Update on International Tax Proposals in President Biden’s Made in America Tax Plan
Last month, I posted a blog on some sites outlining the tax and spending provisions of the Consolidated Appropriations Act, 2021, the American Rescue Plan, and the American Jobs Plan (“Jobs Plan”), the latter being President Biden’s $2.3 trillion infrastructure plan. The first two bills have been enacted, and the third one is being negotiated between the Democrats and Senate Republicans on the one hand, and on the other, between the Democratic leadership and the more centrist Democratic Senator Joe Manchin of West Virginia.
If the Democrats and at least 10 Senate Republicans cannot agree on the scope of the spending under the Jobs Plan, the legislation will likely be enacted under the Reconciliation rules, which require only 50 votes (plus that of the Vice-President sitting as President of the Senate). A similar result will likely occur if 10 Senate Republicans cannot agree with the Democratic plan to pay for the spending. Since I believe that the Senate Republicans will not agree to the scope of the Jobs Plan, particularly those spending proposals outside the scope of “hard” infrastructure, such as child care jobs and facilities and adult home care, as well as the tax increase proposals, I believe the Democrats will ultimately need to resort to Reconciliation to achieve their goals. It has been reported that the President will give the Republicans until Memorial Day to come to agreement. It is possible, however, that the Jobs Plan bill could be split into “hard” and “soft” infrastructure.
Under the Senate Reconciliation rules, however, there can be no deficits created outside of the 10-year budget window. This may seriously constrain the Democratic ambitions for this massive bill – they may be forced to juggle spending or tax priorities over time, or cut back on some programs in order to meet these rules. The Senate Republicans will try their best to bog down the Democrats as they work through the process.
In addition, if the Democrats and Senator Manchin do not agree, there will be no bill at all. So the Democrats will need to compromise, and probably Manchin also. This will result in some scaling down of the bill, or some deficits created thereby. Deficits are acceptable in Reconciliation as long as they occur within the 10-year budget window. The Tax Plan is expected to fully fund the Jobs Plan over 15 years, however, and the Jobs Plan spending may occur over more than 15 years, complicating the legislative task for the Democrats.
The Made in America Tax Plan (“Tax Plan”)
In my April blog, I listed out the main provisions of the Tax Plan. They are mostly modifications of the key international tax provisions of the 2017 TCJA legislation, with some additional proposals. I discuss below some of the issues surrounding each proposal, along with some history, as applicable. Overall, the Tax Plan projects that these provisions will raise over $2 trillion over 15 years, which, as noted, is outside the budget window to a great extent, and therefore raises some issues. However, President Biden strongly backs the Tax Plan, and considers it to be an important policy goal in its own right, and not only in support of the Jobs Plan. Nevertheless, Treasury Secretary Yellen recently stated that some of the Jobs Plan could be funded by deficits.
Increase in the general corporate tax rate from 21% to 28%
The corporate tax rate topped off at 35% prior to TCJA and was somewhat progressive, but the rate for income between $75,000 and $10 million was a flat 34%. TCJA lowered the rate to a flat 21%, at an estimated cost of $1.348 trillion over 10 years. This amount was almost as large as that of TCJA deficit as a whole (i.e., $1.456 trillion). The increase in corporate tax to 28% might claw back around half of the annual decrease in tax. However, Senator Manchin has strongly advocated for an increase to only 25%. President Biden has stated his willingness to compromise, and on May 6 suggested a compromise between 25% and 28%. It seems likely that the Democrats will reach internal compromise on the corporate tax rate within this range. It would not serve any Democrat for the bill to fail on account of this.
Changes to GILTI
There are several rules in TCJA connected to the global intangible low-taxed income (GILTI) provisions (sec. 951A) that would be reversed or modified by the Tax Plan. First, the Tax Plan proposes to increase the corporate tax rate on GILTI from 10.5% to 21% by adjusting the percentage deduction allowed by IRC sec. 250 (which currently allows to a domestic corporation or electing U.S. individual a deduction equal to 50% of GILTI). Second, the Tax Plan would calculate GILTI on a foreign country-by-country basis instead of an overall taxpayer basis, including foreign tax credits. This would reduce certain foreign tax credits and loss offsets by eliminating the current law averaging concept. In general, country-by-country treatment has been in place during a number of prior periods of time, so it is not a new concept. This is expected to be a large revenue raiser. Third, the current annual exclusion of 10% of foreign tangible assets would be eliminated. Finally, although this is not found in the Tax Plan, the regulatory exclusion from GILTI for income taxed at a foreign rate of 90% (or greater) of the U.S. corporate tax rate (the high-tax exclusion) would most likely be eliminated (either by legislation or by terminating the regulation), at least for domestic corporations.
Seek a global agreement through the OECD for a strong minimum tax on corporations that would also deny deductions to foreign-controlled corporations on payments to entities in countries without such a strong minimum tax
This proposal relates to the OECD BEPS 2.0 project. The Biden Administration has already taken action to support the project. The Trump Administration had given it little attention. The OECD plans to announce the minimum tax under BEPS 2.0 in October 2021, after the U.S. legislation sets a U.S. minimum tax. It is currently expected that the minimum tax for this purpose will be the GILTI rate under the President’s plan. I will be providing additional information on the status of BEPS 2.0 as we get closer to October 2021.
This proposal would also be intended to prevent “stripping” of U.S. income by foreign-controlled corporations, likely replacing the current base erosion anti-abuse tax provision of IRC sec. 59A (the “BEAT”), which many Democrats believe is ineffective. Sec. 59A currently applies only to large multinational corporations.
Enactment of stronger anti-inversion provisions
Buttressing and/or extending the current anti-inversion provisions of the Code (sec. 7874) is another objective of the Tax Plan. Currently, domestic corporations or partnerships that effectively migrate to another country, directly or indirectly, a technique called “inversion,” are treated as domestic corporations (that is, the foreign parent or top company is treated for U.S. tax purposes as a domestic company) if 80% or more of the stock of the foreign parent company after the inversion is owned by shareholders formerly owning the initial domestic corporation or partnership. If the ownership percentage is 60% but less than 80%, the domestic entity is instead subject to a minimum tax consisting of tax on “inversion gain.”
During the Obama era, strict regulations were promulgated that extinguished the use of inversions. The proposal is not yet defined, but Senator Durbin (D, IL) has proposed a bill that would trigger the harsher consequences of remaining a domestic corporation if over 50% of the foreign parent stock is owned by the same investors as before the transaction, or if the new company group is “managed and controlled” in the United States. The Treasury Department appears to endorse Durbin’s concept.
Elimination of the deduction for FDII
FDII is a U.S. export incentive, consisting of a 13.125% corporate tax rate for certain export income. It is not clear that it would survive a WTO challenge. The Department of the Treasury currently believes that FDII provides large tax breaks to companies with excess profits for actions they took pre-enactment, encourages U.S. companies to build factories abroad instead of in the United States, and that stronger tax-based incentives for R&D should be offered instead. The Tax Plan proposes to repeal FDII.
Imposition of a 15% minimum tax on corporate book income
This proposal appears to tax very large corporations (with net income of $2 billion or more) at the rate of 15% of book income, as a minimum tax. There are around 45 corporations currently qualifying for additional tax on this basis. The corporate tax base would presumably reach foreign operations and controlled foreign corporations’ income, so it would backstop subpart F and GILTI. Where applicable, it would allow credits for taxes paid above the minimum book tax threshold in prior years, as well as general business and foreign tax credits.
Elimination of (all) tax preferences for fossil fuels
This proposal is more tied in with policies to address climate change, renewable clean energy, carbon capture, and the like than it is with international tax. Accordingly, I will be addressing this in a separate blog dealing with tax aspects of climate change.
Denying companies expense deductions for “offshoring” jobs and providing a credit for expenses for “onshoring” jobs;
These proposals appear to be recycled from the Obama Administration. However, they definitely fit within the “made in America” concept of the Jobs Plan. The scope of the affected expenses in these proposals and the size of the onshoring credit appear unclear at this point, as are the functional definitions of “offshoring” and “onshoring.”
Ramping up of IRS enforcement in the corporate area
This proposal will essentially increase the tax audit rate for large corporations and will provide additional funding to the IRS for that purpose. The Treasury Department states that it is part of a broader overhaul of tax enforcement that includes wealthy individuals, but specific spending amounts on corporate tax enforcement and objective measurement criteria have not yet been delineated.
Typically, Administration proposals are fleshed out in the detailed President’s Budget, in this case, for fiscal year ending September 30, 2022. To accompany the Administration’s detailed budget, the Treasury Department releases the “General Explanations of the Administration’s Revenue Proposals” which provides an explanation of the Administration's revenue proposals, and the Treasury’s revenue estimates of those proposals.
The Budget has not yet been released, but is expected within the next few weeks. This release is typically followed within a month or two by a congressional analysis of the tax provisions in Presidential Budget, prepared by the Joint Committee on Taxation, including the JCT’s revenue estimates of the Administration’s proposals (which may differ from Administration estimates).
As noted above, it is not clear that all of these tax proposals would be sufficient to fund the Jobs Plan, but, depending on political considerations, it is possible that the tax proposals could be scaled up or the spending proposals scaled back, Barring defections or some unanticipated event, however, the Democrats seem determined to push most of this international tax legislation into law in some form. The Treasury Department has laid down a marker for change in the path of U.S. international tax policy:
The Made in America Tax Plan plan would create novel instruments that reject the long-held notion that tax competition and profit shifting are inevitable features of a globalized economy because of the mobility of capital. The plan would eliminate biases in current tax law that favor offshoring economic activity and would largely put an end to corporate profit shifting with a country-by-country minimum tax. The plan would also lead the world toward the creation of a modernized, stable, and coordinated international tax regime that is premised on multilateral cooperation, thereby addressing collective action problems among nations.
Future installments of this blog will continue to track the progress (or lack of progress) of the Jobs Plan and Tax Plan, including the ensuing political discussion and key OECD events. I will also discuss the pros and cons of future major tax legislation proposals as details are made available. Expect future discussions of the individual tax proposals of the American Families Plan, primarily as they relate to international tax policy, proposals relating to energy and climate change, and the evolution of all of these proposals as they make their way through the legislative process. Please contact us with any questions.
Allen is an attorney and a CPA who has an international tax practice focused on working and consulting with accounting and law firms, businesses, and investors on international tax planning, M&A, tax controversy, legislative and regulatory matters.