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House Passes Proposed Section 899

Fri, 23 May 2025 22:26:23 GMT

House Passes Proposed Section 899

On May 22, 2025, the U.S. House of Representatives (“the House”) passed H.R. 1, the budget reconciliation bill known as the “One Big Beautiful Bill Act.” The reconciliation bill introduces a new section, Section 899, titled “Enforcement of Remedies Against Unfair Foreign Taxes,” to the U.S. tax code. It has the potential to significantly impact non-U.S. investors and businesses engaged in business in the United States. Here, we break down the main components of this proposal and what they mean for non-U.S. taxpayers.

Tax Rate Increases

The first main component is an increase to certain tax rates. Under the proposal, the specified rate of tax that applies to an “applicable person” is increased by an “applicable number of percentage points.” The specified rates of tax generally are:

(i) the 30-percent rate imposed on Fixed or Determinable Annual or Periodic income (“FDAP income”) (such as dividends and interest) and certain other types of U.S.-source income of a foreign corporation;

(ii) the 21-percent corporate income tax imposed on a non-U.S. corporation’s ECI;

(iii) the 30-percent rate imposed on divided equivalent amounts of a branch (i.e., branch profits tax);

(iv) the 30-percent rate imposed on FDAP income, certain capital gains, and certain other types of U.S.-source income of nonresident alien individuals;

(v) the individual income tax rates imposed on nonresident alien individuals subject to tax on Effectively Connected Income (“ECI”), but only to the extent imposed on gains and losses from the disposition of a United States real property interest; and

(vi) the 4-percent rate imposed on U.S.-source gross investment income of non-U.S. private foundations.

For purposes of the proposal, an “applicable person” means:

(i) any trust for which the majority of beneficial interests are held (directly or indirectly) by applicable persons;

(ii) any individual (other than a U.S. citizen or resident) who is a tax resident of a discriminatory foreign country;

(iii) any foreign corporation that is a tax resident of a discriminatory foreign country other than certain U.S.-owned foreign corporations;

(iv) any foreign corporation, other than a publicly held corporation, that is more than 50 percent owned (by vote or value) directly or indirectly after applying certain attribution rules by other applicable persons;

(v) foreign partnerships, branches, and any other entity identified by the Secretary with respect to a discriminatory foreign country.

(vi) any government (within the meaning of Section 892) of a discriminatory foreign country; and

(vii) any private foundation (within the meaning of Section 4948) created or organized in a discriminatory foreign country.

A “discriminatory foreign country” is a non-U.S. country that has “unfair foreign taxes,” such as undertaxed profits rule, digital services tax, diverted profits tax, and, to the extent provided by the U.S. Department of Treasury Secretary (“Secretary”), an extraterritorial tax, discriminatory tax, or any other tax enacted with a public or stated purpose that the tax be economically born, directly or indirectly, disproportionately by U.S. persons.

The “applicable number of percentage points” means with respect to any discriminatory foreign country, 5-percentage points during the first one-year period beginning on the applicable date, and such amount increased by an additional 5-percentage points for each one year period thereafter, up to a maximum of 20-percentage points.

Tax Treaties

The proposed Section 899 does not explicitly address income tax treaties. The Joint Committee on Taxation’s description of proposed Section 899 states that if a treaty rate applies, the rate increase applies to the treaty rate. For example, an income tax treaty may provide for a 15-percent rate on dividend income. In the first year Section 899 applies to FDAP income, the 15-percent dividend income rate will increase by 5-percentage points to 20-percent.

It's unclear if the rate increase would apply to items of income that are treated as exempt under an applicable income tax treaty.

Section 892 Foreign Governments

The proposed bill removes the gross income exclusion of Section 892(a) for any non-U.S. government of a discriminatory foreign country. Non-U.S. governments may need to consider income tax treaty benefits, which may be subject to increased tax rates on FDAP income, as discussed above.

Modifications to the Base Erosion and Anti-Abuse Tax (“BEAT”)

The proposal also modifies the treatment of the BEAT with respect to certain corporations that are more than 50-percent owned (by vote or value) by certain applicable persons.

BEAT is a corporate minimum tax imposed on applicable taxpayers who make certain base erosion payments to foreign related parties. Under the current rules, generally, BEAT only applies when the taxpayer is a corporation that has average annual gross receipts for the preceding 3 years of greater than or equal to $500 million USD and has a base erosion percentage for the taxable year of greater than or equal to 3% (2% for certain taxpayers). The proposed Section 899 treats applicable persons as having met the gross receipts and base erosion percentage requirements. The likely result of this proposal would be to subject a larger number of non-U.S. corporations to the BEAT corporate minimum tax when the non-U.S. corporation is treated as an applicable person under proposed Section 899.

Proposed Section 899 would also increase the applicable BEAT tax rate to 12.5-percent instead of 10-percent and make other modifications to the BEAT calculations.

Effective Dates

The rate increases on FDAP income, ECI, branch profits tax, excise tax on non-U.S. private foundations, and the BEAT modifications apply effective the first day of the calendar year beginning on or after the latest of (a) 90 days after the date of enactment of this bill, (b) 180 days after the enactment of an unfair foreign tax that causes a country to be treated as a discriminatory foreign country, or (c) the date that the unfair foreign tax of such country begins to apply. However, the rate increase on FDAP income withholding does not apply until 90 days after a country has been listed as a discriminatory foreign country by the Secretary. Therefore, for example, the FDAP income withholding tax rate increase may apply on or after January 1, 2026, provided the bill is enacted, and the Secretary lists a non-U.S. country as a discriminatory foreign country before October 2025.

Next Steps

The House has passed the proposed bill. Before it is enacted, it must be passed by the U.S. Senate and signed by President Trump. During the Senate review process, changes are likely to be made to the proposed bill.

U.S.-Russia Tax Treaty Suspension

Tue, 18 Jun 2024 18:21:56 GMT

The U.S. Department of the Treasury announced on June 17, 2024, that the United States has formally notified the Russian Federation about the suspension of certain articles and provisions of the Convention between the United States of America and the Russian Federation for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital, signed at Washington, June 17, 1992. This suspension will take effect on August 16, 2024, and will continue until otherwise decided by the two governments. This decision is in response to the Russian Federation's notification on August 8, 2023, expressing its desire to suspend specific articles and provisions of the Convention and the Protocol.

The announcement can be seen at United States’ Notification of Suspension, By Mutual Agreement, of the 1992 Tax Convention with Russia | U.S. Department of the Treasury .

Taxpayers who rely on the U.S.-Russia income tax treaty should plan for this suspension. Please contact International Capital Associates, LLC if you need help planning for the treaty suspension or if you need other U.S. tax services .

U.S. Internal Revenue Service Releases Updated Form W-8EXP With Updates for Qualified Foreign Pension Funds

Mon, 11 Dec 2023 14:39:22 GMT

In November 2023, the U.S. Internal Revenue Service released an updated Form W-8EXP. The Form W-8EXP is a U.S. withholding tax certificate for foreign governments or other foreign organizations. Confusingly, the words “qualified foreign pension fund” do not appear on the Form W-8EXP. However, the updates to the Form W-8EXP are intended to allow a non-U.S. pension fund (or qualifying entity) to certify its Qualified Foreign Pension Fund status.

A non-U.S. pension fund may certify that it is a “Withholding Qualified Holder Under Section 1445” provided it meets the requirements of Section 897(l) and Treas. Reg. 1.897(l)-1 as a Qualified Foreign Pension Fund. A “Qualified Holder” includes certain wholly-owned entities that meet the requirements of Treas. Reg. 1.897(l)-1(d)(2) or (3). A “Withholding Qualified Holder” also consists of a non-U.S. partnership wholly owned by Qualified Holders.

Unfortunately, Form W-8EXP still does not contain sections to allow the taxpayer to claim the benefits of a U.S. income tax treaty. Non-U.S. pension funds and governments will still need to complete Form W-8BEN-E to claim U.S. income tax treaty benefits with a U.S. withholding agent, such as reduced dividend and interest withholding rates.

The release of the updated Form W-8EXP does not invalidate any prior Qualified Foreign Pension Funds certifications. In the future, U.S. withholding agents may request a valid Form W-8EXP instead of other Qualified Foreign Pension Fund certifications.

A Withholding Qualified Holder should ensure that the Form W-8EXP is complete and valid to make a Qualified Foreign Pension Fund certification using the Form W-8EXP.

Please contact International Capital Associates, LLC if you need help determining if the entity is considered a Withholding Qualified Holder, if you need assistance completing Form W-8EXP , or if you need other U.S. tax services .

U.S. Tax Court Holds That Investment Partnership Engaged in U.S. Trade or Business Due to Attribution of Activity from Asset Manager

Tue, 21 Nov 2023 13:40:53 GMT

On Wednesday, November 15, 2023, the U.S. Tax Court (“Court”) served its opinion regarding YA Global Investment, LP (“YA Global”), a Cayman Islands partnership. The opinion was primarily unfavorable to YA Global, holding that YA Global was engaged in a U.S. trade or business due to the activities of the partnership’s asset manager. The U.S. Tax Court held that YA Global's income should be treated as ordinary and as effectively connected income.

One of the central issues addressed in this opinion is the agency relationship between YA Global and its asset manager. YA Global had no employees of its own. The asset manager had a U.S. office with over 50 employees. During the issues under examination, the asset manager discontinued or merged its other funds with the result of YA Global as the only fund managed by the asset manager. The U.S. Tax Court examined the degree of control YA Global had over its asset manager, finding that the asset manager was an agent of YA Global. The Court held that the activities of the asset manager can be attributed to YA Global.

After holding that the activities of the asset manager can be attributed to YA Global, the opinion then focuses on whether YA Global was engaged in a U.S. trade or business. YA Global funded portfolio companies through convertible debentures, Standby Equity Distribution Agreements (SEDAs), and other securities. In one of YA Global’s SEDAs, the partnership committed to purchasing up to a specified dollar amount of a portfolio company’s stock over a fixed period. YA Global acquired more than 100 convertible debentures a year during the years under examination. The terms of some of the convertible debentures allowed YA Global to receive stock of the issuer upon conversion at a discount. The opinion noted that YA Global would generally exercise the conversion feature of the debenture only when it was ready to sell the stock it would receive on conversion. Most of the net income reported on YA Global’s Form 1065 was interest and short-term capital gains. The U.S. Internal Revenue Service (“IRS”) contended that YA Global was engaged in lending activities, noting that “YA Global made hundreds of loans directly to companies in exchange for promissory notes and convertible debentures.”

The SEDAs usually required the portfolio company to pay YA Global and its asset manager various fees upon executing the SEDA and additional fees upon each advance of funds. The fees paid by the portfolio could include commitment, structuring, and transactional fees. The asset manager could remit excess fees to YA Global or apply them in satisfaction of the management fee owed to the asset manager by YA Global. The IRS contended that fees paid by the portfolio companies reinforced that YA Global was engaged in a services business.

The attorneys for YA Global argued that YA Global because YA Global was simply an investor and it met the trading safe harbor from a U.S. trade or business. The U.S. Tax Court held that YA Global did not meet the trading safe harbor from a U.S. trade or business. The U.S. Tax Court cited that it did not meet the trading safe harbor “because the income the partnership earned from portfolio companies went beyond returns on invested capital.” Further, the U.S. Tax Court held that YA Global was engaged in a U.S. trade or business and that YA Global should be treated as a dealer in securities.

The U.S. Tax Court further held that YA Global, as a dealer in securities, did not properly identify which assets were held as investments. The Court further held that YA Global's income was ordinary income that should be treated as effectively connected with a U.S. trade or business.

The Court’s holdings were mainly in favor of the IRS. The IRS has reportedly been auditing investment funds for U.S. trade or business risk. This case is likely to bolster the IRS’s efforts in this area.

U.S.-based funds and non-U.S. investors should review their funds' U.S. trade or business risk. A U.S. trade or business determination is based on a taxpayer's particular facts and circumstances. U.S. trade or business income generally creates U.S. federal and state income tax filing obligations for non-U.S. taxpayers. There are steps that funds can take to reduce U.S. trade or business income risk to non-U.S. investors.

Please contact International Capital Associates, LLC if you need help with inbound tax planning and structuring , U.S. investment tax reviews , or other tax services .

U.S. Treasury and Internal Revenue Service issue final Qualified Foreign Pension Fund Regulations

Wed, 28 Dec 2022 23:25:20 GMT

On December 28, 2022, the U.S. Department of Treasury (“the Treasury”) released final regulations regarding the Qualified Foreign Pension Fund exemption from taxation concerning gain or loss attributable to certain U.S. real property interests. The regulations are effective on December 29, 2022, when the regulations are published in the Federal Register.

The regulations address the qualifications for Qualified Foreign Pension Fund (“QFPF”) and the withholding requirements under Sections 1441, 1445, and 1446 regarding dispositions subject to FIRPTA and distributions described in Section 897(h) (e.g., distributions from real estate investment trusts and mutual funds).

QFPFs should note the new certification requirements below. U.S. withholding agents will require the new certification for eligible transactions on or after December 29, 2022, until the new Form W-8EXP is released.

The regulations provide changes and clarifications regarding the requirements of a QFPF. The clarifications addressed the condition that a QFPF is established to provide retirement and pension benefits. For the first time, the regulations define retirement and pension benefits. The definition of retirement and pension benefits is intended to be broad to accommodate a wide variety of non-U.S. pension funds and non-U.S. laws. The regulations also provide limited exceptions when a pension fund provides more than retirement and pension benefits. The rules also clarify ownership requirements for Qualified Controlled Entities of pension funds.

The regulations also clarify the requirement for a pension fund to provide, or otherwise make available, annual information about its beneficiaries to the relevant tax authorities in the country where the pension fund is established or operates. The final regulations require that the pension fund annually provides information about the amount of qualified benefits provided to each recipient to the relevant tax authorities or other relevant governmental units. The requirement is also met if such information is otherwise available to the relevant tax authorities or other governmental units.

The preamble to the final regulations acknowledges that Internal Revenue Service will be revising the Form W-8EXP withholding tax documentation for use by QFPFs. Until the new Form W-8EXP is released, a QFPF should indicate its status with a certification signed under penalties of perjury. Notably, the QFPF is not required to provide a U.S. Employer Identification Number if it does not have one.

Also of interest, the regulations provide a withholding exemption for certain non-U.S. partnerships wholly owned by QFPFs.

Please contact International Capital Associates, LLC if you need help with inbound tax planning and structuring or U.S. investment tax reviews .

Key U.S. Tax Provisions of the Inflation Reduction Act of 2022

Wed, 17 Aug 2022 19:59:05 GMT

On August 16, 2022, President Biden signed the Inflation Reduction Act of 2022 (“the Act”). This tax alert highlights some of the key U.S. federal income tax provisions of the law.

The Act includes:

A new corporate minimum tax,
A 1 percent excise tax on certain corporate stock buybacks,
Additional funding for the U.S. Internal Revenue Service, and
Energy-related tax credits.

Notably, the Act does not contain increases in the top tax rates for individuals, corporations, or estates.

15% Corporate Minimum Tax

The 15 percent corporate minimum tax would apply to corporations that meet an average annually-adjusted financial statement income test for tax years beginning after December 31, 2022. The test is met when the average 3-year annually-adjusted financial statement income exceeds $1 billion USD and other requirements. There are special rules that apply to non-U.S. parented multinational groups.

The 15 percent corporate minimum tax is not expected to impact most small and midmarket businesses in the U.S. The Bill does not currently include a global minimum tax on non-U.S. earnings of U.S. multinational businesses. Non-U.S. investors with public and private interests in corporations subject to the 15 percent corporate minimum tax may see decreased earnings from the corporation.

1% Excise tax on Corporate Stock Buybacks

The new excise tax generally applies to U.S. publicly-traded corporations. The excise tax also applies to non-U.S. publicly-traded corporations that are treated as surrogate foreign corporations after September 20, 2021.

Additional Internal Revenue Service Funding

The Act provides an additional $78.9 billion in funding to the U.S. Internal Revenue Service. More than half of the funding goes toward tax enforcement. $25.3 billion is allocated to operations support. The Act also provides $4.75 billion for business systems modernization and $3.2 billion for taxpayer support services.

It is expected that it will take time for the Internal Revenue Service to be able to implement the services as stipulated in the Act.

Please contact International Capital Associates, LLC if you need assistance with Inbound Tax Planning and Structuring or Inbound Income Tax Returns .

What the U.S. Tax Changes of the "Inflation Reduction Act of 2022" May Mean for Non-U.S. Investors

Thu, 28 Jul 2022 18:14:23 GMT

The bill in its current form likely does not significantly impact U.S. investments of non-U.S. investors.

In a surprise deal negotiated between Senators Chuck Schumer and Joe Manchin, the senators released a joint statement regarding their support of the proposed Inflation Reduction Act of 2022 ("the Bill"). The senators noted support from President Biden and House Speaker Nancy Pelosi to pass the Bill by the end of 2022. However, it's unclear if the proposed Bill will be enacted without significant changes. The Bill can be found here .

The most significant tax headline for non-U.S. investors regarding the Bill is the lack of changes to the top tax rates of corporations, individuals, and estates. Prior bills in Congress in 2022 included changes to tax rates. The federal corporate income tax rate on corporations is currently 21 percent.

The most significant tax revenue generator in the Bill is a 15 percent minimum tax on large corporations. The 15 percent corporate minimum tax is not expected to impact most small and midmarket businesses in the U.S. The 15 percent corporate minimum tax would apply to corporations that meet an average annually adjusted financial statement income test. The test is met when the average 3-year annually adjusted financial statement income exceeds $1 billion USD and other requirements. The Bill does not currently include a global minimum tax on non-U.S. earnings of U.S. multinational businesses. Non-U.S. investors with public and private interests in corporations subject to the 15 percent corporate minimum tax may see decreased earnings from the corporation.

Other revenue generators of the Bill include changes to the carried-interest rules related to investment funds and increased tax enforcement from the U.S. Internal Revenue Service.

Please contact International Capital Associates, LLC if you need tax advice regarding inbound tax planning and structuring or U.S. investment tax reviews .

Hungarians with U.S. Investments Should Consider the U.S. Tax Implications of the Termination of the Hungary-U.S. Income Tax Treaty

Mon, 18 Jul 2022 23:11:05 GMT

Az egyesült államokbeli befektetésekkel rendelkező magyaroknak mérlegelniük kell a Magyarország-USA jövedelemadó-szerződés felmondásának amerikai adóvonzatait

On July 15, 2022, the U.S. Department of Treasury (“the Treasury”) announced that it provided notice to Hungary that it was terminating the United States notified Hungary of its termination of the Convention between the Government of the United States of America and the Government of the Hungarian People’s Republic for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, in force since 1979 (the “Treaty”). The Treasury provided this notification on July 8, 2022, with an effective date of January 28, 2023. However, the reduced withholding tax rates of the Treaty will remain through December 31, 2023 .

The following chart highlights some of the anticipated changes due to the termination of the Treaty:

*Certain exclusions may apply.

With the high increase in withholding tax rates, Hungarians with U.S. investments should review their current American holdings from a tax efficiency perspective. Other tax structures may reduce the impact of the higher withholding tax rates. Investors should also consider the capital structure of their U.S. investments to ensure the best tax efficiency.

It has been widely reported that the Treasury’s decision to terminate the Treaty resulted from Hungary’s reluctance to adopt a global corporate minimum tax rate as part of the OECD Base Erosion and Profits Shifting tax law recommendations. We understand that it may be possible for the Treasury to rescind the termination notice of the Treaty, but the process is not described in the Treaty. Hungarian taxpayers should still consider the U.S. tax considerations before the increase in withholding tax rates, as any tax planning may take time to complete.

Please contact International Capital Associates, LLC if you need help with inbound tax planning and structuring or U.S. investment tax reviews .

Cayman Islands Issues CRS Enforcement Guidelines

Tue, 05 Apr 2022 16:48:59 GMT

Cayman Islands CRS penalties can be substantial

In late March of 2022, the Cayman Islands Tax Information Authority (“TIA”) released its Common Reporting Standard (“CRS”) Enforcement guidelines (“the Guidelines”). These guidelines provide the framework for the TIA to enforce the penalty provisions of CRS and are not legally binding on the TIA. The Guidelines apply only to administrative penalties and not criminal penalties.

The TIA may impose up to a $50,000 KYD penalty for offenses by a corporation or unincorporated Cayman Financial Institution and up to $20,000 KYD for offenses by other persons related to Part 3 of the Cayman Islands CRS regulations. $50,000 KYD is roughly exchanged for $60,000 USD as of the date of this tax alert. In certain cases, the TIA may also assess a $100 KYD per day continuation penalty.

The Guidelines provide that the TIA may impose a penalty for each offense and include multiple penalties in the same breach notice. The Guidelines provide examples of 4 different offenses related to the failure to establish and maintain written policies and procedures regarding CRS. Each offense has an indicative penalty of $7,500 KYD for certain entities. This could result in total penalties of $30,000 KYD (approx. $36k USD) related to CRS policies and procedures.

The Guidelines also provide indicative penalties of $37,500 KYD (approx. $45k USD) for failing to register on the DITC portal by the notification deadline and $5,000 KYD (approx. $6k USD) for EACH reportable account that was not submitted on a CRS return for certain entities.

Account holders preparing their self-certifications also need to be aware of Cayman Islands CRS penalties. Persons who provide a materially false self-certification may be subject to penalties up to $20,000 KYD (approx. $24k USD) and $8,000 KYD (approx. $10k USD) for certain entities and individuals, respectively. For purposes of this penalty, reasonable excuses do not include that (1) the self-certification was made outside of the Cayman Islands, (2) the person did not know or have reason to know that the self-certification was false, and (3) the self-certification was provided to a financial institution by someone other than the account holder.

Persons who received a breach notice from the TIA may be able to contest the penalty provided they prove that they had a reasonable excuse before the deadline set in the breach notice. Reasonable excuses do not include reliance on an agent or insufficient funds to comply with the CRS regulations. The TIA will not reconsider penalties if the person responds after the deadline indicated in the breach notice. A person who has received a penalty notice may appeal the penalty to a court.

Both financial institutions subject to Cayman Islands CRS regulations and account holders of financial institutions must timely and accurately comply with the Cayman Islands CRS regulations. The penalties outlined in the Guidelines can be substantial.

Do you have questions regarding CRS compliance ? Contact International Capital Associates, LLC to discuss.

The United States-Chile Income Tax Treaty Moves Closer to Ratification

Tue, 29 Mar 2022 16:42:46 GMT

The U.S.-Chile Income Tax Treaty is On the Move

On March 29, 2022, the U.S. Senate Foreign Relations Committee consented to the ratification of the Convention between the Government of the United States of America and the Government of the Republic of Chile for the Avoidance of Double Taxation and Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital (“Treaty”). This Treaty is important as the U.S. has a limited number of income tax treaties with South American countries.

The Treaty provides a reduced withholding tax rate on dividends, interest, and royalties. The U.S. dividend withholding tax rate may be reduced to 5% in cases where a 10% ownership threshold is met and a 15% dividend withholding tax rate in other cases. Notably, the Treaty calls for a 0% withholding tax rate on certain U.S.-sourced dividend payments to pension funds. The protocol of the Treaty provides that in the case of U.S. Regulated Investment Company (e.g., U.S. mutual funds) and U.S. Real Estate Investment Trusts, the dividend withholding tax may be reduced to 15%. However, there are limitations on when the reduced rate is available.

The reduced interest withholding tax rate is generally 15% for five years after the Treaty takes effect and 10% after that. Certain exceptions apply to the reduced interest withholding tax rate. A 4% interest withholding tax rate is available for certain financial institutions and certain other creditors.

The royalty withholding tax is generally 10%. A reduced royalty withholding tax rate of 2% is available for certain royalties that constitute a rental payment for the use of industrial, commercial, or scientific equipment.

The U.S.’s right to impose branch profits tax and branch-level interest tax is preserved in the Treaty.

The Treaty includes a Limitation on Benefits article. The Limitation on Benefits article generally provides that a treaty resident is a “qualifying person” as defined in the article. It’s essential for taxpayers to self-assess if they are a qualifying person.

Overall, the U.S.-Chile income tax treaty mainly reflects the provisions of the U.S. model income tax treaty with variations to account for Chilean tax law and policy. It will be a welcome addition to U.S. tax treaties with South America.

Do you have questions regarding inbound tax planning and structuring ? Contact International Capital Associates, LLC to discuss.

Biden Administration Releases FY2023 Tax Green Book

Mon, 28 Mar 2022 16:37:34 GMT

FY 2023 Biden Tax Proposal Highlights

In March of 2022, President Biden's Administration released its FY 2023 Tax "Green Book." The Green Book explains the administration's tax proposals. The document contains numerous proposals. We highlight a few of the proposals below.

Corporate Income Tax Rate Change

Perhaps the most significant proposal is raising the federal corporate income tax rate to 28%. Currently, the federal corporate income tax rate is 21%. However, corporations may also be subject to state income taxes. While some states do not levy corporate income taxes, most states levy corporate income taxes, and there is an extensive range of state corporate income tax rates. If the federal corporate income tax rate increases to 28%, many corporations may be subject to an effective tax rate well over 30% on their income.

Base Erosion Anti-Abuse Tax ("BEAT") / Undertaxed Profits Rule ("UTPR")

The BEAT tax currently operates similarly to a minimum tax and applies to certain corporate taxpayers. The Green Book proposes to repeal the BEAT tax rules and replace them with the Undertaxed Profits Rule. This change intends to align the U.S. minimum tax rules to be consistent with the model rules of Pillar Two of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting. The Pillar Two rules include (1) an Income Inclusion Rule that imposes a top-up tax on the parent entity related to low-taxed income of a member of the financial reporting group, and (2) an UTPR that denies deductions or requires an equivalent adjustment to tax liability to the extent that the low-taxed income of the group member is not subject to the Income Inclusion Rule.

Importantly, UTPR would only apply to financial reporting groups that have global annual revenue of USD $850 million dollars in at least two of the prior 4 years with several de minimus exclusions. Under UTPR, U.S. tax deductions may be disallowed for certain U.S. corporations part of a non-U.S.-parented multinational group and U.S. branches of non-U.S. corporations. U.S. group members would be disallowed U.S. tax deductions to the extent necessary to collect the hypothetical amount of top-up tax required for the financial reporting group to pay an effective tax rate of at least 15 percent in each non-U.S. jurisdiction where the group has profits.

The proposed rules also include a minimum top-up tax when another jurisdiction adopts the UTPR.

Onshoring Business Tax Credit of 10%

To provide a tax incentive to bring jobs and investments back into the U.S., the Biden Administration proposes a general business credit of 10% of eligible expenses paid or incurred concerning the onshoring of U.S. trade or business. Onshoring a U.S. trade or business refers to reduction or removal of a non-U.S. trade or business and a start-up or expansion of a U.S. trade or business, provided there is an increase in U.S. jobs. The proposal contains rules for certain U.S. territories. The proposal would be effective after the date of enactment of the tax legislation.

Tax Deduction Denial for Offshoring Expenses

The Green Book contains a proposal to limit the deductibility of certain expenses associated with the offshoring of U.S. jobs. Offshoring a U.S. trade or business implies reducing or removing a U.S. trade or business and the start-up or expansion of a non-U.S. trade or business, provided there is a decrease in U.S. jobs. The proposal would be effective after the date of enactment of the tax legislation.

Increase in the Highest Tax Bracket for Highest U.S. Income Earners

The proposals include increasing the top marginal tax rate from the current 37% rate to 39.6%. The top marginal tax rate would apply to taxable income over $450,000 for married individuals filing a joint return, $400,000 for unmarried individuals (other than surviving spouses), $425,000 for head of household individuals, and $225,000 for married individuals filing separate returns. These thresholds would be indexed for inflation. This would apply for tax years beginning after December 31, 2022.

Increase in Capital Gains Tax Rates for High-Income Earners

For taxpayers with more than $1 million taxable income, the proposal would tax long-term capital gains and qualified dividend income at ordinary tax rates. The $1 million threshold would be indexed for inflation.

Deemed Exchange of Assets Upon Death

Currently, when an heir receives inherited property, the tax basis in the asset is generally adjusted to the property's fair market value at the date of the decedent's death. This typically results in no U.S. federal income taxation on the appreciation of the property transferred from the decedent's estate.

The Biden Administration is proposing to treat the decedent's assets as exchanged on the date of the decedent's death. The amount of gain would be the property's fair market value as of the date of death, less the decedent's tax basis on the property. The fair market value would be valued at the value used for gift and estate tax purposes with modifications for partially-transferred property and certain transactions with trusts. The gain would be taxable income to the decedent and reflected on the federal gift or estate tax return or a separate capital gains tax return.

Transfers of property to a U.S. spouse or charity would not be subjected to the deemed exchange of assets upon death. The U.S. spouse or charity would receive carry-over basis on the property.

The proposal would be effective after December 31, 2022.

Do you have questions regarding outbound tax planning and structuring ? Contact International Capital Associates, LLC to discuss.

2022 Proposed PFIC Regulations Focus on Aggregate Treatment of Partnerships

Tue, 25 Jan 2022 16:50:41 GMT

Proposed changes to PFIC treatment related to partnerships

In 2019, the Treasury Department and the Internal Revenue Service 2019 released proposed regulations regarding the aggregate treatment of U.S. partnerships for purposes of the Controlled Foreign Corporation Subpart F rules and requested comments concerning the Passive Foreign Investment Corporation (“PFIC”) rules for U.S. partners of U.S. partnerships. In response to the comments received, the Treasury Department and the Internal Revenue Service (“Treasury and IRS”) released proposed PFIC regulations regarding U.S. partnerships and S-corporation on January 25, 2022 (“the Proposed Regulations”). This tax alert principally focuses on the proposed PFIC rules as it relates to U.S. partnerships.

Let’s start with a brief discussion of the aggregate versus entity treatments for partnerships. In the entity approach, the partnership is treated as owning the assets of the partnership and is treated as separate and distinct from its partners. Conversely, in the aggregate approach, the partners of a partnership are treated as owning the assets of the partnership. This is relevant because the Treasury and IRS intend to use the aggregate approach with respect to the PFIC rules related to U.S. partners of U.S. partnerships per the Proposed Regulations.

The PFIC rules generally negate any U.S. tax benefits of deferral of income related to investments in non-U.S. corporations. These rules are important for U.S. partners to consider as the partner could be subject to interest charges and other special U.S. tax treatments related to their direct or indirect interest in a PFIC.

Similar to recent decisions by the Treasury Department and IRS regarding Controlled Foreign Corporation (“CFC”) rules, the Treasury Department and IRS concluded that domestic partnerships and S-Corporations should be treated as aggregates of their partners and shareholders for purposes of the Qualified Electing Fund (“QEF”) and Mark-to-Market (“MTM”) rules. This is significant as the intention of the Proposed Regulations is to not treat U.S. partnerships and S-corporations are shareholders for purposes of making a QEF or MTM election. Accordingly, U.S. partnerships and S-Corporations should not recognize QEF inclusions or MTM amounts, make PFIC purging elections, or file Form 8621. The Treasury and IRS noted that the new reporting on a partner’s Schedules K-2 and K-3 from a partnership is expected to enable the partner to make a QEF election.

The Proposed Regulations provide transition rules for QEF elections made by U.S. partnerships and S-Corporations. These transition rules will be effective for tax years of a PFIC ending on or before the date of publication of these rules as final regulations.

There are special rules concerning the transfer of QEF stock to U.S. partnerships and flow-through entities amongst other miscellaneous PFIC rule changes.

Do you have questions regarding PFIC tax reporting , PFIC determinations , or outbound tax planning ? Contact International Capital Associates, LLC to discuss.

Proposed Changes to U.S. Portfolio Interest Exception

Fri, 24 Sep 2021 21:40:10 GMT

Proposed changes to 10% shareholder definition

The U.S. portfolio interest exception is a tax incentive to make investments in the United States more attractive to non-U.S. investors. The portfolio interest exemption provides relief from the default withholding tax rate of 30% on U.S.-sourced interest income in certain circumstances.

One of the requirements for a valid portfolio interest exception is that the beneficial owner of the interest income is not a 10% shareholder of the borrower. Under current law, a 10% shareholder includes any person who owns 10% or more of the total combined voting power of all classes of stock of a corporate borrower.

In connection with Build Back Better Act tax proposals, there is a proposed change to the 10% shareholder definition. According to the proposal, a 10% shareholder includes any person who owns 10% or more of the total combined voting power of all classes of stock or 10% or more of the total value of the stock of a corporate borrower. The proposal would be effective after the date of enactment of the law.

The proposal may have a significant impact on investment funds with U.S. assets. In particular, the proposal is most likely to impact investors who do not qualify for U.S. income tax treaty benefits.

Do you have questions regarding applying the portfolio interest exception to a payment of interest to a non-U.S. person, U.S. withholding tax reporting , or U.S. withholding tax documenation ? Contact International Capital Associates, LLC to discuss.

IRS Releases Draft U.S. Forms W-8

Wed, 08 Sep 2021 19:32:39 GMT

New U.S. Withholding Tax Documentation Forms are Forthcoming

Early in September 2021, the U.S. Internal Revenue Service released draft Forms W-8BEN-E, W-8BEN, W-8IMY, W-8ECI, and the related instructions. The Service has not yet released the draft Form W-8EXP. It is expected that the Form W-8EXP will be changed to encompass disclosures for Qualified Foreign Pension Funds.

Form W-8BEN-E

The Form W-8BEN-E is drafted to include changes for additional disclosures regarding Section 1446(f), a disclosure whether the governmental entity is considered an "integral part" of the foreign government, and foreign taxpayer identification number disclosures. The instructions were also updated regarding certain U.S. treaty claims and life insurance contracts. The draft instructions also specify when an electronic signature is acceptable on the form. Here are the links to the draft Form W-8BEN-E and the draft Form W-8BEN-E Instructions .

Form W-8BEN

The Form W-8BEN changes included changes to the signature certification checkbox and foreign taxpayer identification number disclosures. Here are the links to the draft Form W-8BEN and the draft Form W-8BEN Instructions .

Form W-8IMY

The Form W-8IMY is drafted to include changes for Qualified and Nonqualifed Intermediaries, Territory Financial Institutions, certain U.S. branches, and nonwithholding foreign partnerships. The form now includes a line to disclose the entity's foreign taxpayer identification number. Here are the links to the draft Form W-8IMY and the draft Form W-8IMY Instructions .

Form W-8ECI

The Form W-8ECI is updated to include a disclosure whether the governmental entity is considered an "integral part" of the foreign government, changes to the foreign taxpayer identification number disclosure, signature checkbox, and a Section 1446(f) disclosure for dealers. Here are the links to the draft Form W-8ECI and the draft Form W-8ECI Instructions .

Do you have questions regarding U.S. withholding tax documentation preparation , or U.S. FATCA ? Please contact International Capital Associates, LLC if you need any assistance in understanding these disclosures or help with understanding U.S. withholding taxes.