Question

International Taxation Question

How is the Tax Cuts and Jobs Act consistent with the OECD BEPS initiative?

Answer 1

The Tax Cuts and Jobs Act reduces the corporate tax rate from 35% to 21%; allows full dividends-received deduction for the foreign-source portion of dividends paid from 10%-owned foreign subsidiaries to U.S. corporations; requires U.S. shareholders of controlled foreign corporations (CFCs) to include in gross income global intangible low-taxed income (GILTI); and provides a minimum tax on base erosion payments. In addition, new rules on foreign-derived intangible income (FDII), encourage the development of intangibles in the U.S., with a reduced tax on a U.S. corporation's intangible income derived from foreign use.

In 2015, The BEPS project assists countries in closing gaps in existing international rules that allow corporate profits to be shifted artificially to no- or low-tax jurisdictions, where little or no economic activity occurs. The final reports for the 15 BEPS Actions are:

Action 1: Addressing the Tax Challenges of the Digital Economy.

Action 2: Neutralizing the Effects of Hybrid Mismatch Arrangements.

Action 3: Designing Effective Controlled Foreign Company Rules.

Action 4: Limiting Base Erosion Involving Interest Deductions and Other Financial Payments.

Action 5: Countering Harmful Tax Practices More Effectively, Taking Into Account Transparency and Substance.

Action 6: Preventing the Granting of Treaty Benefits in Inappropriate Circumstances.

Action 7: Preventing the Artificial Avoidance of Permanent Establishment Status.

Actions 8-10: Aligning Transfer Pricing Outcomes With Value Creation.

Action 11: Measuring and Monitoring BEPS.

Action 12: Mandatory Disclosure Rules.

Action 13: Guidance on Transfer Pricing Documentation and Country-by-Country Reporting.

Action 14: Making Dispute Resolution Mechanisms More Effective.

Action 15: Developing a Multilateral Instrument to Modify Bilateral Tax Treaties

The TCJA includes international provisions that clearly correspond to their relevant counterparts in the BEPS project (i.e., hybrid mismatches, anti-deferral of CFC income, interest deductibility, and reduced tax on intangible income). In addition, Congress created a general base erosion provision through BEAT.