Current Law

Under present law, foreign sourced income is taxed according to two separate categories: general and passive. While it differs slightly country by country, ‘passive’ income is income from capital gains, dividends, investments and so forth. ‘General’ income is is all other income. General income is taxed at a considerably higher rate than passive income. Furthermore, the foreign tax credit is based on the tax rate paid in the actual country you are paying tax.

Proposed Change

Under the proposal, a U.S. taxpayer would determine its deemed paid foreign tax credit on an aggregated basis of all foreign taxes and earnings and profits of all foreign subsidiaries.

ATRF Analysis

Furthermore, by aggregating the foreign tax credit across countries, subsidiaries in high tax countries will be substantially disadvantaged with an effective ‘cap’ being placed on their Federal Tax Credit rate – notably belowwhat they would be entitled to.

It is notable that the Administration did not even provide a justification for this change. This is no more than a blatant grab for cash.

10-year Revenue Estimate:

U.S. Department of Treasury: 24.5 billion
Joint Committee on Taxation: 45.5 billion

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