Senate Finance Committee Democrats unveiled a “discussion” draft bill that would implement certain international tax proposals included in the Biden Administration’s Made in America Tax Plan and generally follows the Senate framework for international tax reform proposed on April 5, 2021. Among other key proposals, the discussion draft revamps the U.S. subpart F rules and Global Intangible Low-Taxed Income regime (GILTI), which it renames Global Inclusion of Low-Tax Income, to ensure that income of a controlled foreign corporation (CFC) is taxed at a minimum rate on a country-by-country basis.

While the discussion draft does not address specific tax rates, it clearly contemplates a higher rate of current U.S. taxation on GILTI. In contrast with the Biden Administration and House proposals to date, the discussion draft creates exemptions on a county-by-country basis from current income tax for high-tax foreign income that otherwise would be subject to GILTI, subpart F, or direct U.S. taxation (with respect to income earned in a high-tax foreign branch). In addition to reforming GILTI and conforming the subpart F regime to more closely align with the reformed GILTI rules, the discussion draft proposes significant changes to the foreign tax credit rules and the Foreign-Derived Intangible Income deduction (FDII) regime to encourage domestic R&D. The discussion draft retains the Base Erosion and Anti-Abuse Tax (BEAT) and applies a higher rate of tax for payments to low-tax jurisdictions. While the discussion draft is broadly consistent with the objectives described in the Made in America Tax Plan, it leaves open critical policy determinations regarding rates and the availability of offsets, as noted below. The Senate Democrats envision this draft bill being included in the $3.5 trillion budget reconciliation bill.

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On Tuesday, August 10, 2021, in a bipartisan vote, the Senate passed H.R. 3684, the Infrastructure Investment and Jobs Act (“Infrastructure Act”). The Infrastructure Act will be considered by the House in September. The Infrastructure Act is the result of the Bipartisan Infrastructure Framework (“Infrastructure Framework”) previously announced on June 24, 2021. See Ropes & Gray alert on Bipartisan Infrastructure Framework. The $1 trillion Infrastructure Act covers many of the Infrastructure Framework’s priorities for improvements to traditional infrastructure, including improvements to roads and bridges, rail, broadband internet, and some climate-related projects. The Infrastructure Act does not contain any of the tax increases previously proposed by the American Jobs Plan, Made in America Tax Plan, or American Families Plan (see Ropes & Gray American Jobs Plan alert and American Family Plan alert). To fund the Infrastructure Act there are, however, two tax-related changes: (i) increased required reporting of transactions involving the sale of digital assets, and (ii) an early end to the employee retention credits for certain eligible employers. The cryptocurrency reporting is designed to encourage taxpayers to report cryptocurrency transactions and to support IRS enforcement against taxpayers who do not report those transactions. Many have criticized the digital asset reporting as overbroad, and amendments were considered—but not passed—to narrow the reporting requirement. Complete language for the Infrastructure Act can be found here.

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On August 5, 2021 Senate Finance Committee Chairman Ron Wyden and Senator Sheldon Whitehouse introduced proposed legislation (the “Ending the Carried Interest Loophole Act,” or the “Proposal”) that would substantially change the U.S. federal income tax treatment of partnership interests issued in exchange for services, commonly known as carried interests, and potentially other types of partnership interests as well. The Proposal would repeal Section 1061, the “three-year carry rule” that was enacted as part of the 2017 tax reform legislation, and instead subject the holder of a carried interest to current inclusions of compensation income, taxable at ordinary income rates, in amounts that purport to approximate the value of a deemed interest-free loan from the partnership’s other investors to the carried interest holder. The Proposal would be effective for taxable years of a taxpayer beginning after the date of enactment, provided that any applicable partnership’s taxable year ends with or within the relevant taxpayer’s year. For most impacted partnerships and partners, if the Proposal were passed anytime in 2021, the provisions would take effect for calendar year 2022.

Although the Proposal would likely be subject to revisions and clarifications before adoption as final legislation, the proposed rules raise, among other issues, potential phantom income and double taxation concerns for investment partnership sponsors, and uncertainties with respect to potential trade or business risks for non-U.S. persons and tax-exempt organizations that purchase carried interests as investors.

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A recent Tax Notes article covers a Women of IFA Network International Fiscal Association USA (WIN-IFA) webinar that examined the details of the IRS’s latest compliance campaign on financial services entities engaged in a U.S. trade or business. The article includes insights from Kat Gregor, tax partner and tax controversy group co-founder. To read the full article including Kat’s insights, please click here.

Update on LB&I Campaigns: Hear the Latest from the IRS–Northeast WIN Webinar. Northeast regional WIN-IFA chapters co-organized a webinar on August 10. The webinar provided an overview of LB&I campaigns focused on international and partnership issues, including the recently-announced campaign looking at “whether foreign investors were subject to U.S. tax on effectively connected income from lending transactions engaged in through a U.S. trade or business.”  The webinar discussed the campaign process in general and how these new initiatives fit in overall. John Hinding, Director, Cross Border Activities Practice Area and Cindy Kim, CBA Program Manager, Practice Network, both of the IRS and Ropes tax partner Kat Gregor served as panelists and Natallia Shapel, Partner, International Tax Services at BDO USA moderated the discussion.

IBA Tax Open Forum – Pillar 2 Agreed? A New Era of Minimum Corporate Taxation. Kat Gregor was a discussion leader during an International Bar Association (IBA) webinar, presented by the IBA Taxes Committee. This webinar focused on the Organisation for Economic Cooperation and Development’s Pillar 2 proposals.

Fraudulent tax refunds issued as a result of identity theft occur when an individual steals a victim’s personally identifiable information (PII), such as a Social Security number (SSN), and files a tax return claiming to be the victim. More than 89,000 Americans filed complaints with the Federal Trade Commission (FTC) reporting tax fraud linked to identity theft in 2020. Similarly, businesses may also fall victim to tax fraud, where an individual steals a business’s employer identification number (EIN) to file fraudulent returns. In both scenarios, the victims usually discover they have fallen victim to such fraud when their tax returns are rejected, or when the business receives notice about Forms W-2 they didn’t file with the Social Security Administration or notices for balances due to the Internal Revenue Service (IRS) that are not owed. Most frequently, neither businesses nor individuals will have any reliable information as to how their information has been exposed. The IRS has noted such tax fraud tends to increase during tax season and time of crisis, and cybercriminals have undeniably taken advantage of the COVID-19 pandemic to unleash an unprecedented number of tax fraud schemes to steal information from taxpayers.

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In this sixth episode of our Ropes & Gray podcast series addressing emerging issues for fiduciaries of 401(k) and 403(b) plans to consider as part of their litigation risk management strategy, Doug Hallward-Driemeier, chair of Ropes & Gray’s appellate and Supreme Court practice, and Josh Lichtenstein, a benefits partner and head of the ERISA fiduciary practice, discuss the Supreme Court’s decision to hear the Northwestern University retirement plan case next term, which will examine what the applicable pleading standard should be for bringing a claim of fiduciary imprudence in violation of ERISA in connection with the management of a defined contribution plan. The podcast also includes an update on the DOL’s cybersecurity guidance.