No More Tax Breaks for Shipping Jobs Overseas: New Bill Levels the Playing Field

The "No Tax Breaks for Outsourcing Act" aims to do exactly what it says: eliminate tax loopholes that reward companies for moving jobs and profits offshore. This bill, effective for tax years starting after December 31, 2024, tackles several key areas of corporate tax law to make it harder for companies to avoid paying their fair share in the U.S. (SEC. 1).

Closing the Loopholes

The bill revamps how multinational corporations calculate their taxes on foreign income. Instead of lumping all foreign income together, the bill requires companies to calculate their "net CFC tested income" – basically, their foreign profits – on a country-by-country basis (SEC. 2). This prevents companies from using tax havens to artificially lower their tax bills. For example, a tech company can't just shift all its profits to a subsidiary in a country with zero taxes to avoid paying U.S. taxes. It also eliminates the reduced tax rate on net CFC-tested income, treating all income equally. (SEC.2).

It also gets rid of the high-tax exclusion, which allowed companies to avoid taxes on income from countries with high tax rates. (SEC. 2). Now, all foreign income is subject to U.S. tax rules, regardless of the foreign tax rate. It also limits the ability to carry back foreign tax credits, allowing only a 10-year carryforward, adding more restrictions to tax credit usage. (SEC. 2).

Leveling the Financial Playing Field

Another major change is the limitation on interest deductions for domestic corporations that are part of international financial reporting groups (SEC. 4). If a U.S. company is part of a multinational group that reports over $100 million in annual gross receipts, the amount of interest it can deduct is capped. The cap is determined by a complex formula involving the group's net interest expense and the corporation's share of the group's earnings before interest, taxes, depreciation, and amortization (EBITDA). Any disallowed interest can be carried forward for five years. This provision prevents companies from loading up on debt in the U.S. to reduce their tax liability while shifting profits overseas.

Cracking Down on Corporate Inversions

The bill also tightens the rules on corporate inversions, where a U.S. company merges with a foreign company to shift its tax residence abroad (SEC. 5). It treats a foreign corporation as a domestic corporation if it would be a "surrogate foreign corporation" under modified rules, or if it's an "inverted domestic corporation." This means that even if a company technically becomes foreign, it will still be taxed as a U.S. company if it meets certain criteria, such as having more than 50% of its stock held by former shareholders of the domestic entity or having its management and control primarily in the U.S. This section applies retroactively to taxable years ending after December 22, 2017.

Management in the US? Taxes in the US

Finally, the bill treats foreign corporations managed and controlled primarily in the United States as domestic corporations for income tax purposes (SEC. 6). This applies to companies with publicly traded stock or assets of $50 million or more. If the company's top executives and senior managers who make the big decisions are located in the U.S., the company is considered a U.S. corporation for tax purposes. This change kicks in two years after the law is enacted. This helps to prevent companies that, while technically foreign, are essentially run from the U.S. from dodging taxes.

In short, the "No Tax Breaks for Outsourcing Act" aims to overhaul international corporate taxation, making it harder for companies to game the system and encouraging investment in the U.S. economy.