Proposed International Tax Law Changes Under the Biden Administration
July 21, 2021
By Matthew Halpern
We’re only six months into the new administration in Washington and there’s talk of changing the tax laws yet again. Ever since the Tax Cuts and Jobs Act of 2017, there has been a growing influx of new IRS rules and regulations that have changed the face of the accounting industry.
Let’s take a closer look at the international provisions that included a one-time “toll charge,” also known as the Transition Tax and Repatriation Tax, which paved the way for a new annual inclusion regime called Global Intangible Low-Taxed Income (“GILTI”). GILTI has forced many taxpayers, at both an individual and a corporate perspective, to change their operational structures. The aforementioned talk of changing the tax laws includes the international tax landscape.
The administration prepared a report called the Made in America Tax Plan, which was released on March 31, 2021. The goal is to make American companies and workers more competitive by eliminating incentives to offshore investment, substantially reducing profit shifting, and countering tax competition on corporate tax rates. Countries are often competing for multinationals’ business by reducing corporate tax rates, making it difficult for U.S. companies to compete. Part of the president’s plan is to build a strong incentive for nations to join a global agreement to implement a minimum tax rule and deny U.S. deductions on related-party payments to foreign corporations residing in a low-taxed jurisdiction. In a recent G-20 meeting in Venice, Italy, 20 of the world’s largest economies reached an agreement on a two-pillar global tax reform plan that calls for a 15% minimum tax rate.
The president’s plan include raising the minimum GILTI tax rate from an effective 10.5% to 21% and calculating it on a jurisdiction-by-jurisdiction basis. With a corporate tax rate increased to 28% and a GILTI deduction decreased to 25%, the net effect is a higher 21% effective tax rate on GILTI. By moving to a jurisdictional basis, a controlled foreign corporation (“CFC”) in a high-taxed jurisdiction would not be able to utilize its excess foreign tax credits against a CFC in a lower-taxed jurisdiction. Additionally, the president wants to eliminate the qualified business asset investment deduction from the GILTI calculation and repeal the Subpart F and GILTI high-tax exceptions. Currently, these changes would be applicable for tax years beginning after December 31, 2021.
The plan also includes a provision that would repeal the Foreign Derived Intangible Income deduction (“FDII”) for domestic corporations generating foreign revenue and from servicing foreign customers. The current combination of GILTI and FDII incentivizes manufacturing corporations to shift those operations abroad, thereby benefiting from both regimes and paying only a bare minimum tax in the U.S. The goals of these changes are to encourage R&D investments in the U.S. and to increase manufacturing operations.
A new general business credit equal to 10% of the eligible expenses would be formed for onshoring a foreign trade or business if U.S. jobs are created. Meanwhile, deductions related to offshoring a U.S. trade or business would be disallowed if U.S. jobs are lost.
The president wishes to replace the Base Erosion and Anti-Abuse Tax and replace it with a program called Stopping Harmful Inversions and Ending Low-Tax Developments (“SHIELD”) to more effectively target profit shifting to low-taxed jurisdictions. SHIELD looks to deny multinational corporations U.S. tax deductions by referencing payments made to related parties that are subject to a low effective rate of tax. Financial reporting groups—which are groups of entities that prepare consolidated financial statements and include at least one domestic corporation, partnership or foreign entity with a U.S. trade or business, and have revenues of approximately $500 million—are the targets of SHIELD. SHIELD would apply for tax years beginning after December 31, 2022.
Finally, the president is looking to repeal parts the IRC §245A dividend received deduction from foreign corporations, re-characterize the source and income recognized from the disposition of hybrid entities, and make corporate inversions more applicable by reducing the ownership threshold from 80% or 60% to greater-than 50%. Currently, an inversion transaction would allow a foreign corporation to be treated as a domestic corporation for a period of ten years, thereby benefiting from various expenses that can be written off.
So what does this all mean? President Biden’s plan is starting to make some headway and will soon become a bill proposed to Congress. There will be ups and downs during this process, which may change the ultimate outcome of the bill, but there will be change. Unfortunately, it is still too early to fully understand the tax impact to effectively make business decisions for changing operations or structures. As each business is different, certain ones will be more or less affected by these changes. At a minimum, all corporations may see an impact of a rising corporate tax rate.