Here's a summary of the new tax provisions in the Build Back Better Act proposed by the Senate Finance Committee, as compared to the version that the House passed on November 19, 2021.
On December 11, 2021, the Senate Finance Committee released its draft tax language for the Build Back Better Act (the BBBA).
The Senate Finance Committee’s version of the tax provisions of the BBBA (discussed here) is substantively similar to the version that the House passed on November 19, 2021 (discussed here), except as follows:
- No increase of SALT deduction limitation. The Tax Cuts and Jobs Act of 2017 capped the deductibility of personal state and local taxes against a taxpayer’s federal tax liability at $10,000 through 2025. The House version of the BBBA would have increased the deduction to $80,000 for tax years beginning after 2020. The Senate version only contains a placeholder for a compromise SALT provision, should one be reached.
- Expand the inversion rules. Under the current anti-inversion regime, when a foreign corporation acquires a domestic corporation or partnership, the domestic corporation or partnership is subject to certain adverse tax consequences when its former equity owners own 60% or more of the foreign acquiring corporation. When such former equity owners own 80% or more, the foreign acquiring corporation is treated as a domestic corporation for U.S. federal income tax purposes. The Senate version of the BBBA would expand the scope of the anti-inversion rules to apply to an acquisition of a U.S. business of a foreign partnership, and would lower the ownership thresholds to more than 50% and at least 65%, respectively. The provision applies to taxable years ending after December 31, 2021 and any transaction completed after the date of enactment would be subject to revised thresholds. The House version of the BBBA contained no similar provision.
If enacted, this provision could have a significant effect on the cost, structure, and viability of cross-border M&A transactions.
- Limit the participation exemption. Section 245A (enacted by the TCJA) exempts U.S. corporations from tax on dividends paid by certain 10%-owned foreign corporations, even when the foreign corporations are not CFCs so that their earnings are not subject to current U.S. taxation under the subpart F and GILTI regimes. Both the House and Senate versions of the BBBA would limit the 100% exemption to dividends paid by CFCs and U.S. corporations would be allowed to elect to treat certain foreign corporations as CFCs. The Senate version would allow a 50% credit for 10%-owned foreign corporations that are not CFCs. Both the House and Senate versions of the proposal would apply to tax years beginning after the date of enactment.
- Limit deductions for disproportionate U.S. leverage. Under section 163(j) (enacted by the TCJA), U.S. corporations generally are allowed a deduction for business interest expense only to the extent that it exceeds their business interest income plus 30% of EBITDA (or EBIT, beginning after 2021). The House version of the BBBA would further limit interest deductions of U.S. members of multinational groups that prepare consolidated financial statements if their net interest expense for financial reporting purposes exceeds 110% of their proportionate share of the net interest expense reported on those financial statements (determined based on their share of the group’s EBITDA). The Senate version of the BBBA contains similar provisions but would also allow corporations to elect to use aggregate adjusted bases of the group’s assets rather than EBITDA for calculating their share of reported net interest expense.
The proposal would be effective for tax years beginning after 2022, and would apply only to U.S. corporations whose average annual net interest expense (determined on a three-year rolling basis and taking into account all U.S. corporations in the group) exceeds $12 million. Interest expense disallowed under either section 163(j) or new section 163(n) could be carried forward.
