How a Kamala Harris administration could change U.S. international taxation

Vice President Kamala Harris has communicated through her presidential campaign that she generally supports all the revenue-raising measures in President Joe Biden’s fiscal year 2025 budget, which includes numerous reforms to international tax rules that raise revenue.

In light of that indication, multinational businesses can review those proposed reforms and prepare for how their tax profiles might change if Harris wins the White House and the Democratic Party wins control of Congress in the general election on Nov. 5, 2024.

The Biden administration in each of the last three years has articulated its international taxation reform agenda and published it in its annual explanation of fiscal year budget proposals, generally referred to as the Green Book. The proposed international taxation reforms intend to:

• Strengthen the taxation of foreign earnings
• Reduce tax incentives that encourage profit shifting offshore
• Close perceived loopholes

To be clear, enacting these reforms and other tax changes would require legislative processes to play out in Congress, where policymaking can be unpredictable. However, if Harris were to have sufficient support in the Senate and House of Representatives, it would increase the likelihood that her administration would move the U.S. tax system into closer alignment with the Organisation of Economic Co-operation and Development’s (OECD) Pillar Two Model Rules.

Below is a breakdown of the U.S. international taxation reforms detailed in the FY 2025 Green Book. We have noted the ones for which Harris or her campaign have specifically indicated her support. For other proposals, we suggest taxpayers contemplate them because Harris has expressed her support generally for the Biden administration’s proposed U.S. international tax reforms.

Revise the global minimum tax regime

The following five proposals are designed to align the global intangible low-taxed income (GILTI) tax regime with the OECD’s Pillar Two Model Rules on global minimum taxation.

1. Eliminate QBAI (qualified business asset investment)

A U.S. shareholder’s GILTI inclusion is generally reduced by 10% of a controlled foreign corporation’s (CFC) QBAI, which is essentially depreciable foreign tangible property, such as buildings and equipment. The rationale behind this elimination is that the QBAI deduction incentivizes U.S. multinationals to locate tangible assets outside the U.S. Notably, Harris’ campaign has explicitly indicated she supports this change.

If enacted, the elimination of QBAI might cause more of a CFC’s income to be classified as GILTI, reducing the amount of untaxed earnings and profits that may allow gain on a disposition of a CFC to be recharacterized as a dividend under section 1248 that is eligible for a 100% section 245A deduction for corporate taxpayers.

2. Reduce the section 250 deduction to 25%

Section 250 currently allows a corporate U.S. shareholder to deduct 50% of its GILTI inclusion, resulting generally in a 10.5% U.S. effective tax rate on GILTI, which is significantly less than the regular 21% U.S. corporate income tax rate.

This deduction is scheduled to reduce to 37.5% in 2026, the rationale being that the deduction incentivizes U.S. multinationals to locate operations outside the U.S. The Biden administration has proposed to reduce the GILTI deduction to 25%, and Harris’ campaign has indicated specifically that she supports it.

If the reduction in the section 250 GILTI deduction were to be enacted along with Harris’ proposal to increase the corporate income tax rate to 28%, the tax rate on GILTI income would generally be 21%. This would bring the U.S. effective tax rate on GILTI into closer alignment with the U.S. tax on domestic income and may reduce the likelihood that the CFC’s income would be subject to a Pillar Two compliant income inclusion rule or undertaxed profits rule.

3. Determine GILTI inclusions and foreign tax credits (FTCs) separately for each foreign jurisdiction

Under current law, a corporate U.S. shareholder generally determines its FTC limitation for GILTI on a global basis. This allows foreign income taxes paid to high-taxed foreign jurisdictions to reduce the residual U.S. tax on GILTI earned in low-taxed foreign jurisdictions. The Biden administration believes this incentivizes U.S. multinationals to shift profits to low-tax jurisdictions. They propose to change to a jurisdiction-by-jurisdiction GILTI calculation.

Changing to a jurisdiction-by-jurisdiction GILTI calculation intends to provide a stronger deterrent for U.S.-parented multinational groups to shift profits offshore to low-taxed jurisdictions because U.S. tax would generally still be due on those low-taxed profits. This change would also align the GILTI calculation more closely to the Pillar Two income inclusion rules (IIRs) that will generally apply to tax foreign-parented groups on their income earned in low-taxed jurisdictions.

The jurisdictional approach would also apply to sandwich structures (in which a foreign-parented group owns a U.S. subsidiary that owns a CFC) by allowing a qualifying Pillar Two IIR paid by the foreign parent on the low-taxed income of the CFC to be creditable against the U.S. subsidiary’s tax on a GILTI inclusion from that CFC. However, it would prohibit cross-crediting of the Pillar Two IIRs paid for income from CFCs operating in different jurisdictions.

If enacted, the country-by-country foreign tax credit calculation for GILTI would make it difficult for companies to reduce U.S. tax on GILTI by crediting foreign taxes imposed on earnings from high tax jurisdictions against the U.S. tax on GILTI income from low tax jurisdictions.

4. Decrease the 20% FTC disallowance on GILTI to 5% and allow GILTI FTCs to be carried forward 10 years.

Certain foreign income taxes paid by a CFC (including a Pillar-Two-qualified domestic minimum top-up tax, or QDMTT) are creditable against a corporate U.S. shareholder’s U.S. tax liability on GILTI. The amount of the credit is currently limited to 80% of the foreign income taxes that are allocable to the GILTI. The Biden administration has proposed to increase the credit limitation on foreign income taxes that are allocable to GILTI to 95%.

Unlike other foreign income taxes allocable to other types of foreign source income, foreign income taxes that are allocable to GILTI cannot be carried forward for use in another tax year if the U.S. shareholder does not have sufficient foreign source income to use the credits in the year the taxes are paid or accrued. The Biden administration has proposed to allow U.S. shareholders to carry forward creditable foreign income taxes allocable to GILTI up to 10 years.

If enacted, the ability to carry over foreign taxes imposed on a CFC’s earnings would be similar regardless of whether the CFC’s earnings are subject to U.S. tax as subpart F or GILTI. However, foreign taxes imposed on GILTI would continue to be subject to a 5% haircut.

5. Eliminate the high tax exception

Under current law, a U.S. shareholder of a CFC is generally allowed to exclude gross income from GILTI and subpart F if the foreign effective tax rate on the gross income exceeds 90% of the U.S. corporate income tax rate. The Biden administration has proposed to repeal the high tax exception for GILTI and subpart F.

Repealing the high tax exception coupled with eliminating QBAI would move the U.S. tax system closer to the worldwide taxation of U.S. parented multinational groups, with double taxation relieved through the foreign tax credit rather than an exemption system.

Restrict dividend received deductions from non-controlled foreign corporations

Section 245A currently allows a U.S. person who owns at least 10% of a foreign corporation (a U.S. shareholder) to claim a 100% dividend received deduction (DRD) for the foreign-sourced portion of a dividend received from the foreign corporation, regardless of whether the foreign corporation is a CFC.

The Biden administration has proposed restricting the section 245A 100% DRD to foreign-sourced dividends paid by CFCs (and certain qualified foreign corporations incorporated in U.S. territorial possessions). U.S. shareholders of non-controlled foreign corporations (which are not located in U.S. territorial possessions) would be limited to a section 245A DRD on foreign-sourced dividends of 50% (or 65% if the U.S. shareholder owns at least 20% of the foreign corporation), which mirrors the DRD allowed on U.S.-sourced dividends under section 245. The DRD would remain unchanged for dividends received from CFCs.

If enacted, U.S. investors with substantial holdings in a foreign corporation that is not a CFC may want to consider restructuring their investment to create a CFC (e.g., by creating a foreign holding company for their shares).

Expand disallowance of deductions allocable to exempt foreign income

Section 265(a)(1) generally disallows a deduction for an amount that is allocable to certain classes of income that are wholly exempt from U.S. tax. It is unclear under current law whether section 265 applies to disallow deductions allocable to foreign dividends that are eligible for a section 245A DRD or GILTI that is eligible for a section 250 deduction. Section 904(b)(4) currently disallows expenses allocable to a section 245A dividend but only for purposes of determining whether a taxpayer has sufficient foreign source income to utilize foreign tax credits.

The Biden administration believes that allowing deductions allocable to such income is providing a tax subsidy for outbound investment. Accordingly, it has proposed to repeal section 904(b)(4) and replace it with rules that would clarify or expand the application of section 265 to disallow deductions allocable to both section 245A dividends and GILTI income.

Expand the definition of an inversion

An inversion transaction is currently defined in section 7874 as including transactions that meet all the following conditions:

1. Substantially all of the assets of a U.S. corporation are acquired by a foreign corporation
2. The former shareholders of the U.S. corporation hold at least 60% of the foreign corporation by reason of the acquisition
3. The foreign corporation and its expanded affiliated group do not conduct substantial business activities in the country in which it was created or organized.

If the former shareholders own 80% or more of the foreign corporation, the foreign corporation is treated as a U.S. corporation for U.S. tax purposes. If the former shareholder ownership is between 60% and 80%, the foreign corporation retains its status as a foreign corporation, but certain types of income recognized by the inverted U.S. company and its affiliates are subject to U.S. tax for 10 years following the transaction.

The Biden administration has proposed to broaden the definition of an inversion transaction by replacing the 80% test with a greater-than-50% test. The proposal also provided that, regardless of the level of shareholder continuity, an inversion transaction occurs if the following three criteria are met:

1. Immediately prior to the acquisition, the fair market value of the U.S. entity is greater than the fair market value of the foreign acquiring corporation.
2. After the acquisition, the expanded affiliated group is primarily managed and controlled in the U.S.
3. The expanded affiliated group does not conduct substantial business activities in the country in which the foreign acquiring corporation is organized.

The proposal would also expand the scope of section 7874 to include the direct or indirect acquisition of substantially all the assets constituting a trade or business of a U.S. corporation or U.S. partnership, or substantially all the U.S. trade or business assets of a foreign corporation or foreign partnership.

If enacted, the expansive scope of the inversion rules could apply to a host of foreign acquisitions of U.S. entities and U.S. business units in which the acquired business continues to be managed and controlled from the U.S. The introduction of a managed and controlled standard and the application of the inversion rules to the purchase of trade or business assets could create substantial uncertainty regarding application of the inversion rules due to the lack of clarity regarding whether an entity is managed and controlled from the U.S. and whether the acquisition of assets represents substantially all the assets of a U.S. trade or business.

Require downward basis adjustments in stock of foreign corporations

The Biden administration has proposed to require a downward basis adjustment in the stock of a foreign corporation by the amount of a section 245A DRD, a section 250 GILTI deduction, and a section 965 transition tax deduction. The basis reduction would apply to shares in a CFC held directly by a U.S. shareholder and other property by reason of which a U.S. shareholder owns stock indirectly in a CFC (e.g., a partnership interest).

Section 961(d) currently requires a reduction in a U.S. shareholder’s basis in the stock of a foreign corporation by the amount of a section 245A deduction to the extent the shareholder would otherwise recognize a loss on the disposition of the shares. If enacted, the proposal would also require a basis reduction for purposes of determining gain on the disposition of the shares and would extend the rules to partnership interests through which the U.S. shareholder holds shares in the foreign corporation.

Expand information reporting for foreign activities

Section 6038 generally requires a U.S. person who controls a foreign business entity to report information regarding that entity.

The Biden administration has proposed to expand the scope of section 6038 to apply to taxable business units (e.g., foreign branches and permanent establishments) and require that the tax year of the business unit be the same as that of its tax owner.

If enacted, the expanded reporting obligations for taxable business units may facilitate the calculation of Pillar-Two-compliant taxes, which generally require the determination of constituent entities’ effective tax rates. Foreign branches and permanent establishments are generally classified as constituent entities under the Pillar Two model rules. Additionally, failure to file Forms 8858 could result in a monetary penalty similar to the Form 5471.

Replace BEAT with an undertaxed profits rule

Section 59A imposes a base erosion and anti-abuse tax (BEAT) on U.S. corporations that meet the following criteria:

• Have gross receipts exceeding an average of $500 million over the prior three years
• Make certain types of base eroding payments to foreign related persons

This tax also affects foreign corporations that earn effectively connected income.

Taxpayers that fall within the scope of the BEAT are essentially subject to a 10% gross basis tax on the tax benefit of the base eroding payments. The rate is scheduled to increase to 12.5% in 2025.

The Biden administration has proposed to repeal BEAT and replace it with an undertaxed profits rule (UTPR) that is consistent with the Pillar Two Model Rules. Notably, Harris has expressed her support for this.

The UTPR would disallow U.S. tax deductions of a U.S. corporation, and foreign corporations with a U.S. branch, by reference to the amount of low-taxed income earned by foreign branches and foreign affiliates that are included in the same financial reporting group, and which is not subject to an income inclusion rule (IIR) in a foreign jurisdiction.

The U.S. tax deductions would be disallowed on a pro rata basis to the extent necessary to collect a hypothetical top-up tax for the financial reporting group to pay a minimum 15% tax in each foreign jurisdiction in which it operates.

To the extent the UTPR expense disallowance exceeds the deductions otherwise allowed, the UTPR disallowance would be carried forward indefinitely to disallow deductions that would otherwise be allowed in subsequent years. The UTPR generally would only apply to foreign-parented multinational groups with global annual revenue in excess of 750 million euros. The proposal includes an exception for groups with operations in five or fewer jurisdictions that have tangible assets of less than $55 million.

The proposal also includes a domestic minimum top-up tax that would apply when the income of a U.S. corporation or U.S. branch is subject to another jurisdiction’s UTPR. The top-up tax would impose a 15% tax on the U.S. profit of the financial reporting group over the group’s income tax paid on that U.S. profit.

If enacted, a Pillar-Two-compliant UTPR may have a narrower application than the current BEAT rules. The proposed UTPR is expected to apply primarily to foreign-parented groups that have low-taxed income that is not subject to a Pillar-Two-compliant income inclusion rule, or IIR.

Additionally, the UTPR would only apply to financial reporting groups with 750 million euros and operations in more than five countries. In contrast, BEAT has a $500 million gross income threshold and does not provide an exclusion for groups with operations that are limited geographically to a few countries.

Repeal FDII and replace it with R&D incentives

Section 250 currently allows a U.S. corporation to take a deduction for a percentage of its foreign-derived intangible income (FDII). A corporation’s FDII is generally the corporation’s income derived from exports reduced by a deemed tangible income return of 10% on the corporation’s tangible business assets.

The Biden administration has proposed to repeal FDII on the basis that it incentivizes U.S. corporations to locate economic activity outside the U.S. to allow the income to qualify as FDII qualifying export income. Notably, the Harris campaign has stated that she agrees with this proposal and would replace FDII with unspecified R&D incentives.

Revise allocation rules for subpart F and GILTI

Under current law, a U.S. shareholder’s pro rata share of subpart F income is based on the percentage of earnings and profits that the U.S. shareholder would receive if the CFC were to distribute all its current year earnings and profits. A U.S. shareholder’s pro rata share of Subpart F is reduced by the portion of the year during which the corporation was not a CFC and by any dividends paid by the CFC to another person during the tax year with respect to the same stock. The reduction in Subpart F for dividends paid to a prior owner of the CFC shares occurs regardless of whether that prior owner was subject to U.S. tax on the dividends (e.g., including where the prior owner was eligible for a 100% section 245A DRD).

The Biden administration’s proposal would require a U.S. shareholder of a CFC that owns shares in a CFC for part of the tax year and does not own the shares on the last day of the tax year, to include in gross income a portion of the foreign corporation’s Subpart F allocable to the portion of the year during which time it held the shares and the foreign corporation was a CFC.

The remaining portion of the Subpart F income would be allocated to U.S. shareholders that own stock in the CFC on the last day of the tax year. Similar revisions would be made to the pro rata share rules for determining a U.S. shareholder’s GILTI inclusion.

If enacted, the revised subpart F allocation rules may increase the cost of acquiring CFC stock by eliminating a tax benefit to a U.S. acquirer. It may also close down a planning technique for cross chain acquisitions and impose additional compliance obligations on the part of a U.S. shareholder disposing of shares in a CFC.

Require a CFC’s tax year to match its majority U.S. shareholder’s tax year

Section 898(c) requires a CFC to use the same tax year as its majority U.S. shareholder but provides an election to use a tax year that ends one month earlier than the majority U.S. shareholder’s tax year.

The Biden administration’s proposal would eliminate the election for a CFC to use a tax year that differs from the tax year of its majority U.S. shareholder.

Limit foreign tax credits from sales of hybrid entities

A corporation that makes a qualified stock purchase of a target corporation is allowed to make an election under section 338 to treat the acquisition as an asset purchase for U.S. tax purposes, which often allows the target corporation to step up the basis in its assets.

Section 338(h)(16) provides that the deemed asset sale is generally ignored in determining the source and character of income for purposes of determining a taxpayer’s foreign tax credit foreign source income limitation. There are currently no comparable rules that apply to a sale of an interest in a hybrid entity (i.e., an entity that is classified as a corporation for foreign tax purposes and as a partnership or disregarded for U.S. tax purposes).

The Biden administration has proposed to apply rules similar to section 338(h)(16) to a disposition of an interest in a hybrid entity.

Restrict interest deduction

Section 163(j) generally limits the U.S. tax deduction for business interest expense to the sum of business interest income, 30% of adjusted taxable income, and floor plan financing interest. Interest expense that is disallowed under section 163(j) may be carried forward. Interest expense may also be disallowed under section 267A, which limits deductibility if the amount is not included in the income of the recipient under foreign law or the recipient receives a deduction with respect to the interest. The timing of a deduction for related party interest payments may also be deferred under section 267(a) until the interest is included in the related-party’s gross income.

The Biden administration has proposed to restrict a financial reporting group’s interest expense if a member of the group has net interest expense for U.S. tax purposes that exceeds the member’s proportionate share of the financial reporting group’s net interest expense. The proposal does not apply to financial service entities.

Modify portfolio interest exclusion

Portfolio interest received by a foreign person is generally exempt from U.S. tax. Portfolio interest is U.S. source interest paid on an obligation that is in registered form that is not effectively connected to a U.S. trade or business.

Interest paid to a 10% shareholder is ineligible for the portfolio interest exemption. Under current law, a 10% shareholder is a person who owns 10% or more of the combined voting power of all classes of stock. Taxpayers are often able to qualify for the portfolio interest exemption by holding less than 10% of the voting power of the debtor while retaining an equity interest that represents 10% or more of the value of the debtor.

The Biden administration has proposed to modify the definition of a 10% shareholder to include persons who own 10% or more of either the voting power or value of all classes of stock in the debtor.

If enacted, the proposal could make it difficult for taxpayers that hold a significant portion of the value of a company to qualify for the portfolio interest exemption. Taxpayers that rely on the current rules, which look only at a shareholder’s voting power in the shares of the debtor to qualify for the portfolio exemption, may need to consider restructuring their investment.

Treat derivative financial instrument payments as U.S. source dividends if related income is ECI from a partnership

A foreign person that invests in a partnership that earns income that is effectively connected with a U.S. trade or business (ECI) is required to file a U.S. tax return and pay tax on the ECI. Gain on the sale of an interest in a partnership that is engaged in a U.S. trade or business may also be ECI and subject to withholding. Foreign persons may take the position that the ECI tax and reporting obligations do not apply when the ECI is earned through a derivative financial instrument rather than through a direct partnership interest.

The Biden administration has proposed to treat a payment made on a derivative financial instrument (including a securities loan or a sale-and-repurchase agreement) as a dividend equivalent to the extent that the related income or gain would have been ECI if the foreign person held the partnership interest directly.

If enacted, income from a derivative financial instrument based on ECI earned by a partnership may be subject to the FDAP (fixed, determinable, annual or periodical) tax in the same way that section 871(m) currently subjects income from derivative financial instruments that are based on U.S. sourced dividends to the FDAP tax.

Expand access to retroactive QEF elections

The passive foreign investment company (PFIC) rules were designed to prevent taxpayers from deferring tax on income from passive investments and converting the character of ordinary income into capital gains.

Unless a U.S. taxpayer makes a qualified electing fund (QEF) or mark-to-market election, excess distributions from a PFIC are subject to the highest marginal tax rate and interest must be paid on tax that was deferred while the income was retained by the PFIC. Gain on the sale of stock in a PFIC is treated as an excess distribution. A QEF election allows a taxpayer to avoid the excess distribution tax regime and makes the income earned by the PFIC taxable as if it had been earned directly by the shareholder regardless of whether it is distributed.

A taxpayer normally may make a QEF election only on a timely filed return unless it reasonably believed the company was not a PFIC. Generally, a taxpayer cannot make a late or retroactive QEF election without going through a special consent procedure, which is difficult to obtain because it requires that the failure to file the election timely was based on advice from a qualified tax professional. Taxpayers that inadvertently did not make a timely QEF election may not be eligible under the special consent procedure.

The Biden administration has proposed to allow taxpayers to make retroactive QEF elections without going through the special consent procedures if it would not prejudice the interests of the government (e.g., provided the QEF election does not apply to closed tax years).

The ability to make retroactive QEF elections is expected to greatly expand the number of taxpayers that will be able to make late QEF elections and avoid the negative tax consequences of holding a PFIC without making a purging election. Such proposal would increase revenue for Treasury as with a QEF election, income is currently included in a U.S. shareholder’s income even if there are no actual distributions or dispositions.

Looking ahead to possible U.S. international tax reforms

Outcomes of the U.S. general election will steer the direction of tax policy in 2025, including proposed U.S. international tax reforms. However, there will be legislative uncertainty even after election outcomes establish the balance of power in the new federal government.

Given the complexity of U.S. international tax laws and the potential for significant changes, businesses that work with their tax advisors to model various scenarios can equip themselves to understand how reforms could affect their tax profiles and overall business strategies. Being proactive can help taxpayers make smart, timely decisions if legislative changes are enacted.