S. 409 — No Tax Breaks for Outsourcing Act

This section cites the Act as the "No Tax Breaks for Outsourcing Act"; states that amendments made by the Act, except as otherwise expressly provided, are to the Internal Revenue Code of 1986; and includes a table of contents.

This section revises the global intangible low-taxed income (GILTI) regime under IRC §951A (which requires U.S. shareholders owning 10% or more of a controlled foreign corporation (CFC) to annually include their pro rata share of the CFC group's GILTI, generally net CFC income above a routine return on depreciable tangible assets held and used in a trade or business) as follows: (1) repeals the formula subtracting a 10% deemed tax-free return on qualified business asset investment (QBAI) and the 50% inclusion rate, requiring inclusion of 100% of net CFC tested income; (2) repeals the high-tax exception; (3) requires country-by-country determination of net CFC tested income using CFC taxable units (i.e., CFCs, U.S.-owned foreign disregarded entities treated as branches, and partnerships grouped by tax residence country, similar to foreign tax credit separate baskets under §904(e)); (4) eliminates exclusions from tested income for foreign oil and gas extraction income and certain other income; (5) repeals IRC §250, eliminating the 37.5% deduction for GILTI and the 50% deduction for foreign-derived intangible income (thus subjecting the full GILTI inclusion to the 21% corporate tax rate); and (6) makes conforming amendments, adds regulatory authority for anti-avoidance rules (including basis adjustments and related-party transfer rules), and coordinates GILTI inclusions with post-inclusion tracking rules under §§959 and 961.

This section establishes a country-by-country application of the foreign tax credit limitation under IRC §904(d)—which limits the credit to the U.S. tax on foreign-source income within separate limitation categories (baskets) to prevent cross-crediting of excess credits—for taxable years beginning after December 31, 2024. Under the new §904(e), the limitation applies separately to aggregate income attributable to each "taxable unit" of the taxpayer that is a tax resident of (or, for branches, located in) the country, with taxable units generally comprising (1) the taxpayer itself, (2) each foreign corporation of which the taxpayer is a U.S. shareholder, (3) interests in pass-through entities (i.e., partnerships or similar entities) located in a different country than the owner, and (4) branches (or portions thereof) creating a taxable presence in a different country; fiscally autonomous jurisdictions and U.S. possessions (American Samoa, Commonwealth of the Northern Mariana Islands, Commonwealth of Puerto Rico, Guam, and Virgin Islands) are treated as separate countries. (Thus, taxpayers with multinational operations must compute the limitation separately by country and taxable unit, potentially limiting credits from high-tax countries to offset U.S. tax on low-tax-country income.) The provision defines relevant terms (tax resident, pass-through entity, branch), authorizes the Secretary to issue regulations (including for hybrids, dual residents, and item allocations), and makes conforming amendments to §904(d)(4)(C)(ii) and §904(d)(2)(J)(i) (replacing references to "qualified business units" with "foreign branches" as newly defined).

This section establishes a limitation on the interest deduction for any domestic corporation that is a member of an international financial reporting group (IFRG), defined as a group of entities that (1) includes at least one foreign corporation engaged in a U.S. trade or business or at least one domestic and one foreign corporation, (2) prepares consolidated financial statements, and (3) reports average annual gross receipts exceeding $100 million over the prior three reporting years. Under the limitation, the allowable interest deduction equals the allowable percentage of 110% of the excess of the corporation's interest expense over its interest income, plus its interest income. The allowable percentage is the ratio (not exceeding 100%) of the corporation's allocable share of the IFRG's reported net interest expense to the corporation's own reported net interest expense, with the allocable share determined by the corporation's ratio of EBITDA (earnings before interest, taxes, depreciation, and amortization, as reported in the IFRG's consolidated financial statements) to the IFRG's EBITDA. Special rules apply if group or entity EBITDA is zero or negative, and consolidated financial statements must meet specified filing or use requirements (e.g., SEC 10-K, audited statements for credit or shareholder reporting).

This section revises the anti-inversion rules of IRC §7874 to treat additional foreign corporations as domestic for federal income tax purposes, including (1) those that would qualify as surrogate foreign corporations under the 80% ownership threshold substituted for the prior 60% threshold in §7874(a)(2), and (2) inverted domestic corporations that after December 22, 2017, acquire substantially all properties of a domestic corporation or partnership where, afterward, former shareholders or partners hold more than 50% of the entity's stock (by vote or value) or the expanded affiliated group has management and control primarily in the United States (as determined by regulations requiring substantially all executive officers and senior management to be U.S.-based) plus significant domestic business activities (i.e., at least 25% of employees, compensation, assets, or income in the United States). (As background, §7874 generally prevents U.S. corporations from reducing tax liability by reincorporating in low-tax foreign jurisdictions through acquisitions that shift ownership and control abroad; thus, these changes expand the scope of corporations treated as domestic and subject to U.S. tax, with an exception for those with substantial business activities—per pre-December 23, 2017, regulations, subject to possible threshold increases—in their foreign country of organization.) The amendments include conforming changes to §7874(a), (c); apply to taxable years ending after December 22, 2017; and extend the assessment period for related taxes by three years if it would otherwise expire sooner.

This section establishes a new rule treating certain foreign corporations as domestic corporations solely for income tax purposes (i.e., chapter 1 of the Internal Revenue Code) if their management and control occurs primarily within the United States, notwithstanding the general incorporation-based test for domestic status. (As background, foreign corporations are currently taxed only on U.S.-source income, whereas domestic corporations are taxed on worldwide income; thus, this rule subjects qualifying foreign corporations to U.S. tax on their worldwide income.) A corporation qualifies if (1) its stock is regularly traded on an established securities market or (2) it has aggregate gross assets of $50 million or more (including assets under management for investors, whether held directly or indirectly) at any time during the taxable year or a preceding taxable year, subject to an exception and waiver for non-publicly traded corporations with assets reasonably expected to remain below $50 million. The Treasury Secretary must prescribe regulations determining management and control, including treating it as primarily in the U.S. if substantially all executive officers and senior management (or equivalents) exercising day-to-day strategic, financial, and operational decision-making are located primarily in the U.S., or, for corporations primarily holding investment assets, if investment decisions are made in the U.S. The provision applies to taxable years beginning on or after the date two years after enactment, regardless of whether regulations are issued.