Proposed International Tax Law Changes Under the Biden Administration
July 21, 2021
By Matthew Halpern and Chip Niculae
We’re only several months into the new administration in Washington and there’s talk of tax reform 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.
On March 31, 2021, the Biden administration released the Made in America Tax Plan (“MATP”), which seeks to make U.S. companies and workers more competitive by eliminating incentives to invest offshore, substantially reducing profit shifting and countering tax competition on corporate income tax rates. Countries are often competing for multinationals’ business by reducing corporate income tax rates below the U.S. rate. Part of the president’s plan is to build a strong incentive for other countries to join a multilateral global tax agreement that would create a minimum tax rate and deny U.S. deductions on related-party payments to foreign corporations residing in a low-taxed jurisdiction. At a recent G-20 meeting in Venice, Italy, the finance ministers and central bank governors of the world’s major economies reached an agreement on a two-pillar global tax reform plan that calls for a 15% minimum tax rate.
The president’s tax plan includes a proposal to raise the minimum global intangible low-tax income (“GILTI”) tax rate from an effective 10.5% to 21% and calculate it on a jurisdiction-by-jurisdiction basis. The Biden administration’s proposal seeks to increase the corporate tax rate to 28% and decrease the GILTI deduction from 50% to 25%; the net effect is a higher 21% effective tax rate on GILTI. In addition, 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 (“FTC”) in the GILTI FTC basket against the income of a CFC in a lower-taxed jurisdiction. Next, the president intends 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 effective for tax years beginning after December 31, 2021.
The MATP also includes a provision that would repeal the Foreign Derived Intangible Income deduction and replace it with R&D investment incentives. For example, the MATP provides for the creation of a new general business credit equal to 10% of the eligible expenses for onshoring a foreign trade or business if U.S. jobs would be created. Conversely, the Biden plan would disallow deductions related to the offshoring of a U.S. trade or business if U.S. jobs would be lost. The goals of these changes are to encourage R&D investments and increase manufacturing operations in the U.S.
Moreover, the president wishes to repeal 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 tax rate. 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. The SHIELD regime would be effective for tax years beginning after December 31, 2022.
Finally, the president is looking to also repeal parts the IRC §245A dividend received deduction from foreign corporations, recharacterize the source and income recognized from the disposition of hybrid entities, and strengthen the anti-inversion provisions by treating a foreign acquiring corporation as a U.S. company based on a reduced 50% continuing threshold or if a foreign acquiring corporation is managed and controlled in the U.S.
So what does this all mean? President Biden’s tax plan is starting to make some headway and may 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 of the MATP and make business decisions to restructure operating models. As each business is different, some may be more impacted by these proposed changes than others. At a minimum, U.S. corporations may see an increase in their corporate tax liabilities.