President Biden campaigned on a promise to “Build Back Better.” He also promised to raise corporate taxes, eliminate tax breaks for the fossil fuel industry and provide tax incentives for renewable energy. The Biden Administration has now given us a peek into what candidate Biden had in mind.
The details of the $2.25 trillion infrastructure plan, known as “The American Jobs Plan” (the “Jobs Plan” — the actual cost of which changes depending on who is writing about it), are beyond the scope of this alert. As outlined in the Jobs Plan and its accompanying tax proposal, the “Made In America Tax Plan” (“MAT Plan”), the cost is intended to be fully funded by changes to, among other things, the way the United States taxes multinational corporations.
The MAT Plan has six stated goals:
- Collecting sufficient revenue to fund critical investments
- Building a fairer tax system that rewards labor
- Reducing profit shifting and eliminating incentives to offshore investment
- Ending the race to the bottom around the world by negotiating global minimum tax rules
- Requiring all corporations to pay their fair share
- Building a resilient economy to compete
The MAT Plan aims to raise funds for its initiatives in the following ways, all of which relate to corporate taxes:
- Domestic tax rate changes
- Modifying or repealing international tax provisions for multinational corporations
- Modifying or replacing various tax incentives
- Increasing IRS enforcement
Domestic tax rate changes
- Increase the corporate tax rate: The MAT Plan calls for a corporate rate of 28 percent. Not coincidentally, this is the same rate that President Obama proposed in each of the eight budgets he presented to Congress. That being said, it is probable the rate won’t go that high. West Virginia Senator Joe Manchin, the current “swing vote” in the Senate, has said he won’t support anything higher than 25 percent.
- Corporate Minimum Tax: Candidate Biden proposed a 15 percent minimum tax on any large, profitable corporation reporting $100 million or more on its financial statements. Proving Mario Cuomo’s adage that you campaign in poetry but govern in prose, the proposed tax would apply only to companies making more than $2 billion in reported income. According to the MAT Plan, there are only 180 companies that would meet the threshold and only 45 that would pay the tax.
- Global minimum tax: To facilitate the implementation of the increased corporate tax rates without fear of being undercut by other countries, a proposal to the Organisation for Economic Co-operation and Development suggests that the world’s largest multinational businesses pay taxes to their national government based on local sales — regardless of their physical presence in any other country.
Modifying or repealing international tax provisions for U.S.-based companies
- Right now, the global intangible low-taxed income regime (“GILTI”) imposes a 10.5 percent minimum tax on 10-percent U.S. Shareholders of Controlled Foreign Corporations (“CFC”)based on the CFC’s active income, determined on an annual basis through a complex regulatory formula. Currently,the netting of CFC’s income located in different countries is allowed for the GILTI tax computation, as well as an annual high tax exclusion for CFC income that is subject to an effective tax rate (“ETR”) at higher than 18.9 percent. The MAT Plan would make three changes to the GILTI rules:
- The ETR on GILTI for corporate taxpayers would increase from 10.5 percent to 21 percent, which represents an increase in the effective tax rate on GILTI to 75 percent of the corporate tax rate (21 percent/28 percent, assuming the U.S. federal corporate tax rate is raised to 28 percent) from 50 percent of the corporate tax rate under current law (10.5 percent/21 percent).
- GILTI would be required to be determined on a country-by-country basis; under current law, GILTI may be blended with higher-taxed income and either greatly reduced or eliminated entirely.
- The exclusion equal to 10 percent of Qualified Business Asset Investment (“QBAI”) within the GILTI formula would be removed. Currently, the QBAI provision is seen as favorable for taxpayers with GILTI.
In summary, the MAT Plan would change the GILTI regime to be more of the “stick” that it was initially perceived to be and generally tax foreign source income of U.S.-based companies at a significantly higher rate to further disincentivize offshore investments by U.S. taxpayers.
- The “foreign derived intangible income” (“FDII”) regime under current law provides a tax incentive for C-corps that derive income from foreign markets, equal to an ETR of 13.5 percent. The hope and purpose was to have corporations keep and exploit valuable assets (such as IP) in the U.S. and perform export-type functions and sales from the United States. The MAT Plan would repeal the FDII regime in its entirety. The administration may use the revenue from the repeal of FDII to expand current research and development (“R&D”) investment incentives.
- The base erosion and anti-abuse tax (“BEAT”) is a 10 percent additional minimum tax that applies to large multinational corporations that make tax deductible payments to their foreign related parties. The Biden Administration will seek a global agreement on a strong minimum tax through multilateral negotiations and will repeal and replace the BEAT with tax laws that deny deductions to U.S. multinationals that make payments to countries in jurisdictions that have not adopted the minimum tax.
- Although “anti-inversion” rules have evolved and been strengthened throughout the years (e.g., Burger King, Allergan-Pfizer), these rules will become even stricter to prevent U.S. corporations from merging with foreign corporations, thereby reducing their U.S. federal income tax while retaining management functions and operations in the United States.
- The MAT Plan would eliminate deductions for expenses relating to off-shoring jobs and provide new tax credits for on-shoring jobs within the U.S.
Modifying or replacing various tax incentives
This aspect of the MAT Plan appears designed to directly support infrastructure initiatives. It focuses on eliminating preferences for fossil fuels, extending or providing new incentives for renewable energy — both at the business and consumer level — and requiring polluters to pay a tax for EPA Superfund site clean-up costs.
- While the MAT Plan is silent on the subject, there has been some mention of restoring the Section 199 Domestic Production Activities Deduction, which was repealed in 2017, as part of the Tax Cuts and Jobs Act.
Increasing IRS enforcement
The MAT Plan calls for the Internal Revenue Service to hire and train new revenue agents. In this case, the target is not just corporations but, as the MAT Plan puts it, “the wealthy individuals who own them.” Already, the Biden Administration’s 2022 Budget Proposal includes a 10.4 percent increase — about $900 million — to support this goal and another $417 million “as part of a multiyear tax initiative that will increase tax compliance and increase revenues.”
As always, we will keep you updated of new developments. In the meantime, please contact your Friedman LLP advisor with any questions.