Issues in International Corporate Taxation: The 2017 Revision (P.L. 115-97)




Issues in International Corporate Taxation:
The 2017 Revision (P.L. 115-97)

Updated October 13, 2021
Congressional Research Service
https://crsreports.congress.gov
R45186




Issues in International Corporate Taxation: The 2017 Revision (P.L. 115-97)

Summary
One of the major motivations for the 2017 tax revision (P.L. 115-97) was concern about the
international tax system. Issues associated with these rules involved the al ocation of investment
between the United States and other countries, the loss of revenue due to the artificial shifting of
profit out of the United States by multinational firms (both U.S. and foreign), the penalties for
repatriating income earned by foreign subsidiaries that led to the accumulation of deferred
earnings abroad, and inversions (U.S. firms shifting their headquarters to other countries for tax
reasons). In addition to lowering the corporate tax rate from 35% to 21% and providing some
other benefits for domestic investment (such as temporary expensing of equipment), the 2017 tax
bil also substantial y changed the international tax regime.
The tax change moved the system from a nominal worldwide tax on al foreign-source income,
with a credit against U.S. tax for foreign taxes due, to a nominal territorial system that does not
tax foreign-source income. Nevertheless, both systems could be considered a hybrid of a
worldwide and territorial system. Prior law reduced the tax on foreign-source income by al owing
deferral (taxing income of foreign subsidiaries only if it was repatriated, or paid as a dividend to
the U.S. parent) and cross-crediting of foreign taxes (so the credit for high taxes paid in one
country could offset U.S. tax on income from a low-tax country). The new system exempts
dividends, but also imposes a current worldwide tax on global intangible low-taxed income
(GILTI), but at a lower rate. It also introduces a corresponding lower rate on intangible income
derived from abroad from assets in the United States (foreign-derived intangible income, or
FDII). The new law adds the base erosion and anti-abuse tax (BEAT) to existing anti-abuse
measures aimed at artificial profit shifting. BEAT imposes a minimum tax on ordinary income
plus certain payments to related foreign companies.
Despite the lower corporate tax rate, it is not clear that capital wil be shifted into the United
States from abroad; although a lower rate reduces the tax rate on equity-financed investments, it
decreases the subsidy to debt-financed investments. Whether the capital stock increases or
decreases depends on the magnitude of the tax changes (which appear largely offsetting) and the
international mobility of debt versus equity. It is also not clear whether the capital stock wil be
al ocated more efficiently or in a way more optimal for U.S. welfare, although economic theory
suggests that reducing the tax subsidy for debt is a clear improvement.
Although a territorial tax may make profit shifting more attractive, overal , given other elements
of the new system, it appears to make profit shifting less important. GILTI and FDII bring the tax
treatment of income from intangibles in the United States and abroad closer together, and BEAT
and stricter thin capitalization rules (rules limiting interest deductions) also limit profit shifting,
including shifting through leveraging.
The new system ends the penalties (except for portfolio investment in foreign firms) for
repatriating earnings and thus eliminates the prior incentives to retain earnings abroad. A series of
measures aimed at inversions appears to make inversions much less attractive.
Some of the measures may violate international agreements, such as the World Trade
Organization (WTO), bilateral tax treaties, and Organisation for Economic Co-operation and
Development (OECD) minimum standards, to prevent harmful tax practices.
A number of concerns exist about design features in the new regime, including the dividend
deduction, GILTI, FDII, BEAT, and other features. President Biden has proposed a number of
revisions, and bil s introduced in the 117th Congress have proposed significant changes. The Ways
and Means Committee has released recommendations for the Build Back Better Act that include
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Issues in International Corporate Taxation: The 2017 Revision (P.L. 115-97)

many of these provisions. There has also been some controversy over certain regulatory decisions
implementing the regime.
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Contents
International Tax Treatment Under Prior and New Law ......................................................... 1
Territorial or Worldwide: Basic Rules ........................................................................... 1
Prior Law: Deferral and the Foreign Tax Credit......................................................... 2
New Law: Dividend Exemption, GILTI, and FDII ..................................................... 4
Allocation and Anti-Abuse Rules ................................................................................. 6
Prior Law: Subpart F; Transfer Pricing; Interest Deductions and Thin
Capitalization Rules ........................................................................................... 6
New Law: BEAT, Modifications to Subpart F, Transfer Pricing Changes, Stricter
Thin Capitalization Rules.................................................................................... 8
Tax Treaties ............................................................................................................ 10
Repatriation Rules ................................................................................................... 11
Prior Law: Voluntary Repatriation......................................................................... 11
New Law: Deemed Repatriation ........................................................................... 11

Anti-Inversion Rules ................................................................................................ 11
Prior Law: Section 7874 ...................................................................................... 11
New Law: Additional Restrictions on Inversions ..................................................... 12
Interaction of Interest Restrictions, GILTI, FDII, BEAT, Repatriation Taxes, and Net
Operating Losses .................................................................................................. 14
Net Operating Losses .......................................................................................... 14
Interactions with International Provisions............................................................... 14

Issues in Prior Law and Implications for New Law............................................................. 16
The Location of Investment in the United States and Other Countries .............................. 16
U.S. Tax Rates Compared to Other Countries Before the Revision ............................. 16
Changes in Marginal Effective Tax Rates ............................................................... 19
Other Provisions Affecting Location of Investment.................................................. 24
Effects on the Location of Investment.................................................................... 26
Effects on Efficiency and Optimality ..................................................................... 27
A Note on Cash Flow, Employee Bonuses, Investment, and Stock Buybacks ............... 28
Profit Shifting ......................................................................................................... 29
Repatriation ............................................................................................................ 31
Inversions............................................................................................................... 32
Issues With International Agreements: Tax Treaties, WTO, and OECD Minimum
Standards ............................................................................................................. 33
Current Agreements ............................................................................................ 33
The New Law: Issues with Tax Treaties, WTO, and the OECD BEPS Agreement......... 34
Concerns and Options in the New Tax Framework ............................................................. 34
Legislative Proposals in the 117th Congress.................................................................. 35
Biden Proposal................................................................................................... 35
S. 714 and H.R. 1785 .......................................................................................... 36
S. 725 and H.R. 1786 .......................................................................................... 36
S. 991 ............................................................................................................... 37
S. 1501 and H.R. 2976 ........................................................................................ 37
Proposal by Senators Wyden, Brown, and Warner ................................................... 37
Provisions in the House Ways and Means Build Back Better Proposal ........................ 38
General Issues in the Move to a Territorial Tax and the Dividend Deduction ..................... 39
GILTI .................................................................................................................... 40
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Options for Revision ........................................................................................... 43
FDII ...................................................................................................................... 43
Options for Revision ........................................................................................... 44
BEAT .................................................................................................................... 45
Options for Revision ........................................................................................... 48
Thin Capitalization .................................................................................................. 48
Options for Revision ........................................................................................... 49
Deemed Repatriation Tax.......................................................................................... 49
Options for Revision ........................................................................................... 50
Anti-Inversion Rules ................................................................................................ 51
Options for Revision ........................................................................................... 51

Tables
Table 1. Marginal Effective Tax Rates for Equity-Financed Investment ................................. 20
Table 2. Marginal Effective Tax Rates for Debt-Financed Investment .................................... 22
Table 3. Marginal Effective Tax Rates for Debt- and Equity-Financed Investment,
36% Debt Share ......................................................................................................... 23
Table 4. Marginal Effective Tax Rates for Debt- and Equity-Financed Investment,
32% Debt Share ......................................................................................................... 24
Table 5. Marginal Effective Tax Rates for Debt- and Equity-Financed Investment, 32%
Debt Share, 20% of Interest Disal owed Under New Law ................................................. 25

Contacts
Author Information ....................................................................................................... 52

Congressional Research Service

Issues in International Corporate Taxation: The 2017 Revision (P.L. 115-97)

ne of the major motivations for the 2017 tax revision was concern about the international
tax system. Issues associated with these rules involved the al ocation of investment
O between the United States and other countries, the loss of revenue due to the artificial
shifting of profit out of the United States by multinational firms (both U.S. and foreign), the
penalties for repatriating income earned by foreign subsidiaries that led to the accumulation of
deferred earnings abroad, and inversions (U.S. firms shifting their headquarters to other countries
for tax reasons). In addition to changes in a variety of rules determining the degree to which
foreign income of U.S. persons is subject to U.S. tax, the tax change lowered the corporate tax
rate from 35% to 21%. It also made some changes, both temporary and permanent, in the
treatment of investments in the United States that could affect international al ocation of capital.
Both the rate changes and the changes in international rules have significant implications for the
concerns that had arisen due to international tax rules and tax rates.
This report begins by explaining prior international tax rules and the revisions made in the new
law. The second part of the report discusses the four major issues of concern under prior law—
al ocation of investment, profit shifting, repatriation, and inversions—and how the new law
addresses these concerns, or raises new ones. That section also discusses issues associated with
international agreements. The final section summarizes commentary about problems and issues,
including legal chal enges and uncertainty, as wel as new regulations, within the new
international tax regime and options that have been suggested. That section discusses legislative
proposals made by President Biden as wel as bil s introduced in Congress. It also discusses some
of the more detailed rules. The Congressional Budget Office has recently projected a larger loss in
corporate revenues from the 2017 tax revision due, in part, to regulatory decisions.1
International Tax Treatment Under Prior
and New Law
The description of international tax law is divided into a section on basic rules, a section on
al ocation and anti-abuse rules, a section on tax treaties, a section on the new deemed repatriation
rules, and a section on anti-inversion rules.2
Territorial or Worldwide: Basic Rules
Under a territorial or source-based tax, al income earned within a country is taxed only by that
country, regardless of the nationality of the firms. Alternatively, under a worldwide or residence-
based system, a tax would also be imposed on foreign-source income of domestic firms and a
credit al owed for foreign taxes paid. For purposes of the corporate profits tax, most countries
have a territorial system (although most have some type of anti-abuse rules, as discussed below in
reference to the U.S. Subpart F rules).3 With either regime, countries tax profits earned within
their borders whether earned by a domestic or a foreign firm.

1 Congressional Budget Office, T he Budget and Economic Outlook: 2020 -2030, January 2020, pp. 73-74,
https://www.cbo.gov/system/files/2020-01/56020-CBO-Outlook.pdf.
2 A few minor international provisions of the new law are not discussed in this section. For a comparison of all the
provisions of the new law with prior law, international and others, see CRS Report R45092, The 2017 Tax Revision
(P.L. 115-97): Com parison to 2017 Tax Law
, coordinated by Molly F. Sherlock and Donald J. Marples.
3 Prior international tax rules are discussed in more detail in CRS Report RL34115, Reform of U.S. International
Taxation: Alternatives
, by Jane G. Gravelle; and CRS Report R42624, Moving to a Territorial Incom e Tax: Options
and Challenges
, by Jane G. Gravelle.
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Issues in International Corporate Taxation: The 2017 Revision (P.L. 115-97)

Prior Law : Deferral and the Foreign Tax Credit
The prior U.S. tax system was a hybrid. It had some elements of a residence-based or worldwide
tax, in which income of a U.S. firm is taxed regardless of its location, and some elements of a
source-based or territorial tax. Income earned in the United States was taxed whether earned by a
U.S. firm or a foreign firm. The provisions that introduced territorial features into a system that
was nominal y a worldwide system were deferral of income of foreign subsidiaries and cross-
crediting of foreign taxes.
Glossary of Selected Terms
Base Erosion and Anti-Abuse Tax (BEAT): A minimum tax that applies a lower rate to an expanded base,
including certain payments to foreign related firms.
Controlled Foreign Corporation (CFC): A foreign corporation with more than 50% of the shares owned by
U.S. shareholders owning 10% of more of the shares. Ownership is by value or voting power.
Expanded Affiliated Group (EAG): A group that includes a common parent with 50% ownership of the
related firms. This group, which relates to inverted firms, is defined more broadly than affiliated group, where
firms are linked by at least 80% ownership.
Earnings Before Interest and Taxes (EBIT): Earnings used as the permanent measure of income for
restrictions on interest deductions under thin capitalization rules.
Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA): Earnings used as the
temporary measure of income for restrictions on interest deductions under thin capitalization rules.
Foreign Derived Intangible Income (FDII): A formulary measure of income earned by domestic firms from
the use of intangible assets abroad and eligible for lower tax rates.
Global Intangible Low-Taxed Income (GILTI): A measure of income earned by control ed foreign
corporations with exclusion for returns on tangible assets, and subject to current U.S. taxes, at a lower rate.
Subpart F: Also cal ed CFC rules, provisions of the tax code that tax on a current basis certain easily shifted
foreign-source income of control ed foreign corporations.
Surrogate Foreign Corporation: A term related to the movement of headquarters abroad in an inversion, and
refers to the new foreign parent, where the former U.S. shareholders own at least 60% of the shares but not 80%
or more. A surrogate foreign corporation is not subject to U.S. tax, whereas a firm where the former U.S.
shareholders own 80% or more is treated as a U.S. corporation.
Deferral
Deferral al owed a firm to delay taxation of its earnings in foreign-incorporated subsidiaries until
the income was paid as a dividend to the U.S. parent company. Some income, however, was taxed
currently. Income that was not part of corporate profits, such as royalties and interest payments,
and income earned by foreign branches of U.S. firms was taxed currently. In addition, certain
easily shifted income, cal ed Subpart F income, was included in income and taxed currently.
Under prior and current law, firms can take deductions for expenses (overhead, interest, research)
incurred by the U.S. parent that are properly al ocated to foreign-source income whether that
income is earned directly or through a foreign subsidiary and whether the income is deferred from
U.S. tax because it is earned through a foreign subsidiary. An al ocation of these expenses for
purposes of the foreign tax credit limit is discussed below. As long as income is deferred,
al owing deductions against U.S. income provides not a zero tax but a subsidy, with the
magnitude of that subsidy depending on the foreign taxes paid.
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The role that the al ocation of expense could play in past and current foreign tax rules is shown
through some effective tax rate calculations in a recent Tax Notes article.4 U.S. effective tax rates
on foreign-source income were estimated at 2.3% under prior law, in 2004.
Branch income is taxed in the year it is earned.
Foreign Tax Credits
The U.S. tax system al owed a credit against U.S. tax due on foreign-source income subject to tax
for foreign income taxes paid. A foreign tax credit is designed to prevent double taxation of
income earned by foreign subsidiaries of U.S. corporations. Thus, firms were not levied a
combined U.S. and foreign tax in excess of the greater of the foreign tax or U.S. tax due if the
income was earned in the United States. If the foreign tax credit had no limit, a worldwide system
with current taxation and a foreign tax credit would produce the same result, for firms, as a
residence-based tax. The tax effectively applicable would be the tax of the country of residence.
Firms in countries with a higher rate than the U.S. rate would receive a refund for the excess tax,
and firms in countries with a lower rate than the U.S. rate would pay the difference. However, to
protect the nation’s revenues from excessively high foreign taxes, the credit is limited to the U.S.
tax due.
Cross-Crediting
Cross-crediting occurs when credits for taxes paid to one country that are in excess of the U.S. tax
due on income from that country can be used to offset U.S. tax due on income earned in a second
country that imposes little or no tax. If the limit were applied on a country-by-country basis, a
firm would pay the maximum of the U.S. tax or the foreign tax in each country.
Cross-crediting al ows income subject to a low tax to have its U.S. income tax offset by credits on
highly taxed income. For this reason, foreign tax credit limits were applied to different categories
of income, or baskets. The main baskets were passive and active baskets. Notably, however,
royalties on active business operations were classified in the active basket, and because they were
typical y deducted in the country of source, they could benefit from excess credits against U.S.
tax from foreign taxes on other active income. There were also restrictions on the use of excess
credits generated from oil and gas extraction, which is often subject to relatively high foreign tax
rates.
The combination of deferral, which al owed firms to choose the income to be subject to tax, and
cross-crediting meant that multinational firms on average had relatively little U.S. tax; the
effective U.S. residual tax was estimated at 3.3%.5
Sourcing Rules and the Foreign Tax Credit Limit
Because of the foreign tax credit limit, whether income is considered to be foreign-source income
affects the tax liability of firms with excess credits: the greater the share of total income that is
considered foreign-source income, the greater the ability to take foreign tax credits. Foreign-
source income is also affected by deductions. Some deductions can be specifical y attributed to
foreign- or domestic-source income, but some general expenses incurred by the U.S. parent, such

4 Patrick Driessen, “GILT I’s Effective Minimum T ax Rate is Zero or Lower,” Tax Notes, August 5, 2019, pp. 889-895.
5 See Melissa Costa and Jennifer Gravelle, “T axing Multinational Corporations: Average T ax Rates,” Tax Law Review,
vol. 65, issue 3 (spring 2012), pp. 391-414. See also Melissa Costa and Jennifer Gravelle, “ U.S. Multinationals
Business Activity: Effective T ax Rates and Location Decisions,” Proceedings of the National T ax Association 103 rd
Conference, 2010, at http://www.ntanet.org/images/stories/pdf/proceedings/10/13.pdf.
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as interest and research and development costs, are al ocated between U.S. and foreign income
based on the relative size of foreign and domestic assets. After December 31, 2020, interest paid
by foreign subsidiaries is to be al ocated in the same way; that expansion to include worldwide
rather than just U.S. interest would al ocate some foreign interest deductions to the United States
and reduce foreign deductions, increasing the size of foreign-source income for the foreign tax
credit limit.
Prior law al owed half of income from goods manufactured in the United States and sold abroad
to be sourced to the country where the transfer takes place (the title passage rule). Since arranging
a foreign transfer location for exports is relatively easy, this rule makes half of export income
eligible for foreign tax credit offsets for firms with excess credits. In addition, as noted earlier,
royalties paid in association with active business operations abroad were considered foreign-
source income for purposes of the foreign tax credit limit, effectively shielding them from tax
(since they are typical y deductible as costs under foreign rules) for firms in excess credit
positions.
New Law : Dividend Exemption, GILTI, and FDII
Perhaps the hal mark of the new law is that it virtual y ends deferral. The system nevertheless
remains a hybrid, albeit a different one, of worldwide and territorial approaches. The new law
moves toward a territorial system with respect to its treatment of certain profits of tangible
investments, such as plant and equipment. With respect to other income (primarily income from
intangible assets) the system moves toward a current inclusion in income but at a lower rate, a
minimum worldwide tax. It also maintains most of the existing treatment of included income
(interest, royalties, rents, branch income, and Subpart F). Deferral of income and taxation at
repatriation is retained only for portfolio investments (less than 10% U.S. ownership) in foreign
firms. It also creates two new foreign tax credit baskets: a GILTI basket and a separate basket for
active branch income.
Dividend Deduction
A 100% deduction for dividends is available for U.S. firms owning at least 10% of the foreign
firm. No foreign tax credit is al owed, and the income is general y not subject to tax.
Global Intangible Low-Taxed Income
The new law, however, taxes, at a reduced rate, income of foreign subsidiaries (controlled foreign
corporations, or CFCs) in excess of a deduction for 10% of tangible assets minus interest costs.6
Subpart F income is excluded along with certain other income (foreign oil and gas income,
related party dividends, and income effectively connected to the United States). GILTI is included
in currently taxed income, but a 50% deduction for this income is al owed for taxable years
beginning after December 31, 2017, and through tax years beginning before January 1, 2025,
resulting in a 10.5% rate at the new 21% corporate tax rate. For taxable years beginning after
December 31, 2025, the deduction is to be reduced to 37.5%, resulting in a higher rate of
13.125%.
Foreign tax credits are al owed for 80% of foreign taxes paid. As a result, a residual U.S. tax is
collected when foreign tax rates are below 13.125% in the initial years (0.105/0.80), and

6 T angible assets are measured at cost minus depreciation, with depreciation reflecting an alternative depreciation
system with rules providing longer lives than that applied to domestic assets and determined at a straight line rate that is
slower than depreciation of domestic assets.
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subsequently 16.406% (0.13125/0.80). GILTI is in a separate foreign tax credit basket. The rules
for al ocating income for purposes of the foreign tax credit limit continue, and if those rules
produce a foreign-source taxable income smal er than that measured for purposes of the foreign
tax, GILTI applies at rates lower than 13.125% (or 16.406%). These rates correspond with the
FDII rates (discussed below). The residual U.S. tax in the early years begins at 10.5% when
foreign taxes are zero and decline to 0% when foreign taxes are 13.125% (in the later years
13.125% and 16.406%, respectively).
GILTI does not apply in countries where the tax rate is 90% or more of the U.S. tax rate (referred
to as the high-tax kickout rule). Regulations applied this high-tax kickout rate to GILTI, although
there is some dispute as to whether this rule is consistent with the tax code.7
Foreign-Derived Intangible Income
The new law also al ows a deduction aimed at providing a lower tax rate on intangible income
produced in the United States but derived from abroad. FDII is based on a formulary measure of
domestic intangible income (deemed intangible income), which is then multiplied by the
estimated share of this income that is derived from foreign sales and use. Deemed intangible
income is defined as deduction-eligible income in excess of 10% of tangible depreciable assets.
Deduction-eligible income, in turn, is gross income minus excepted income minus deductions
(including taxes) al ocable to this income. Excepted income subtracted out is general y foreign-
source income (Subpart F income, GILTI, dividends from CFCs, foreign branch income) as wel
as active financial services income, and domestic oil and gas extraction income. The purpose of
al of these deductions is to estimate a reasonable measure of intangible domestic source income.
To determine the share of this deemed intangible income that is eligible for the deduction, it is
multiplied by the ratio of foreign-derived deduction-eligible income over total deduction-eligible
income. Foreign-derived deduction-eligible income is aimed at measuring income from the export
of goods and services; it includes any deduction-eligible income that is from the sale of property
for foreign use and the provision of services used abroad, including leases and licenses (and
therefore royalties, both those in the active foreign tax credit basket and those from unrelated
firms).
FDII is eligible for a deduction of 37.5% for taxable years beginning after December 31, 2017,
and through taxable years beginning before January 1, 2025, resulting in a 13.125% rate (the 21%
corporate tax rate multiplied by (1-0.375)). For taxable years beginning after December 31, 2025,
the deduction declines to 21.875%, resulting in a rate of 16.406% (21% multiplied by (1-
0.21875)).
Taxable Income Limitation
The deduction for FDII and GILTI is limited if the sum of these amounts exceeds taxable income
excluding GILTI. The excess is not al owed as a deduction and is apportioned between GILTI and
FDII according to their shares of the total amount of GILTI and FDII.
Foreign Tax Credit Revisions
Several revisions are made in the foreign tax credit system. The taxes paid on dividends are no
longer al owed as credits. In addition to a separate basket for GILTI, there is also a separate

7 See Stephen Shay, “A GIlT I High-T ax Exclusion Would Erode the U.S. T ax Base,” Tax Notes Federal, November
18, 2018, pp. 1129-1146.
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foreign tax credit basket for branch income. As a result, foreign royalties associated with an
active business is no longer sheltered by excess credits, although these royalties now benefit from
the deduction for foreign-derived intangible income. The new law also eliminates the ability to
shield exports with excess credits by repealing the title passage rule and sourcing exports where
they are produced (which also increases the deduction for foreign-derived intangible income).
The revision also requires assets to be valued on an adjusted tax basis (rather than a choice of fair
market value or adjusted tax basis) for determining sourcing for the foreign tax credit limit.8
Allocation and Anti-Abuse Rules
In either type of system, territorial or worldwide with deferral, where taxes are paid and how
much is determined by the al ocation of income of multinational firms between different
countries. The first right of taxation goes to the source country, regardless of whether the
residence country has a territorial tax or a worldwide tax with a foreign tax credit.
Nexus is the first step in the process of determining whether a country has the right to tax any of a
firm’s profits. A U.S. firm that exports abroad, without taking part in an activity within the
country it is exporting to, is not subject to profits taxes by that country. To establish the right to
tax, a firm has to have nexus, or connection, with the country, which requires a permanent
establishment. A permanent establishment is general y viewed as having a physical presence,
which means that some assets are in the country (and a profits tax is a tax on the return to assets).
A firm that manufactures abroad or has retail stores abroad has a physical presence, but other
circumstances with a minimal presence are less clear. If nexus is established, then the amount of
income sourced in that country must be determined. In the U.S. tax law, this establishment of a
presence is termed effectively connected income and general y must require a physical presence or
be derived from assets that are used in the United States. Tax treaties (discussed below) also
contain provisions on permanent establishment.
Once the right to tax has been established, the al ocation of income in each country must be
determined. Although income can be al ocated in a straightforward way for transactions between
unrelated firms, related firms can potential y manipulate the location of profits by shifting the
location of passive income, by setting the price of transactions between them to shift earnings
(transfer prices), and to locate deductions, such as interest, in high-tax countries. The more
income a firm can assign, for tax purposes, to a foreign subsidiary in a low -tax country, the lower
its overal tax burden, since taxes in the residence country can be deferred on income or shielded
by cross-crediting. The overal al ocation of foreign-source income also affects the limit on the
foreign tax credit.
Prior Law: Subpart F; Transfer Pricing; Interest Deductions and Thin
Capitalization Rules

Subpart F
Like many other countries, the United States has anti-abuse rules to tax income that is relatively
easily shifted on a current basis. The primary anti-abuse rule deals with CFCs. CFC rules are also
commonly referred to as Subpart F rules, after the section of the tax code containing the rules.
The rules applied to foreign firms in which U.S. shareholders that each own 10% of the voting

8 T he adjusted tax basis is original cost reduced by depreciation deductions and increased by capital additions.
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power together own at least 50% of the voting power or value. Many CFCs are wholly owned by
a single U.S. parent.
There are other anti-deferral rules, most importantly rules relating to passive foreign investment
companies (PFICs) that are not CFCs and whose income is primarily passive.
The principal category of income taxed under Subpart F is cal ed foreign base company income,
and includes passive income (such as dividends, interest, rents, and royalties) received by a
subsidiary and certain income from business operations. Income from business operations
includes foreign base company income of sales and services subsidiaries in foreign countries
where the production and consumption of those goods and services take place in other countries,
and foreign oil-related income (income derived from processing, transporting, or sel ing oil and
gas). In addition to foreign base company income, Subpart F includes income from insurance of
risks outside the country (or within the country if receiving the same premiums).
Income invested in U.S. property (including lending to the parent) was taxed currently (to prevent
a way to repatriate without paying dividends). There are de minimis exclusions (for smal
amounts or shares or tax rates more than 90% of the U.S. rates) and full inclusion rules (when
Subpart F income is more than 70% of total income). A firm is not classified as a CFC unless
stock has been held for 30 days.
Since the late 1990s, the scope of Subpart F has been reduced by the adoption of check-the-box
rules. Check-the-box was a regulatory provision, but it has been codified and extended through
the temporary look-through rules, set to expire after 2025. The provision al ows a foreign
subsidiary of a U.S. parent to elect to disregard its own (second-tier) subsidiary, incorporated in a
different country, as a separate entity. If the second-tier subsidiary borrows from the first-tier
subsidiary, it can deduct the interest in the country of incorporation; normal y, the payment of
interest would be considered Subpart F income and taxed currently. Under check-the-box, the
payment is not recognized because there is no separate second-tier entity. If the first-tier
subsidiary is in a no-tax jurisdiction, the interest is deducted, but not taxed currently. This type of
arrangement creates what is referred to as a hybrid entity, one characterized differently in
different jurisdictions.
Subpart F does not apply in countries where the tax rate is 90% of the U.S. rate. Payments
between related firms are not included in Subpart F if the two firms are in the same country.
Transfer Pricing
The current system general y requires firms to set hypothetical transfer prices, which are required
to approximate the prices two firms would agree on if they conducted their transactions with
unrelated parties (arm’s length). These prices can be difficult to determine. When there are
comparable transactions between unrelated parties that can be observed, establishing an arm’s-
length price is relatively straightforward. For many transactions, especial y those associated with
intangible assets or licenses for the right to use intangible assets (such as inventions, formulas,
and trademarks), the intangible asset may be unique, and transfer prices are more difficult to
establish.
Interest Deductions and Thin Capitalization Rules
One method of shifting profits is to claim interest deductions in the high-tax country. Although
there was an al ocation to foreign sources of interest for purposes of the limit on the foreign tax
credit, there is not one to al ocate interest between U.S. firms and related firms incorporated in
other countries, whether subsidiaries to a U.S. parent or a subsidiary of a foreign parent.
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There was a rule that limited the total amount of related party interest a firm can deduct, applying
to al firms, sometimes referred to as Section 163(j) rules, or thin capitalization rules. The
deduction for net interest was limited to 50% of adjusted taxable income (income before taxes,
interest deductions, and depreciation, amortization or depletion deductions) for firms with a debt-
to-equity ratio above 1.5. (This measure of income is referred to as EBITDA, for earnings before
interest, taxes, depreciation, and amortization.) Interest paid above the limitation may be carried
forward indefinitely. Most firms would not be constrained by a restriction, especial y in light of
the safe-harbor debt equity ratio (which would lead to a debt share of 60%). In addition, by
al owing a fairly high limit to interest deductions and making it a percentage of inc ome before
deductions for depreciation, most firms with significant amounts of tangible property would be
unlikely to be affected by this restriction even if the safe harbor did not apply.
New Law: BEAT, Modifications to Subpart F, Transfer Pricing Changes,
Stricter Thin Capitalization Rules

Base Erosion and Anti-Abuse Tax
The new law introduces a general anti-abuse provision whose focus is primarily on U.S.
subsidiaries of foreign parents, although it applies in general to related parties (although as noted
below, it may also affect U.S. multinationals with foreign-source income from higher-tax
locations). Unlike Subpart F or the new GILTI provision, BEAT is not aimed at including income
but at taxing deductions. BEAT imposes a minimum tax equal to 10% of the sum of taxable
income and base erosion payments on corporations with average annual gross receipts of at least
$500 mil ion over the past three tax years and with deductions attributable to outbound payments
exceeding 3% of overal deductions. The rate is 5% in 2018 and 12.5% for taxable years
beginning after December 31, 2025. (Applicable taxpayers that are members of an affiliated
group that includes a bank or registered securities dealer under Section 15(a) of the Securities
Exchange Act of 1934 are subject to an additional increase of one percentage point in the tax
rates, and the tax applies when base erosion payments exceed 2% of deductions.)
Base erosion payments include payments to related foreign parties, including those that would
result in a deduction under Chapter 1 of the Internal Revenue Code (such as interest, rents,
royalties, and services), the purchase of depreciable or amortizable property, certain reinsurance
payments, and payments to inverted firms or foreign persons that are a member of an affiliated
firm that includes the inverted firm that became inverted after November 9, 2017 (but not firms
that continue to be treated as U.S. firms). Cost of goods sold would not be included, and cost of
services would not be included if determined under the services cost method under the transfer
pricing rules in Section 482.9 Disal owed interest under the thin capitalization rules, which are
tightened (as discussed below), would be first al ocated to unrelated parties. Base erosion
payments are reduced to the extent that withholding taxes are applied.10
A related person is a person who owns 25% of the taxpayer or another entity controlled by the
same interests. The constructive ownership rules treat a taxpayer owning 10% of a firm as
controlling 100% of the firm. (In other provisions of the code a taxpayer must have a 50%
ownership to be considered as controlling 100% of the firm.)

9 T here is some uncertainty about whether services with a markup or that cannot use the services cost method would
include the whole payment for services or just the markup. See discussion in the final section summarizing commentary
on the new rules.
10 Withholding taxes are applied to dividends, some interest, and royalties, but are often reduced to very low rates by
tax treaties.
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Because BEAT is effectively a lower tax rate on a broader base, it wil not apply to al taxpayers
who have related party payments. Only taxpayers with base erosion payments that are large
relative to their taxable income wil be affected.
BEAT can increase the cost of certain transactions between U.S. subsidiaries and their foreign
parents by including interest payments and royalty payments to the foreign parent in their BEAT
base. These payments are targeted because they are also used to shift profits out of the United
States.
Although BEAT appears to be aimed at profit shifting out of the United States through royalty
payments and interest payments, presumably to a foreign parent, BEAT is calculated in a way that
al ows the tax to be reduced by the research credit and 80% of the sum of three credits (the low-
income housing credit, the renewable electricity production credit in Section 45(a) of the code,
and credits for renewable energy, such as wind), but not other credits. A taxpayer fal ing under the
BEAT minimum tax wil not be eligible for foreign tax credits on foreign-source income. Thus a
firm could have a higher tax liability under BEAT because it had large amounts of foreign tax
credits relative to tax liability before credits.
Modifications to Subpart F
Subpart F is retained with only minor modifications. Foreign oil-related income is no longer
included as Subpart F income, and a provision for recapturing certain prior shipping income is
eliminated.11 The 30-day holding period is eliminated. The determination of 10% ownership is
based on shares of stock by value or voting power rather than just by voting power.12
Check-the-box is not altered.
Transfer Pricing
The new law modifies, and attempts to clarify, rules determining the valuation of intangible
property. It adds goodwil , going concern value, or the value of workforce in place to the list of
intangible property (which currently includes items such as patents, inventions, formula,
processes design, pattern, know-how, copyrights, compositions, and other specified items). It also
includes any other item with a value not attributable to tangible property or services of any
individual. It specifies that the Secretary of the Treasury has the authority to require aggregation
of intangible assets for valuation purposes (since value as a group may be different from the sum
of individual values) and to use realistic alternative principles (a taxpayer may enter into the
transaction if there is no realistic economical y preferable outcome). For example, the taxpayer’s

11 Foreign base company shipping income (income associated with international transport by aircraft or vessel) has
undergone several treatments under Subpart F. It is currently excluded, but between 1975 and 1986 it was excluded but
reduced by the extent the income was reinvested in the business, and in 1986 it was excluded without a reinvestment
requirement. If those reinvested funds are repatriated, that income is Subpart F income. T he revision eliminates that
coverage under Subpart F.
12 T he legislation also modifies the definition of a CFC. In determining whether a foreign corporation is a CFC (50%
owned by U.S. persons who each own 10%), direct, indirect, and constructive ownership rules apply for determining
CFC status (although only direct and indirect ownership applies for determining the share of Subpart F income). If a
person owns 50% of the voting power, she is considered to own 100% of the stock under the constructive attribution
rules. Constructive attribution rules also take into accoun t related parties. Current law, however, does not allow these
constructive attribution rules to apply so that a U.S. person is attributed stock owned by a foreign person even though
they are related. T he new allow allows attribution of stock owned by a related foreign person. T his provision was
primarily aimed at inverted firms and is discussed in that section.
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earnings from licensing of an intangible asset to produce a product (such as a drug formula) could
be compared to the income if the taxpayer instead manufactured the product (e.g., the drug).
Thin Capitalization Rules
Interest restrictions were extended to al interest payment, not just related party interest. Three
other revisions to the thin capitalization rules cause them to apply to more firms. First, the safe-
harbor debt-to-equity-ratio rule (i.e., the provision that requires debt to be 1.5 times equity value
for the limit on the deduction for interest to apply) is eliminated. Second, deductible interest is
reduced from 50% to 30% of adjusted taxable income for businesses with gross receipts greater
than $25 mil ion. Final y, for years beginning after December 31, 2021, adjusted taxable income
does not al ow a deduction for depreciation, amortization, and depletion (this base is cal ed
EBIT). The provision also has an exception for floor plan financing for motor vehicles (including
boats and farm equipment as wel as cars and trucks). Real estate can elect a longer depreciation
period instead of limits on interest deductions which would be attractive for heavily mortgaged
properties. In any case, real estate is not the normal target of concerns about earning stripping
(concerns are general y directed at inverted firms and multinationals).
The Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020 (P.L. 116-136)
increased the interest deduction to 50% of EBIT for 2019 and 2020.
Hybrid Entities and Instruments
Hybrid entities and instruments can confer tax advantages on related parties if they are treated
differently in different jurisdictions. An example of a “hybrid instrument” is one where a royalty
or interest payment (which is deductible in the United States) is not included in income in the
jurisdiction where the interest or royalty is received. A “hybrid entity” is one that is recognized as
a separate entity in one jurisdiction but not the other, which affects whether they include
payments in income. The tax revision disal ows a deduction by a related party for an interest or
royalty payment to a recipient in a foreign country if that payment is not taxed (or is included in
income and then deducted) in the foreign country.
Tax Treaties
The United States and other countries have tax treaties designed to avoid double taxation. A
significant area of coverage in treaties is the agreements regarding withholding taxes, but treaties
cover other issues as wel , such as the recognition of a permanent establishment or other grounds
to impose source-based taxes, such as corporate profits taxes. For U.S. firms’ subsidiaries
incorporated abroad, the treaties of those countries of incorporation and other countries are also
relevant.
A change in domestic law, as in P.L. 115-97, in the United States would override treaty
provisions, and certain provisions in the new law may be in conflict with treaties, as discussed
subsequently (basical y the most recently enacted provision is treated as primary).13

13 See CRS Legal Sidebar LSB10047, What Happens if H.R. 1 Conflicts with U.S. Tax Treaties?, by Erika K. Lunder.
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Repatriation Rules
Prior Law: Voluntary Repatriation
U.S. firms with overseas operations could indefinitely postpone paying U.S. tax on foreign
income by operating through a foreign subsidiary and reinvesting the earnings abroad. U.S. taxes
were due when the earnings were repatriated to the United States as an intra-firm dividend or
other payment. These earnings were taxed at the then corporate tax rate of 35%.
The U.S. firm paid taxes on its overseas earnings only when they were paid to the U.S. parent
corporation as intra-firm dividends or other income.
With respect to repatriated dividends, U.S. firms can claim foreign tax credits for foreign taxes
paid by their subsidiaries on the earnings used to pay the repatriated dividends. The ability to
defer U.S. tax thus poses an incentive for U.S. firms to invest abroad in countries with low tax
rates. Proposals to cut taxes on repatriations are based largely on the premise that even this
deferred tax on intra-firm dividends discourages repatriations and encourages firms to reinvest
foreign earnings abroad and that a cut in the tax would stimulate repatriations.
New Law: Deemed Repatriation
A deemed repatriation is imposed on accumulated post-1986 foreign earnings determined as of a
certain measurement date, without requiring an actual distribution, upon the transition to the new
participation exemption system. The transition rule requires mandatory inclusion of such deferred
foreign income as Subpart F income by U.S. shareholders of deferred foreign income
corporations.14 The included amount is taxed at a reduced rate that depends on whether the
deferred earnings are held in cash (which are taxed at 15.5%) or other assets (which are taxed at
8%) with applicable foreign tax credits similarly reduced. (These rates are technical y
accomplished via a deduction that results in the stated rate.) The resulting tax may be paid in
instal ments over eight years.15
S corporations are subject to a special rule. Shareholders of an S corporation are al owed to elect
to maintain deferral on such foreign income until the S corporation changes its status, sel s
substantial y al its assets, ceases to conduct business, or the electing shareholder transfers its S
corporation stock.
Anti-Inversion Rules
Prior Law: Section 7874
In the American Jobs Creation Act of 2004 (P.L. 108-357), Congress responded to an increase in
the prevalence of corporate inversions by enacting Section 7874 of the Internal Revenue Code
(IRC). Section 7874 imposes negative tax consequences on an inverted company, by reducing or,
in some cases, eliminating the tax benefits of an inversion. Section 7874 creates two different

14 In particular, for the last tax year beginning before January 1, 2018, the Subpart F income of a deferred foreign
income corporation (as otherwise determined for that tax year under Code §952) is increased by the greater of (1) the
accumulated post -1986 deferred foreign income of the corporation determined as of November 2, 2017, or (2) the
accumulated post -1986 deferred foreign income of the corporation determined as of December 31, 2017.
15 If installment payments are elected, the payments for each of the first five years equal 8% of the net tax liability. T he
amount of the sixth installment is 15% of the net tax liability, increasing to 20% for the seventh installment and 25%
for the eighth installment.
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taxing regimes for the inverted corporation depending on whether 60% or 80% of the inverted
company is owned by shareholders of the U.S. company. If at least 60% of the foreign parent’s
stock is held by former shareholders of the U.S. company, then the U.S. subsidiary (and related
persons) is limited in its ability to claim credits and deductions against certain income when
calculating its U.S. income taxes. If the 80% threshold is met, then the foreign parent is treated as
a domestic corporation for U.S. tax purposes and subject to tax on its worldwide income. The
section general y applies to companies that inverted after March 4, 2003, and is not applicable if
the substantial activities test is met. Inverted firms not taxed as U.S. firms are referred to as
surrogate firms.
Since 2004, additional regulatory steps have been taken to reduce the incentives for inversion
transactions and their benefits. In 2012, Treasury Regulations (T.D. 9592, June 12, 2012)
increased the safe harbor for the substantial business activities test from 10% to 25%. In 2014 and
2015, Treasury Notices 2014-52 and 2015-79 limited access to earnings of U.S. foreign
subsidiaries and addressed several techniques that could be used to artificial y reduce the
calculated share of U.S. shareholders. In 2016, Treasury regulations regarding these notices put in
place several anti-inversion rules that target groups that have engaged in a series of inversion or
acquisition transactions as wel as a rule that restricts postinversion asset dilution and restricts the
ability of foreign-parent groups to shift earnings out of the United States through dividends or
other economical y similar transactions (under Section 385).16
New Law: Additional Restrictions on Inversions
The new law contains several measures that affect inverted firms that are not treated as U.S.
firms.
Recapture of Deemed Repatriation Rate Reduction
A special recapture rule applies on deemed repatriations of newly inverted firms. This recapture
rule applies if a firm first becomes an expatriated entity at any time during the 10-year period
beginning on December 22, 2017, with respect to a surrogate foreign corporation that first
becomes a surrogate foreign corporation during that period (i.e., after enactment). In this case, the
tax wil be increased from 8% and 15.5% to 35% tax for the entire deemed repatriation, with no
foreign tax credit al owed for the increase in tax rate. The additional tax is due on the full amount
of the deemed repatriation in the first tax year in which the taxpayer becomes an expatriated
entity.
Excise Tax on Stock Compensation
The excise tax rate on stock compensation received by insiders in an expatriated corporation is
increased from 15% to 20%, effective on the date of enactment for corporations that first become
expatriated after that date.
Individual Tax on Dividends from Inverted Companies
Dividends (like capital gains) are al owed lower tax rates than the rates applied to ordinary
income. The rates are 0%, 15%, and 20% depending on the rate bracket that ordinary income fal s
into. Certain dividends received from foreign firms (those that do not have tax treaties and

16 For a more detailed discussion of prior rules and inversion activity, see CRS Report R43568, Corporate
Expatriation, Inversions, and Mergers: Tax Issues
, by Donald J. Marples and Jane G. Gravelle.
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PFICs17) are not eligible for these lower rates. Dividends paid by firms that inverted after the date
of enactment of P.L. 115-97 are added to the list of those not eligible for the lower rates.
Base Erosion Payments to Expatriated Entities
Base erosion payments general y do not include any amount that constitutes reductions in gross
receipts, including payments for costs of goods sold (COGS). However, an exception applies for
certain payments to expatriated entities, described below.
Base erosion payments include any amount that results in a reduction of gross receipts of the
taxpayer that is paid or accrued by the taxpayer with respect to (1) a surrogate foreign corporation
that is a related party of the taxpayer, but only if such corporation first became a surrogate foreign
corporation after November 9, 2017; or (2) a foreign person who is a member of the surrogate
foreign corporation’s expanded affiliated group (EAG).
A surrogate foreign corporation is a foreign corporation that meets the following criteria:
 It acquires (after March 4, 2003) substantial y al of the properties held by a U.S.
corporation, or substantial y al of the properties constituting a trade or business
of a domestic partnership.
 After the acquisition, the U.S. corporation’s former shareholders, or the domestic
partnership’s former partners, own at least 60% of the stock (by vote or value) of
the foreign acquiring corporation.
 The surrogate foreign corporation’s EAG does not have substantial business
activities in the country where that corporation is organized or created compared
to the total business activities of the EAG.
A surrogate foreign corporation does not include a foreign corporation where the former
shareholders of the U.S. corporation or the former partners of the domestic partnership hold 80%
or more (by vote or value) of the stock of the foreign acquiring corporation after the transaction.
The EAG includes the foreign acquiring corporation and al companies connected to it by a chain
of greater than 50% ownership.
Modification of Attribution Rules
The constructive ownership rules for purposes of determining 10% U.S. shareholders, whether a
corporation is a CFC and whether parties satisfy certain relatedness tests, were expanded in the
2017 tax revision. Specifical y, the new law treats stock owned by a foreign person as attributable
to a U.S. entity owned by the foreign person (so-cal ed “downward attribution”). As a result,
stock owned by a foreign person may general y be attributed to (1) a U.S. corporation, 10% of the
value of the stock of which is owned, directly or indirectly, by the foreign person; (2) a U.S.
partnership in which the foreign person is a partner; and (3) certain U.S. trusts if the foreign
person is a beneficiary or, in certain circumstances, a grantor or a substantial owner.
The downward attribution rule was original y conceived to deal with inversions. In an inversion,
without downward attribution, a subsidiary of the original U.S. parent could lose CFC status if it
sold enough stock to the new foreign parent so the U.S. parent no longer had majority ownership.
With downward attribution, the ownership of stock by the new foreign parent in the CFC is
attributed to the U.S. parent, so that the subsidiary continues its CFC status, making it subject to

17 A PFIC is a passive foreign investment company, a foreign corporation that primarily holds passive assets. It does
not fall under CFC rules, but has a separate set of anti-avoidance rules that generally were not changed by the new law.
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any tax rules that apply to CFCs (such as Subpart F and repatriation taxes under the old law, and
Subpart F and GILTI under the new law).
Interaction of Interest Restrictions, GILTI, FDII, BEAT,
Repatriation Taxes, and Net Operating Losses
The 2017 tax revision introduced provisions that interacted with each other and with net operating
losses (NOLs), which were also revised. NOL rules were subsequently further revised in the
CARES Act. How this interaction is determined can have an effect on taxes paid. The CARES
Act also temporarily increased the limit on interest deductions, as noted earlier. Before discussing
these interactions, this section provides a brief explanation of NOL rules.
Net Operating Losses
When a firm has a loss (a net operating loss), taxes are not reduced immediately beyond zero.
Rather, the business owes no income tax in that tax year and the loss can be carried to another
year when firms have profits. Prior to the 2017 revision, losses could be carried back two years
and carried forward for 20 years, fully offsetting tax liability. Carrybacks of losses yield
immediate tax reductions, whereas carryforwards reduce future tax liabilities.
The 2017 act disal owed carrybacks but provided that losses could be carried forward indefinitely,
but only reduce 80% of taxable income.
The CARES Act al ows firms to carry back losses in tax years beginning after December 31,
2017, and before January 1, 2021 (for calendar year firms, covering 2018, 2019, and 2020) for up
to five years. NOLs carried back can also offset 100% of taxable income—an increase from the
80% offset under permanent law.
Interactions with International Provisions
How offsets occur matter for two reasons. First, carryovers of unused deductions differ across
provisions. NOLs and interest deductions can be carried forward indefinitely, but FDII and GILTI
deductions cannot be carried to any other period and are lost if not used. Second, GILTI and
deemed repatriations may also have foreign tax credits that cannot be immediately used if taxable
income is reduced or eliminated. Foreign tax credits have a one-year carryback and a 10-year
carryforward, but there is no foreign tax credit carryover for foreign taxes related to GILTI.
The 2017 act al owed firms to elect not to apply NOLs against deemed repatriation amounts. This
election al ows firms to avoid the loss of foreign tax credits. The CARES Act specified that when
carrybacks are applied to the years when deemed repatriation taxes were paid, the taxpayer is
automatical y considered to make this election not to apply NOLs against deemed repatriation
amounts.
Ordering Rules for Interest, GILTI, FDII, and NOLs
The 2017 act limited the deduction for GILTI and FDII to taxable income before taking into
account these deductions. Interest deduction limits also relied on taxable income, and NOLs were
limited to a percentage of taxable income. The law did not specify how to handle the relationship
between taxable income and the limited deductions for interest, GILTI, FDII, and NOLs, and
some provisions appeared to require simultaneous equations. Preliminary regulations issued in
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early 2019 specified how the interactions would be handled.18 First, the taxpayer would determine
a tentative deduction for GILTI and FDII without considering NOLs. Next the taxpayer would
determine the amount of interest deducted, taking into account GILTI and FDII deductions but
not NOLs. Then the taxpayer would determine the NOL deduction, taking into account interest
deductions, but not GILTI and FDII deductions. Then FDII (income not the deduction) w ould be
determined taking into account interest and NOLs. Final y the GILTI plus FDII deduction would
be determined based on taxable income taking into account interest deductions and NOLs.
To il ustrate, consider a simple case where a taxpayer has $100 of NOLs from a previous year, no
ordinary income, and $100 of GILTI. Under the rule, the NOL would offset income before the
GILTI deduction (80% of $100), leaving $20 of income. The 50% deduction would apply and the
remaining income of $10 would be subject to $2.10 of tax. The taxpayer would have $20 of
NOLs to carry forward to future years. Now suppose instead the GILTI deduction could be taken
first. In that case, GILTI would be reduced by a 50% deductions, leaving $50 in income. A net
operating loss would be taken to offset 80% of that income, or $40, leaving taxable income of
$10. This is stil a $2.10 current tax, but now the taxpayer has a NOL carryforward of $60 rather
than $20 to reduce taxes in the future. In effect, the ordering rule causes the loss of $40 of NOL
carryforwards.
In addition to using up NOLs that could have value in the future, loss of GILTI and FDII can
cause the loss of foreign tax credits, which means the 80% limit on NOL deductions can be
harmful rather than beneficial. For example, if there were sufficient foreign tax credits to offset
al taxes on GILTI, no current tax would be due in the above example. Without the 80% limit on
NOLs, under the ordering rules, al GILTI would be eliminated by the $100 NOL, but if the
GILTI deduction were al owed first, leaving $50, a $50 NOL would remain. In this case, there is a
loss of $50 rather than $40 of NOLs, with no change in tax liability.
A firm can elect to opt out of the carryback rules enacted in the CARES Act, which could prevent
the loss of GILTI and FDII deductions and foreign tax credits in 2018 and 2019. Opting out could
also be beneficial, in general, if losses reduced foreign-source income and foreign tax credits that
could not be used in the 10-year foreign tax credit carryforward period.
Interest deductions apply before the GILTI and FDII deductions, and they can also lead to the
permanent loss of the GILTI and FDII deductions and foreign tax credits, in the same manner as
NOLs. The CARES Act’s temporary interest deduction increase from 30% to 50% as a
percentage of EBIT may not be beneficial to firms with this income, although they can also elect
to opt out of the increase.
Deemed Repatriations
As noted, the 2017 act al owed firms to elect not to apply NOLs against deemed repatriation
amounts. This election al ows firms to avoid the loss of foreign tax credits. The CARES Act also
specified that when carrybacks applied to the years when deemed repatriation taxes are paid (for
example, in 2018 and 2019), the taxpayer is automatical y considered to make this election. The
CARES Act also al owed firms to skip years with a deemed repatriation because of concerns that

18 Proposed REG-104464-18, March 6, 2018, https://www.federalregister.gov/documents/2019/03/06/2019-03848/
deduction-for-foreign-derived-intangible-income-and-global-intangible-low-taxed-income. Corrections were published
on April 12, 2019, https://www.federalregister.gov/documents/2019/04/12/C1-2019-03848/deduction-for-foreign-
derived-intangible-income-and-global-intangible-low-taxed-income.
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these benefits would be considered an advance payment of deemed repatriation taxes as indicated
in an IRS internal memo.19
BEAT and Interest Payments
BEAT only applies after related party deductions are 3% of total deductions. Proposed regulations
issued December 6, 2019, al ow a taxpayer to choose to forgo deductions to reduce BEAT
payments below the threshold.20 The increased interest deductions under the CARES Act may
push additional firms above the threshold and may cause more firms to forego al interest
deductions if the BEAT tax is higher than the normal tax.
Issues in Prior Law and Implications for New Law
The Location of Investment in the United States
and Other Countries
A long-standing concern about the international tax system involved the effects of taxes on the
location of investment in the United States rather than in other countries. One target of concern
was the higher tax rate in the United States, and lowering that rate (of 35%) was an objective of
the drive for tax revision.
Two questions can be raised about the prior law. One is the question of the potential effects of the
tax changes on the al ocation of investment. A related issue is whether the tax change makes the
al ocation of investment more efficient (increasing worldwide output) or better for the United
States (increasing aggregate welfare in the United States by moving closer to an optimal
treatment).
To address these issues, the first section begins with the comparison of U.S. tax rates with those
of other countries before the tax change, and addresses the importance of considering effective
tax rates. The next section examines the effect of the new general y applicable tax revisions (the
rate changes and changes in depreciation on U.S. domestic investment). The final section
examines the effects of the new international rules, or related rules, including the thin
capitalization rules, GILTI, FDII, and BEAT. The section concludes with a discussion of what
these findings imply for the al ocation of investment and the efficiency or optimality of that
al ocation.
U.S. Tax Rates Compared to Other Countries Before the Revision
The U.S. corporate tax rate (combining federal and average state and local taxes, and accounting
for the deductibility of state and local taxes) of 39% was higher than the statutory rate in any
other major country, including the countries in the Organisation for Economic Co-operation and
Development (OECD) and the G-20. Using an average weighted by GDP, the statutory tax rate in
the OECD countries outside of the United States was 27%. The rate for the G-20 was 28%.21

19 PMT A 2018-16 August 2, 2018, https://www.irs.gov/pub/lanoa/pmta_2018_16.pdf.
20 IRS, REG-112607-19, “Additional Rules Regarding Base Erosion and Anti-Abuse T ax,” 84 Federal Register 67046,
December 6, 2019, at https://www.federalregister.gov/documents/2019/12/06/2019-25745/additional-rules-regarding-
base-erosion-and-anti-abuse-tax.
21 Data for tax rates of the OECD countries are from the OECD data. See http://www.oecd-ilibrary.org/economics/
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The statutory corporate tax rate, however, is more relevant for the profit-shifting issue to be
discussed subsequently. Investment location is determined by the effective tax rate. Two measures
of effective tax rates are the average effective tax rate and the marginal effective tax rate.
The average effective tax rate divides tax liability by some measures of profit, and thus captures
to some degree special deductions and credits in the system as wel as the statutory tax rate. The
average effective tax rate captures many smal er provisions, but it does not capture the significant
timing issues associated with accelerated depreciation and expensing.22 To capture timing, a tax
rate needs to be based on looking forward to the expected tax payments for a representative
investment and take into account the time value of money.
A marginal effective tax rate measures the difference between the return on the investment before
taxes are considered to the return after taxes. This amount is the share of the return collected in
taxes on a present value basis, and that amount is divided by the pre-tax return to obtain a
marginal effective tax rate. The term marginal is used because it applies to marginal investments
that break even (i.e., an investment that earns just enough to be worth undertaking). This measure
is, in theory, the best measure to determine how the corporate income tax affects investment, but
it requires a lot of information about depreciation practices. Because of the data demands, for
example, studies often use a representative equipment investment, although there is a wide
variation in the tax treatment and durability of equipment. Thus, these marginal effective tax rates
should be considered as rough measures of relative tax burdens. In addition, the effective tax rates
depend on the assets included in the measure and whether the measure includes the effect of debt
finance.
A variety of different estimates in recent years have been made examining these two effective tax
rates. In general, most studies of average effective tax rates found these tax rates (federal, state,
and local combined) to be relatively close, whereas the U.S. marginal effective tax rate tended to
be about 6 percentage points above the weighted average of the OECD.23 These estimates were

oecd-economic-surveys-norway-2018/norway-s-corporate-tax-rate-has-been-lowered_eco_surveys-nor-2018-graph33-
en. Data for other countries in the G-20 are from Congressional Budget Office, International Com parisons of
Corporate Tax Incom e Tax Rates
, March 8, 2017, at https://www.cbo.gov/publication/52419. Data on GDP are from
the Central Intelligence Agency World Factbook, estimated for 2017, at https://www.cia.gov/library/publications/the-
world-factbook/rankorder/rawdata_2001.txt. The unweighted (simple) average of the OECD is about a percentage point
lower. T ypically larger countries have higher tax rates. T ax rates are based on weighted pre -tax returns, that is, a
weighted average of 1/(1-t) rather than of t.
22 Depreciation allows the cost of the asset to be deducted from earnings over a period of years. Depreciation is
accelerated when it is allowed more quickly than the decline in the value of an asset, or economic depreciation.
Expensing, the most extreme form of accelerated depreciation, allows cost to be recovered immediately, when the asset
is acquired.
23 See CRS Report R41743, International Corporate Tax Rate Comparisons and Policy Implications, by Jane G.
Gravelle. T his report explains the different concepts of tax rate and also illustrates the importance of using tax rates
where each country is weighted by GDP to make comparisons. A variety of estimates are presented in this report,
although some of these estimates reflect tax rates that do not fall into the category of a standard marginal tax rate, or do
not confine themselves to income tax rate comparisons. For example, a measure called an effective average tax rate
(EAT R) is a blend of statutory and marginal tax rates, and a measure by Mintz and Chen of the University of Calgary
(Jack Mintz and Duanjie Chen, “ U.S. Corporate T axation: Prime for Reform,” T ax Foundation, Special Report No.
228, February 4, 2015, available at https://taxfoundation.org/us-corporate-taxation-prime-reform; and Jack Mintz,
“Corporation T ax: A Survey,” Fiscal Studies, vol. 16, issue 4 (1995), pp. 23-68) includes the state and local sales tax
(which sometimes falls on business capital assets) in the U.S. marginal tax rate. A study prepared for the Alliance for
Competitive T axation (International Com parison of Effective Corporate Tax Rates Prepared for Alliance for
Com petitive Taxation by Price Waterhouse
, 2016, at http://www.actontaxreform.com/wp-content/uploads/2016/09/
International-Comparison-of-Effective-Corporate-Tax-Rates_FINAL_20160926.pdf) reports these two measures. T hey
also report a marginal effective tax rate (termed EMT R) estimated in an EU study that includes property and wealth
taxes. T he EU study does not provide a mean, and the reported comparison in the Alliance for Progress Study uses a
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for equity investment (buildings, equipment, intangibles, and inventory), with the marginal
effective U.S. tax rate estimated at about 22%.24 These estimates assume the tax base for purposes
of state and local taxes is the same as for federal taxes. The marginal effective tax rate for OECD
countries outside of the United States, weighted by GDP, is 16.4%.
Considering equipment and buildings separately, equipment earnings were subject to a 22.5%
marginal effective tax rate, compared to an 18.9% marginal effective tax rate in other OECD
countries (a difference of 3.6 percentage points), whereas buildings were subject to a 28.4%
marginal effective tax rate in the United States and a 23.6% marginal effective tax rate in the rest
of the world (a difference of 4.8 percentage points).
In 2016, the Treasury estimated a marginal effective tax rate in the United States (federal and
subnational) of 18.1%, which compares to a 19.4% marginal effective tax rate in the rest of the
G-7. The U.S. rate al owed for bonus depreciation.25
In 2017, the Congressional Budget Office (CBO) released a study of statutory, average effective,
and marginal effective tax rates for the G-20.26 The G-20 includes some of the larger economies
of the world that are excluded from the OECD, especial y the BRIC countries (Brazil, Russia,
India, and China). Although the CBO data were from 2012, the study provided some updates for
the changes in statutory rates through 2015 in the text. Making some further proportional changes
for the minor tax rate reductions since that time (and excluding Saudi Arabia, where full data
were not available), the estimates are a weighted statutory tax rate outside of the United States of
27.9%, compared to a 39.1% U.S. statutory rate. The average tax rate was 29% in the United
States and 22.2% in the rest of the G-20 outside of Saudi Arabia.
The marginal effective rate, which accounted for debt finance as wel as equity finance, was
18.6% in the United States, compared to a marginal effective tax rate of 10.9% in the rest of the
G-20. Since the corporate tax subsidizes debt, including it in marginal effective tax rates would
lower those rates.
The CBO report also provided data for marginal effective tax rates of tangible assets (buildings
and equipment). Its estimate for equipment in the United States was 10.5%, compared to a 17.3%
rate for the rest of the G-20; its estimate for buildings was 20.1%, compared to an estimated rate
of 11.1% for the rest of the G-20.
These comparisons in the CBO study suggest that the rates of tax in the United States were
several percentage points above the rest of the G-20 for al four categories of assets and for
buildings, but lower for equipment.

simple average rather than a weighted average. See Effective Tax Levels Using the Devereux/Griffith Methodology –
Update 2015
, at http://www.zew.de/en/publikationen/effective-tax-levels-using-the-devereuxgriffith-methodology-
update-2015/?cHash=b54a84e000c7e4e1ad65cdd59c575c10. T wo measures of average effect ive tax rates are included
in the Alliance for Competitive T axation summary, one of which was included in the CRS report, but the other, by the
World Bank, was for a hypothetical firm and not based on actual data.
24 Separate rates were reported for invest ments not eligible and eligible for the domestic production activity deduction;
weighting these by estimated shares of earnings eligible and not eligible (73% and 27%) for the deduction produces an
overall rate of 21.7%.
25 T he President’s Framework for Business Tax Reform: An Update, A Joint Report by the White House and the
Departm ent of the Treasury
, April 2016, https://www.treasury.gov/resource-center/tax-policy/Documents/T he-
Presidents-Framework-for-Business-T ax-Reform-An-Update-04-04-2016.pdf.
26 Congressional Budget Office, International Comparisons of Corporate Income Tax Rates, March 8, 2017, at
https://www.cbo.gov/publication/52419.
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Changes in Marginal Effective Tax Rates
This section provides estimates of federal marginal effective tax rates from the basic changes in
the treatment of domestic investment: the reduction in the statutory tax rate from 35% to 21%, the
repeal of the production activities deduction, the temporary expensing of equipment (al owed at
100% for the first five years and then phased out over the next five years), and the provision
requiring the amortization over five years, that is, deducting the costs in equal amounts over five
years (rather than expensing) for research and experimentation, to begin in 2022. In 2017,
investments in equipment were al owed bonus depreciation, with half of the cost expensed and
half depreciated. That bonus depreciation was, under prior law, to be phased out and be
eliminated entirely after 2019, so the tables also report effective tax rates without bonus
depreciation. Which comparisons are appropriate depend on what might have been expected to
happen to bonus depreciation, which has been in place as a temporary provision since 2008 and
has been continuously extended, as wel as expectations as to whether the permanent provisions
for depreciation of equipment and amortization of research investments wil occur.
Table 1 reports the effective tax rates on equity-financed investments by asset group for 2017 law
with and without bonus depreciation, and then for the temporary provisions in the new law
(providing expensing of equipment and retaining it for research costs) and the permanent
provisions (depreciation of equipment and five-year amortization for research). For purposes of
bonus depreciation and expensing, public utility structures are considered equipment and are
eligible.
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Table 1. Marginal Effective Tax Rates for Equity-Financed Investment
2017 Law With
2017 Law
New Law:
New Law:
Bonus
Without Bonus
Temporary
Permanent
Asset
Depreciation (%)
Depreciation (%)
Provisions (%)
Provisions (%)
Equipment
13.4
23.6
0.0
13.7
Public Utility
14.2
24.9
0.0
14.5
Structures
Nonresidential
Structures
30.8
30.8
18.5
18.5
Residential
Structures
28.1
28.2
16.7
16.7
Intangibles




Research
-63.3
-63.3
-63.3
-30.2
Advertising
0.0
0.0
0.0
0.0
Other
0.0
0.0
0.0
0.0





Total
15.6
19.7
3.2
10.9
Source: Congressional Research Service (CRS). See CRS Report R44638, Corporate Tax Integration and Tax
Reform
, by Jane G. Gravel e; and CRS Report R44242, The Effect of Base-Broadening Measures on Labor Supply and
Investment: Considerations for Tax Reform
, by Jane G. Gravel e and Donald J. Marples, for method of computation
and assumptions.
Notes: The corporate statutory rate used for 2017 law is 34.14% to reflect the production activities deduction.
The other assumptions and underlying data include a corporate after-tax real discount rate of 7% and an inflation
rate of 2%, used in al simulations. The research credit is 11.3% (see CRS Report R44522, A Patent/Innovation Box
as a Tax Incentive for Domestic Research and Development
, by Jane G. Gravel e). Note that these tables do not
include land, which is not reproducible, and inventories, whose short lives make them likely relatively insensitive
to the rates of return. Both are taxed at rates above the rates for other nonresidential structures ( land at the
statutory rate and inventories above the statutory rate). Other intangibles primarily reflect human capital
investment.
Calculating from the tax rates as shown in this table, under 2017 law, investment in tangible
assets is subject to positive effective tax rates ranging from 38% (0.134/0.35) to 88% (0.308/0.35)
of the statutory rate with bonus depreciation and from 67% to 88% without bonus depreciation.27
These differences reflect the degree of acceleration of the present value of depreciation
deductions as compared with economic depreciation (the rate of decline in the value of an asset).
Depreciation is more accelerated for equipment than for structures. Intangible investments are
taxed at zero or negative rates. Intangible assets are eligible for expensing (the maximum amount
of acceleration in depreciation), which produces a zero effective tax rate. The addition of a
research credit results in a negative tax rate for investment in research. (Note that the magnitude
of negative tax rates may appear to be more powerful subsidies than are actual y the case because
of the method of calculating effective tax rates.28) Overal , investment returns are taxed at an

27 T hese categories are aggregates of in some cases very heterogeneous assets. Effective tax rates under 2017
permanent law without bonus depreciation range from 17% to 32% for equipment. Nonresidential structures include oil
and gas investments with an effective tax rate of 11% and various types of buildings taxed at rates ranging from 26% to
35%.
28 In calculating the effective tax rate, the required after-tax return is held constant: positive taxes increase the pre-tax
required return, and negative tax rates reduce that pre-tax return. As the pre-tax return falls to a very low rate, the share
received as a subsidy can become large when expressed as a percentage of that rate. An alternate way to present the tax
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effective rate of 15.6% with bonus depreciation, or 45% of the statutory rate, and at 19.7%
without bonus depreciation, or 57% of the statutory tax rate. The tax on tangible investment is
much larger than the tax on intangible investment.
The temporary provisions (al owing expensing of equipment and public utility structures and
retaining the expensing of research) would cut the effective tax rate on equity-financed
investment to 3%, whereas the permanent provisions would reduce the rate to 11%. If the
assumption is made that temporary benefits become permanent, the appropriate comparison is the
2017 rate with bonus depreciation to the temporary provisions of the new law, showing an overal
decline in the tax rate from 15.6% to 3%, a reduction of almost 13 percentage points. Comparing
the permanent provisions, the rate fal s from 19.7% to 10.9%, a slightly smal er reduction of 8
percentage points.
Table 2 provides estimates with assets financed by debt. Corporate investment financed by debt is
subsidized rather than taxed. In a world without inflation and with tax depreciation equal to
economic depreciation, the effective tax rate on debt-financed investments would be zero: the
deduction for interest exactly offsets the tax on the earnings from the investment. The presence of
inflation and accelerated depreciation causes debt-financed investments to be subsidized, because
the deduction for interest is al owed a full rate on nominal income (including the inflation portion
of the interest rate) and at the statutory rate, whereas only the real return is taxed and at a lower
effective rate.
The effective tax rates for debt-financed assets are negative, but the rates rise (or subsidies
decrease) under the new provisions, as the value of deducting interest at 21% is smal er than the
value at 35%. The overal tax rates under the new temporary provisions change little from 2017
law without bonus depreciation, as the benefits for equity (expensing for equipment) offset the
reduced debt subsidy due to the lower rate. The tax rates under the permanent provisions lead to a
reduced subsidy with tax rates becoming a smal er negative.

rate is as a tax wedge, t/(1-t), which indicates how much higher or lower the pre-tax return would have to rise or fall to
break even. T ax wedges are larger than tax rates for positive tax rates and smaller for negative ones. For example, the
30.8% tax rate is a wedge of 44.4%, whereas a minus 63.3% tax rate is a wedge of -38.8%.
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Table 2. Marginal Effective Tax Rates for Debt-Financed Investment
2017 Law With
2017 Law
New Law:
New Law:
Bonus
Without Bonus
Temporary
Permanent
Asset
Depreciation (%)
Depreciation (%)
Provisions (%)
Provisions (%)
Equipment
-59.4
-38.8
-40.1
-20.0
Public Utility
-63.0
-44.4
-40.1
-21.4
Structures
Nonresidential
Structures
-27.5
-27.5
-13.8
-13.8
Residential
Structures
-38.9
-38.9
-18.5
-18.5
Intangibles




Research
-701.4
-701.4
-252.0
-147.3
Advertising
-87.1
-87.1
-40.1
-40.1
Other
-87.1
-87.1
-40.1
-40.1





Total
-64.0
-53.5
-48.4
-27.4
Source: Congressional Research Service (CRS). See CRS Report R44638, Corporate Tax Integration and Tax
Reform
, by Jane G. Gravel e; and CRS Report R44242, The Effect of Base-Broadening Measures on Labor Supply and
Investment: Considerations for Tax Reform
, by Jane G. Gravel e and Donald J. Marples, for method of computation
and assumptions.
Notes: The corporate statutory rate used for 2017 law is 34.14% to reflect the production activities deduction.
The other assumptions and underlying data include a nominal interest rate of 7.5% and an inflation rate of 2%,
used in al simulations. The research credit is 11.3% (see CRS Report R44522, A Patent/Innovation Box as a Tax
Incentive for Domestic Research and Development
, by Jane G. Gravel e). Note that these tables do not include land,
which is not reproducible, and inventories, whose short lives make them likely relatively insensitive to the rates
of return. Both are taxed at rates above the rates for other nonresidential structures (land at the statutory rate
and inventories above the statutory rate).
Table 3 and Table 4 combine the debt and equity investment using two different leveraging rates,
one estimated by CRS (36%) and one used in CBO effective tax rate estimates (32%). Rates in
either case are smal under current law, ranging from -0.3% to 5.7% and 7.8%.29 Under the
temporary provisions of the new law they receive an overal subsidy, whereas under the
permanent provisions they receive a smal effective tax rate of 2% to 3%. The provisions for the
assets that are probably of most concern with shifting of investment (i.e., equipment and
nonresidential structures) would have taxes fal more significantly.

29 T he 7.8% rate is higher than the rates in the CBO international study discussed above. It seems likely that the higher
rate is due to inclusion of R&D, but not other intangibles (only R&D intangibles are in the National Income Accounts)
and the inclusion of inventories, which are taxed at higher rates. T he CBO report with the 32% debt share is Taxing
Capital Incom e: Effective Marginal Tax Rates Under 2014 Law and Selected Policy Options
, December 18, 2014, at
https://www.cbo.gov/publication/49817.
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Table 3. Marginal Effective Tax Rates for Debt- and Equity-Financed Investment,
36% Debt Share
2017 Law With
2017 Law
New Law:
New Law:
Bonus
Without Bonus
Temporary
Permanent
Asset
Depreciation (%)
Depreciation (%)
Provisions (%)
Provisions (%)
Equipment
-0.9
11.1
-9.6
5.4
Public Utility
-0.8
11.3
-9.6
5.8
Structures
Nonresidential
Structures
19.2
19.2
10.7
10.7
Residential
15.2
15.2
8.2
8.2
Structures
Intangibles




Research
-116.3
-116.3
-95.4
-52.2
Advertising
-16.7
-16.7
-9.6
-9.6
Other
-16.7
-16.7
-9.6
-9.6





Total
-0.3
5.7
-6.6
1.8
Source: Congressional Research Service. See CRS Report R44638, Corporate Tax Integration and Tax Reform, by
Jane G. Gravel e; and CRS Report R44242, The Effect of Base-Broadening Measures on Labor Supply and Investment:
Considerations for Tax Reform
, by Jane G. Gravel e and Donald J. Marples, for method of computation and
assumptions.
Notes: The corporate statutory rate used for 2017 law is 34.14% to reflect the production activities deduction.
The other assumptions and underlying data include a real discount rate for equity of 7%, a nominal interest rate
of 7.5%, and an inflation rate of 2%, used in al simulations. The research credit is 11.3% (see CRS Report
R44522, A Patent/Innovation Box as a Tax Incentive for Domestic Research and Development, by Jane G. Gravel e).
Note that these tables do not include land, which is not reproducible, and inventories, whose short lives make
them likely relatively insensitive to the rates of return. Both are taxed at rates above the rates for other
nonresidential structures (land at the statutory rate and inventories above the statutory rate).
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Table 4. Marginal Effective Tax Rates for Debt- and Equity-Financed Investment,
32% Debt Share
2017 Law With
2017 Law
New Law:
New Law:
Bonus
Without Bonus
Temporary
Permanent
Asset
Depreciation (%)
Depreciation (%)
Provisions (%)
Provisions (%)
Equipment
1.0
12.8
-8.4
6.5
Public Utility
1.3
13.2
-8.4
6.9
Structures
Nonresidential
Structures
20.8
20.8
11.7
11.7
Residential
17.1
17.1
9.3
9.3
Structures
Intangibles




Research
-107.6
-107.6
-90.9
-49.2
Advertising
-14.9
-14.9
-8.4
-8.4
Other
-14.9
-14.9
-8.4
-8.4





Total
1.7
7.8
-5.4
3.0
Source: Congressional Research Service. See CRS Report R44638, Corporate Tax Integration and Tax Reform, by
Jane G. Gravel e; and CRS Report R44242, The Effect of Base-Broadening Measures on Labor Supply and Investment:
Considerations for Tax Reform
, by Jane G. Gravel e and Donald J. Marples, for method of computation and
assumptions. The debt share is from Congressional Budget Office estimates. See CBO, Taxing Capital Income:
Effective Marginal Tax Rates Under 2014 Law and Selected Policy Options
, December 2014, at https://www.cbo.gov/
publication/49817.
Notes: The corporate statutory rate used for 2017 law is 34.14% to reflect the production activities deduction.
The other assumptions and underlying data include a real discount rate for equity of 7%, a nominal interest rate
of 7.5%, and an inflation rate of 2%, used in al simulations. The research credit is 11.3% (see CRS Report
R44522, A Patent/Innovation Box as a Tax Incentive for Domestic Research and Development, by Jane G. Gravel e).
Note that these tables do not include land, which is not reproducible, and inventories, whose short lives make
them likely relatively insensitive to the rates of return. Both are taxed at rates above the rates for other
nonresidential structures (land at the statutory rate and inventories above the statutory rate).
Other Provisions Affecting Location of Investment
In addition to the basic domestic changes affecting investment, and captured in the preceding
tables, other elements may affect the tax burdens on domestic relative to foreign investment.
Restrictions on Interest Deductions
One element is the tighter limit on the deductibility of interest. In order to explore how important
this issue is, consider the revenue estimate in the first full year of $17.7 bil ion, which, assuming
a 21% tax rate, accounts for 14% of net interest paid, according to the National Income Accounts
(calculation excludes financial corporations).30 The estimate increases about 54% after the income
base no longer al ows depreciation deductions, and would then be about 20% of interest. This
provision thus appears to be significant. If interest is not deductible at the margin, the overal
effective tax rates would be similar to the equity rates in Table 1. For these firms, the overal

30 See T able 7.1 of the National Income and Product Accounts, at https://www.bea.gov/iT able/iT able.cfm?reqid=19&
step=2#reqid=19&step=3&isuri=1&1921=survey&1903=288.
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effective tax rate of 7.8% would rise to around 11% under the permanent provisions and fal to
3% for the temporary ones.
As a conservative il ustration of the possible aggregate effect, Table 5 shows overal tax rates at a
32% debt share, with 20% of the interest disal owed, which causes the overal tax rate under the
new law to rise by about two percentage points relative to the tax rates computed in Table 4. The
effects would likely be larger because more of the disal owed interest would have marginal
effects.
Table 5. Marginal Effective Tax Rates for Debt- and Equity-Financed Investment, 32%
Debt Share, 20% of Interest Disallowed Under New Law
2017 Law With
2017 Law
New Law:
New Law:
Bonus
Without Bonus
Temporary
Permanent
Asset
Depreciation (%)
Depreciation (%)
Provisions (%)
Provisions (%)
Equipment
1.0
12.8
-6.6
8.0
Public Utility
1.3
13.2
-6.6
8.5
Structures
Nonresidential
Structures
20.8
20.8
11.7
12.3
Residential
Structures
17.1
17.1
9.3
10.9
Intangibles




Research
-107.6
-107.6
-86.3
-45.9
Advertising
-14.9
-14.9
-8.4
-6.6
Other
-14.9
-14.9
-8.4
-6.6





Total
1.7
7.8
-3.6
4.7
Source: Congressional Research Service. See CRS Report R44638, Corporate Tax Integration and Tax Reform, by
Jane G. Gravel e; and CRS Report R44242, The Effect of Base-Broadening Measures on Labor Supply and Investment:
Considerations for Tax Reform
, by Jane G. Gravel e and Donald J. Marples, for method of computation and
assumptions. The debt share is from Congressional Budget Office estimates. See CBO, Taxing Capital Income:
Effective Marginal Tax Rates Under 2014 Law and Selected Policy Options
, December 2014, at https://www.cbo.gov/
publication/49817.
Notes: The corporate statutory rate used for 2017 law is 34.14% to reflect the production activities deduction.
The other assumptions and underlying data include a real discount rate for equity of 7%, a nominal interest rate
of 7.5%, and an inflation rate of 2%, used in al simulations. The research credit is 11.3% (see CRS Report
R44522, A Patent/Innovation Box as a Tax Incentive for Domestic Research and Development, by Jane G. Gravel e).
Note that these tables do not include land, which is not reproducible, and inventories, whose short lives make
them likely relatively insensitive to the rates of return. Both are taxed at rates above the rates for other
nonresidential structures (land at the statutory rate and inventories above the statutory rate).
Effects of the International Provisions: Dividend Relief, GILTI, FDII, and BEAT
The international changes wil likely affect the choice of investment location, although in a way
that is difficult to quantify. The exemption of dividends combined with the deduction for a return
on tangible assets under the GILTI wil make investing in plants and equipment abroad largely
exempt from U.S. tax on foreign-source income through foreign subsidiaries. Most evidence
suggests that returns to investment abroad were subject to a relatively smal residual rate of
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around 3%. Thus, moving to a zero rate would not likely create a significant change in tax
treatment of foreign earnings, which in prior law are reduced by deferral and cross-crediting.
Because of the formula approach to exempting the returns to tangible investments, tangible
investments in assets with a lower return than the 10% rate specified wil also reduce the scope of
GILTI coverage, whereas those with a higher return wil subject some of the income from the
intangible asset to GILTI. The opposite effect occurs with FDII, where low-yield tangible
investments wil increase the FDII deduction (by increasing gross income by less than the deemed
return), whereas high-yield tangible investments wil reduce the FDII deduction.
The international provisions in general are aimed at making the location of intangibles in the
United States more attractive than in past law. The returns are subject to the GILTI tax rate on a
current basis, a subsidy is al owed for intangibles located in the United States but licensed abroad,
and intangible returns earned abroad may also face a current tax without a foreign tax credit under
BEAT. However, for economic activity, the concern is where intangibles are created. In this case,
intangibles, to the extent they are subject to a lower statutory rate in the United States due to
FDII, would experience even higher overal tax burdens through the loss of the benefits from debt
finance, given expensing. That is, equity investment is not affected by the lower tax rate with
expensing (which is always zero), but the lower tax rate reduces the subsidy for debt, making the
overal subsidy smal er (which means a higher burden). With five-year amortization in the case of
research and development, the benefit of the lower rate on equity finance would roughly offset
the burden of the lower rate on debt.
Although a separate basket for GILTI would have reduced opportunities under the title passage
rule to increase the foreign tax credit limit, that rule has been repealed in any case. The loss of tax
benefits for exports may also encourage more production abroad.
Effects on the Location of Investment
Overal , it is unlikely that the location of investment wil be significantly affected by the tax
change. Equity investment in tangible assets, especial y the temporary investments for equipment,
could increase. These effects are much smal er when debt is included. Moreover, adding
intangible assets leads to an even smal er differential. These differences narrow further when
restrictions on the deductibility of interest are in effect. (Other international provisions are
probably not important to the location of investment.)
The importance of capital flows to the economy would also be limited. First, the corporate capital
stock, where the principal effects of the reductions in equity capital would matter, is only a share
of the business capital stock, and an even smaller share of the total capital stock in the country
(even aside from land). Corporations account for about 55% of tangible business assets and 60%
of tangible and intangible assets. Multinational corporations are a subset of that corporate share.
Economic forces limit the amount of capital that can be absorbed (which is constrained by labor
resources available to combine with production), and in general, capital investments in different
locations in the world are imperfect substitutes.31
Moreover, it is not clear that the capital stock in the United States would increase. First, debt-
finance costs would also rise for the noncorporate sector. Moreover, if debt is more mobile than

31 See CRS Report R41743, International Corporate Tax Rate Comparisons and Policy Implications, by Jane G.
Gravelle, which suggests a small (0.2%) increase in GDP when a change of a similar size is made, without allowing for
the possibility of debt finance.
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equity, the corporate-sector capital stock could contract, since lower tax rates, although making
equity finance more attractive, make debt finance more costly.32
Final y, although the size is likely to be smal even though the direction is uncertain, the effects
are also likely to be offset by the lowering of corporate rates elsewhere in the world. Such a fal in
rates occurred the last time the United States lowered its corporate rate.33 Moreover, there have
been indications of lowered corporate tax rates after the momentum toward a lower corporate tax
rate began in the United States. In July 2017, Belgium announced a rate reduction from 33.99%
to 25% by 2020. In September, France announced its rate, already planned to fal from 33.33% to
28% by 2020, would be reduced further to 25%.34 China has adopted a tax holiday for foreign
companies investing in certain sectors, Australia is considering a reduction from 30%, and Israel
has recently reduced its tax rate from 24% to 23% and possibly more in the future.35 Germany has
agreed to phase out a 5.5% surtax on corporate and individual income.36
Preliminary observations from the first year after the tax change have found little evidence of a
flow of capital into the United States from abroad; although there was a smal increase in net
capital inflows in 2018, such an increase is not out of line with historical fluctuations.37
Effects on Efficiency and Optimality
Wil the tax change lead to a more efficient or optimal system? General y, efficiency refers to
rules that wil maximize worldwide welfare, which requires al ocating capital to its best uses.
That objective, in turn, requires that investments face the same tax rate so that they equalize their
pre-tax returns. Optimality would require the same rules if maximizing world welfare, but
different rules would apply in maximizing U.S. welfare. The method that produces efficiency is
cal ed capital export neutrality, whereas the method that produces optimal treatment for outbound
investment is cal ed national neutrality.38
Referencing the CBO study cited earlier, investment in equipment was already favored in the
United States relative to the rest of the world, and the tax changes increase that favoritism,
particularly in the case of expensing, where the overal marginal tax rate is negative. In the case
of buildings, however, the United States had higher tax rates than other countries, and lowering
the rates moved toward more efficiency. Note that the international comparisons use a
representative asset, and the nonresidential structures category in the previous tables is a
composite. Considering industrial and commercial buildings that tax rate is approximately the
statutory rate, so that buildings tax rates on equity would fal from around 35% to 21% (plus

32 T he possibility of lowering the corporate tax rate leading to a reduction in the U.S. capital stock was made by Harry
Grubert and John Mutti, “ International Aspects of Corporate T ax Integration: T he Role of Debt and Equity Flows, ”
National Tax Journal, vol. 47, no. 1 (1994), pp. 111-133.
33 See CRS Report R41743, International Corporate Tax Rate Comparisons and Policy Implications, by Jane G.
Gravelle.
34 Amanda Athanasiou, “Big Banks Detail Costs and Benefits of T ax Reform,” Tax Notes International, February 19,
2019, pp. 741-744.
35 Mindy Herzfeld, “Competition or Coordination: Responses to the T ax Cuts and Jobs Act,” Tax Notes International,
January 15, 2018, pp. 209-212.
36 Stephanie Soong Johnston, “German Leader Vows No T ax Hikes, Wins Backing for Coalition Deal,” Worldwide Tax
Daily
, February 27, 2018.
37 See CRS Report R45736, The Economic Effects of the 2017 Tax Revision: Preliminary Observations, by Jane G.
Gravelle and Donald J. Marples.
38 See CRS Report RL34115, Reform of U.S. International Taxation: Alternatives, by Jane G. Gravelle, for a detailed
discussion of the efficiency and optimality issues.
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about 4 percentage points for state and local taxes), which would bring them to a 25% rate, which
is very close to the remaining G-20 average for equity-financed buildings of 23.8%.
Optimal rules differ for outbound and inbound capital. For outbound capital (investments of U.S.
firms abroad), taxes should be imposed by al owing a deduction for foreign taxes paid so that the
return received by the United States (whether in the form of profits or taxes on profits) from
domestic versus foreign investments is equalized. Moving to a largely territorial tax for
investments in tangible assets would move further from that optimal goal. For inbound
investment (investments by foreigners in the United States), the optimal tax is 1/E, where E is the
elasticity of capital inflow with respect to the after-tax rate of return. That rate maximizes the
benefit for the United States from foreign investors. Setting a lower tax rate might induce more
equity capital, but it would also reduce the amount of tax collected in the United States (the
earnings from the investment accrue to foreigners). For equity, the elasticity is probably less,
around two, so the optimal tax is around 33%.39 Since the effective tax was already below this
optimal rate, lowering it further wil likely lead to a less optimal system. In the case of debt,
however, the system moves toward a more optimal one. The optimal tax rate on inbound
investment is never less than zero, and by reducing the subsidy for debt, the system moves closer
to an optimal one, even if the elasticity of debt inflows is infinitely large.
There are also welfare gains for the United States aside from international considerations that
arise largely from the corporate rate reduction, due to the reduction of subsidies for debt, which
also brings overal tax rates across asset types closer together.
In sum, therefore, as in the case of investment, the effects on efficiency and optimality are mixed,
with gains in some cases and losses in others.
A Note on Cash Flow, Employee Bonuses, Investment, and Stock Buybacks
There were news reports at the end of 2017 and early in 2018 that companies were using the tax
cut to increase employees’ pay, primarily in bonuses.40
Economic theory suggests that the availability of cash, whether from the tax cut or from access to
funds held abroad, should not lead to increased pay directly.41 Since employee compensation is
deductible, it is not affected by the change in the tax rate or cash flow, and a firm that is
maximizing profits should pay its workers the same amount regardless of the tax rate or cash on
hand. There is, however, an advantage in making planned pay raises while the 35% rate is stil in
effect (the lower rate applies for tax years beginning after December 31, 2017, and not al firms
have tax years that match the calendar year, so some bonuses paid in 2018 would also be

39 An elasticity is a percentage change in quantity divided by a percentage change in price. For a substitution elasticity
it is the percentage change in relative quantities divided by the percentage changes in relative prices. For a review of
the empirical evidence on the elasticity of substitution between domestic and foreign capital with respect to the aft er-
tax rate of return, indicating that the value is around 3, see Jennifer C. Gravelle, Corporate Tax Incidence, Review of
General Equilibrium Estim ates and Analysis: Working Paper 2010-03
, Congressional Budget Office, May 20, 2010, at
https://www.cbo.gov/publication/21486. T o transform a substitution elasticity that considers the relative quantities
(dKd/Kd –dKf/Kf) where the first term is the percentage change in domestic capital and the second the p ercentage
change in foreign capital stock, into an elasticity for the percentage change in the domestic capital stock, multiply by
the foreign share of the worldwide capital stock, estimated to be approximately 70%, leading to an elasticity of 2.
40 See, for example, Adam Shell, “List of Companies T hat Paid Bonuses or Boosted Pay,” USA Today, January 11,
2018. T his article identifies about $870 million in one-time bonuses. See also data posted on the Americans for T ax
Fairness, which is tracking bonuses, stock buybacks, and other spending, at https://americansfortaxfairness.org/
trumptaxcuttruths/.
41 See Alan D. Viard, “Economic Effects of the Corporate Rate Reduction,” Tax Notes, March 5, 2015, pp. 1393-1406.
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deductible at the higher rate). Other explanations that have been made for the announced pay
increases are that pay raises were already planned due to a tightening labor market (and new
minimum-wage increases going into effect in 2018) and that tying them to the tax cut was a
public relations measure (especial y as many of the firms are in industries that are heavily
regulated by the government).42
Employee wages could increase if investment increases the capital stock. Cash should not directly
affect investment unless the firms were previously liquidity constrained, and U.S. firms in general
already had large cash reserves as wel as access to low-cost debt. Any effects on wages should
come from the incentives to invest in the United States, an effect that happens slowly and, as
indicated earlier, may be relatively smal .
There is some evidence that much of the tax cut and cash flow is being used to repurchase shares,
an action equivalent to paying dividends. Statistical studies following the 2004 repatriation
holiday found that most of the repatriation was used for this purpose.43 According to one source,
firms have repurchased $290 bil ion in stock (compared to $6.7 bil ion in bonuses),44 and
financial analysts have estimated buybacks in 2018 of $650 bil ion and $800 bil ion.45 Paying
dividends or repurchasing shares is consistent with what economic theory suggests in the short
term, that a tax cut would benefit shareholders. To the extent the cut induces investment, it would
occur over time.
Preliminary data from the first year the tax change was in effect found little or no effec t on
worker bonuses or wages, but a significant amount of share repurchases, with worker bonuses
accounting for $4.4 bil ion but share repurchases of $1 tril ion. There is no indication of an
overal surge in wages compared to increases in wages and salaries relative to GDP or history.
Profit Shifting
Two methods used to recognize more profit in low-tax jurisdictions than economic reality
suggests are increased leveraging in high-tax countries and use of transfer pricing, primarily of
intangible assets such as drug formulas, technological advances, and trademarks.
To shift profits through leveraging, firms locate their debt in high-tax countries, including the
United States. This technique involves both U.S. multinational firms locating their debt in the

42 Martha White, “Companies Are Announcing Raises and Bonuses, But is T rump’s T ax Plan the Reason?” NBC
News, January 23, 2018, at https://www.nbcnews.com/business/business-ne ws/companies-are-announcing-raises-
bonuses-trump-s-tax-plan-reason-n839871.
43 See CRS Report R40178, Tax Cuts on Repatriation Earnings as Economic Stimulus: An Economic Analysis, by
Donald J. Marples and Jane G. Gravelle.
44 As of mid-February 2018, $170 billion in buybacks were announced. See Patti Domm, Market Insider, CNBC,
February 15, 2018, at https://www.cnbc.com/2018/02/15/companies-buying-back-stock-at-record-pace-since-trump-
tax-bill-may-aid-markets-comeback.html. For the $290 billion figure and a list, see “ More T han $290 Billion in Share
Buybacks,” Senate Democrats, at https://www.democrats.senate.gov/goptaxscam (site visited May 1, 2018). See also
Americans for T ax Fairness, T rump T ax Cut T ruths, https://americansfortaxfairness.org/trumptaxcuttruths/; Matt Egan,
“Goldman Sachs Warns Against Falling in Love with Stock Buybacks,” CNN Money, April 26, 2018,
http://money.cnn.com/2018/04/26/investing/stock-buybacks-goldman-sachs/index.html.
45 T hese estimates are from Goldman Sachs and J. P. Morgan. See Jeff Cox, “Companies Projected to Use T ax Cut
Windfall for Record Share Buybacks, JP Morgan Says,” CNBC, March 2, 2018, at https://www.cnbc.com/2018/03/02/
companies-projected-to-use-tax-cut-for-record-share-buybacks-jp-morgan.html. A survey of Morgan Stanley analysts
predicted that firms would use 43% of the tax cut for buybacks and dividends, 19% for mergers and acquisitions, 17%
for investment, and 13% for bonuses. See Editorial Board, “Well-Heeled Investors Reap the Republican T ax Cut
Bonanza,” New York Tim es, February 25, 2018, at https://www.nytimes.com/2018/02/25/opinion/investors-republican-
tax-cut.html.
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United States rather than abroad and foreign parents of U.S. subsidiaries locating debt in their
U.S. subsidiaries.
The second method of profit shifting is through transfer pricing methods that determine the price
associated with a transfer of goods and assets. The standard for transfer pricing is that goods and
assets bought and sold between related firms should reflect arm’s length pricing, that is, the price
that would be paid by two unrelated firms. If a U.S. firm sel s a good or asset to its foreign
subsidiary for a price that is too low, profit in the United States is reduced and profit abroad is
increased. Most of the transfer pricing issues arise due to intangible assets that are often unique,
so there is not a market to observe arm’s length prices. A variety of different methods are used to
determine transfer prices. When an intangible asset is transferred abroad (such as the right to sel
a mobile phone or to sel advertising for a search engine), there is sometimes a buy-in payment by
the foreign subsidiary, followed by cost-sharing payments. The subsidiary pays for a share of the
research costs in the United States in return for a share of the rights (to future technological
advances).
Estimates have suggested that leveraging is responsible for about 25% of profit shifting, and
pricing of intangibles is responsible for the remaining 75%.46
Profit shifting would likely be reduced with a lower tax rate. As noted earlier, the U.S. statutory
tax rate was higher than the average rate weighted by GDP in the OECD countries, 27%, and the
G20 countries, 28%. Lowering the U.S. rate to 21% and adding about five percentage points for
state and local taxes (the additional state tax rate slightly higher than the 4% in prior law because
of the lower saving from the federal deduction with the lower federal rate) places the U.S.
statutory rate close to the middle of other countries, at least at current foreign tax rates. Most
profit shifting is estimated to be associated with low-tax or no-tax countries where profits of
multinationals are out of line with the size of the country.47 In that case, rate reduction alone
might not affect profit shifting.
Based on estimates of elasticities of profit location based on tax rate, the rate reduction alone
restores between 0.5% and 5% of profits in the United States.48 Since the revenue lost directly
from the rate cut (given the corporate alternative minimum tax was repealed) was about 35% of
profits, if the primary objective of the rate cut was to address profit shifting, the rate cut costs
more than the potential revenue gain, by some estimates much more.
Other provisions would also affect profit shifting, although some are more difficult to quantify.
They include the thin capitalization rules and BEAT for leveraging, and GILTI, FDII, and BEAT
for transfer pricing. If the rate reduction may be termed a “carrot” (a tax cut to induce less profit
shifting), FDII would also be a carrot, whereas the remaining provisions could be termed “sticks”
(tax increases to reduce profit shifting).

46 Jost H. Heckemeyer and Michael Overesch, Multinationals’ Profit Response to Tax Differentials: Effect Size and
Shifting Channels
, Center for European Economic Research, Discussion Paper 13 -045, July 2013, at http://ftp.zew.de/
pub/zew-docs/dp/dp13045.pdf.
47 See CRS Report R40623, Tax Havens: International Tax Avoidance and Evasion , by Jane G. Gravelle, for a
discussion.
48 An elasticity is the percentage change in quantity divided by the percentage change in price, although the elasticities
used here are semi-elasticities measuring the percentage change in quantity divided by the absolute change in the tax
rate. T hese estimates represent a range of effects from studies: an elasticity of 1.848 with current profit shi fting
accounting for 19% of profits, an elasticity of 1.41 with a share of profits at 15%, and an elasticity of 0.8 with a share
of profits at 5%. T he formula for measuring the effects is EdtS, where E is the elasticity, dt is the tax change (set at
0.14), and S is the current share of U.S. profits being shifted, consistent with the elasticities. See Jane Gravelle, “ Policy
Options to Address Profit Shifting: Carrots or Sticks?” Tax Notes, July 4, 2016, pp. 121-134.
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FDII therefore can be seen as the same as a rate cut but applicable only to domestic income and in
proportion to exports. As an additional rate reduction it appears to be only around a percentage
point (based on the size of revenue effects), although it would be more significant for exporters
and for firms that have a lot of intangibles, as is its objective (to provide a similar tax rate on the
return to intangibles in foreign and domestic locations).
GILTI is the other half of the base erosion provisions designed to encourage intangibles to remain
in the United States and might be more effective per dollar of gain, because it has a very direct
effect of raising taxes for firms that operate largely in tax havens (although the effect would be
more targeted with a per-country foreign tax credit limit). Although there is stil a gap between
the tax rate under FDII and under GILTI (if a firm operated solely in a no-tax jurisdiction, its rate
abroad would be 10.5% on an additional amount of profit shifted, whereas it would be 13.125%
in the United States, with these rates rising to 13.125% and 16.406% after 2025) assuming both
investments were to serve foreign markets.
If firms were investing abroad to manufacture and export to the United States as compared to
manufacturing and sel ing in the United States, the GILTI rate would be considerably below the
standard corporate tax rate of 21% (as the FDII would not come into play, and BEAT does not
cover cost of goods sold).
The movement of intangibles and their associated profits might take some time, as moving
existing intangibles back to the United States would incur a tax (a provision al owing those assets
tax-free status was in the Senate bil but was eliminated in conference).49
Both the tightening in the thin capitalization rules and the inclusion of interest payments in the
BEAT would limit the amount of profit shifting that might be achieved through interest
deductions. A more effective method (although perhaps one with certain administrative
chal enges) may be to al ocate interest within firms in a multinational group in proportion to the
firm’s share of earnings or assets. This provision was included in both the House and Senate bil s
but dropped in conference.
Overal , it appears the new provisions have taken significant steps to reduce the incentives for
profit shifting.
Repatriation
The prior law’s application of the deferral principle al owed a firm to delay taxation of its
earnings in foreign-incorporated subsidiaries until the income was paid as a dividend to the U.S.
parent company. This tax contributed to U.S. companies holding an estimated $2.6 tril ion in
unrepatriated earnings that could not be directly used for U.S. operations.50 Concerns were raised
that the inability to use these funds could reduce U.S. economic growth and job creation. As
noted earlier in the discussion of investment location, however, the holding of funds abroad was
unlikely to affect domestic investment.
After the assessment of the deemed repatriation tax in the 2017 tax revision, U.S. companies wil
have unrestricted access to previously unrepatriated funds. In addition, future overseas earnings

49 For further discussion, see Isabel Gottlieb, “Will T ax Reform Bring Back Patents?” Bloomberg BNA Daily Tax
Report
, January 19, 2018.
50 Institute on T axation and Economic Policy (ITEP), “Fortune 500 Companies Hold a Record $2.6 T rillion Offshore,”
March 28, 2017, https://itep.org/fortune-500-companies-hold-a-record-26-trillion-offshore/.
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wil general y not be taxed when repatriated to the United States as a result of the dividend
exemption.51
Preliminary evidence indicated a substantial repatriation following the act, but not of al the cash
held abroad. In 2018, repatriations were $664 bil ion compared to amounts ranging from $144
bil ion to $158 bil ion in each of the three previous years.52 Some of the deferred income abroad
is not in cash, but in physical investments such as plant and equipment. A study by the Federal
Reserve estimated about $1 tril ion held in cash.53 Thus about half of the cash held abroad appears
to have been repatriated based on the increase in repatriations in 2018 and the estimate of $1
tril ion in cash.
Inversions
Corporate inversions occur when U.S. firms reorganize their structure so that the “parent”
element of the group is a foreign corporation rather than a corporation chartered in the United
States. A main objective of these transactions is U.S. tax savings, and they involved little to no
shift in actual economic activity. These tax benefits included earnings stripping in the U.S.
operation (in part by leveraging), future operation under a territorial system, and finding ways to
effectively repatriate earnings of foreign subsidiaries. Since 2004, U.S. policy (both enacted law
and regulations) has attempted to limit the benefits of inversion transactions.
The anti-inversion provisions in the 2017 tax revision significantly reduce the tax incentives
available for newly inverted firms, especial y in the next 10 years, when inversion triggers a
retroactive taxation of deemed repatriations at a 35% rate, rather than rates of 8% and 15.5%.
After that time, the base erosion tax on cost of goods sold, the downward attribution rules, and the
taxation of dividends to individual shareholders at ordinary rates make inversions less attractive.
The restrictions on interest deductions under the tightened thin capitalization rules make loading
the U.S. firm with debt less feasible, although there are currently regulations aimed at inverted
companies that treat some related party debt as equity. These regulations are, however, scheduled
for review and could be changed, potential y making the thin capitalization rules more important
as an anti-inversion measure.
Other provisions in the new law would also make U.S. headquarters more attractive, including the
lower corporate rate, the move to a territorial tax to the extent of the dividend exclusion, and
FDII, although GILTI and BEAT would make a U.S. location less attractive.
Although the legislative tax changes made inversions less attractive, announced inversions had
already substantial y slowed following the regulatory changes implemented in 2014, 2015, and
2016, and aggregate data also indicated that foreign acquisitions of U.S. companies fel in 2016
and 2017.54

51 Portfolio investment will remain subject to U.S. tax when repatriated.
52 See CRS Report R45736, The Economic Effects of the 2017 Tax Revision: Preliminary Observations, by Jane G.
Gravelle and Donald J. Marples.
53 Michael Smolyansky, Gustavo Suarez, and Alexandra T abova, “U.S. Corp orations’ Repatriation of Offshore
Profits,” September 4, 2018, FEDS Notes, Board of Governors of the Federal Reserve System,
https://www.federalreserve.gov/econres/notes/feds-notes/us-corporations-repatriation-of-offshore-profits-
20180904.htm.
54 See CRS Report R45736, The Economic Effects of the 2017 Tax Revision: Preliminary Observations, by Jane G.
Gravelle and Donald J. Marples.
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Issues With International Agreements: Tax Treaties, WTO, and
OECD Minimum Standards
Several legal scholars and practitioners have pointed out conflicts between the new law and
current international agreements.55 This section summarizes the current agreements and that
debate.
Current Agreements
Bilateral Tax Treaties
The United States has bilateral tax treaties with approximately 65 countries that are intended to
reduce the incidence of double taxation and prevent tax evasion.56 Under these treaties, residents
(not necessarily citizens) of foreign countries are taxed at a reduced rate, or are exempt from U.S.
taxes on certain items of income they receive from sources within the United States. These
reduced rates and exemptions vary among countries and specific items of income. Under these
same treaties, residents or citizens of the United States are taxed at a reduced rate, or are exempt
from foreign taxes, on certain items of income they receive from sources within foreign countries.
Treaties contain a number of provisions affecting the sourcing and taxation of profits.
World Trade Organization
The World Trade Organization (WTO), established in 1995, succeeded the General Agreement on
Tariffs and Trade (GATT, established in 1947), which was created to foster an open international
framework. The WTO provides a mechanism to settle disputes on practices that affect trade.
The United States had, in the past, a dispute over a series of tax provisions that were struck by
GATT and then the WTO as prohibited export subsidies. The first provision was found to be a
prohibited provision and was replaced by a second that was in turn found to be prohibited, then
replaced by a third, also found il egal (the Domestic International Sales Corporation, or DISC,
enacted in 1971; the Foreign Sales Corporation, or FSC, enacted in 1984; and the Extraterritorial
Income regime, or ETI, enacted in 2000). Following the last finding, where countries could have
levied countervailing tariffs, the ETI provisions were repealed (in 2004).

55 See David Kamin et al., The Games They Will Play: Tax Games, Roadblocks, and Glitches Under the New
Legislation
, December 7, 2017, at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3084187 and The Gam es They
Will Play: An Update on the Conference Com m ittee Tax Bill
, at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=
3089423; Reuven Avi-Yonah, Beat It: Tax Reform and Tax Treaties, University of Michigan Public Law and Legal
T heory Research Paper No. 587, January 2018, at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3096879, and
The Elephant Always Forgets, Tax Reform and the WTO, University of Michigan, Public Law and Legal T heory
Research Paper No. 585, January 18, 2018, at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3095349; Alison
Bennett, “Legislation Raises T ax T reaty Concerns for U.S. Multinationals,” Bloomberg BNA, Daily Tax Report,
December 14, 2017; Joe Kirwin, “ EU Contemplates WT O Challenge to U.S. T ax Reform,” Bloomberg BNA, Daily
Tax Repor
t, December 22, 2017; Stephanie Soong Johnston, “ EU Commission Mulls ‘All Options” in Wake of Final
U.S. T ax Bill,” Worldwide Tax Daily, December 26, 2017; Bret Wells, “Get With T he Beat,” Tax Notes, February 19,
2018, pp. 1023-1032; J. P. Finet, “ WTO Challenges to T ax Reform’s International Provisions Likely,” Tax Notes
International
, December 11, 2017.
56 For a list of countries with which the United States has income tax treaties, see https://www.irs.gov/businesses/
international-businesses/united-states-income-tax-treaties-a-to-z.
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Organisation for Economic Co-operation and Development
Although the Organisation for Economic Co-operation and Development (OECD), with a 34-
country membership, has no special authority, the United States is a party to the organization,
which provides many standards for tax practices, such as transfer pricing. Recently, the OECD
has engaged in a project to reduce base erosion and profit shifting (BEPS).57 One hundred and
two countries including the United States have agreed to four minimum standards, one of which
is countering harmful tax practices, a standard primarily aimed at patent boxes (regimes that
provide lower tax rates on income from intel ectual property).
The New Law: Issues with Tax Treaties, WTO, and the
OECD BEPS Agreement

Tax Treaties and BEAT
There is some disagreement over whether BEAT violates tax treaties. The primary reason such a
violation might occur involves nondiscrimination rules, which require the same deductions be
al owed to residents and nonresidents, and might apply because BEAT taxes payments to foreign
related partners but not domestic ones. However, BEAT does not disal ow deductions but rather
includes them in a minimum tax base, leaving this issue uncertain. In addition, it is unclear what
sort of action could be taken, at least by EU member states, whose tax laws are constrained by EU
agreements.
WTO, FDII, and BEAT
There is considerably more agreement that FDII is also a prohibited export subsidy under the
WTO. There are also some technical reasons to see parts of BEAT as inconsistent with the WTO
as a tax on imports. BEAT excludes cost of goods sold, but includes imports of depreciable
property and costs of goods sold for firms that invert. These latter instances may be so rare or so
unlikely (i.e., if the law virtual y ends inversions) that the practical consequence could be limited.
OECD Standards and FDII
One of the minimum standards agreed to by the United States was countering harmful tax
practices, including patent boxes located in countries where the activities to create intangibles
were not performed. The regime created by FDII could be viewed as in conflict with that
agreement, since there is no connection to the economic activity creating the income being
located in the United States. According to Douglas Poms, Treasury’s international tax counsel, the
OECD’s Forum on Harmful Tax Practices wil soon assess whether FDII violates the minimum
standard for preferential regimes.58
Concerns and Options in the New Tax Framework
During consideration of the tax legislation and after its enactment, numerous issues have been
raised about the general system and about specific aspects of the new law, including GILTI, FDII,

57 See CRS Report R44900, Base Erosion and Profit Shifting (BEPS): OECD/G20 Tax Proposals, by Jane G. Gravelle.
58 Ryan Finley, “Online Platform Users Shouldn’t Create a PE, US Official Says,” Worldwide Tax Daily, March 28,
2018.
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BEAT, and other provisions. This section discusses some of the more technical issues within the
framework of the new law, but some lawmakers have proposed more basic changes.
Many of the issues discussed in this section have been raised in conferences, individual articles,
and a congressional hearing.59 This section also discusses significant regulations that have been
promulgated since enactment of P.L. 115-97. It first discusses legislative proposals and then
provides a general discussion arranged by topic.
Legislative Proposals in the 117th Congress
There are a variety of legislative proposals to strengthen international tax rules regarding the
taxation of foreign-source income. Changes to make GILTI fully taxable—by eliminating the
deduction for tangible investment and eliminating the 50% deduction—have been proposed in
President Biden’s budget plan.60 Such changes have also been included in four bil s introduced in
the 117th Congress: S. 20 (Klobuchar), S. 714 (Whitehouse), H.R. 1785 (Doggett), and S. 991
(Sanders). These proposals would also provide for a per-country limit on foreign tax credits under
GILTI (and for al foreign tax credits in S. 714, H.R. 1785, and S. 991). Other aspects of these
proposals as wel as additional bil s are discussed below.
Biden Proposal
President Biden’s budget proposals include major changes to the corporate tax and the
international regime. He also proposed other changes that, although not specific to the
international tax system, could increase taxes on foreign-source income, including a proposal to
increase the corporate tax rate to 28% and to impose an alternative 15% minimum tax on the
book income of companies with more than $2 bil ion in income.
With respect to the international provisions, the plan would tax foreign-source income outside of
Subpart F by disal owing the deduction for a deemed return on tangible assets, reduce the
deduction to achieve a 21% rate, apply the foreign tax credit on a country-by-country basis, and
eliminate the current exclusion for foreign oil and gas extraction income. The plan would
strengthen anti-inversion rules by treating foreign corporations that are managed and controlled in
the United States as domestic corporations and treating inverted firms as U.S. firms when the
shareholders of the former U.S. company own more than 50% of the shares. It would repeal the
FDII deduction, with the revenues used to provide incentives for research in the United States. It

59 Although some specific issues have particular references (including a number of articles from various publications by
tax analysts reporting on tax conferences), the following are general sources for many of the points discussed in this
section. T wo reports coauthored by 13 law professors appeared during the course of the debate and after the conference
report: David Kamin et al., The Gam es They Will Play: Tax Gam es, Roadblocks, and Glitches Under the New
Legislation
, December 7, 2017, at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3084187, and David Kamin et
al., The Gam es They Will Play: An Update on th e Conference Com m ittee Tax Bill, at https://papers.ssrn.com/sol3/
papers.cfm?abstract_id=3089423; see also Reuven Avi-Yonah, Beat It: Tax Reform and Treaties, University of
Michigan Public Law Research Paper No. 587, March 22, 2018, at https://papers.ssrn.com/sol3/papers.cfm?
abstract_id=3096879. A conference held by the International T ax Policy Forum and Institute and Georgetown Laws
Institute for International Economic Law, “ Can an Internationally Competitive T ax Protect Its T ax Base?,” on February
2, 2018, featured many experts in international tax law who commented on the new tax regime. Some of the slides are
posted at https://www.itpf.org/conferences and U.S. Congress, Senate Committee on Finance, How U.S. International
Tax Policy Im pacts Am erican Workers, Jobs, and Investm ent
, hearings, 117th Cong., 1st sess., March 25, 2021,
https://www.finance.senate.gov/hearings/how-us-international-tax-policy-impacts-american-workers-jobs-and-
investment .
60 Department of the Treasury, General Explanations of the Administration’s Fiscal Year 2022 Revenue Proposals,
May 2021, https://home.treasury.gov/system/files/131/General-Explanations-FY2022.pdf.
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would replace BEAT with a new provision, stopping harmful inversions and ending low-tax
developments (SHIELD), which would deny related-party deductions when the income is
recognized in a low-tax country. It would limit interest deductions in the United States to the
proportionate share of the firm’s earnings.61 Additional y, it would disal ow foreign tax credits on
sales of stock by foreign hybrid entities. Final y, the plan would disal ow the expenses of moving
production abroad (offshoring) and provide a credit for moving production to the United States.
The revenue gain from the corporate provisions, including the rate increase and the minimum tax
on book income, is estimated at $2,035 bil ion from FY2022 to FY2031.
S. 714 and H.R. 1785
In addition to making GILTI fully taxable (including disal owing the exclusion for foreign oil and
gas extraction income and creating per-country limits on foreign tax credits), S. 714 and H.R.
1785 would eliminate the deduction for FDII; treat foreign corporations that are managed and
controlled in the United States as domestic corporations; treat inverted firms as U.S. firms when
the shareholders of the former U.S. company own more than 50% of the shares; and limit interest
deductions in the United States to the proportionate share of the firm’s earnings.62 The last
proposal (to al ocate worldwide interest) was original y included in both the House and Senate
versions of H.R. 1 in the 115th Congress (in somewhat different form), but was not retained in the
final law (P.L. 115-97). These bil s do not change the 21% tax rate and have the effect of taxing
al foreign-source income at the 21% rate.
S. 725 and H.R. 1786
The Stop Tax Haven Abuse Act, S. 725 (Whitehouse) and H.R. 1786 (Doggett), would repeal the
check-the-box regulations and the look-thru rules in the tax code that al ow firms to avoid
Subpart F taxation-related payments through disregarded entities (al owing multinational
corporations to disregard firms, such as a subsidiary of the parent foreign subsidiary, by not
treating them as separate entities).63 It would treat swap payments to foreign corporations as
sourced to the payor rather than the payee, which would subject swap payments sent abroad to
U.S. tax. (Swaps are contracts that al ow one to take a financial position based on expected future
prices, such as currency prices.) It would require firms who file SEC 10-K reports to disclose
actual U.S. federal, state and local, and foreign taxes paid as wel as country-by-country
information on revenues, taxes, assets, employees, earnings, and profits. It would charge interest
on instal ment payments for the transition tax on accumulated deferred foreign earnings.
The bil would modify BEAT by reducing the gross receipts test from $500 mil ion to $100
mil ion, by eliminating the 3% rule, and by requiring that payments that the taxpayer elects to
capitalize (thereby reducing the deductions) be included. It would treat foreign oil-related base
company income as part of Subpart F.

61 T he allocation of interest is based on the U.S. domestic corporation’s share of worldwide earnin gs before interest,
taxes, depreciation, and amortization (EBITDA).
62 See Sen. Sheldon Whitehouse, “Whitehouse, Doggett, Durbin Introduce No T ax Breaks for Outsourcing Act,” press
release, March 11, 2021, at https://www.whitehouse.senate.gov/news/release/whitehouse-doggett -durbin-introduce-no-
tax-breaks-for-outsourcing-act. T he allocation of interest in H.R. 1785 and S. 714 is based on the U.S. domestic
corporation’s share of worldwide earnings before interest, taxes, depreciation , and amortization (EBITDA). T he
Whitehouse-Doggett bills have been introduced in prior Congresses, although without the per -country foreign tax credit
limit: S. 2459 and H.R. 5108 in the 115th Congress and S. 780 and H.R. 1711 in the 116th Congress.
63 See CRS In Focus IF11392, H.R. 1865 and the Look-Through Treatment of Payments Between Related Controlled
Foreign Corporations
, by Jane G. Gravelle, written when an extension of the look-through rules, which was a
temporary provision, was being considered.
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The bil would restrict foreign tax credits for taxes paid where there is an income tax that is paid
in part to receive a benefit (i.e., the firm is paying a tax in a dual capacity) to the amount that
would be paid if the taxpayer were not a dual-capacity taxpayer. This provision typical y relates
to taxes being substituted for royalties in oil-producing countries. (The bil includes a provision
that this restriction wil not abrogate any existing treaties.)
It would tax the gain on the transfer of an intangible asset to a foreign partnership. General y,
exchanges of assets in return for a share of the partnership would not be taxed.
Final y, some sections of the bil are associated with international tax administration and
enforcement, including taxation of U.S. citizens living abroad. (As previously mentioned, the bil
would make GILTI fully taxable and create per-country limiting on foreign tax credits.)
S. 991
The Corporate Tax Dodging Prevention Act (S. 991) would also modify multiple aspects of the
international corporate income tax system.64 Foreign-source income would be taxed at a 35% rate
(including foreign oil and gas extraction and related income), the same rate as on domestic
income. Similar to some elements of S. 714, S. 725, H.R. 1785, and H.R. 1786, the bil would
repeal the check-the-box regulations and the look-thru rules, eliminate the deduction for FDII,
treat foreign corporations that are managed and controlled in the United States as domestic
corporations, and treat inverted firms as U.S. firms when the shareholders of the former U.S.
company own more than 50% of the shares.
The bil would modify BEAT by reducing the gross receipts test from $500 million to $25
mil ion, raising the BEAT rate to 12.5% in 2022 (moved up from 2026 under current law),
eliminating the 3% rule, and requiring that payments that the taxpayer elects to capitalize (thereby
reducing the deductions) be included. It would treat foreign oil-related base company income as
part of Subpart F. The bil would also limit the deductibility of interest for U.S. affiliates of
multinational companies to 105% of the U.S. affiliates’ share of total income.
S. 1501 and H.R. 2976
Two bil s, S. 1501 (Durbin) and H.R. 2976 (Doggett), would tighten anti-inversion rules by
treating foreign corporations that are managed and controlled in the United States as domestic
corporations and treating inverted firms as U.S. firms when the shareholders of the former U.S.
company own more than 50% of the shares.
Proposal by Senators Wyden, Brown, and Warner
Senator Wyden, chairman of the Senate Finance Committee, along with Senators Brown and
Warner, have proposed draft legislation that would eliminate the deemed deduction for tangible
investment from GILTI.65 It would exempt income in countries with tax rates higher than the U.S.
rate, and impose a per country limit on foreign tax credits for the remaining countries. The
amount of any deduction, either GILTI or FDII, is yet to be determined, as is the share of foreign
tax credits al owed (80% or more). The proposal would apply the same exclusion for countries
with high tax rates and the same limit on the foreign tax credit to Subpart F income, and apply the

64 In addition to the international corporate tax provisions, the act would make additional changes to the corporate
income tax, such as raising the top corporate in come tax rate to 35%.
65 See U.S. Congress, Senate Committee on Finance, International Tax Reform Framework Discussion Draft: Section-
by-section description
, at https://www.finance.senate.gov/imo/media/doc/section%20by%20section%20-
%20WBW%20Framework%20discussion%20draft%208.20.21%20FINAL.pdf .
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high tax exclusion to branch income. (Currently, Subpart F income is excluded if taxes are 90%
or more of the U.S. rate, with a similar rule applied through regulation to GILTI, but not to branch
income. Both are eligible for credits for 100% of foreign taxes paid.)
The draft would also disal ow any cost of research and stewardship (overhead costs) to be
deducted, and these expenses could not be al ocated to foreign-source income if performed in the
United States. This change increases foreign-source income for purposes of the foreign tax credit
limit and increases creditable foreign taxes.
The income eligible for the deduction for FDII would be revised from a provision based on an
estimate of intangible income to a percentage (as yet unspecified) of research costs and certain
worker training costs conducted in the United States. The deduction percentages for GILTI and
FDII would be equated. Eligible training costs would be defined as apprenticeship and training
programs that lead to a postsecondary credential and are provided to nonhighly compensated
employees.
For BEAT, a higher-tier tax would be applied to base erosion payments, so that the alternative tax
would be 10% of taxable income without base erosion payments plus a higher tax rate (to be
determined) that would apply to the added base erosion payments. Both rates would increase by
2.5 percentage points after 2025. Al domestic credits would be al owed (e.g., research, energy,
and others). Additional changes are being considered to address the objectives of the
Administration’s SHIELD proposal.
Provisions in the House Ways and Means Build Back Better Proposal
The House Ways and Means Build Back Better Act (BBBA; H.R. 5376 ) proposal, part of
reconciliation, would increase the corporate tax rate to 26.5%. The bil also contains a number of
revisions to the international tax system that are similar to those in the Administration’s budget
and other congressional proposals.66
Under the BBBA proposal, a firm’s U.S. share of worldwide interest deductions could not exceed
110% of its U.S. share of worldwide earnings before interest, taxes, depreciation, and
amortization (EBITA). The proposal would limit disal owed interest from either this provision or
the existing 163(j) limit to a five-year carryforward rather than being carried forward indefinitely.
The BBBA would accelerate the deduction for GILTI to the 37.5% now scheduled for after 2025,
making the effective tax rate 16.5625%. It also would accelerate the lower deduction for FDII,
leading to a tax rate of 20.7% and al ow a carryforward of unused GILTI and FDII deductions. It
would reduce the deemed deduction for tangible assets from 10% to 5% and increase the share of
foreign taxes credited from 80% to 95%. Foreign oil and gas extraction income would be
included in GILTI. Under the BBBA, GILTI income and loss would apply on a per-country basis
(so that losses in one country could not offset gains in another country). It al ows losses a one-
year carryforward.
The BBBA proposal would eliminate the branch basket under the foreign tax credit and apply the
foreign tax credit limit on a per-country basis for the remaining baskets: GILTI, passive, and
active. It would no longer al ocate interest and head office costs to foreign source income
(increasing the limit). Unused foreign tax credits could be carried forward for 5 years rather than
10 years and the one-year carryback would be eliminated.

66 See CRS Report R46923, Tax Provisions in the “Build Back Better Act:” The House Ways and Means Committee’s
Legislative Recom m endations
, coordinated by Molly F. Sherlock for a summary of all tax provisions and revenue
estimates.
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The proposal would increase the BEAT tax rate from 10% (12.5% after 2025) to 12.5% in 2024
and 2025, and 15% after 2025 and al ow tax credits. It adds to the base payments to foreign-
related parties for inventory that is required to be capitalized (such as inventory to produce
tangible property) and payments for inventory in excess of cost.
The proposal would also make some smal er (in terms of revenue) changes, and notably two
increases and decreases in one provision that result in a smal net change. It would limit the
current deduction for dividends by U.S. persons who own 10% of a foreign firm to only those
dividends from controlled foreign corporations (CFCs). Firms could elect CFC status with the
agreement of al U.S. shareholders (which would al ow the dividend deduction but make them
subject to Subpart F and GILTI). This provision would raise revenue. It would also provide a
benefit by reducing the scope of downward attribution rules adopted in 2017 that al ow control
for purposes of determining CFC status to be traced up through the foreign parent.67 The proposal
would increase the required ownership share by the foreign parent from 10% to 50% for these
rules to apply. This latter change focuses the attribution rules more on inverted corporations.
In addition, the proposal would make some changes in Subpart F by limiting the inclusion of
foreign base company sales and service income to transactions with related parties resident in the
United States, moving income associated with foreign affiliates into the GILTI category. It would
also eliminate the “branch” rule that treats branches as subsidiaries for foreign base company
sales income. This change could gain revenue given the more restrictive per-country rules relating
to income and loss in GILTI. In the same section of the bil , another revision that gains revenue is
included.68 Subpart F income is normal y treated as a distribution to shareholders on the last day
of the year. The proposal assigns income to shareholders who had ownership at other times of the
year who received dividends that were eligible for the dividends-received deduction or were
exempt from Subpart F rules for other reasons. This change associates taxable Subpart F income
with shareholders who received benefits.
General Issues in the Move to a Territorial Tax and the
Dividend Deduction
Some critics have expressed general concerns about the overal system and the move to a
territorial tax that treats operations and owners differently.69 The dividend deduction applies only
to income of businesses organized as foreign corporations and not to branches. At the same time,
elements of the new law make it costlier to incorporate a new business. The elimination of the
active trade or business exception in Section 367(a)(3) of the tax code taxes transfers of assets
used in a foreign branch (and increases recognition of gain when incorporating branches with
losses). The additions of goodwil , going concern value, and workforce in place to the definition

67 T his downward attribution provision was part of an earlier technical corrections draft introduced by former Chairman
of Ways and Means Kevin Brady. For a technical explanation, see Joint Committee on Taxation, T ax Clerical and
T echnical Corrections Act, JCX-1-19, January 2, 2019, https://www.jct.gov/publications/2019/jcx-1-19/.
68 T his provision was also part of the technical corrections draft.
69 T his discussion summarizes comments made in Mindy Herzfeld, “How Some T axpayers Got Cut Out of T he T ax
Cuts and Jobs Act,” Tax Notes International, January 22, 2018, pp. 277-281. It does not cover some of the narrower
and technical points made, especially with respect to the tax treatment of foreign investors. T he treatment of individuals
under GILT I is also discussed in Martin Sullivan, “More GILT I than You T hought,” Tax Notes, February 12, 2018, pp.
587-592.
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of intangibles and the increased IRS authority over transfer pricing wil increase the value of
assets being transferred.70
In addition, the system treats individual owners of foreign corporations and portfolio investors
differently from corporations with 10% ownership. There is no deduction for dividends because
the provision was enacted as an expansion of the intercorporate dividend deduction, although the
repatriation tax applies to corporate and individual shareholders that have at least one U.S.
corporate shareholder owning 10% of the firm. Thus individuals pay the repatriation tax, which
can be viewed as a transition tax to move to a system with the deduction, although they do not
benefit from dividend deduction.
GILTI is treated as Subpart F income so it wil be imposed on individual shareholders, without
the indirect foreign tax credits; in addition, they do not get the GILTI deduction, and income is
taxed at ordinary rates (although in some cases they would be eligible for lower rates on qualified
dividends). They are also not eligible for a FDII deduction.71
The sale of stock wil not be eligible for a dividend deduction, so firms may be encouraged to sel
the underlying assets abroad to be eligible for the lower GILTI rate.72
At the same time, at least with respect to the dividend deduction, the individual shareholder is the
final taxpayer, whereas a corporation’s earnings from abroad would be taxed again to
shareholders if distributed as a dividend.
One technical point relating to the dividend relief proposal is that the legislation did not change
the rules treating as a deemed distribution when CFC stock is pledged as security on a loan of the
U.S. firm, or when the CFC directly guarantees the loan. In that case, such income would be
subject to tax, although an actual dividend would be deductible. This provision was included in
the House and Senate bil but not in the final legislation.73
GILTI
GILTI has been criticized by some for being too harsh and by some as not capturing enough
income.
Perhaps the major concern that GILTI is too harsh involves the foreign tax credit. The law retains
the existing rules for the al ocation of deductions for purposes of the foreign tax credit limit.
These rules al ocate interest, R&D spending, and overhead to a narrowed GILTI foreign tax credit
basket (which excludes a variety of foreign-source income, including royalties that may be
associated with domestic research and development). Al ocating too many deductions to foreign-
source income can cause GILTI to apply at a higher rate than 13.125%. In addition, there is no
foreign tax credit carryback or carryforward, so that unused foreign tax credits are lost, and no

70 See Alexander Lewis, “U.S. T ax Reform Bill’s International Provisions Require Quick Action, Practitioners Say,”
Tax Notes Today, December 19, 2017.
71 As with Subpart F, individuals are required to include GILT I but can’t get the foreign tax credit. T here are some
restructuring possibilities or elections that may provide individuals with tax reductions. See Sandra P. McGill et al.,
“GILT I Rules Particularly Onerous for Non-C Corporation CFC Shareholders,” McDermott, Will & Emery, January
30, 2018, at https://www.mwe.com/en/thought -leadership/publications/2018/01/gilti-rules-particularly-onerous-nonc-
corporation.
72 Alexander Lewis, “T axpayers Should Prepare Now for GILT I and FDII,” Worldwide Tax Daily, January 29, 2018.
73 Winston and Strawn LLP, “T ax Reform: Impact on Lending,” January 16, 2018, at https://www.winston.com/en/
thought -leadership/tax-reform-impact-on-lending.html.
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credits are al owed for loss CFCs.74 CFCs with losses also lose the tangible asset return exclusion,
as wel as foreign tax credits, and foreign tax credits of other CFCs are reduced to the extent that
the loss offsets another CFC’s income.75
The IRS has proposed and finalized regulations that relate to the al ocation of expenses to the
different types of foreign-source income. The regulations rejected the argument made by some
commentators to al ocate no deductions (as the law retained the prior al ocation rules), and
al ocated expenses to the GILTI foreign income basket as wel as other baskets (such as Subpart F
and the general basket that includes royalties). It did al ow for adjustments for exempt or
excluded income, which wil reduce the amount of expenses apportioned to GILTI. The final
regulations also included an exclusion for high-taxed income (a similar provision exists for
Subpart F income) that is taxed at more than 90% of the U.S. rate (or 18.9%). This rule is referred
to as a high-tax kickout rate.
The current system, therefore, provides a benefit for foreign-source income by al owing
deductions by the U.S. parent for expenses properly apportioned to foreign sources when that
income is not taxed. Proposed regulations have indicated that research expenses wil not be
apportioned to GILTI, however.76 The regulation al owing an al ocation of deductions to the
exempt portion of income as wel as the taxable portion can result in low tax rates or negative tax
rates on foreign-source income just as the al owance of deductions associated with deferred
income could.
Some taxpayers argued that al income from CFC’s with tax rates above 13.125% should be
excluded from coverage under GILTI. The regulations, however, followed the pattern of the
treatment of Subpart F income. The 90% high-tax kickout rate has been criticized as not having a
basis in the statute (unlike the Subpart F provision that is explicitly stated in the law) and creating
another exempt set of income like that for Subpart F.77 Legislation was introduced in the 116th
Congress by Senators Ron Wyden and Sherrod Brown (S. 3280 in the 116th Congress) to prevent
application of the high-tax kickout rate for GILTI.

74 In addition to being discussed in the general sources mentioned earlier, many of these points about GILT I are made
by Martin Sullivan, “ More GILT I than You T hought,” Tax Notes, February 12, 2018, pp. 587-592. Sullivan also notes
that the GILT I deduction is reduced when GILT I and FDII exceed taxable income. Sullivan’s objective in the article
appeared to be explaining these features of GILT I rather than necessarily suggesting revisions. Others have made the
point that the taxable income limit is to prevent GILT I and FDII deductions from sheltering other taxable income. See
Lee Sheppard, “News Analysis: International Clawbacks and Minimum T axes in T ax Reform,” Tax Notes, January 1,
2018.
75 Alexander Lewis, “T axpayers Should Prepare Now for GILT I and FDII,” Worldwide Tax Daily, January 29, 2018.
76 See regulation REG-105495-19 at https://www.irs.gov/pub/irs-drop/reg-105495-19.pdf, which excluded an allocation
to the GILT I basket. T he change is justified in the regulations because research must be properly compensated for.
77 Stephen E. Shay, “A GILT I High-T ax Exclusion Election Would Erode the U.S. T ax Base,” Tax Notes, November
18, 2019, pp. 1129-1146; Testimony of Professor Rebecca Kysar, before the House Ways and Means Committee,
TCJA’s Business Tax Provisions: Design Flaws and Undemocratic Implementation, February 11, 2020,
https://waysandmeans.house.gov/sites/democrats.waysandmeans.house.gov/files/documents/Kysar%20T estimony.pdf.
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The regulations had not dealt fully with the al ocation of research and development expenses,78
but proposed regulations indicated these expenses would not be al ocated to GILTI, based on the
argument that taxpayers must be compensated in income for the research expenditures.79
Another criticism is that interest is offset first against deemed tangible income, so if a firm
borrows to buy an intangible asset and has some net tangible income, the expense reduces the
exemption and is, in effect, not deductible. An alternative would be to al ocate interest in
proportion to the shares of tangible deemed income and overal income before interest
deductions.80 At the same time, the Treasury regulations have been criticized as contravening the
statute by al owing the interest expense to be netted against al interest income and not just
interest income of related parties.
Many critics note that GILTI is not focused on intangible income but on any residual income not
associated with tangible property, and thus captures excess profits, along with income from
finance or insurance.
Another issue is the basing of tangible property on cost less depreciation rather than fair market
value. The depreciation rules in that case provide for slower recovery than those used for
domestic equipment (although they are similar for structures), but basis is not adjusted for
inflation, so it seems more likely that tangible property wil be undervalued, making the tangible
exemption too smal . Using cost minus depreciation does, however, avoid disputes over fair
market value.
Others argue that GILTI could be made stronger. Unlike some earlier proposals for a minimum
tax to limit profit shifting under a territorial tax, which were to be imposed on a per-country basis,
GILTI al ows cross-crediting over al countries, which can help shield income from the U.S. tax.
Cross-crediting creates incentives to blend operations in high-tax and low-tax countries. Under
cross-crediting, if a firm is paying tax, there is an incentive to shift operations from the United
States to a country with a similar tax rate to generate foreign tax credits to shield income
potential y taxable under GILTI.81 That is, under these circumstances, investment in intangible
assets abroad is subsidized.
Another criticism of GILTI is that the 10.5% tax rate would stil apply to operations in a zero-tax-
rate country, and to match the FDII rate, the tax rate should be set at 13.125% as a method to

78 Preliminary Reg-105600-18, at https://www.irs.gov/pub/irs-drop/reg-105600-18.pdf; regulations were finalized as
part of general regulations relating to GILT I, T .D. 9866, on June 21, 2019, https://s3.amazonaws.com/public-
inspection.federalregister.gov/2019-12437.pdf. T hese regulations are discussed, along with others, by Mindy Herzfeld,
“Status Check on T CJA Guidance,” Tax Notes Federal, July 29, 2019, pp. 654-658. See also Mindy Herzfeld, “Gaps in
the T CJA Guidance,” Tax Notes International, August 5, 2019, pp. 480-484; and Andrew Velarde, Jennifer
McLoughlin, and Ryan Finley, “ GILT I Regs Make Room for High -T ax Exclusion,” Tax Notes International, June 24,
2019, pp. 1340-1342.
79 Internal Revenue Service (IRS), REG-105495-19, “ Guidance Related to the Allocation and Apportionment of
Deductions and Foreign T axes, Financial Services Income, Foreign T ax Redeterminations, Foreign T ax Credit
Disallowance Under Section 965(g), and Consolidated Groups,” 84 Federal Register 69124, December, 17, 2019, at
https://www.federalregister.gov/documents/2019/12/17/2019-24847/guidance-related-to-the-allocation-and-
apportionment -of-deductions-and-foreign-taxes-financial.
80 T estimony of Professor Rebecca Kysar, before the House Ways and Means Committee, TCJA’s Business Tax
Provisions: Design Flaws and Undem ocratic Im plementation
, February 11, 2020, https://waysandmeans.house.gov/
sites/democrats.waysandmeans.house.gov/files/documents/Kysar%20T estimony.pdf.
81 T his incentive was pointed out early in the tax debate. Gene B. Sperling, “How T rump’s Corporate-Tax Plan Could
Send American Jobs Overseas,” The Atlantic, November 1, 2017, at https://www.theatlantic.com/business/archive/
2017/12/tax-jobs-overseas/547916/?wpmm=1&wpisrc=nl_daily202.
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protect the U.S. tax base. (These rates apply initial y, but subsequently the rate should be set at
16.406%.)
Others have argued that the deemed return on tangible income may be too high and is fixed rather
than variable. Thus, it cannot reflect inflation or variations in real interest rates. An alternative is
to set the rate at a riskless return plus a fixed risk premium. Another concern about the tangible
investment exemption is that it wil encourage low-margin tangible investments to move abroad
to generate additional GILTI deductions, which might support setting the deemed return rate
lower.
Final y, given the criticisms of FDII (with respect to violating the WTO), incentives to locate
abroad could also be offset by eliminating both the GILTI and FDII deduction, while al owing a
100% foreign tax credit. Or, alternatively, FDII could be eliminated, and the foreign tax credits
al owed for GILTI could be in proportion to the share of income taxed (i.e., 50% of foreign taxes
al owed with a 50% deduction, and 62.5% al owed when the exclusion is 37.5%), so a residual
tax would apply whenever the foreign tax rate was less than the U.S. corporate rate.
Some other, more technical issues have also been raised about GILTI.82 One issue is that there is
not a clear al ocation method for attributing foreign taxes to GILTI.83 Issues of the assignment of
foreign taxes were addressed in the regulations discussed above.84
Options for Revision
Most of the revisions that might respond to criticisms are relatively straightforward, such as
al owing foreign tax credit carryforwards (including for loss CFCs), al owing the same level of
exemptions for GILTI as for FDII, apportioning interest deductions based on the share of tangible
earnings, imputing income for tangible assets with a riskless return plus a risk premium, or
disal owing GILTI and FDII deductions altogether or disal owing FDII and reducing foreign tax
credits under GILTI. Others, such as apportioning deduction al ocations across the relevant
foreign tax credit baskets, using a per-country limit, or valuing tangible assets at market value,
may represent administrative and policy chal enges.
FDII
FDII has attracted considerable criticism because it appears likely to violate WTO rules, to the
point that some have recommended it be eliminated altogether. As noted above, the same relative
tax treatment at home and abroad can be obtained by eliminating both the GILTI and FDII
deductions.
Commentary has pointed to mechanisms for a firm to increase the benefits of FDII, such as round
tripping (sel ing abroad to an independent firm and then reimporting products), sel ing unfinished

82 Elizabeth J. Stevens and H. David Rosen, “GILT I Pleasures,” Worldwide Tax Daily, February 28, 2018, express
concern that the statute does not appear to assign the gross-up of taxes (taxes added back to after-tax income to produce
after-tax income) to the GILT I basket. Andrew Velarde, “ Is T reasury Reconsidering Interest Limitation Role on
GILT I?” Tax Notes International, February 12, 2018, p. 663 suggests that the law is unclear about interaction between
the interest limitation and whether it applies to CFCs for determining GILT I.
83 See Lee Sheppard, “News Analysis: International Clawbacks and Minimum T axes in T ax Reform,” Tax Notes,
January 1, 2018.
84 Preliminary Reg-105600-18, at https://www.irs.gov/pub/irs-drop/reg-105600-18.pdf; regulations were finalized as
part of general regulations relating to GILT I, T .D. 9866, on June 21, 2019, https://s3.amazonaws.com/public-
inspection.federalregister.gov/2019-12437.pdf. T he assignment of income, deductions, and taxes to baskets begins at
the lowest -tier subsidiary and then assigns to successively higher tiers.
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goods to foreign manufacturers, or buying goods from a foreign supplier for resale abroad. It
might also be possible to sel to an unrelated foreign firm with advertising and marketing
requirements and price restrictions to accomplish round tripping. A firm could also buy from a
foreign supplier for resale abroad.
Proposed regulations issued in March 2019 were aimed in part at establishing the sales were
foreign. For example, the regulations required that sales of property (excluding intangibles) are
for foreign use only—if they are not subject to domestic use within three years of manufacture,
assembly, or processing outside the United States prior to domestic use. No sales to unrelated
domestic parties wil qualify even if destined for use abroad. Intangible property is for foreign use
only if the end users are outside the United States.85
FDII also encourages more high-margin tangible investment in the United States to increase the
base for FDII (just as GILTI encourages low-margin manufacturing abroad). At the same time,
FDII would be available to firms with no manufacturing or employees in the United States.
As indicated above, one of the major concerns about FDII is that it would probably violate the
WTO rules against export subsidies. FDII might also be viewed abroad as a harmful tax regime
(similar to some patent boxes), although it might be noted that its objective is to remove tax as a
factor in locating intel ectual property, as is the case of the OECD BEPS-compliant patent boxes.
However, FDII has a mechanical rule rather than being based on transfer pricing and no nexus
requirement (i.e., no direct connection against the cost of developing the intangible and revenue,
and thus may be noncompliant).86 Germany also has a provision for a royalty barrier that
disal ows a deduction for royalties paid to related firms that benefit from noncompliant patent box
regimes.87 Loss of a deduction for royalties would more than offset the benefit of FDII in that
case.
Options for Revision
As noted under the discussion of GILTI, the potential for FDII violating WTO as an export
subsidy had already led some observers to argue that FDII should never have been enacted.
Bringing together tax rates for U.S. and foreign locations could also be reached by eliminating
both the FDII and GILTI deductions, as noted in the section on GILTI. If GILTI were also
imposed on a per-country basis, the incentive for locating intangibles abroad rather than in the
United States would largely be eliminated, especial y now that the United States has tax rates at
or below those of most developed countries. Revenues might be used for other purposes (for
example, al owing intangibles to be brought back to the United States without paying tax, a
provision original y contained in the Senate version of H.R. 1). A related option would be to
restrict both GILTI and FDII treatment to tax havens or low -tax countries.

85 REG-104464-18, Issued March 6, 2019, at https://www.federalregister.gov/documents/2019/03/06/2019-03848/
deduction-for-foreign-derived-intangible-income-and-global-intangible-low-taxed-income. See also Mindy Herzfeld,
“Status Check on T CJA Guidance,” Tax Notes Federal, July 29, 2019, pp. 654-658, Mindy Herzfeld, “Locating Sales:
FDII Regs Address Questions OECD Workplan Must Answer,” Tax Notes International, June 24, 2019, pp. 1281-
1285. See also Julia Ushakova Stein, “Proposed FDII Regulations Bring Some Clarity ,” Tax Notes International, April
8, 2019, pp. 147-151.
86 “T axpayers Should Prepare Now for GILT I and FDII,” Worldwide Tax Daily, January 29, 2018. For a discussion of
the OECD BEPS initiative, see CRS Report R44900, Base Erosion and Profit Shifting (BEPS): OECD/G20 Tax
Proposals
, by Jane G. Gravelle. Note that the United States agreed to four minimum BEPS standards, among them
harmful tax practices, which would include patent boxes.
87 Robert Goulder, “Achtung! U.S. T ax Reform Stumbles Over German Royalty Barrier,” Tax Notes International,
January 22, 2018, pp. 375-378.
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Another option is to make FDII elective so that if U.S. firms face retaliation from countries
denying royalty deductions, they could have an option to forgo the deduction (an election that is
country-by-country would provide more flexibility).
Proposals introduced in the past to move to a territorial system would have provided reduced
rates on royalties, which may or may not violate the BEPS agreement, but probably would not
have been viewed as an export subsidy. They were proposed for a different purpose, to provide
relief from firms that had formerly shielded active royalties from the U.S. tax through excess
foreign tax credits, based on the expectation that foreign tax credits would largely disappear.
Since the United States retains significant taxation abroad with foreign tax credits, one option
would be to add active royalties back to the foreign tax credit basket that contains GILTI.
Final y, FDII relies, as does GILTI and BEAT, on a formulaic treatment. Formulas simplify the
tax law and reduce disputes with the tax authorities, but a move away from a formulaic treatment
might al ow FDII to be redesigned to be BEPS compliant by establishing nexus. And if it were
limited to royalties it might also avoid violating both BEPS and WTO.
BEAT
BEAT was aimed at profit shifting out of the United States via outbound payments and may be
seen as particularly targeted to U.S. subsidiaries of foreign parents (although it applies to any
related firm payments). For example, a U.S. subsidiary of a foreign parent might pay excessively
large royalties for rights to use intangible assets as wel as higher than arm’s length prices for
goods and services, while also having more of the debt and interest deductions, al with the
objective of minimizing income subject to U.S. tax (which was perhaps a greater issue when the
United States had a 35% tax rate).88
Many comments have been made about the lack of a credit for foreign taxes under BEAT. BEAT
might therefore be triggered for companies that have a lot of foreign-source income from high tax
countries along with relatively modest base erosion payments (enough to trigger BEAT). In that
case, BEAT acts primarily as a tax on foreign-source income rather than achieving the objective
of limiting profit shifting through outbound payments.
BEAT also excluded cost of goods sold from its base (except for surrogate firms89 that inverted
after November 9, 2017), along with the exclusion for services if valued at cost. Both treatments
have led to some criticism. By completely excluding cost of goods sold, it is possible to
effectively avoid including royalties in the base by embedding them in inventory. That is, when a
U.S. firm is paying a foreign related firm from tangible property to sel and also paying a royalty
for distribution rights or rights to use a logo, the royalty could be eliminated and the price of the
goods increased. Thus, royalties wil be taxed only if separated, or for firms that do not keep
inventory. Other planning possibilities may be associated with the exclusion of costs of goods
sold, including supply chain restructuring.90

88 A number of uncertainties, including measuring gross receipts and defining the related group, are discussed in Jasper
L. Cummings, “Selective Analysis: T he BEAT ,” Tax Notes, March 26, 2018.
89 T hese are firms that inverted and are not taxed as U.S. firms; these would be firms with between 60% and 80% of
ownership.
90 Planning possibilities arising through the exclusion of cost of goods sold have been discussed in the general
comments referenced earlier, and also by Bret Wells, who first proposed the general idea of tax ing payments to related
parties. See “Get With the Beat,” Tax Notes, February 19, 2018, pp. 1023-1032.
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An issue of extensive debate is whether the cost component of services with a markup can be
excluded.91 The statute states that services using the service cost method with no mark-up can be
excluded as a base erosion payment. Some see that and other relevant information from the
legislative history as indicating that any service with a markup, whether eligible for the cost
method or not, would be included in BEAT in its entirety. Others argue that only the markup
would be included.
Proposed regulations issued in December 2018 indicated that the cost of services under the
service-cost method would be excluded from BEAT even if there is a mark-up. The regulations
did not provide relief, and perhaps could not given the statutory language, for the inclusion in the
base of GILTI without a foreign tax credit.92
The proposed regulations also provided rules relating to financial institutions. One rule that has
received particular attention is the exclusion of payments with respect to total loss-absorbing
capacity (TLAC) required by the U.S. Federal Reserve. Payments of interest to foreign banks
(general y parents of U.S. subsidiaries) that have made loans to cover TLAC would be excluded
from BEAT.93 Final regulations issued in December 2019 expanded that treatment to branches,
but also required the payments to be excluded from the denominator of the base when

91 See Lowell D. Yoder et al., “T he New Base Erosion Minimum T ax,” McDermott, Will and Emery, January 17, 2018,
at https://www.mwe.com/en/thought -leadership/publications/2018/01/the-new-base-erosion-minimum-tax; Andrew
Velarde, “Failing BEAT ’s Services Cost Method Exception Could Cost Big,” Tax Notes International, January 29,
2018, pp. 419-421 reports on a District of Columbia Bar Community of T axation event hosted by Jones Day in
Washington, DC. T he Velarde article notes that tax counsel for the House Ways and Means Committee Loren Ponds
indicated that the whole payment is included, as did Jennifer Acuna, counsel for the Senate Finance Committee. David
Noren of McDermott, Swill & Emery said some legislative history supports only the markup being included. Marty
Sullivan, “Economic Analysis: Can Marked-Up Services Skip the BEAT ,” Tax Notes, February 5, 2018, pp. 705-709
argues that services with a markup will be taxed in full, but Manal Corwin et al., “ A Response to an Off-Beat
Analysis,” Tax Notes, February 12, 2018, pp. 933-936 said that services cost will be excluded even if a markup used.
Ryan Finley, “BEAT Clear on Markup Question, Former T reasury Official Says,” Worldwide Tax Daily, February 16,
2018, reports that Mike McDonald of Ernst and Young and formerly of the Department of the T reasury indicates the
cost component can be excluded even if the component eligible for services is required to be marked up. Alexander
Lewis, “ Officials Differ on Importance of BEAT Legislative History,” Tax Notes Today, February 16, 2018, reporting
on the same conference discusses a dispute about whether a colloquy between Sens. Hatch and Portman on the Senate
floor on December 1, 2017, might justify a deduction for the cost component and should be considered part of the
legislative history. Mark Prater, staff member of the Senate Finance Committee, said that the Conference Report makes
it clear that the exclusion applies only to services with no markup. Barbara Angus, staff member of the Ways and
Means Committee, said the colloquy should be considered, but the article does not indicate that she took a position.
Martin Sullivan, “Marked-Up Services and the BEAT Part II,” Tax Notes, February 26, 2018, pp. 1171-1175,
responding to the previous critique of his earlier article by Manal Corwin et al. , argues the entire payment is taxed if it
contains a mark-up. In a related discussion at the earlier conference, Andrew Velarde, “ Failing BEAT ’s Services Cost
Method Exception Could Cost Big,” Tax Notes International, January 29, 2018, pp. 419-421 also reports on a
discussion about whether tax accounting could be changed to treat services the same as inventory (as a reduction in
gross receipts) allowing services to be excluded under BEAT . T his issue was raised by Viva Hammer , staff member of
the Joint Committee on T axation, but David Noren indicated that a subcontractor service fee was in the scope of
BEAT . Joseph Calianno of BDO USP LLP argued that economically similar transactions should be treated the same ,
but Kevin Nichols, from the T reasury Office of International T ax Counsel, indicated that the tax code’s existing rules
on inventory should be referenced and do not include services in cost of goods sold.
92 REG-104259-18, at https://www.irs.gov/pub/irs-drop/reg-104259-18.pdf. See Mindy Herzfeld, “Status Check on
T CJA Guidance,” Tax Notes Federal, July 29, 2019, pp. 654-658. This article indicated that the regulations had created
more confusion by including noncash payments in nonrecognition transactions to BEAT .
93 T his provision was identified as one that among those highlighted in a New York Times article by Jesse Drucker and
Jim T ankersley, “How Big Companies Won New T ax Breaks From the T rump Administration, December 30, 2019,
https://www.nytimes.com/2019/12/30/business/trump-tax-cuts-beat-gilti.html.
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determining whether a firm met the BEAT threshold.94 Critics have also identified this regulation
as one that does not have a basis in the statutory language.95
Proposed regulations issued December 6, 2019, al ow a taxpayer to choose to forgo deductions to
reduce BEAT payments below the threshold.96
Issues have been raised about whether individual payments wil be aggregated, an issue important
to financial institutions (i.e., whether interest payments wil be assessed on a net or gross basis),
applying to other payments as wel (for example, where a services hub pays for foreign related
party services but also receives a payment for services provided to foreign related parties).97 The
final regulations did not al ow netting unless the law otherwise specifical y permits it.98 There are
related issues about the extent to which BEAT applies to ordinary transactions. Some have noted
that BEAT includes nonabusive commercial transactions such as repos (short-term repurchase
agreements for securities) and securities lending but not derivatives. Some have expressed
concerns that routine lending between groups thus may be penalized. BEAT can have important
effects on intragroup interest payments made by banks, securities dealers, and other regulated
financial intermediaries. Firms may also try to replace intragroup debt with leases, convertible
debt, or short-term debt.99
The final regulations also al owed for BEAT payments’ exclusion for transactions that are not
recognized through reorganizations, perhaps in part to not discourage movement of intel ectual
property back to the United States, and treated partnerships as the aggregation of partnerships
rather than a single entity for purposes of applying the BEAT to payments.100
There are also no look-through rules to the final suppliers. For example, if a services payment is
made to a related party that in turn subcontracts with an unrelated party for part of the services,
the entire payment to the related party would be included in the base (that is, there is no
recognition that part of the services were supplied by an unrelated party). Lack of a look-through
rule would encourage the domestic corporation to make separate contracts with the unrelated
party to minimize the amount of payment included in BEAT.101

94 T .D. 9885, December 2, 2019, https://www.irs.gov/irb/2019-52_IRB.
95 T estimony of Professor Rebecca Kysar, before the House Ways and Means Committee, TCJA’s Business Tax
Provisions: Design Flaws and Undem ocratic Im plementation
, February 11, 2020, https://waysandmeans.house.gov/
sites/democrats.waysandmeans.house.gov/files/documents/Kysar%20T estimony.pdf.
96 IRS, REG-112607-19, “Additional Rules Regarding Base Erosion and Anti-Abuse T ax,” 84 Federal Register 67046,
December 6, 2019, at https://www.federalregister.gov/documents/2019/12/06/2019-25745/additional-rules-regarding-
base-erosion-and-anti-abuse-tax.
97 According to some experts, it appears that interest will be included on a gross basis, which could produce
significantly tax liability under BEAT for banks. See Lowell D. Yoder et al., “ T he New Base Erosion Minimum T ax,”
McDermott, Will and Emery, January 17, 2018, at https://www.mwe.com/en/thought -leadership/publications/2018/01/
the-new-base-erosion-minimum-tax; Yalman Onaran, “ How T rump’s T ax Overhaul Could Hit Big Foreign Banks,”
Bloomberg, December 29, 2017, at https://www.bloomberg.com/news/articles/2017-12-29/trump-s-tax-overhaul-may-
punish-foreign-banks-with-u-s-units.
98 See Lee A. Shepard, “T roubleshooting the Final BEAT Regulations,” Tax Notes, January 6, 2020, pp. 9-20.
99 See Lowell D. Yoder et al., “T he New Base Erosion Minimum T ax,” McDermott, Will and Emery, January 17, 2018,
at https://www.mwe.com/en/thought-leadership/publications/2018/01/the-new-base-erosion-minimum-tax; Lee A.
Sheppard, “ Corporate Borrowing After T ax Reform,” Tax Notes, January 29, 2018, pp. 565-569, reporting on a
conference on BEAT and interest restrictions. See also Lee A. Sheppard, “ News Analysis: Can a DISC Beat?” Tax
Notes
, March 5, 2018, pp. 1312-1319. T he last article also discusses the possibilities of avoiding BEAT by setting up
an IC-DISC (an interest charge domestic international sales corporation) to receive payments.
100 See Lee A. Shepard, “T roubleshooting the Final BEAT Regulations,” Tax Notes, January 6, 2020, pp. 9-20.
101 Lowell D. Yoder et al., “T he New Base Erosion Minimum T ax,” McDermott, Will and Emery, January 17, 2018, at
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Another criticism of BEAT is that it has too high a threshold ($500 mil ion in revenue) for
applicability, an amount that is 10 times the size of the threshold for the Treasury regulations
aimed at earnings stripping.102
A general criticism of BEAT is that it is not targeted to abuse but simply captures al payments of
a certain type (which may be a reason it is incompatible with international agreements).103
Moreover, because it is a minimum tax, it is most likely to apply to firms with thin margins, that
is, with a lot of costs relative to profits, since a large amount of deductible base erosion payments
compared to taxable income leads to effects of BEAT.104
Options for Revision
There are a number of revisions to BEAT that might be considered, some that lose revenue and
some that raise revenue. Most follow from the various issues that have been raised. These might
include al owing a foreign tax credit, and including payments for goods but al owing a deduction
for the cost component (which would address the embedding of royalties), with a paral el
treatment for services.
Interest payments might be removed from the BEAT coverage, substituting a worldwide
al ocation of interest (that is, al owing a U.S. firm to deduct only the share of interest in the
United States consistent with its share of worldwide income or assets). Such a provision was
original y in both the House and Senate versions of H.R. 1 and was dropped in conference.
A more general proposal for BEAT is to restrict the tax to payments to tax havens or low-tax
countries. Another approach is to substitute stricter transfer pricing rules for BEAT.
Thin Capitalization
A number of comments have been made about ways to avoid the proposed interest restrictions.
One possibility is that financial institutions that tend to have positive net interest can lease assets,
and the rental payments on those leases would be deductible. Other possibilities are to substitute
floating-rate debt that has lower interest rates for fixed-rate debt along with a hedge.105 Firms
affected can also make the choice to borrow outside of the United States or to issue preferred
equity.
Although thin capitalization rules are applied general y, an important target is multinational firms
where the incentive to locate interest deductions in higher-tax countries has been an issue. A
provision more specifical y targeted to international profit shifting that was in addition to the
general thin capitalization rules, providing a restriction on the U.S. firm’s share of debt (based on

https://www.mwe.com/en/thought -leadership/publications/2018/01/the-new-base-erosion-minimum-tax. See also Lee
A. Shepard, “T roubleshooting the Final BEAT Regulations,” Tax Notes, January 6, 2020, pp. 9-20 for a discussion.
102 Bret Wells, “Get With T he Beat,” Tax Notes, February 19, 2018, pp. 1023-1032. The T reasury press release from
April 4, 2016, regarding the new regulations is at https://www.treasury.gov/press-center/press-releases/Pages/
jl0405.aspx. Wells also indicates that BEAT plus the interest deduction limits make these regulations unnecessary,
although they would apply to smaller firms that are not affected by BEAT .
103 See Stephanie Soong Johnston, “EU Commission Mulls ‘All Options’ in Wake of Final U.S. T ax Bill,” Tax Notes,
December 26, 2017, p. 60.
104 T his point is made by James P. Fuller and Larissa Neumann, “U.S. T ax Review,” Tax Notes International, February
5, 2018, pp. 533-547.
105 Lee A. Sheppard, “Corporate Borrowing After T ax Reform,” Tax Notes, January 29, 2018, pp. 565-569.
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either a measure of income or assets), was contained in both the House and Senate bil s but not
included in the final version.106
As noted earlier, the thin capitalization rules are coordinated with BEAT by treating disal owed
interest as associated first with unrelated party and net operating losses (NOLs), a provision that
strengthens the effect of BEAT.
One uncertainty is whether GILTI wil be included in the earnings base, which includes items
attributable to the taxpayer’s business, since GILTI is not associated with the domestic
business.107 Proposed regulations indicate that GILTI wil be included in income, but the
deduction for both FDII and GILTI wil reduce taxable income. The taxable income limitation
wil not affect taxable income.108
Options for Revision
A major option that may be considered is to restore the worldwide interest al ocation measure,
probably in the form of an al ocation based on income.
Deemed Repatriation Tax
A number of comments have been made concerning the deemed repatriation, which imposes a tax
of 15.5% on cash equivalents held abroad and 8% on other unrepatriated earnings. One concern is
that the proposed definition of cash equivalent is overly broad.109 Under Treasury Notice 2018-
07,110 the IRS stated that it intends to treat as cash a number of financial instruments—such as
options contracts, futures contracts, and non bona fide hedging transactions—held overseas and
tax them at 15.5%. Commentators have questioned whether this treatment is overly harsh, as
some of these financial instruments may not be liquid or may serve a nonspeculative business
purpose.
A second concern is that the downward attribution rules may unintentional y result in the
inclusion of income in the deemed repatriation tax.111 A reading of the 2017 tax revision
legislative language along with the changes in the downward attribution could increase the
number of taxpayers being defined as a U.S. shareholder of a CFC (and subject to the deemed
repatriation tax) above the level intended by Congress, according to the American Institute of
Certified Public Accountants (AICPA).

106 Arguments have been made that the asset basis used in the Senate version would be difficult to implem ent because
of lack of data. See Robert Goulder, “ T ax Reform and the Desirability of Interest Barriers,” Forbes, December 16,
2017, at https://www.forbes.com/sites/taxanalysts/2017/12/16/tax-reform-and-the-desirability-of-interest-barriers/
#4c93cc914e1c.
107 Raymond Wynman and Andrew Wai, “ Interest Expense Limitation and the New I.R.C. § 163(j): Not Just a Foreign
Concept Anymore,” February 13, 2018, https://gtmtax.com/knowledge/interest -expense-limitation-new-i-r-c-
%C2%A7-163j/.
108 REG-106089-18, https://www.irs.gov/pub/irs-drop/REG-106089-18-NPRM.pdf.
109 Alison Bennett, “Repatriation T ax on Derivatives: Hard on Financial Companies,” Daily Tax Report, January 10,
2018.
110 T he full notice can be viewed at https://www.irs.gov/pub/irs-drop/n-18-07.pdf.
111 Andrew Velarde, “AICPA Lobbying for Downward Attribution T ransition T ax Relief,” Tax Note International,
March 19, 2018.
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Another concern that has been raised is the dates used to calculate the base for the deemed
repatriation tax.112 Specifical y, setting the base as the higher measured base on two testing dates,
(November 2, 2017, and December 31, 2017) could result in an overstatement of cash positions
(subject to the higher 15.5% tax rate) if tax expenses incurred during the year were not booked
prior to the earlier testing date or if cash was transferred abroad (via a loan from a U.S. parent)
for a pending acquisition. This issue, however, was recently addressed in IRS guidance providing
that foreign taxes would be al ocated between the two portions of the tax year (through November
2, 2017, and to the period following ending on December 31, 2017).113
Another issue related to the testing dates is the effect on taxpayers that use a different tax year
than the calendar year (such as Microsoft, with a year ending on June 30, or Apple, with a year
ending on September 30). The measuring point for determining the aggregate cash position is
greater than the average of the end of the two taxable years ending before November 2, 2017, or
the end of the last tax year beginning before January 1. Since the dividend exclusion takes effect
on January 1, 2018, these firms can avoid additional cash accumulations by paying out any
increase as dividends.114
Some individuals wil likely be subject to the deemed repatriation tax, as a result of owning 10%
or more of a foreign corporation, though they do not appear eligible to claim foreign tax
credits.115 Final y, the constitutionality of the deemed repatriation has been questioned by a set of
researchers.116
Options for Revision
The legislation provides the Secretary with the authority to define cash equivalents. The basic
idea was to distinguish liquid (cash and its equivalents) and il iquid (e.g., plant and equipment)
assets. Drawing the line with respect to financial assets is complex. For example, the Treasury
guidance excluded bona fide hedging transactions (which have the purpose of reducing risk). The
regulatory process is ongoing, and although Congress could define specific assets by legislation, a
regulatory approach is more flexible.
Limiting the downward attribution rules to only corporations may be an appropriate way to
address the scope of the rules if they were primarily introduced to limit corporate inversions.
Another option is to general y revisit the treatment of individual shareholders under the deemed
repatriation tax as wel as under other rules (such as GILTI), especial y when foreign tax credits
are not al owed.

112 Letter from Pamela Olson, PriceWaterhouseCoopers, to Dana T rier, Esq., T reasury Deputy Assistant Secretary -T ax
Policy, February 5, 2018; and Ryan Finley, “T reasury Has Limited Authority on T ransition T ax, Officials Say,”
Worldwide Tax Daily, February 27, 2018.
113 IRS Notice 2018-26, April 2, 2018, https://www.irs.gov/pub/irs-drop/n-18-26.pdf.
114 See Stephen E. Shay, “T reasury Can Close a Potential Loophole in the T reatment of Deferred Foreign Income in the
T ax Cuts and Jobs Act —Will It Act?,” December 26, 2017, at https://dash.harvard.edu/bitstream/handle/1/34596007/
Shay_12_26_17.pdf?sequence=1; Lynnley Browning, “ T ax Law Quirk Could Help Apple and Microsoft Lower T heir
Bills,” Bloomberg, April 3, 2018.
115 Lee A. Sheppard, “News Analysis: Individuals and the Repatriation Tax,” Tax Notes Today, March 12, 2018; Letter
from Meyer H. Fedida and Daniel I. Hanna to Editor, Tax Notes Today, March 5, 2018; and Charles M. Bruce, Tax
Reform Bill (H.R. 1) and Am ericans Abroad: What Happened? What’s Next?
American Citizens Abroad, December 22,
2017, at https://www.americansabroad.org/tax-reform-bill-hr1-and-americans-abroad-what -happened-whats-next/.
116 Mark E. Berg and Fred Feingold, “T he Deemed Repatriation T ax-A Bridge T oo Far?” Tax Notes, March 8, 2018.
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Issues in International Corporate Taxation: The 2017 Revision (P.L. 115-97)

The issue of two testing dates might be addressed with a facts and circumstances consideration of
any cash movements and investments (in assets or acquisitions).
The transition tax was the subject of numerous notices regarding the calculation of the transition
tax, with proposed regulations issued in late 2018 and final regulations in February 2019. An
important issue in the regulations was defining cash and noncash assets in certain circumstances,
and the regulations did not include assets in inventory that may be viewed as liquid as cash.117
Anti-Inversion Rules
The 2017 tax revision changes in attribution rules are likely to result in more CFCs than under
prior law.118 Specifical y, with downward attribution of the shares of the foreign subsidiary to the
U.S. subsidiary, the foreign subsidiary becomes a CFC, and the U.S. shareholder could be subject
to the deemed repatriation tax. Although it is thought that the change in the attribution rules was
intended to block decontrolling transactions made after an inversion, commentators expect a
broader reach to other corporate structures unrelated to inversion transactions.119 In addition,
certain CFC income wil also likely be included as income for the deemed repatriation tax due to
the downward attribution rule.
Although the new law included some anti-inversion measures proposed in the past (such as the
thin capitalization rules) as wel as other measures to restrict inversions, the new law did not
include other measures proposed in the past, such as treating firms that merge with 50%
ownership and/or firms with 25% of business income in the United States, or firms managed and
controlled in the United States as U.S. firms.
Options for Revision
As noted above, Congress might consider whether to revisit the scope of the downward
attribution rules. Additional measures to discourage inversions might be considered, including
proposals described above and codifying the regulations treating certain related party interest as
equity.


117 T .D. 9846, at https://www.federalregister.gov/documents/2019/02/05/2019-00265/regulations-regarding-the-
transition-tax-under-section-965-and-related-provisions. See also See Mindy Herzfeld, “ Status Check on T CJA
Guidance,” Tax Notes Federal, July 29, 2019, pp. 654-658; Andrew Velarde, “No Apparent Bombshells in Final
T ransition T ax Regs,” Tax Notes International, January 21, 2019, pp. 277-279; and Andrew Velarde and Alexander
Lewis, “T ransition T ax Regs Offer Limited Relief on big-T icket Items,” Tax Notes International, January 21, 2019, pp.
274-276.
118 Lee A. Sheppard, “News Analysis: Corporate Borrowing After T ax Reform,” Tax Notes Today, January 29, 2018.
119 Jasper L. Cummings, “Selective T ax Act Analysis: Subpart F and Foreign T ax Credits,” Tax Notes, January 29,
2018. See also Jeffrey L. Rubinger and Summer Ayers LePree, “ T he (Unintended?) Consequences of T ax Reform on
Inbound Financing,” Tax Notes, March 12, 2018, pp. 1511-1516.
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Issues in International Corporate Taxation: The 2017 Revision (P.L. 115-97)


Author Information

Jane G. Gravelle
Donald J. Marples
Senior Specialist in Economic Policy
Specialist in Public Finance




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Congressional Research Service
R45186 · VERSION 19 · UPDATED
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