Ways & Means Bill Lobbyist Change-Less Subpart F More Profit Shifting

Abstract

This is a letter to the editor of Tax Notes Federal that highlights some changes to subsections (d) and (e) of section 954. These are the definitional rules for what is foreign base company sales income and foreign base company services income.

I see this as something that was likely drafted by a disingenuous lobbyist to fall under the radar so that no one would notice it. It significantly reduces what would be subpart F income under current law. This reduction comes from two things. First, a new limitation greatly reduces the transactions that will cause FBCSI and FBCSvcI. Second, the change completely eliminates the FBCSI "branch rule" from the law, something that goes completely unmentioned in both the W-M and JCT section-by-section summaries.

Not only does the change in the law look really innocuous, but this major revenue loser shows up in the JCT estimated revenue figures as a revenue gainer since it is mixed in with other items included in the same section of the draft bill.

This is a major revenue loser because each dollar that is transformed from subpart F income to GILTI will be taxed at the significantly lower GILTI tax rate. Further, some of this income could be covered by the QBAI exemption that would continue under the Ways & Means bill. Any such income would be free of any U.S. tax and could be repatriated under the section 245A dividend received deduction.

This is clearly something that should be eliminated from the bill before it gets enacted.

Keywords: Tax Reform, Subpart F, International Tax, Lobbying, Branch Rule, Foreign Base Company Sales Income, FBCSI, Foreign Base Company Services Income, FBCSvcI

JEL Classification: H21, H25, K34, E62