The Senate Finance Committee Chairman’s Mark (Senate Mark) released last Thursday includes a provision that would impose a so-called “base erosion tax” on deductible payments made by certain corporations to their non-U.S. affiliates in taxable years beginning after December 31, 2017. We previously discussed a similar proposal in the House that would impose a 20% excise tax on certain payments made by U.S. corporations to their non-U.S. corporate affiliates here.
Base Erosion Tax. The Senate Mark’s base erosion tax would apply to U.S. and non-U.S. corporations (other than regulated investment companies, real estate investment trusts and S corporations) with average annual gross receipts of at least $500 million for the prior three-year period that have a “base erosion percentage” of 4% or higher for the taxable year. A corporation’s “base erosion percentage” would be determined for any taxable year by dividing the deductions taken by the corporation with respect to its “base erosion payments” (as discussed below) by the overall number of deductions taken by the corporation (including any deductions taken with respect to “base erosion payments,” but excluding net operating loss carrybacks and carryforwards and deductions for dividends attributable to foreign earnings).
Corporations subject to the base erosion tax would be required to pay a tax equal to the excess of 10% of the “modified taxable income” of the corporation for the taxable year over the corporation’s regular tax liability for the taxable year (reduced by the excess of the corporation’s allowable income tax credits over the corporation’s allowable research tax credits).
A corporation’s “modified taxable income” would equal the corporation’s taxable income, without regard to any deductions taken with respect to “base erosion payments” or the base erosion percentage of any net operating loss carrybacks or carryforwards. Any deduction attributable to payments for which a non-U.S. person is subject to U.S. withholding or income tax would not be taken into account for purposes of determining a corporation’s modified taxable income, and such payments that are subject to reduced rates of U.S. withholding tax would be excluded from a corporation’s modified taxable income in proportion to the reduction.
“Base erosion payments” would generally consist of amounts paid or accrued by a corporation (i) to a related foreign party with respect to which a deduction is allowed or (ii) to a related inverted corporation or a foreign party that is a member of the same expanded affiliated group as an inverted corporation that result in a reduction of the corporation’s gross receipts.
Example. Assume in a taxable year, a corporation has $1,100 of income and makes a $100 deductible interest payment to a related foreign party. Assuming a 20% corporate tax rate and a withholding tax rate of 0%, the corporation’s regular tax liability for the taxable year would be $200 (i.e., (20% x ($1,100 – $100)), and the corporation would be subject to $0 in additional tax (i.e., (10% x ($1,000 + $100)) – $200) under the Senate Mark’s proposal.
Assume instead that the corporation makes a $750 deductible interest payment to a related foreign party during the taxable year. The corporation’s regular tax liability for the taxable year would be $70 (i.e., (20% x ($1,100 – $750)), and the corporation would be subject to $40 in additional tax (i.e., (10% x ($350 + $750)) – $70) under the Senate Mark’s proposal.
Information Reporting. The Senate Mark’s proposal would permit the Treasury Department to issue regulations requiring corporations to report (i) the names, principal places of business and jurisdictions of organization or residency of related foreign parties with which the corporations transact during the taxable year, (ii) the nature of the relationships between the corporations and related foreign parties and (iii) information with respect to transactions between the corporations and related foreign parties. In addition, the Treasury Department would be permitted to issue regulations requiring corporations subject to the base erosion tax to report base erosion payments made during the taxable year, as well as any other information determined by the Treasury Department to be necessary in calculating the amount of base erosion tax to which the corporations would be subject.