22 September 202119 minute read

House tax proposal: significant statutory changes include raising corporate rate, overhauling international taxation system

The House Ways and Means Committee has approved a package of roughly $2.2 trillion in tax increases and modifications to provisions enacted in the Tax Cuts and Jobs Act (TCJA) to offset part of the cost of $3.5 trillion in new spending for social and environmental policies that will be included in a budget reconciliation bill for Fiscal Year 2022.  The key provisions are described below and are intended to embody President Joe Biden`s Build Back Better agenda. 

Because no Republicans are expected to support the reconciliation bill, and because the Democratic majorities in the House and Senate are extremely tight (Democratic leaders will need the votes of all 50 Democratic senators to pass the measure and cannot lose more than three votes in the House), House and Senate Democratic leaders have a challenging task in building a consensus.

At least two Democratic senators and a coalition of House Democratic members favor a significantly smaller level of spending and lower tax increases, while House and Senate Progressives favor higher taxes and more spending.  Democratic leaders and President Biden will need to find a consensus between these two groups before passing the reconciliation bill on the House and Senate floors.  The Senate Finance Committee has released some limited tax increase proposals, but is likely to take more time than Ways and Means to complete its reconciliation proposals. 

Although there are differences between Progressives and Moderates in the Party, Democrats are under great pressure to resolve those differences and move forward, given that failure to pass the President`s agenda could have very negative political consequences in next year’s midterm elections.

The House Ways and Means provisions described below are a starting point, and while the Senate is likely to cut back on some of them, tax increases for business and individuals are expected to be enacted by Thanksgiving. 

Members of the tax writing committees and their staffs, especially in Senate, are open to hearing concerns from the business community about these proposals as they try to find the consensus they will need to move ahead. 


On September 13, 2021, House Ways and Means Committee Chairman Richard Neal (D-MA) released a tax proposal (the House Proposal) to fund the Build Back Better Act reconciliation bill. The House Proposal contains significant statutory changes, including raising the corporate rate and overhauling the international taxation system. While the provisions discussed below appear to represent the House’s position to date with respect to tax-specific revenue raisers, moderate Democrats in the Senate Chamber have already indicated they will not support the current $3.5 trillion scope of legislation, further indicating that many of the House revenue raisers discussed here will be further vetted for inclusion/elimination in the Senate Chamber.  The most noteworthy corporate and international tax elements of the House Proposal are discussed below.


The House Proposal would raise the top corporate tax rate to 26.5 percent on taxable income exceeding $5,00,000 (from 21 percent) for years beginning after 2021. An additional 3 percent tax would be imposed on a corporation’s taxable income above $10 million, capped at $287,000. The House Proposal would create the following taxable income brackets for corporate taxpayers:

Taxable income

Tax rate (%)

Not over $400,000


Over $400,000 but not over $5 million


Over $5 million



III.  Modifications to the dividends-received deduction

For tax years beginning after 2021, the House Proposal would increase the section 243(a)(1) dividends-received deduction (DRD) from 50 percent to 60 percent and the section 243(c)(1) DRD from 65 percent to 72.5 percent.


The House Proposal significantly overhauls the outbound international tax provisions enacted or significantly modified just a few years ago as part of the TCJA. The House Proposals are generally similar to contemporaneous proposals from the Biden Administration and from members of the Senate Finance Committee. Certain changes also conform with Pillar 2 of the OECD BEPS project (eg, determining GILTI tax liability on a country-by-country (CbC) basis).

Outbound proposals worth highlighting include (i) increasing the “effective” GILTI rate to 16.56 percent from its current “effective” rate of 10.5 percent; (ii) retaining FDII (albeit with a reduced benefit) resulting in an effective rate of 20.7 percent; (iii) permitting the carry-forward of GILTI FTCs and net tested losses on a CbC basis; (iv) allowing 95 percent of deemed paid GILTI FTCs with respect to tested losses in addition to tested income (100 percent for foreign taxes paid to a US possession). Additional details on these and other notable proposed changes included within the House Proposal are described below.

A.  Section 250 deduction (GILTI and FDII)

The House Proposal would modify the section 250 deduction, effectively accelerating the rates otherwise effective in 2026. For GILTI, the deduction would be reduced from 50 percent to 37.5 percent and for FDII, reduced from 37.5 percent to 21.875 percent. Further, the deduction would be determined without a taxable income limitation and would be considered when calculating net operating losses.

The proposed changes would be effective for tax years starting after 2021, with a transition rule for fiscal year taxpayers effectively imposing the proposed increased effective rate for the portion of the year after December 31, 2021.


Under the House Proposal, section 951A would be applied on a CbC basis, by identifying a single taxable unit per jurisdiction and consolidating in such unit the activities subject to tax (either through a CFC or look through entity or branch owned by the CFC) within the jurisdiction. This taxable unit concept is similar, with modifications, to the concept of “tested units” within the GILTI high tax exclusion regulations.

A CbC approach is expected to increase complexity in determining a taxpayer’s GILTI liability, in addition to reducing netting opportunities and highlighting non-economic results caused by timing differences. Helpfully, and consistent with taxpayer commentary in response to prior CbC proposals, the House Proposal provides relief for some timing differences by permitting the carry-forward of tested losses and GILTI foreign tax credits.

Departing from previous proposals, the House Proposal would maintain the QBAI exclusion (reduction to the net tested income based on certain depreciable assets, expected to reflect a “routine return”). The House Proposal reduces the amount of the exclusion from 10 percent to 5 percent, unless such QBAI is in a US possession. These changes would be effective for tax years starting after 2021.

As it relates to FTCs in the GILTI basket, the House Proposal contains taxpayer favorable modifications. Notably, under the House Proposal foreign taxes properly attributable to tested losses (in addition to those attributable to tested income) would be treated as creditable foreign taxes. Further, the haircut on the deemed paid FTCs related to tested income and loss would be reduced from 20 percent to 5 percent. Notably, tested income in a foreign jurisdiction subject to tax at a rate of at least 17.43 percent would generally be expected to have no residual US tax liability (especially given changes to expense allocation rules noted below). Excess credits on the GILTI basket would be eligible for a 5-year carry-forward.

Effective for years after 2017, the House Proposal would modify section 78 (which requires an inclusion in income equal to the amount of foreign taxes deemed paid by the US Shareholder) preventing its application in the context of foreign taxes properly attributable to previously taxed earnings and profits (PTEP) distributions.

C.  FTC limitations

Under the House Proposal, the section 904 FTC limitation would be calculated per basket on a CbC basis, preventing the possibility of cross-crediting between high-tax and low-tax jurisdictions. The House Proposal would not alter either the subpart F high-tax exception nor the regulatory GILTI high-tax exclusion.

The House Proposal would eliminate the possibility of carryback excess credits while also reducing the period of carry forward from 10 to 5 years for taxes in all categories of income (ie, including GILTI).

Further, the proposal would repeal the “branch” basket; and importantly, in the context of the GILTI basket, the limitation based on foreign source income would not be reduced by interest, R&E nor stewardship expenses, with the section 250 deduction being the only deduction allocable to such category of income.

The House Proposal leaves to future Treasury regulations in determining how to handle carry-forward credits from pre-CbC years.

D.  Subpart F and changes to pro rata share rules

Under the House Proposal, foreign base company sales income and company services income would be limited to transactions involving a related person who is a US tax resident. This proposal would be effective for tax years after 2021.

Further, the House Proposal would significantly modify the section 951(a) pro rata share rules. In this regard, a US Shareholder may suffer an inclusion even if it does not own an interest in the CFC on the last day of the year on which it is a CFC. Specifically, a US Shareholder who owns stock in a CFC during the year but not on the last day, would have an inclusion to the extent it has received a “nontaxed current dividend” which generally includes a dividend sourced out of current year earnings that would either qualify for the section 245A(a) DRD or would not be treated as subpart F because the application of certain section 954 exceptions. In turn, the US Shareholder, who owns the stock on the last day of the year, would reduce its inclusion by the amount of the “nontaxed current dividend” received by another US Shareholder determined under similar conditions as current section 951(a)(2)(B).

It is noteworthy that the effective date for the proposed pro rata rules would be for taxable years beginning after 2021, but still retroactive for distributions made after 2017. This could create considerable uncertainty given the House Proposal’s blessing of the rules provided under Treas. Reg. Section 1.245A-5 which denies the section 245A(a) DRD and an exception from subpart F income under similar circumstances.

E.  Previously taxed E&P (PTEP)

The proposal would clarify that section 961(c) applies in determining basis adjustments and the recognition of gain for purposes of the GILTI in addition to subpart F; as well that gain may result from a PTEP distribution between CFCs by reason of section 961(b)(2).

Modification in the computation of the GILTI and the determination of FTCs on a CbC basis would be expected to increase complexity to an already overly complex PTEP system. Taxpayers would be impacted by additional burdens related to the tracking of the different classes of PTEP per country as well as added compliance complexity.

F.  Other noteworthy modifications

  • Section 245A limited to dividends received from CFCs. For distributions after the date of enactment, the House Proposal would narrow the eligibility for the section 245A deductions to dividends received from a CFC (ie, dividends from specified 10 percent owned foreign corporations would no longer be available).
  • Repeal of section 898 one-month deferral election. For years after November 30, 2021, taxpayers who have made this election with respect to an SFC (commonly, a CFC) would have to conform to the year of its majority US Shareholder’s year.
  • CFC E&P determination. The House Proposal would modify the way in which a CFC determines its E&P. Specifically, under the proposal, the E&P of a CFC would be determined without regard to certain provisions in section 312(n). Specifically, (i) LIFO under section 312(n)(4); (ii) installment sales under section 312(n)(5); and (iii) completed contract method accounting under section 312(n)(6). While the provisions are already taken into account for purposes of calculating a CFC’s E&P to determine subpart F, the House Proposal would make these provisions relevant for all purposes of determining a CFC’s E&P.
  • Reinstatement of section 958(b)(4). The proposed language would reinstate section 958(b)(4) which prevents “downward” attribution of stock from a foreign person to a US person for purposes of determining US Shareholder status or whether a foreign corporation is a CFC. This reinstatement would be retroactive back to 2018.
  • New section 951B inclusion for foreign-controlled CFCs. In connection with the reinstatement of section 958(b)(4), the House Proposal creates a new inclusion under section 951B which would cause a Subpart F/GILTI inclusion for US Shareholders of foreign corporations who would be owned more than 50 percent by such US Shareholder in the absence of the reinstatement of section 958(b)(4). Similar to the reinstatement of section 958(b)(4), this provision would be retroactive back to 2018.


The House Proposal contains important inbound proposals, including a substantial overhaul of the base erosion and anti-abuse tax regime (BEAT).

A.  Modifications to the BEAT

The House Proposal would make several significant changes to BEAT for tax years beginning after 2021.

The House Proposal would exclude from the definition of a “base erosion payment” (1) payments subject to an effective rate of foreign income tax that equals or exceeds the applicable BEAT rate and (2) payments that are subject to US federal income tax. The Joint Committee on taxation accompanying commentary to the proposal clarifies that for this exclusion to be available, it is sufficient (in the context of GILTI) for the payment to be included in the computation of GILTI. In the context of US parented MNCs, this exclusion would be expected to reduce the general impact of the BEAT to such MNCs; as the majority of foreign earnings are expected to be subject to the subpart F or GILTI provisions, payments to foreign related entities would, under this exclusion, generally not be considered base erosion payments.

For foreign parented MNCs, the BEAT may become even more burdensome as the definition of base erosion payments has been increased to include: (1) purchases of inventory from foreign related parties to the extent the cost exceeds the sum of the direct costs of such entity and its indirect costs paid to US persons or unrelated persons, and (2) indirect costs capitalized into cost of goods sold, subject to the application of the exception above regarding sufficient level of foreign tax.

Under the House Proposal, the definition of a “base erosion minimum tax amount” is expanded to allow for taxpayers to consider all tax credits for purposes of determining BEAT. As a result, under the House Proposal, taxpayers would not be penalized under BEAT for utilizing foreign tax credits or other general business credits to reduce US tax liability. Additionally, in proposed amendments to section 38, taxpayers would be able to utilize general business credits to offset the tax liability owed under BEAT.

The House Proposal would also repeal the 3 percent base erosion percentage threshold for applicable taxpayer qualification for taxable years beginning after December 31, 2023. As a result, all corporations (other than regulated investment companies, real estate investment trusts, or S corporations) that meet the gross receipts threshold would be considered applicable taxpayers and potentially subject to BEAT in such later years.

The House Proposal would also increase the BEAT rate from 10 percent to 12.5 percent for tax years beginning after 2023, and before 2026; for tax years beginning after 2025, the rate would increase from 12.5 percent to 15 percent.

B.  Modifications to portfolio interest

Under current section 874(h)(3)(A), portfolio interest does not include interest received by a 10 percent shareholder. For this purpose, section 874(h)(3)(B) provides that a 10 percent shareholder is, in the case of an obligation issued by a corporation, any person who owns 10 percent or more of the total combined voting power of all classes of stock of such corporation entitled to vote, or, in the case of an obligation issued by a partnership, any person who owns 10 percent or more of the capital or profits interest in such partnership.

The House Proposal, effective as of date of its enactment, would expand the definition of a 10 percent shareholder to include, in addition to persons who own 10 percent or more of the total combined voting power of all classes of stock entitled to stock, any person who owns 10 percent or more of the total value of the stock of such corporation.


A.  Limitations on deduction of interest expense

The House Proposal would impose a new limitation on net interest expense deductible by a “specified domestic corporation.” For these purposes, a “specified domestic corporation” is a domestic corporation, which is a member of a multinational group that prepares consolidated financial statements and has averaged business interest expense in excess of $12 million annually over a three-year reporting period.

The specified domestic corporation’s allowable percentage of the group’s net interest expense for any reporting year would be equal to the ratio of (i) the specified domestic corporation’s “allocable share” of the international financial reporting group’s reported net interest expense over (ii) such specified domestic corporation’s reported net interest expense. For this purpose, the House Proposal explains that a specified domestic corporation’s “allocable share” of the international financial reporting group’s reported net interest expense is equal to the ratio of (i) the specified domestic corporation financial statement earnings (computed by adding back net interest expense, taxes, depreciation, depletion and amortization) (EBIDTA) to (ii) the group’s financial statement EBIDTA.

As section 163(j) remains in effect, taxpayers would be limited to deducting the lesser of the interest expense limitation under section 163(j) or this new section 163(n).

The House Proposal would also modify the existing section 163(j) limitation to apply at the partner and shareholder level, rather than at the level of the partnership or S corporation.

Finally, the House Proposal would limit the carry-forward period for excess interest expense to five years (compared to the indefinite carry-forward period under current law). Interest would be treated as a deduction on a first-in, first-out basis. The interest expense changes would be effective for tax years beginning after 2021.

B.  Modifications to extraordinary dividends

Under current section 1059, if a corporation receives an extraordinary dividend (as defined in section 1059(c)) with respect to any stock that such corporation has not held for more than 2 years as of the dividend declaration date, the basis of the stock is reduced by the nontaxed portion of such dividends, and any excess is treated as gain from the sale or exchange of such stock.

The House Proposal would provide that any “disqualified CFC dividend” is treated as an extraordinary dividend without regard to the holding period of the taxpayer receiving the dividend. For this purpose, the House Proposal defines a “disqualified CFC dividend” as meaning any dividend paid by a CFC to a taxpayer that is a US Shareholder and that is attributable to E&P which were earned or gain with respect to property which accrued during a period (i) when such corporation was not a CFC or (ii) when such stock was not owned by a US Shareholder. This change would be effective after the enactment of the House Proposal.

To learn more about the implications of this rapidly shifting legislation, please contact any of the authors.


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