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By Alex M. Parker
· · February 9, 2021 at 7:52 pm EST
The Pandemic Aid Act, published by House Democrats, includes a provision to remove a lengthy corporate tax break that would ease restrictions on foreign tax credits for companies with interest expenses.
The bill introduced on Monday would eliminate Internal Revenue Code Section 864 (f). which came into force this year and would apply for the tax year 2021. Originally passed by Congress in 2004, this section allows companies to apportion interest expenses worldwide to determine the taxable income that will be applied to overseas tax credit restrictions.
The elimination of Section 864 (f) would generate revenues of $ 22 billion in the next 10 years, based on applicable law, according to the information from the Joint Tax Committee.
While U.S. taxpayers can claim foreign tax credits on taxable income, federal tax law limits how much they can claim to ensure they aren't used on U.S. income. The thresholds are based on calculating a company's foreign taxable income versus domestic income. Deductions for interest expenses are shared between both sides, depending on whether the expenses were incurred by domestic companies or controlled foreign companies.
The global allocation would allow companies to apportion excess interest expense from all of their foreign subsidiaries to their domestic income, which would increase the limitation on the use of foreign tax credits.
Foreign tax credit restrictions have become a bigger issue since the passing of the Tax Cut and Employment Act of 2017 This lowered the US corporate tax rate and created new categories of foreign income, such as the global low intangible tax income.
While the authors of the TCJA claimed that tax on GILTI would only apply to income taxed less than 13.125%, foreign tax credit restrictions may result in tax payments on GILTI at higher rates. The US Treasury Department offered some relief however, on this issue, it refused to create a full exception.
The House Ways and Means Committee is expected to review the provisions proposed by the Democrats on Wednesday. The Democrats hope to pass the legislation in the coming weeks through the budget balancing process.
The committee did not respond to requests for comment.
– Adaptation by Neil Cohen.
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