More on the Ways & Means “Tax Team” front. The S Corporation Association today submitted its comments to the members of the Global Competitiveness Tax Team.

For many readers, the idea that the S corporation community has a large international presence may come as a surprise, but they do and the issues surrounding their treatment under Section 199A, GILTI, the IC-DISC, and Pillar 2 are substantial and worthy of Congress’ attention. As the comments state:

The S Corporation Association has a long history of advocacy on international tax issues. While this discussion typically focuses on C corporations, many S corporations and other pass-through businesses engage in international commerce as exporters, owners and operators of foreign branches, and the owners of controlled foreign corporations (CFCs). As such, these businesses face many challenges specific to their pass-through status that should be understood by the Global Competitiveness Tax Team. 

One example of a challenge is the current Pillar 2 plan, which appears to seek fair treatment of pass-through businesses but only if they get the details right. This from the comments:

The current plan includes a carve-out for business income in the US that passes through to a taxpayer when the taxpayer pays a sufficiently high effective tax rate. For those pass-through businesses, they effectively would be exempt from the proposed Pillar 2 minimum tax regime.

The carve-out, however, only applies if the direct shareholder of the pass-through entity pays tax, either as an individual or a trust (such as an ESBT). In situations where an S corporation has trust ownership where the trust is not taxed directly — such as a grantor trust where the grantor pays the tax rather than the trust – the taxes paid would not count towards the minimum tax, so a family businesses with trust ownership would be at increased risk of paying the Pillar 2 top-up taxes.

This is just one example of how our international rules may shortchange S corporations. The comments include several others. By way of recommendations, the comments ask for five specific actions by Congress:

  1. The Section 199A deduction should be expanded to apply to foreign-source income;
  2. S corporations making the Section 962 election should be given access to the Section 245A dividends received deduction, together with rules ensuring the repatriated earnings are subject to US tax when they are distributed to the domestic parent corporation shareholders;
  3. Congress should reaffirm its support for small and closely-held exporters by supporting the IC-DISC;
  4. The Pillar 2 pass-through carve-out be expanded to include S corporations and other pass-through businesses with both direct and indirect owners that pay taxes at a high marginal rate; and
  5. Pillar 2 minimum tax payments should be credited against US tax liabilities.

As always, S-Corp appreciates the work of the Tax Teams and the opportunity to comment on these important issues.  You can read the full comments here.