New Tax Bill Targets Corporate 'Round-Tripping' Loophole, Raises Compliance Bar for Multinationals

The “Close the Round-Tripping Loophole Act” is a deep dive into the complex world of international corporate tax, specifically targeting a maneuver where U.S. companies use their foreign subsidiaries (Controlled Foreign Corporations, or CFCs) to route sales back to the U.S. to lower their tax bills. Essentially, it aims to prevent a U.S. company from selling goods or services to itself, via an offshore entity, just to claim a tax break on that income.

The New Math of Foreign Earnings

This bill doesn't introduce a new tax; it changes the math on an existing one—the tax on Global Intangible Low-Taxed Income (GILTI). Currently, U.S. shareholders pay tax on certain foreign earnings, but they get a deduction that lowers the effective rate. Section 2 introduces a brand-new calculation called the “round-tripping ratio.” This ratio measures how much of a company's foreign income comes from sales or services provided by the U.S. parent to another U.S. person, routed through the CFC. If you’re a multinational, this means your tax liability now hinges on proving that those goods or services were actually intended for foreign use. If you can’t prove it, that income gets flagged as “round-tripped.”

Who Gets Hit, and Who Gets a Pass?

The bill is clearly aimed at large corporations. Section 2 includes a crucial small taxpayer exception: if your average annual gross receipts over the last three years are under $100 million, your round-tripping ratio is automatically zero. This is a big win for mid-sized and smaller businesses that might have simple international operations but lack the massive compliance teams of a Fortune 500 company. They get to skip the new, complex calculations entirely.

For the big players, however, the stakes are high. Section 3 takes this newly calculated round-tripping ratio and uses it to reduce the amount of the deduction they can take on their GILTI. If a significant portion of their foreign income is deemed “round-tripped,” their deduction shrinks, and their overall U.S. tax bill goes up. This means the bill effectively increases the tax rate on foreign earnings for large companies that use this specific structure.

The Compliance Catch

While the goal—closing a loophole—is straightforward, the execution is anything but. The introduction of the round-tripping ratio adds significant compliance complexity. Companies now have a heavier burden of proof to demonstrate that property sold or services provided overseas were genuinely intended for “foreign use.” For a company with complex global supply chains, tracking and documenting the final destination of every component or service to meet this standard will be a massive undertaking, potentially leading to more disputes with the IRS. For the average person, this complexity doesn't seem like much, but higher compliance costs for large businesses often get passed down the line, either through higher prices or reduced investment.