholds, could lead to increased tax burdens for corporations that previously used these deductions to lower taxable income. Such measures aim to ensure that both foreign and domestic profits are taxed more equitably but could result in unintended fiscal pressures or disputes, as noted in various sections addressing complexities in tax compliance.
Issues
The bill attempts to modify the treatment of certain foreign corporations to be treated as domestic corporations if they are managed and controlled within the United States, but it lacks clear criteria on determining the primary location of management, potentially leading to legal disputes and complexities (Section 8).
The acceleration of the base erosion and anti-abuse tax rate from 10% to 12.5% and the reduction of the applicable taxpayer threshold from $500,000,000 to $25,000,000 could significantly impact businesses, particularly smaller entities, without providing a clear rationale for the changes (Section 9).
The repeal of section 250, which involves deductions for foreign-derived intangible income, might negatively impact companies that currently benefit from this provision, with no detailed rationale provided for the repeal (Section 12).
The equalization of tax rates on domestic and foreign income uses complex terminology like 'subpart F income' that may confuse stakeholders, potentially leading to misunderstandings in compliance (Section 3).
The modifications to rules for inverted corporations still hinge on complex language and retroactive application to a past date, May 8, 2014, which could lead to challenges regarding its relevance and fairness (Section 7).
The bill's changes to limitations on treaty benefits might conflict with existing international agreements, raising diplomatic concerns, especially as it includes complex technical terms without sufficient clarification (Section 11).
The language regarding 'taxable units' for the application of the foreign tax credit is highly technical and complex, potentially leading to difficulties for taxpayers in comprehension and compliance (Section 4).
The repeal of check-the-box rules for certain foreign entities, while not completely explained, could impact international tax planning strategies currently utilized by businesses, leading to financial reconfigurations (Section 5).
Sections
Sections are presented as they are annotated in the original legislative text. Any missing headers, numbers, or non-consecutive order is due to the original text.
1. Short title Read Opens in new tab
Summary AI
The first section of the bill gives it the name “Corporate Tax Dodging Prevention Act.”
2. Restoration of progressive corporate tax rate Read Opens in new tab
Summary AI
The section amends the Internal Revenue Code to restore a progressive corporate tax rate by specifying different tax rates for varying levels of corporate taxable income. For taxable years starting after December 31, 2024, corporations will be taxed at rates ranging from 15% for income up to $50,000 to 35% for income over $10 million, with certain additions for high-income corporations and a flat 35% rate for qualified personal service corporations.
Money References
- — “(1) IN GENERAL.—The amount of the tax imposed by subsection (a) shall be the sum of— “(A) 15 percent of so much of the taxable income as does not exceed $50,000, “(B) 25 percent of so much of the taxable income as exceeds $50,000 but does not exceed $75,000, “(C) 34 percent of so much of the taxable income as exceeds $75,000 but does not exceed $10,000,000, and “(D) 35 percent of so much of the taxable income as exceeds $10,000,000.
- In the case of a corporation which has taxable income in excess of $100,000 for any taxable year, the amount of tax determined under the preceding sentence for such taxable year shall be increased by the lesser of (i) 5 percent of such excess, or (ii) $11,750.
- In the case of a corporation which has taxable income in excess of $15,000,000, the amount of the tax determined under the foregoing provisions of this paragraph shall be increased by an additional amount equal to the lesser of (i) 3 percent of such excess, or (ii) $100,000.
3. Equalization of tax rates on domestic and foreign income Read Opens in new tab
Summary AI
The section amends the Internal Revenue Code to equalize tax rates on income earned by domestic and foreign corporations, effective for taxable years beginning after December 31, 2024. It also details new rules for interest payment deadlines on previously deferred foreign income and outlines specific provisions for S corporations, particularly referencing the Corporate Tax Dodging Prevention Act.
4. Country-by-country application of limitation on foreign tax credit based on taxable units Read Opens in new tab
Summary AI
The bill proposes changes to tax laws to ensure that foreign tax credits are applied based on the specific country or location where a taxpayer's business activities and units are located, affecting how taxes are calculated for foreign branches and entities similar to corporations. These changes would start for tax years beginning after December 31, 2024.
5. Repeal of check-the-box rules for certain foreign entities and CFC look-thru rules Read Opens in new tab
Summary AI
The bill section proposes changes to tax rules by removing specific provisions for classifying foreign entities and preventing certain income types like dividends and interest from receiving favorable tax treatment under the Corporate Tax Dodging Prevention Act. These changes will take effect once the Act is enacted.
6. Limitation on deduction of interest by domestic corporations which are members of an international financial reporting group Read Opens in new tab
Summary AI
In this section of the bill, new rules are introduced for U.S. corporations that are part of international financial groups. These companies will have limits on how much interest they can deduct from their taxes, and the rules explain which financial records are used to calculate these limits.
Money References
- — “(A) For purposes of this subsection, the term ‘international financial reporting group’ means, with respect to any reporting year, any group of entities which— “(i) includes— “(I) at least one foreign corporation engaged in a trade or business within the United States, or “(II) at least one domestic corporation and one foreign corporation, “(ii) prepares consolidated financial statements with respect to such year, and “(iii) reports in such statements average annual gross receipts (determined in the aggregate with respect to all entities which are part of such group) for the 3-reporting-year period ending with such reporting year in excess of $25,000,000. “(B) RULES RELATING TO DETERMINATION OF AVERAGE GROSS RECEIPTS.—For purposes of subparagraph (A)(iii), rules similar to the rules of section 448(c)(3) shall apply. “(3) ALLOWABLE PERCENTAGE.—For purposes of this subsection— “(A) IN GENERAL.—The term ‘allowable percentage’ means, with respect to any domestic corporation for any taxable year, the ratio (expressed as a percentage and not greater than 100 percent) of— “(i) such corporation’s allocable share of the international financial reporting group’s reported net interest expense for the reporting year of such group which ends in or with such taxable year of such corporation, over “(ii) such corporation’s reported net interest expense for such reporting year of such group.
7. Modifications to rules relating to inverted corporations Read Opens in new tab
Summary AI
This section of the bill amends the Internal Revenue Code to define certain foreign corporations as domestic for tax purposes, particularly if they acquire a large portion of a domestic corporation or partnership and their stock becomes mostly owned by former shareholders or partners of the domestic entity after the acquisition. An exception is made if the corporation continues significant business activities in its country of origin compared to its overall business activities.
8. Treatment of foreign corporations managed and controlled in the United States as domestic corporations Read Opens in new tab
Summary AI
In this section, certain foreign corporations that have their management and control based in the United States are treated as domestic corporations for tax purposes if either they are publicly traded or have significant assets. Regulations will define when a corporation's management is considered to be located primarily in the U.S., especially if most executives are based there or if the corporation deals mainly with investment assets managed in the U.S. These changes will take effect two years after the Act is enacted.
Money References
- corporation is described in this paragraph if— “(i) the stock of such corporation is regularly traded on an established securities market, or “(ii) the aggregate gross assets of such corporation (or any predecessor thereof), including assets under management for investors, whether held directly or indirectly, at any time during the taxable year or any preceding taxable year is $50,000,000 or more.
- “(B) GENERAL EXCEPTION.—A corporation shall not be treated as described in this paragraph if— “(i) such corporation was treated as a corporation described in this paragraph in a preceding taxable year, “(ii) such corporation— “(I) is not regularly traded on an established securities market, and “(II) has, and is reasonably expected to continue to have, aggregate gross assets (including assets under management for investors, whether held directly or indirectly) of less than $50,000,000, and “(iii) the Secretary grants a waiver to such corporation under this subparagraph. “
9. Modifications to base erosion and anti-abuse tax Read Opens in new tab
Summary AI
The section makes changes to the U.S. tax code's rules on base erosion and anti-abuse tax, increasing the tax rate from 10% to 12.5% and changing several definitions and exceptions regarding taxable entities and payments. The changes are scheduled to take effect in the tax years following the law's enactment.
Money References
- (a) Acceleration of modifications.—Section 59A(b) of the Internal Revenue Code of 1986 is amended— (1) in paragraph (1)(A), by striking “10 percent (5 percent in the case of taxable years beginning in calendar year 2018)” and inserting “12.5 percent”, (2) in paragraph (1)(B), by striking “by the excess of” and all that follows and inserting “by the aggregate amount of the credits allowed under this chapter against such regular tax liability.”, (3) by striking paragraphs (2) and (4) and redesignating paragraph (3) as paragraph (2), and (4) in paragraph (2)(A) (as so redesignated), by striking “paragraphs (1)(A) and (2)(A) shall each” and inserting “paragraph (1)(A) shall”. (b) Modifications to definition of applicable taxpayer.—Section 59A(e)(1) of the Internal Revenue Code of 1986 is amended— (1) by striking “$500,000,000” in subparagraph (B) and inserting “$25,000,000”, and (2) by inserting “and” at the end of subparagraph (A), by striking “, and” at the end of subparagraph (B) and inserting a period, and by striking subparagraph (C). (c) Exceptions to definition of base erosion payment.—Section 59A(d) of the Internal Revenue Code of 1986 is amended by adding at the end the following new paragraph: “(6) EXCEPTION FOR CERTAIN PAYMENTS INCLUDIBLE IN GROSS INCOME OF PAYEE.— “(A) IN GENERAL.—Paragraph (1) shall not apply to any portion of an amount— “(i) which is paid or accrued by the taxpayer to a foreign person who is a member of the same controlled group of corporations as the taxpayer, and “(ii) which— “(I) is treated by the foreign person as an amount of income from sources within the United States which is effectively connected with the conduct by such person of a trade or business within the United States, or “(II) if the foreign person is a controlled foreign corporation, is included in the income of a United States shareholder of such controlled foreign corporation under section 951(a). “
10. Modifications of foreign tax credit rules applicable to oil, gas, mining, gambling and other industry taxpayers receiving specific economic benefits Read Opens in new tab
Summary AI
The section changes how foreign tax rules apply to certain industries, like oil and gas, by specifying that payments by companies, called dual capacity taxpayers, to foreign countries may not be treated as taxes if the country doesn't impose a normal income tax, or if the payments are higher than what would be paid under such a tax. It also clarifies that these rules apply regardless of any United States treaties, and they take effect for taxes paid in the future.
11. Limitations on treaty benefits Read Opens in new tab
Summary AI
Section 11 of the bill introduces limits on tax treaty benefits, specifically targeting deductible payments made between related companies within a foreign-controlled corporate group. These amendments restrict the reduction of withholding taxes on such payments unless they comply with certain conditions and also disallow treaty benefits for income linked to permanent establishments outside a treaty country if that income is untaxed or minimally taxed.
12. Repeal of deduction for foreign-derived intangible income Read Opens in new tab
Summary AI
The section of the bill repeals the deduction for foreign-derived intangible income by eliminating section 250 from the Internal Revenue Code and makes related changes to sections 172 and 246. These amendments will take effect for taxable years starting after December 31, 2024.