S-1605 : Still Just a Bill

The "International Competition for American Jobs Act" proposes several significant changes to the U.S. international tax system, primarily impacting the Internal Revenue Code of 1986. This legislation aims to enhance the competitiveness of American businesses operating globally and simplify various complex tax rules. Key provisions include:

• Permanent Extension of Look-Thru Rule: Makes permanent a rule that allows certain related-party payments (like interest, rents, and royalties) between controlled foreign corporations (CFCs) to be excluded from taxable income, preventing its scheduled expiration.
• Modification of Deductions for Foreign-Derived Income:
  • Increases the deduction rates for Global Intangible Low-Taxed Income (GILTI) and Foreign-Derived Deduction Eligible Income (FDDEI).
  • Allows these deductions to be fully considered when calculating net operating losses and removes a limitation based on total taxable income.
  • Changes the rules for allocating expenses against FDDEI, generally limiting them to expenses directly related to that income.
  • Expands the types of income that qualify for the FDDEI deduction.
• Modifications to the Base Erosion Minimum Tax (BEAT):
  • Allows general business credits to offset the BEAT, effectively reducing the tax burden for some companies.
  • Prevents scheduled increases in the BEAT tax rate and base erosion percentage, keeping them at current levels.
  • Expands exemptions for certain payments from being treated as "base erosion payments," including those already subject to U.S. tax, those made to foreign entities paying a high enough foreign tax (at least 18.9%), and certain service payments.
• Simplification of Foreign Tax Credit (FTC) Limitations:
  • Reduces the number of income categories, or "baskets," for foreign tax credit calculations from four to two (passive category income and general category income). This means GILTI and foreign branch income will now fall into the general category.
  • Eliminates the "80 percent haircut" on foreign taxes related to GILTI, allowing 100% of these taxes to be credited against U.S. tax.
  • Revises rules for allocating deductions to foreign source income for FTC purposes, potentially increasing the amount of foreign taxes that can be credited.
  • Broadens the definition of what constitutes a creditable foreign income tax, focusing on the tax's "predominant character" rather than a strict connection to the jurisdiction.
  • Provides taxpayers more time and flexibility to choose or change their foreign tax credit election.
• Changes Affecting Controlled Foreign Corporations (CFCs):
  • Eliminates the requirement for U.S. corporate shareholders to include in their income a CFC's investment in U.S. property.
  • Removes "foreign base company sales income" and "foreign base company services income" from the types of income that trigger Subpart F inclusions, simplifying how certain foreign earnings are taxed.
  • Allows for the carryover of "net CFC tested losses," enabling companies to use losses from prior years to offset future GILTI.
  • Restores a limitation on how stock ownership is attributed (preventing "downward attribution" from foreign persons to U.S. persons) for determining if a foreign corporation is a CFC. However, it introduces new rules for "foreign controlled United States shareholders" to ensure that certain foreign-parented U.S. groups remain subject to Subpart F and GILTI.
• Special Rules for Repatriating Intangible Property: Creates a temporary measure allowing U.S. corporations to bring certain intangible property (e.g., patents, copyrights) held by their CFCs back to the U.S. without triggering U.S. tax on the appreciation of that property.
• Exclusion for Virgin Islands Services Income: Exempts specific "qualified Virgin Islands services income" from GILTI for individuals, trusts, estates, and certain closely-held C corporations, offering a tax benefit for particular activities conducted in the U.S. Virgin Islands.

Most of these amendments are scheduled to take effect for taxable years beginning after December 31, 2025.