On March 31, 2021, President Joe Biden unveiled a $ 2 trillion infrastructure and recovery plan (American job plan) to strengthen the economy after the pandemic. The American employment plan focuses, among other things, on increasing federal spending on repairing freeways, power grids, broadband, schools and childcare facilities, manufacturing, and R&D investments. To compensate for the American employment plan, the White House also introduced the “Made in America Tax Plan” (Tax plan), which aims to raise the corporate tax rate to 28% and propose other significant international tax changes. The tax plan is to raise over $ 2 trillion over the next 15 years and permanently reduce the deficit.
Special provisions of the tax plan
Tax rates on domestic and offshore profits
The tax plan would increase the corporate tax rate from 21% to 28% and include other measures to end preferential tax rates on offshore profits. Thus, the tax plan would increase the tax rate on certain active income of controlled foreign corporations (CFC) known as global low intangible tax income (VALID) up to 21%. Currently, GILTI is taxed based on the 50% deduction under Section 250 of the Internal Revenue Code (10.5% effective).code). GILTI would also be calculated on a country basis to maximize US corporate income tax on income in tax haven areas. In addition, the tax plan would remove the exemption of up to a 10% return on depreciable property, plant and equipment made offshore from the GILTI calculation (also known as qualified corporate investment or QBAI).
In addition, certain intangible income (including income from sales and services) from serving foreign markets can currently be deducted (also known as Abroad Derived Intangible Income (FDII) Deduction), which can lower the corporate tax rate to 13.125% on such income. The tax plan would remove the FDII deduction and use the revenue from the cancellation to expand the R&D incentives, which are said to be more effective than the FDII deduction.
The tax plan would introduce a minimum tax of 15% on book revenues of certain large corporations (that is, revenues that are used to report profits to investors). It is not clear which companies would be subject to the minimum tax system.
The tax plan would also include a measure to refuse deductions for payments to companies based in countries that do not have a solid minimum tax system. An anti-profit stripping rule (without specifying the rule) is also displayed, which is enforced by the Tax Reduction and Jobs Act of 2017 (TITLE) as ineffective. Therefore, it would replace this rule with a global agreement on a strong minimum tax through multilateral negotiations. While not entirely clear, the tax plan could potentially replace the soil erosion and abuse tax (BEAT), which is generally aimed at large companies with gross revenues greater than $ 500 million.
Under the tax plan, companies would also no longer be allowed to write off expenses related to offshoring jobs. On the contrary, the tax plan would provide a tax credit for onshoring jobs.
The tax plan would introduce tough anti-inversion measures. It could introduce a rule that foreign companies can treat as US companies when their administrative and business offices are in the United States.
Increased taxes for the fossil fuel industry
Currently, the fossil fuel industry has certain subsidies and special tax credits. The tax plan would remove such special preferences and reintroduce the Superfund Trust Fund’s taxes on location adjustments.
Funding the IRS Enforcement
The tax plan would provide the IRS with additional funding to improve tax enforcement.
On March 11, 2021, two tax reform bills (the Anti-Abuse Tax Haven Act and the Outsourcing Tax Incentive Act) were introduced in both the House and Senate, targeting international transactions and introducing some significant international tax changes. The announcement of the tax plan appears to reflect the proposed changes in tax reform laws. However, with a slim majority of Democrats in the House and Senate, some changes to the current plan are expected. Treasury Secretary Janet Yellen has also mentioned that the Treasury Department is expected to issue a “Green Paper” sometime this spring to provide technical explanations of the Biden government’s proposed revenue. The Senate Finance Committee held a hearing on the international tax changes on March 25, and Chairman Ron Wyden (D-OR) is expected to publish an international tax framework for the proposed international tax changes.
In addition to the sweeping corporate change proposals mentioned above, the White House made a statement that it would introduce tax changes in the coming weeks that would affect high-income individuals.
Taxpayers should consult with their tax advisors on how the tax plan may affect their existing organizational structures as well as domestic and global businesses. Any anticipated structuring and reorganization should take into account the impact of the Biden administration’s tax proposals, if they are issued in their current form.
© 2020 Greenberg Sad, LLP. All rights reserved. National Law Review, Volume XI, Number 92