S. 2021: Close the Round-Tripping Loophole Act

The bill titled the "Close the Round-Tripping Loophole Act" proposes changes to how certain income is reported and taxed under the Internal Revenue Code. The primary aim is to address what is known as "round-tripping," which involves U.S. corporations shifting profits earned abroad back to the U.S. in a way that minimizes tax liability on those profits.

Key Provisions

• Exclusion of Round-Tripped Income: The bill seeks to amend the tax code to exclude round-tripped income from the calculation of what is termed "global intangible low-taxed income." This means that U.S. companies that engage in this practice would not be able to benefit from a lower tax rate on this income.
• Modification of Income Calculations: The legislation will modify how the net deemed intangible income is calculated by introducing a "round-tripping ratio." This ratio will determine the extent to which round-tripped income is factored into tax calculations.
• Defining Round-Tripping: Round-tripping is identified as income that a U.S. shareholder earns from controlled foreign corporations (CFCs), specifically income that might benefit from lower taxes or specific deductions under U.S. tax laws if it is returned to the U.S. For example, this may include profits from goods sold or services provided that cannot be clearly established as serving foreign markets.
• Restrictions on Deductions: The bill also introduces limitations on deductions for domestic corporations related to their global intangible low-taxed income. Essentially, it prevents companies from reducing their taxable income based on profits that are considered to have been "round-tripped." This is measured by applying the previously mentioned round-tripping ratio to the income amounts.
• Exceptions for Small Businesses: A provision is included that allows for a 0 percent round-tripping ratio for smaller U.S. shareholders—specifically those with average annual gross receipts not exceeding $100 million over a three-year period. Thus, these smaller entities are not significantly affected by the changes proposed in the bill.

Effective Dates

The amendments proposed in this bill are intended to take effect for taxable years of foreign corporations that begin after the enactment of the Act. Additionally, U.S. shareholders will also see these provisions apply to their taxable years that coincide with those of the foreign corporations.

Impact on Businesses

By closing this loophole, the bill aims to ensure that U.S. businesses report income honestly and pay taxes on it, rather than exploiting legal loopholes to gain tax advantages. The intention is to create a fairer tax landscape and potentially increase tax revenue from these operations.

Relevant Companies

• AAPL: Apple Inc. could see impact as it often utilizes international subsidiaries for its operations and may engage in round-tripping to manage tax liabilities.
• MSFT: Microsoft Corp. may also be affected as it has significant foreign operations and might rely on similar tax strategies.
• GOOGL: Alphabet Inc., the parent company of Google, may face changes in how its income from foreign subsidiaries is taxed.