Corporate Tax

Proposed corporate tax will increase threaten US competitors overseas and domestically

The Biden administration released the American Jobs Plan, which outlined steps to create domestic jobs, rebuild national infrastructure, and increase American competitiveness.

The American Jobs Plan, released March 31, is part of the first phase of Biden’s Build Back Better agenda. This phase focuses on the classic infrastructure and is paid for through tax increases to companies.

In addition to the American Jobs Plan, this first phase of Biden’s Tax Plan includes a second package known as the Made in America Tax Plan. According to the plan, this package will “fix corporate tax law to incentivize job creation and investment in the United States, stop unfair and wasteful shifting of profits to tax havens, and ensure that companies pay their fair share”. The plan does not address how companies in difficulty will deal with an additional tax burden during this difficult time.

Case in point: proposed updates by the Biden administration as part of their American employment plan that would increase taxes on Global Intangible Low Taxed Income (GILTI). It might look like a simple tax rate hike on paper, but this move carries worrying risks to American competitiveness.

Prior to the tax reform passed by the Trump administration in 2017, US-based multinational corporations paid US corporate tax rates on global profits when repatriating their overseas profits.

This policy has encouraged companies to keep their money overseas rather than reinvesting it in the United States. Firms generating income from intangible sources – drug patents, software, royalties, etc. – found it increasingly beneficial to protect their profits in countries with lower taxes.

GILTI: A background

However, the Tax Cuts and Jobs Act of 2017 attempted to roll back businesses by easing tax rules on GILTI. The new tax rules included a statutory 10.5% tax rate with a 50% profit deduction, the exclusion of 10% of returns on foreign property, plant and equipment, and the ability to pool foreign profits, losses and tax credits for a company’s US tax bill.

Biden’s GILTI plan proposals

Changes to GILTI play a role in funding the package – Biden’s plan would double the GILTI tax rate from 10.5% to 21%.

This step alone is a major step up. Commentators may point out that this is still below the regular corporate tax rate of 28%, but overlook the fact that the effective tax rate in GILTI’s fine print is higher.

Prior to the TCJA, companies could offset 100% of the overseas taxes they paid on their US tax bill and carry losses forward and backward. Since 2017, however, GILTI has only allowed 80% of foreign taxes to be credited and has waived advance and return payments.

In addition, the Biden Plan would expand the assessment basis for the GILTI rate. Currently, GILTI exempts the first 10% of a company’s returns on property, plant and equipment.

The idea behind this exception was that GILTI was originally intended to apply to big tech, pharmaceutical companies and other companies whose profits are based on patents from low-tax countries. The Biden government wants to cut this exemption, arguing that exemptions reward companies that move jobs and profits overseas.

However, this argument overlooks the fact that many companies are relocating their operations abroad because of the labor costs at home. The increase in GILTI taxes offers little motivation to bring jobs home. Consider companies with a strong focus on customer service or industries that rely on foreign real assets that are not valuable for tax purposes. They are just as likely as multibillion dollar corporations to get caught in the crossfire of GILTI, but far more likely to be brought down.

To combat this, the Biden Plan proposes a “claw-back” provision to force a company to give back tax breaks when it closes US jobs and sends jobs overseas.

A final option in the Biden government’s plan would be to assess each country’s taxes rather than consolidating all of the overseas taxable profits and loans into a single filing. Consider the hassle of calculating tax credits and taxable profits for just one country – doing so for multiple countries would create compliance issues for the Internal Revenue Service and the businesses involved.

Another perspective

As the congressional discussions get underway, another line of conversation is stirring from the Treasury. Treasury Secretary Janet Yellen has expressed interest in working with the Organization for Economic Co-operation and Development to propose a global minimum tax to discourage global tax competition.

The OECD has not provided any concrete figures, but indicates that the global minimum tax would have a lower statutory rate than the Biden GILTI. In addition, they are trying to find out how companies are allowed to maintain carryforward and backward charges.

It remains to be seen what support both action plans will receive from relevant politicians and voters alike. However, the possibility remains that, although the GILTI taxes were introduced as an anti-circumvention measure, the concept could well provoke a backlash.

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