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Changes in the U.S. International Tax System Proposed by the Biden Administration


Under the pre-TCJA (Tax Cuts and Jobs Act) U.S. international tax system, the U.S. implemented a worldwide tax system that theoretically imposed U.S. tax on all foreign income of a U.S.-based multinational company (hereafter referred to interchangeably as a “U.S. multinational” or a “U.S. parent”).[1] However, the pre-TCJA system was not a pure worldwide system because of 1) the U.S. foreign tax credit system (FTC system) and 2) the U.S. deferral provision.

Under the pre-TCJA system, §951(a) required a U.S. multinational to report its annual pro rata share of Subpart F income of a controlled foreign corporation (CFC).[2] Foreign tax credits (FTCs) were allowed for foreign taxes deemed paid by the U.S. parent, which offset a portion or all of the residual U.S. tax on the U.S. parent’s Subpart F income inclusion.[3]

U.S. multinationals routinely formed CFC’s to serve as holding companies in lower-tax foreign jurisdictions.[4] Generally, when a U.S. parent forms a CFC in a foreign country, the U.S. recognizes that CFC as a separate legal entity for U.S. tax purposes. U.S. multinationals routinely structured their business activities so that income was treated for U.S. tax purposes as earned by a CFC rather than the U.S. parent. Under certain circumstances, CFCs effectively served as “blockers” from U.S. tax liability, thereby allowing profits to accumulate free of U.S. tax and often subject to minimal local country taxes.

The Subpart F regime curtailed the ability of U.S. multinationals to utilize blockers for the primary purpose of evading U.S. tax liability. The Subpart F regime made passive income generated from capital assets held by a CFC subject to immediate U.S. tax.[5] The Subpart F regime also made sales and services income of a CFC subject to immediate U.S. tax if such goods were not manufactured/consumed in the CFC’s local jurisdiction, or if such services were not performed in the CFC’s local jurisdiction.[6]

Conversely, under the pre-TCJA system, the U.S. was not as proficient at taxing non-Subpart F income of a CFC. The tax law then, in effect, did not require a U.S. multinational to report its annual pro rata share of non-Subpart F income of a CFC until those foreign earnings were repatriated by the CFC to the U.S. parent as a taxable dividend distribution. As such, a U.S. parent could potentially defer U.S. tax on its non-Subpart F income indefinitely. A subsequent dividend distribution by a CFC out of those foreign earnings “brought up” FTCs attributable to foreign taxes deemed paid by the U.S. parent.[7]

The primary purpose of the FTC system is to prevent double taxation. FTCs are theoretically intended to make the global tax rate[8] on foreign income equal to the U.S. corporate income tax rate (U.S. rate), thereby reducing the tax incentive for U.S. companies to shift profits offshore. Assume, pre-TCJA, a CFC (CFC 1) earned $100 of Subpart F income and the local country imposed a tax rate of 10%. CFC 1 pays $10 to the local country and the U.S. parent owes $35[9] of residual tax to the Internal Revenue Service (IRS). The $10 of foreign taxes deemed paid by the U.S. parent would “flow up” to the U.S. parent with the Subpart F income and be available to credit against the residual U.S. tax, thereby reducing the residual U.S. tax due the IRS to $25 and resulting in a global tax rate of 35% (the pre-TCJA U.S. rate).

Assume the same facts, but instead CFC 1 earned $100 of non-Subpart F income. CFC 1 pays $10 to the local country and owes no residual tax in the U.S., unless the CFC distributes the non-Subpart F income to the U.S. parent as a taxable dividend. A subsequent dividend distribution by the CFC to the U.S. parent would “bring up” the $10 of FTCs, thereby reducing the residual U.S. tax due the IRS to $25. In both scenarios, the global tax rate is the same, but there’s a difference of timing for U.S. tax purposes of when the recognition event occurs and when FTCs become available. As discussed above, CFCs were routinely choosing not to distribute non-Subpart F income to the U.S. parent in order to avoid U.S. tax liability such that foreign earnings became “trapped” offshore.

Moreover, if a CFC earned foreign income in a higher-tax foreign jurisdiction,[10] the U.S. parent could utilize a portion of the resulting FTCs to fully offset any residual U.S. tax. Under such a scenario,[11] what happens to the unused FTCs (excess credits)? The U.S. parent could utilize excess credits generated from a higher-tax foreign jurisdiction to offset residual U.S. tax on foreign income earned in a lower-tax foreign jurisdiction (which did not generate sufficient FTCs to fully offset the U.S. residual tax resulting from that jurisdiction).[12] This sort of opportunity for “cross-crediting” was routinely utilized by U.S. multinationals to reduce their global tax rate on foreign income.

Foreign Earnings “Trapped” Overseas

As discussed above, due to the tax cost of repatriation, U.S. multinationals routinely allowed non-Subpart F income of a CFC to accumulate offshore indefinitely.[13] As a result, trillions of dollars in accumulated foreign earnings were considered “trapped” overseas, at least for tax accounting purposes. In 2016, an estimated $2.6 trillion was collectively held by U.S. Fortune 500 companies in predominantly lower-tax foreign jurisdictions, thereby avoiding up to $767 billion in U.S. corporate income taxes.[14] In 2017, over 40% of foreign income of U.S. multinationals was reported in just three lower-tax foreign jurisdictions, namely: the Netherlands, Ireland, and Luxembourg.[15] These “trapped” foreign earnings were a hot-button issue during the 2016 presidential election. Critics of the deferral provision advocated for tax reform that would incentivize U.S. multinationals to bring those foreign earnings back to the U.S., theoretically for reinvestment in U.S. corporate growth and jobs creation.

Adding a Minimum Tax on Foreign Income Under the 2017 Tax Cuts and Jobs Act

The TCJA eliminated the dividend tax on repatriated earnings[16] but added the GILTI regime, which acts as a sort of catch-all that imposes a global minimum tax on foreign income on a non-deferral basis. Under §951A, a U.S. parent must report its annual pro rata share of a CFC’s global intangible low-taxed income (GILTI) in a given year.[17] The GILTI regime broadens the U.S. tax base, as it is generally imposed on net foreign income of a CFC that is not Subpart F income or an exempt item of foreign income.[18]

The GILTI regime exempts a portion of the foreign income of a CFC that would otherwise be subject to the GILTI tax, equal to 10% of a U.S. multinational’s pro rata share of a CFC’s qualified business asset investment (QBAI) less certain adjustments (GILTI exemption).[19] QBAI is a measure of a CFC’s basis in depreciable tangible assets utilized by the CFC in a trade or business to generate business income.[20] The practical effect of the GILTI exemption is inherently dichotomous. The GILTI exemption is available to U.S. multinationals that deploy tangible assets offshore to engage in substantial business activities in a foreign jurisdiction, rather than to a company that merely utilizes a CFC as a holding company for tax purposes. At the same time, the GILTI exemption creates an additional tax benefit to offshoring tangible assets, rather than keeping those tangible assets in (or returning them to) the U.S.

A U.S. multinational must compute a single GILTI inclusion amount by aggregating its pro rata share of the GILTI for all of the CFC’s of which it is a §951(b) U.S. shareholder.[21] The GILTI regime allows a deduction against GILTI equal to 50% of the U.S. rate (Section 250 deduction), thereby reducing the GILTI tax rate from 21% to 10.5%.[22] However, the taxpayer’s ability to claim FTCs to offset the GILTI tax is limited by the imposition of an 80% “haircut,”[23] therefore, the actual tax rate on GILTI is 13.125%.[24]

Same as the Subpart F regime, applicable FTCs “flow up” to the U.S. parent in the same taxable year,[25] but are held in a separate GILTI basket. Because GILTI is imposed on a worldwide basis, a U.S. parent can utilize excess GILTI credits generated in higher-tax foreign jurisdictions to offset the GILTI tax resulting in lower-tax foreign jurisdictions. As a result, a U.S. multinational can potentially reduce the residual U.S. tax rate it pays on GILTI below 13.125%. Further, if the average foreign tax rate paid by all of its CFCs on GILTI equals or exceeds the current GILTI tax rate of 13.125%, a U.S. multinational could owe zero residual U.S. tax on GILTI.[26] As such, U.S. multinationals routinely restructure their foreign holdings to convert Subpart F income into GILTI income, in order to obtain the more favorable GILTI tax rate of 13.125%.

Changes in the U.S. International Tax System Proposed by the Biden Administration

During the 2020 campaign and following the presidential election, President Biden has proposed substantial reform to international tax aspects of the TCJA.[27] Considering all of the challenges the Biden administration currently faces due to the COVID-19 pandemic, it remains to be seen whether tax reform will be a priority in 2021. However, given the ongoing impact of the pandemic on the U.S. economy and the resulting need for economic relief, it is possible we might see substantial tax reform this year. In that regard, the Biden administration has proposed to increase taxes on foreign-earned income in order to 1) disincentive the outsourcing of manufacturing facilities/jobs; and 2) to increase government revenue to fund government-sponsored programs.[28] With these goals in mind and as part of its “Build Back Better” plan, the Biden administration is proposing major changes to the U.S. tax code and has also indicated a strong desire for global tax reform through multi-country initiatives.[29]

Increase the Corporate Tax Rate and Impose a New Minimum Tax on Corporate Income — The Biden administration has proposed increasing the corporate income tax rate from 21% to 28%.[30] This would account for the most substantial increase in federal revenue under Biden’s plan, resulting in approximately $1 trillion in federal revenue over a period of 10 years.[31] In addition, the Biden administration has proposed a minimum tax on corporate income of 15%, which would likely apply to U.S. corporations with book income in excess of $100 million.[32]

Biden Offshoring Tax Penalty — Under the Biden Offshoring Tax Penalty, the Biden administration reportedly seeks to further disincentivize the offshoring of business operations/ activities of U.S. multinationals by imposing a tax penalty on U.S. multinationals that utilize foreign subsidiaries either 1) to produce goods offshore and then sale those goods back into the U.S. market; or 2) to provide foreign-based services back to the U.S. market.[33] Specifically, the proposal provides for the imposition of a 10% surtax on all profits derived from such sales or services into the U.S. market.[34] Coupled with the proposal to raise the U.S. rate to 28%, this would result in an effective tax rate on certain applicable foreign income of 30.8% (28% proposed U.S. rate + (28% x 10% proposed surtax)). In addition, the Biden administration has expressed interest in minimizing or eliminating deductions for outsourcing jobs or production to foreign jurisdictions.[35]

Biden “Made in America” Tax Credit — The TCJA added the FDII regime that taxes certain export income of a U.S. company at favorable rate of 13.125%, if derived from 1) the sale of goods for foreign use; or 2) the provision of services to foreign persons.[36] The Biden administration seeks to further encourage investment in U.S. production by providing a 10% advanceable tax credit to domestic manufacturing companies that bring back manufacturing and/or service jobs to the U.S.[37] The details regarding eligibility for the tax credit are still pending, but the Biden administration has indicated its desire to encourage U.S. investment in the following: 1) the renovation of closed manufacturing facilities; 2) the enhancement of existing facilities; 3) or the “retooling” of existing facilities to reward companies that a) expand into certain industries “deemed essential for national or health security,” b) return production or jobs from overseas, or c) expand production / production payroll.

Changes to the GILTI Regime — The Biden administration wants to eliminate the GILTI exemption and double the GILTI tax rate to 21%.[38] It is not clear by what mechanism the Biden administration plans to double the GILTI tax rate or whether it would involve eliminating or tweaking the Section 250 deduction. Additional indication of what to expect from the administration is outlined in “The Removing Incentives for Outsourcing Act,” a recently proposed U.S. Senate bill led by Sen. Amy Klobuchar (D-Minnesota), which aligns with the Biden administration’s proposed changes to the GILTI regime, among other things.[39] Specifically, the bill seeks to eliminate the ability to utilize cross-crediting of FTCs. The bill’s sponsors advocate that cross-crediting incentivizes U.S. multinationals to shift assets and business operations to various foreign jurisdictions in order to shield income in lower-tax foreign jurisdictions with excess credits generated in higher-tax foreign jurisdictions, thereby achieving a global tax rate lower than what Congress likely intended such companies to attain.[40] Instead, the bill would require U.S. multinationals with CFCs to calculate FTCs on a country-by-country basis, even with respect to FTCs attributable to the same basket of foreign income.[41]

Taxation of the Digital Economy — In the modern digital economy, U.S. multinationals routinely sell products through their online platforms into countries in which they may have no physical presence. A major issue of the global tax system is the taxation of “Big Tech,” i.e., how countries should allocate taxing authority over such cross-border online sales. The Organization for Economic Co-operation and Development (OECD), consisting of 37 member countries, has taken a lead role in developing a multilateral agreement to establish a regime of global tax rules of the digital economy.[42] The goal is a multilateral agreement to deter companies from taxing digital profits through unilateral action, which could impact global trade and economic growth.[43] As such, the OECD has developed a two-pillar proposal: Pillar one deals with the allocation of taxing rights among countries,[44] while pillar two focuses on the implementation of a global minimum tax regime. [45] Under this two-pillar proposal, the corporate tax revenues of low-income countries and high-income countries are each estimated to increase by approximately 4%.[46]

Treasury Secretary Janet Yellen has expressed strong support for a multilateral agreement to establish a truly fair global tax system.[47] The U.S. faces a difficult task in trying to balance the interests of 1) protecting Big Tech in the U.S. versus 2) protecting emerging/developing countries that need revenue and want to seize the opportunity to tax digital sales made into their local country markets.[48] In recent years, the Office of the United States Trade Representative (USTR) has conducted investigations of digital taxes imposed by other countries and has deemed many to be discriminatory and, thus, in violation of the 1974 Trade Act; those countries include Austria, Brazil, Czech Republic, the European Union, India, Indonesia, Italy, Spain, Turkey, and the United Kingdom.[49] In response, the U.S. has imposed retaliatory tariffs on goods imported from certain of those countries, which has led to ongoing trade wars.[50]


Pre-TCJA, due to the tax cost of repatriation, U.S. multinationals routinely allowed non-Subpart F income of a CFC to accumulate offshore indefinitely. The TCJA eliminated the tax cost of repatriation and broadened the tax base, but provided a 50% deduction on GILTI. As a result, U.S. multinationals routinely planned out of the Subpart F regime and into the GILTI regime.

The Biden administration’s proposals expand upon the GILTI regime by 1) eliminating the GILTI exemption, 2) doubling the GILTI tax rate, and 3) eliminating cross-crediting. The administration’s proposals further include increasing the U.S. corporate income tax rate, imposing a new minimum tax on corporate income, creating a system of tax penalties and tax credits to incentivize U.S. manufacturing, and a desire to finalize a multilateral agreement under the OECD to implement a global tax system that fairly taxes the digital economy.

[1] For purposes of this article, a “U.S. multinational” or a “U.S. parent” means a domestic Type C corporation that is a §951(b) U.S. shareholder in one or more controlled foreign corporations.

[2] Under current law, a “controlled foreign corporation” means any foreign corporation if more than 50% of the stock (vote or value) is owned directly, indirectly, or constructively by U.S. shareholders. I.R.C. §957(a).

[3] I.R.C. §960(a).

[4] For purposes of this article, a “lower-tax foreign jurisdiction” means a foreign country with a lower corporate income tax rate than the U.S.

[5] I.R.C. §954(a)(1).

[6] I.R.C. §954(a)(2)-(3).

[7] I.R.C. §902 allowed deemed paid FTC’s based on the proportion of foreign taxes paid on distributed earnings. Section 902 was repealed by the TCJA for tax years beginning after 2017. Deemed paid credits are only available under §960 post-2017. See IRS, Foreign Tax Credit,

[8] For purposes of this article, the global tax rate means the overall tax rate paid by a U.S. multinational to the U.S. and the local country jurisdiction in regard to an item of foreign income.

[9] For purposes of this example, the applicable U.S. rate is 35%, i.e., the U.S. rate prior to being reduced to 21% under the TCJA.

[10] For purposes of this article, a “higher-tax foreign jurisdiction” means a foreign country with a higher corporate income tax rate than the U.S.

[11] This scenario is more common post-TCJA due to the lower current U.S. rate of 21% compared to the pre-TCJA U.S. rate of 35%.

[12] The FTC calculation had to be applied separately to each “basket” of income. Credits from one basket could not be applied against income of another basket. Pre-TCJA, there were only two baskets: general and passive income.

[13] Perhaps U.S. multinationals were hoping for another “tax holiday” similar to the one provided under the American Jobs Creation Act of 2004 that allowed U.S. multinationals to repatriate foreign earnings at a reduced tax rate of 5.25%. Pub. L. 108-357 (Oct. 22, 2004).

[14] Institute on Taxation and Economic Policy, Fortune 500 Companies Hold a Record $2.6 Trillion Offshore (Mar. 28, 2017),

[15] Tax Policy Center, Key Elements of the U.S. Tax System (May 2020),

[16] I.R.C. §245A.

[17] I.R.C. §951A(a).

[18] I.R.C. §951A(a)-(c).

[19] I.R.C. §951(A)(b)(2)(A).

[20] I.R.C. §951(A)(d)(1).

[21] I.R.C. §951A(c).

[22] I.R.C. §250(a)(1)(B).

[23] I.R.C. §960(d).

[24] (21% current U.S. rate x 50% Section 250 deduction)/80% FTC haircut).

[25] I.R.C. §960(d).

[26] Moreover, a U.S. multinational is permitted to make an election whereby GILTI income subject to a foreign tax rate of at least 90% of the U.S. rate is not subject to any residual U.S. tax liability. U.S. multinationals that make the election pay zero tax on GILTI subject to a foreign tax rate of at least 18.9% (21% U.S. corporate income tax rate x 90%). T.D. 9902. 85 FR 44620 (July 23, 2020).

[27] 2020 Biden for President, Fact Sheet: The Biden-Harris Plan to Fight for Workers by Delivering on Buy America and Make It in America (Sept. 9, 2020).

[28] Id.

[29] Id.

[30] Id.

[31] Tax Foundation, Details and Analysis of President Joe Biden’s Tax Plan (Oct. 22, 2020),

[32] Id.

[33] See note 27.

[34] Id.

[35] Id.

[36] I.R.C. §250(a)(1)(A).

[37] See note 27.

[38] Id.

[39] Amy Klobuchar: U.S. Senator for Minnesota, Klobuchar, Van Hollen, Duckworth Introduce Legislation to Keep Jobs in the United States (Jan. 26, 2021).

[40] Id.

[41] Id.

[42] See OECD,

[43] Id.

[44] OECD, Tax Challenges Arising from Digitalisation — Report on Pillar One Blueprint: Inclusive Framework on BEPS (Oct. 9, 2019). See OECD Library, foreward,

[45] OECD, Tax Challenges Arising from Digitalisation — Report on Pillar Two Blueprint: Inclusive Framework on BEPS (Oct. 14, 2020), available at

[46] Elke Asen, Summary of the OECD’s Impact Assessment on Pillar 1 and Pillar 2, Tax Foundation (Mar. 17, 2020),

[47] See Readout: Secretary of the Treasury Janet L. Yellen’s Call with United Kingdom Chancellor of the Exchequer Rishi Sunak, U.S. Department of Treasury (Jan. 27, 2021). See also Readout: Secretary of the Treasury Janet L. Yellen’s Call with German Finance Minister Olaf Scholz, U.S. Department of Treasury (Jan. 27, 2021).

[48] Id.

[49] Office of the United States Trade Representative, Initiation of Section 301 Investigations of Digital Services Taxes, Docket No. USTR-2020-0022 (June 2, 2020).

[50] Id.

Thomas TreeceThomas Treece is an associate attorney in the Naples office of Dunwody White & Landon, P.A. He earned his J.D. from the Florida State University College of Law and his LL.M. in taxation from the University of Miami School of Law. Prior to joining Dunwody White & Landon, P.A., he was a senior associate at an international tax consulting firm where he focused his practice on inbound and outbound international tax planning for multinational companies. He is an active member of The Florida Bar Tax Section and serves as a director of the education division.

This column is submitted on behalf of the Tax Section, Dennis Michael O’Leary, chair, and Taso Milonas, Charlotte A. Erdmann, Daniel W. Hudson and Angie Miller, editors.