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On May 28, 2021, the US Treasury Department published its general notes (the “Greenbook”) on the Biden administration’s proposed revenue for fiscal year 2022. The Greenbook provides additional details on the tax proposals previously published in President Biden’s “Made in America Tax Plan “and” American Families Plan “that we discussed in previous customer updates (including those available here and here), as well as some new suggestions.
It remains to be seen whether the Green Paper’s proposals will be translated into law, but they can have a significant impact on corporate taxpayers and their shareholders. Some of the suggestions that may be of particular interest to such taxpayers are discussed below.
General corporate tax proposals
The Green Paper proposes increasing the corporate tax rate from 21% to 28% for tax years beginning after December 31, 2021. For tax years beginning after January 1, 2021 and before January 1, 2022, the tax rate would be 21% plus 7% of the part of the tax year that occurs in 2022.
The Greenbook also proposes a minimum corporate income tax of 15% on worldwide pre-tax book income (i.e. net income reported to shareholders) for companies with such income greater than $ 2 billion for tax years beginning December 31, 2021. Specifically, under this proposal, the provisional minimum book tax would be 15% of global pre-tax book profit (calculated after deducting book net operating losses from book profit), less applicable general business tax credits (including R&D, clean energy and housing tax credits) and foreign tax credits. The book income tax would then correspond to the possible excess of the book-based minimum tax over the regular tax. Taxpayers could take a book tax credit (generated by a positive book income tax liability) to lower the regular tax in future years, but not below the provisional minimum book tax that year.
International tax proposals
The Greenbook contains numerous suggestions for redesigning the international tax landscape. Some of the highlights are the following:
- Increase the US tax levied on a US shareholder’s global low-taxed intangible income (“GILTI”) by expanding the GILTI tax base by eliminating the 10% return exemption on qualified business investment; and the GILTI tax rate is raised from a minimum rate of 10.5% to 21% and the calculation of GILTI according to jurisdiction.
- Abolition of the basic erosion anti-abuse tax (“BEAT”) and replacement with the rule “Stopping Harmful Inversions and Ending Low-Tax Developments” (“SHIELD”), according to which certain domestic companies or branches would not allow a deduction for payments made directly to a member of their accounting group is paid (or deemed to have been paid in certain cases) whose income is subject to an effective tax rate below an internationally agreed global minimum rate (or, if no such rate has been agreed) at the GILTI minimum tax rate of 21% in accordance with the proposal).
- Extend the anti-inversion rules significantly.
- Limit interest deductions for disproportionate borrowing in the United States by limiting the interest deduction of an entity that is a member of a multinational accounting group when the member’s net interest expense for accounting purposes exceeds its proportional share of the group’s net interest expense shown in its consolidated financial statements. Alternatively, if the member is unable to demonstrate their proportional share of the group’s net interest expense for financial reporting purposes, or the member chooses to do so, the member’s interest deduction would be limited to his interest income plus 10% of his adjusted taxable income (as defined) under Section 163 (j )).
- Abolition of the foreign intangible income deduction (“FDII”) and use of the resulting income to “promote research and development”.
These and other proposals related to international tax law are discussed in more detail here.
The Green Paper proposes removing many fossil fuel tax breaks (including, for example, the offsetting of intangible drilling costs, the credit for improved oil production for eligible costs attributable to a qualified oil production project, the credit for marginal well production, the percentage of oil and gas wells and two-year amortization of geological and geophysical expenses of independent producers) and reintroduction of superfund excise taxes, which expired in 1996, in double the amount. In addition, the Green Paper proposes to create, expand or improve various tax incentives for clean energy. For more details on these and other energy-related tax proposals, please see our customer updates here and here.
Tax administration proposals
The Greenbook contains a variety of tax reporting and administration suggestions that may affect corporate taxpayers or their shareholders, including requiring electronic corporate filing for companies with assets of $ 10 million or more or more than 10 shareholders and the imposition of secondary liability on shareholders to collect unpaid income tax from certain corporations involved in “Intermediary Transaction Tax Shelters” as set out in Notice 2001-16. You can find further information on the proposals of the tax administration here in our customer update.
Tax proposals at shareholder level
The Greenbook proposes increasing taxes for corporate shareholders by increasing the highest federal income tax rate on capital gains and dividends to 39.6% (plus the 3.8% Medicare tax) provided the taxpayer’s adjusted gross income is 1 million US dollars for taxpayers exceeds year (US $ 500,000 for separate marriages) indexed for post-2022 inflation. The Greenbook states that this increase would be effective for gains realized after the date of the proposal’s publication, which is refers to April 28, 2021, the date that President Biden announced this proposal as part of the American Families Plan.
In addition, the Green Paper proposes increasing taxes for S-shareholders for tax years beginning after December 31, 2021 by extending the application of self-employment tax to all income from ordinary business activities (with the exception of certain types of income generated by the self-employed Employment are exempt). Taxes, such as rent, dividends and capital gains) derived from S-corporations in which the shareholder has a significant stake in the company, provided that the shareholder’s income exceeds certain thresholds. The proposal would also extend the Medicare tax of 3.8% to all corporate income and profits that are otherwise not subject to wage tax for taxpayers with adjusted gross income greater than $ 400,000 for the tax year.
We will continue to monitor developments regarding potential federal tax laws and provide further updates as necessary. In the meantime, Baker Botts will be happy to assist you in analyzing these suggestions.
The content of this article is intended to provide general guidance on the subject. Expert advice should be sought regarding your specific circumstances.
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