This article has been saved to your Favorites!

Dems' Pandemic Relief Bill Seeks End To Foreign Tax Credit Rule

By Alex M. Parker · February 9, 2021, 7:52 PM EST

The pandemic relief legislation released by House Democrats includes a provision to eliminate a long-delayed corporate tax benefit that would loosen foreign tax credit limitations for companies with interest expenses.

The bill introduced Monday would eliminate Internal Revenue Code Section 864(f) , which took effect this year and would apply to the 2021 tax year. That section, initially passed by Congress in 2004, allows companies to apportion interest expense on a worldwide basis to determine taxable income applied to foreign tax credit limitations.

Eliminating Section 864(f) would raise $22 billion in revenue over the next 10 years, relative to current law, according to the Joint Committee on Taxation

While U.S. taxpayers can claim foreign tax credits on taxable income, the federal tax code limits how much they can claim to ensure that they are not used on U.S. income. The limits are based on the calculation of a company's foreign taxable income, compared with its domestic income. Deductions for interest expense are apportioned to either side, depending on whether the expense was incurred by domestic entities or controlled foreign corporations.

Worldwide allocation would allow companies to apportion excess interest expenses of all of their foreign subsidiaries to its domestic income, raising the limit on the use of foreign tax credits.

Foreign tax credit limitations have become a greater concern since the passage of the 2017 Tax Cuts and Jobs Act , which lowered the U.S. corporate tax rate and created new categories of foreign income, such as global intangible low-taxed income.

While the TCJA's authors claimed that the tax on GILTI would apply only to income taxed at lower than 13.125%, foreign tax credit limitations can cause tax payments on GILTI at higher rates. The U.S. Department of the Treasury offered some relief on the issue but declined to create a full exemption.

The House Ways and Means Committee is expected to consider the provisions proposed by Democrats on Wednesday. Democrats hope to enact the legislation through the budget reconciliation process in the coming weeks.

The committee did not respond to requests for comment.

--Editing by Neil Cohen.

For a reprint of this article, please contact reprints@law360.com.