No Tax Breaks for Outsourcing Act: Targeting Profit Shifting and Corporate Inversions, Starting 2025

The "No Tax Breaks for Outsourcing Act" aims to overhaul how multinational corporations are taxed, with major changes taking effect mostly after December 31, 2025. This bill, introduced to amend the Internal Revenue Code of 1986, tackles several key areas of international tax law to discourage companies from moving profits and operations overseas to avoid U.S. taxes.

Profit Shifting Crackdown

The core of the bill focuses on eliminating incentives for companies to shift profits to low-tax jurisdictions. It does this by replacing the current "global intangible low-taxed income" (GILTI) rules with a "net CFC tested income" approach, calculated on a country-by-country basis (SEC. 2). This means companies can't offset profits in high-tax countries with losses in low-tax ones. For example, a tech company with significant profits in Ireland and losses in a smaller market can no longer average those out to reduce their U.S. tax bill. They'll be taxed separately on their Irish profits.

The bill also eliminates the deduction for "foreign-derived intangible income" (FDII) and the high-tax exclusion for foreign base company income (SEC. 2), closing loopholes that previously allowed for lower tax rates on certain types of income. The foreign tax credit system is also revised, applying limitations on a country-by-country basis based on "taxable units" (SEC. 3). This prevents companies from using excess tax credits from one country to offset taxes in another, ensuring a more accurate reflection of their tax obligations in each jurisdiction.

Interest Deduction Limits and Inversion Rules

The Act introduces limits on interest deductions for domestic corporations that are part of international groups with over $100 million in average annual gross receipts (SEC. 4). The deductible amount is capped based on a formula tied to the group's overall net interest expense and the corporation's share of earnings. This is designed to prevent companies from loading up U.S. subsidiaries with debt to reduce their U.S. tax liability. For instance, if a multinational corporation's U.S. branch is paying significantly more interest to its foreign parent company than what's proportional to its earnings, some of that interest deduction will be disallowed.

Furthermore, the bill tightens rules on corporate inversions (SEC. 5), where U.S. companies merge with foreign entities to shift their tax residence. If a foreign corporation acquires a U.S. company and more than 50% of the new entity is owned by former shareholders of the U.S. company, or if the management and control of the group are primarily in the U.S. with significant domestic business activities, it will be treated as a U.S. corporation for tax purposes. This provision applies retroactively to taxable years ending after December 22, 2017.

U.S. Managed, U.S. Taxed

Finally, the bill treats foreign corporations with significant assets (over $50 million) or publicly traded stock that are primarily managed and controlled in the U.S. as domestic corporations (SEC. 6). This means that even if a company is incorporated overseas, if its key decisions and operations are run from the U.S., it will be subject to U.S. tax laws. This change takes effect two years after the Act's enactment.

These changes, while aimed at increasing tax fairness and revenue, present significant compliance challenges for multinational corporations. Companies will need to carefully analyze their global structures and potentially restructure operations to comply with the new rules. The long-term impact could include increased tax revenue for the U.S. government and a potential shift in how multinational corporations structure their global operations.