Close the Round-Tripping Loophole Act

Bill Number

S. 2021

Origin Chamber

Senate

Congress

119th Congress, Session 1

Policy Area

Taxation

Status

Introduced

Latest Action

2025-06-11: Read twice and referred to the Committee on Finance.

Last Updated

2025-06-30T17:59:09Z

AI-Generated Summary

Purpose

The "Close the Round-Tripping Loophole Act" (S. 2021) aims to prevent U.S. multinational companies from avoiding taxes on foreign earnings by routing income through foreign subsidiaries in ways that ultimately serve the U.S. market. It targets "round-tripping," a practice where income is shifted abroad but connected to U.S. sales or services, to close a loophole in the global intangible low-taxed income (GILTI) rules. GILTI is a U.S. tax regime that requires U.S. companies to pay taxes on certain low-taxed foreign income from controlled foreign corporations (CFCs), which are overseas subsidiaries majority-owned by U.S. entities.

Key Provisions

• Modification to GILTI Calculation (Section 2):
• Amends the formula for net deemed intangible income return under IRC Section 951A(b)(2)(A) to subtract an amount based on a "round-tripping ratio."
• The round-tripping ratio is a percentage (up to 100%) of a U.S. shareholder's net CFC tested income (foreign earnings eligible for GILTI) that qualifies as round-tripped.
• Round-tripped income includes:
• Income from property sold to U.S. persons.
• Income from property where the taxpayer cannot prove it is for "foreign use" (determined similarly to rules under IRC Section 250(b), which generally means use outside the U.S.).
• Income from services provided to U.S. persons or U.S.-located property, unless proven otherwise to the IRS satisfaction.
• Only deductions allocable to this round-tripped income are considered in the calculation.
• Exception: Small U.S. shareholders (average annual gross receipts of $100 million or less over the prior three years) have a 0% round-tripping ratio, exempting them from this adjustment. Aggregation rules similar to those for base erosion taxes apply.
• Limitation on GILTI Deduction (Section 3):
• Amends IRC Section 250(a)(1)(B) to reduce the 50% deduction available for GILTI inclusions by subtracting an amount equal to the GILTI amount multiplied by the round-tripping ratio.
• This effectively denies the deduction for the round-tripped portion.
• Effective Dates:
• Section 2 applies to taxable years of foreign corporations beginning after enactment, and corresponding U.S. shareholder years.
• Section 3 applies to taxable years beginning after enactment.

Significant Changes to Existing Law

• GILTI Base Adjustment: Previously, GILTI calculations under IRC Section 951A included all tested foreign income without distinguishing round-tripped amounts. The bill introduces a subtraction for round-tripped income in the 10% deemed tangible return calculation, reducing the overall GILTI base for affected income.
• Deduction Reduction: The existing 50% deduction for GILTI (allowing an effective U.S. tax rate of around 10.5% on GILTI) is now limited by excluding the round-tripped portion, increasing the effective tax rate on such income to closer to 21% (the corporate rate).
• These changes build on the 2017 Tax Cuts and Jobs Act's GILTI regime but add specificity to curb avoidance strategies involving U.S.-connected foreign income.

Potential Impacts

• On Government Agencies: The IRS will need to verify claims of "foreign use" for property and services, potentially increasing administrative burdens and audit requirements. This could generate additional tax revenue for the U.S. Treasury by capturing more GILTI inclusions from round-tripping.
• On Citizens and Businesses: Large U.S. multinational corporations may face higher tax liabilities on foreign earnings tied to U.S. markets, discouraging profit-shifting tactics. Small businesses (under $100 million in receipts) are unaffected, protecting them from added complexity. U.S. shareholders of CFCs will need to track and document foreign use more rigorously.
• On International Relations: Could strain relations with countries hosting CFCs if it leads to reduced foreign investment or disputes over tax treaty interpretations, but it aligns with global efforts (e.g., OECD initiatives) to combat base erosion and profit shifting.

Main Stakeholders Affected

• U.S. Multinational Corporations: Primary targets, especially large firms in tech, manufacturing, or services that use foreign subsidiaries for U.S.-related sales; they may incur higher taxes and compliance costs.
• U.S. Shareholders of CFCs: Individuals or entities owning stakes in foreign subsidiaries; the bill affects their GILTI inclusions and deductions.
• Small Businesses: Exempted, so minimal direct impact.
• U.S. Government (IRS and Treasury): Gains enforcement tools and revenue but faces implementation challenges.
• Foreign Governments and Entities: Indirectly affected if U.S. companies adjust operations to minimize round-tripping, potentially reducing foreign tax bases.

Notable Legal, Constitutional, or Political Implications

• Legal Implications: Introduces IRS discretion in verifying "foreign use," which could lead to litigation over documentation standards or burden-of-proof rules. The changes are narrowly tailored to GILTI, avoiding broader IRC overhauls, but may interact with international tax treaties (e.g., under the U.S. model treaty) if seen as discriminatory.
• Constitutional Implications: No apparent issues; the bill exercises Congress's taxing power under Article I, Section 8, and does not infringe on due process or equal protection by providing clear definitions and a small-business exception.
• Political Implications: Sponsored by Senate Democrats (Wyden, Warner, Warnock, Welch), it reflects efforts to close perceived corporate tax loopholes post-2017 reforms. Referred to the Senate Finance Committee, passage could signal bipartisan interest in tax fairness, though opposition from business lobbies might arise over increased complexity and effective tax rates.

This summary was generated by AI and may contain inaccuracies. Refer to the official source document for the authoritative text.

Sponsor

Sen. Wyden, Ron [D-OR]

Cosponsors (3)

Sen. Warner, Mark R. [D-VA], Sen. Warnock, Raphael G. [D-GA], Sen. Welch, Peter [D-VT]

Recent Actions

• 2025-06-11: Read twice and referred to the Committee on Finance.
• 2025-06-11: Introduced in Senate

Bill Versions

• Close the Round-Tripping Loophole Act — issued 2025-06-11 — PDF (6 pages)