- House Committee on Ways and Means Chairman Richard Neal has proposed 25 new tax policies that would increase taxes on U.S. corporations by $ 963.6 billion over the next decade.
- Eighty-seven percent of that revenue came from 5 major changes to corporate tax law, although the proposal to raise the U.S. corporate tax rate by 5.5 percentage points increases by far the most revenue of any corporate tax increase proposed by Ways and Means.
- While the outlook for this tax package and the Reconciliation Act in general is uncertain, the direction of tax policy under this proposal is clear: over the next decade, taxes on U.S. corporations would rise by nearly $ 1 trillion.
This week, the House Means and Ways Committee will raise and likely report on significant new tax changes as part of the Democrats’ domestic spending agenda. The Democrats on the Ways and Means Committee have proposed Subtitle I, a package of tax increases for individuals and businesses. Subtitle I is just one element of the larger reconciliation package that will bring together the legislative recommendations of 12 House Committees. The outlook for this tax package and the Reconciliation Act in general is unclear as the policies and political priorities of the Democrats in Congress continue to diverge widely. What is clear is the direction of tax policy under this proposal, which would result in taxes for US corporations rising by nearly $ 1 trillion over the next decade.
Subtitle I – Corporate and International Tax Reforms
Ways and Means Committee Chairman Richard Neal has proposed 25 new tax policies that would increase taxes on U.S. companies by $ 963.6 billion over the next decade. Eighty-seven percent of that revenue came from 5 major changes to corporate tax law, although the proposal to raise the U.S. corporate tax rate by 5.5 percentage points increases by far the most revenue of any corporate tax increase proposed by Ways and Means.
Corporate tax rate
The Ways and Means Committee Subtitle I would raise the corporate tax rate from the current 21 percent to 26.5 percent. This is 1.5 percentage points below what the Biden government proposed in its budget. Under current law, the United States has a federal rate of 21 percent, which combined with state and local rates is 25.75 percent, making it the twelfth highest in the Organization for Economic Co-operation and Development (OECD), and slightly above the 22 average , 85 percent of the 37 OECD countries. An increase in this rate by 5.5 percentage points would put the combined US rate in second place after Portugal, which has hardly a growth record to emulate. According to the Joint Tax Committee, this provision would raise $ 540 billion over the next decade and is the single largest source of income in Subtitle I.
Expand GILTI inclusion
Subtitle I introduces a number of significant changes to the tax treatment of income generated by US corporations abroad. These proposals are similar in nature to those of the Biden Administration, but differ in a number of areas. Most significant in terms of revenue collection is the proposed amendment to the Global Intangible Low Taxed Income (GILTI) regime. According to current law, GILTI serves as a minimum income tax, which has characteristics similar to highly mobile intangible income. According to current law, the GILTI regulation taxes income that exceeds the normal return (10 percent) on property, plant and equipment abroad, which is determined by political decision-makers. Taxpayers who report GILTI can deduct half of the income above this threshold at an effective rate of 10.5 percent. However, the GILTI provision also provides a “haircut” for applicable foreign tax credits of 20 percent, which means that taxpayers are only allowed to apply 80 percent of their foreign tax credits to this income, increasing the effective rate under applicable law to 13.125 percent. and a number of the companies are facing higher rates. Note that a separate provision in Subtitle I would reduce the haircut for foreign tax credits from 20 percent to 5 percent. Subtitle I would lower the currently applicable threshold, the so-called Qualified Business Asset Investment (QBAI) threshold, to 5 percent. Significantly, Subtitle I would also switch the GILTI regulation to a country-specific test instead of the current global mixed approach, which could pose costly administrative challenges for multinational companies.
The GILTI regime is important for the multilateral tax negotiations convened by the OECD, known as the Inclusive Framework. As part of this initiative, over 130 nations have agreed to introduce a new global minimum tax, known as Pillar 2, of at least 15 percent. The agreement also provides for a substantial spin-off of at least 5 percent (and at least 7.5 percent for the first 5 years) of the value of the fixed asset and payroll. The effect of this proposal is to exclude the normal returns on foreign material investment and labor, a similar concept to that of QBAI. Subtitle I would therefore expose a larger proportion of foreign income to taxation than the OECD Pillar 2 policy.
Together, these changes to GILTI would gross $ 106.7 billion over the next decade.
Reduce FDII and GILTI deductions
The Foreign Originated Intangible Income (FDII) of the Tax Cuts and Jobs Act (TCJA) provides a new tax preference for locating mobile intellectual property income in the United States. FDII draws on similar concepts and definitions as other policies established under the TCJA such as GILTI and is designed to act in concert with those policies to maintain the US tax base while improving the investment climate in the United States. The FDII provision – a 37.5 percent deduction from overseas income that exceeds an assumed return on property, plant and equipment (QBAI) – provides a reduced effective tax rate on high-yield income that is consistent with and similar to intellectual property income in their inspiration the “patent”. Boxing “in other nations.
According to this provision in Subtitle I, both FDII and GILTI deductions would be reduced to 21.875% and 37.5%, respectively. Given the proposed corporate tax rate of 26.5 percent, these reduced deductions result in an FDII rate of 20.7 percent and a GILTI rate of 16.5625. A separate regulation in Subtitle I would reduce the discount on the foreign tax credit from 20 percent to 5 percent, so that instead of 80 percent, 95 percent of the foreign tax credit could be claimed. This effect, together with the other modifications of GILTI in Subtitle I, would lead to an effective GILTI rate of around 17.4 percent. Here too, the Ways and Means legislation would tax US companies that do business abroad above the rate agreed in Pillar 2.
Together, these changes to FDII and GILTI would gross $ 96.4 billion over the next decade.
Changes to the foreign tax credit
Under applicable law, subject to certain restrictions, U.S. firms may aggregate foreign taxes paid for the purpose of obtaining foreign tax credits. Foreign tax credits are limited in their application to taxes paid on various types of income or “baskets”. Under subtitle I, companies would have to claim foreign tax credits per country, among other changes, which excludes the mixing and averaging, which somewhat simplifies the administrative burden of the current calculation of the foreign tax credit. Subtitle I would also limit the degree to which excess credits can be used now and in the future to offset tax liabilities. This policy would remove the applicable statutory annual carry-back allowance and reduce the ability for companies to carry excess credits forward from 10 to 5 years.
Taken together, these foreign tax credit changes would raise $ 63.3 billion over the next decade.
Interest Deduction Limitations
In general, US firms can deduct a portion of debt interest from taxable income. Under current law, this deduction is usually limited to 30 percent of income. According to Subtitle I, US companies that are part of multinational corporations would be further restricted from claiming interest deductions. The main idea is to reduce the shift in income from US companies to related parties overseas. The provision would limit the interest that such a company can deduct to a percentage of 110 percent of the multinational company’s total interest expense. The percentage is the percentage of the domestic company in the total revenue of the multinational corporation.
Combined, this proposal would generate sales of $ 34.8 billion over the next decade.
Subtitle I contains 19 additional provisions that would increase taxes for US corporations. The estimated revenues from two of these provisions are included in the revenue estimates for the proposed changes to the foreign tax credit restrictions and the GILTI regime. Other changes include increases in property tax on erosion and anti-abuse (BEAT), as well as higher taxes related to corporate restructuring and certain other transactions. One of the above provision that loses revenue would, among other things, make the treatment of foreign tax credits under GILTI more generous.
Together, these additional measures would generate net sales of $ 122.2 billion over the next decade.
House Democrats enacted a budget resolution instructing the Ways And Means Committee to come up with a bill by September 15 that will reduce the deficit by $ 1 billion over the next decade. The Ways and Means Committee has the Tax Code under its jurisdiction and, given the significant spending the House Democrats intend to track through the Tax Code, it must offset those expenditures through other changes to programs under its jurisdiction. While these compensations could be spending cuts, House Democrats have instead proposed substantial tax increases to pay for the new spending. The proposed $ 963 billion in tax hikes for US firms is part of that agenda. https://www.jct.gov/publications/2021/jcx-42-21/