U.S. FY2025 Budget Contains International Tax Proposals – Selected Topics

The United States Treasury explains several international tax proposals in the administration’s F.Y. 2025 budget. Most proposals presented in this year’s Budget appeared in the F.Y. 2024 budget. The international tax proposals are numerous and we will focus on the following in this blog:

• Raise the corporate income tax rate to 28% and limit the IRC Section 250 deduction to 25%, thereby raising the effective rate on global intangible low-taxed income (GILTI) to 21%
• Modify the GILTI regime to align with the global minimum tax rules under Pillar Two of the Base Erosion and Profit Shifting initiative of the Organization for Economic Co-operation and Development (OECD)
• Replace the Base Erosion Anti-abuse Tax (BEAT) with an “undertaxed profits rule” (UTPR) that is consistent with the UTPR in the Pillar Two rules
• Repeal the deduction for foreign-derived intangible income (FDII)

Increasing Corporate and GILTI Rates

The Budget would raise the corporate tax rate to 28% from 21%, thereby increasing the effective GILTI rate. Other changes to the IRC Section 250 deduction for GILTI (as described later) would increase the effective GILTI rate to 21%.

Revising the GILTI Regime

The Budget would change the GILTI regime and certain other provisions to eliminate perceived incentives to move U.S. operations offshore and to comply with the global minimum tax rules under Pillar Two.

The significant changes could include:

• Taxing a U.S. shareholder’s entire net CFC-tested income by eliminating the exemption for qualified business asset investments (effective for tax years beginning after December 31, 2024)
• Decreasing the deduction for a global minimum tax inclusion under IRC Section 250 to 25%, which would increase the GILTI rate to 21% when combined with the proposed corporate rate of 28% (effective for tax years beginning after December 31, 2023)
• Disallowing only 5%, rather than 20%, of a shareholder’s FTCs with respect to the global minimum tax (effective for tax years beginning after December 31, 2024)

Replacing BEAT with UTPR

The Budget would repeal the BEAT and replace it with a UTPR that is consistent with the Pillar Two Model Rules. The UTPR would not apply to income subject to an income inclusion rule (IIR) consistent with the Pillar Two Model Rules, which would include income subject to GILTI, reformed as proposed in the Budget. Thus, the UTPR would generally not apply to U.S.-parented multinationals.

Under the Budget, both domestic corporations and domestic branches of foreign corporations would be denied U.S. tax deductions (subject to certain de minimis exclusions) to the extent necessary to collect the hypothetical top-up tax required for the financial reporting group (generally, a group of business entities that prepare consolidated financial statements) to pay an effective tax rate of at least 15% in each foreign jurisdiction in which the group has profits.

The proposal would be effective for tax years beginning after December 31, 2024.

Repealing and Replacing the FDII Tax Benefit

The Budget would repeal the tax benefit for FDII and use the revenue to provide other unspecified incentives to encourage R&D, effective for tax years after December 31, 2024.

If you have questions about the U.S. FY2025 Budget or any of our international tax services, please contact our Global Business Services team.