With Democratic control of Congress and the Presidency, and a desire to pay for a large infrastructure plan, the prospect for major tax legislation is at its highest point since passage of the Tax Cuts and Jobs Act in 2017. On April 5, 2021, three leading Democrats on the Senate Finance Committee—Ron Wyden (D-OR), Sherrod Brown (D-OH), and Mark Warner (D-VA)—released their proposal on “Overhauling International Taxation.” On April 7, 2021, Treasury also released a paper providing additional details on the Biden Administration’s “Made in America Tax Plan.” While these proposals are still in preliminary stages, taxpayers should move quickly to model to understand the potential impact of these proposals to their fact pattern and to consider contacting their trade associations or members of Congress if they wish to help steer the legislation.
These proposals represent significant modifications to the TCJA’s international provisions and, in the case of some of the Biden Administration proposals, align with work being done by the Organization for Economic Cooperation and Development (“OECD”).
We have prepared the below comparison of the Made in America Tax Plan and Overhauling International Taxation proposal. The plans do share certain common modifications that address Democratic criticisms of the TCJA, including:
- Overall increase to the U.S. corporate income tax rate;
- Increase to the effective rate of tax on Global Intangible Low-Taxed Income (“GILTI”), elimination of the exemption for 10% deemed return on qualified business asset investment (“QBAI”), and calculation of GILTI on a country-by-country or mandatory high vs. low-tax basis; and
- Significant reform of the Foreign-Derived Intangible Income (“FDII”) incentive and Base Erosion and Anti-Abuse Tax (“BEAT”) minimum tax.
|
Biden Administration |
Senate Finance Committee |
|
|
CIT Rate |
– Increase to 28% |
Increase not specified |
|
GILTI: |
||
|
Overall Rate on GILTI |
21% (i.e. 75% of domestic rate) |
Increase overall rate to somewhere between 60%–100% of domestic rate (16.8%-28% with a 28% corporate rate). At a minimum, the GILTI rate (currently 10.5%) should be equalized to any future FDII rate (currently 13.125%). |
|
QBAI |
Eliminate exemption for 10% deemed return on QBAI |
Same |
|
Country-by-Country Calculation |
Calculate GILTI on a per-country basis |
Suggest either separate, per-country GILTI FTC baskets or mandatory exclusion of high-tax locations from GILTI calculation |
|
861/904 FTC Considerations |
Not addressed |
Expenses for research and management that occur in the U.S. should be treated as entirely domestic expenses |
|
FDII |
Repeal FDII and presumably replace it with expanded R&D/manufacturing credits |
– Eliminate 10% deemed return on QBAI |
|
BEAT |
Replace with SHIELD (“Stopping Harmful Inversions and Ending Low-tax Developments”), which denies multinational corporations U.S. tax deductions by reference to payments made to related parties that are subject to a low effective rate of tax. The low effective rate of tax would be defined by reference to the rate agreed upon in the multilateral agreement. However, if the SHIELD is in effect before such an agreement has been reached, the default rate trigger would be the tax rate on the GILTI income, as modified by the President’s plan. |
– Provide full value to domestic business tax credits (treatment of FTCs TBD) |
|
Inversions |
Disallow deductions for the offshoring of production and strengthen the anti-inversion rules by generally treating a foreign acquiring corporation as a U.S. company based on a reduced 50 percent continuing ownership threshold or if a foreign acquiring corporation is managed and controlled in the United States. |
Not addressed |
The Made in America Tax Plan adds additional measures targeting perceived corporate tax abuses, including a 15% minimum tax on book profits and strengthened anti-inversion rules. The plan’s replacement for BEAT, called SHIELD, also points to the Biden administration’s engagement with the OECD Base Erosion and Profit Shifting (“BEPS”) project. Specifically, SHIELD denies deductions for payments by US taxpayers to low tax jurisdictions. What is considered a low tax jurisdiction is undefined at this stage; however, the OECD has done some preliminary economic modeling that suggested a 12.5% rate as a global minimum corporate tax rate.
The Overhauling International Taxation proposal notably contains a few taxpayer-friendly provisions, including apportioning R&D expense for purposes of Section 861 to domestic income and providing full value of domestic business tax credits in the BEAT calculation.
While modeling the changes to the overall corporate statutory and GILTI effective rates, and elimination of QBAI from the GILTI calculation is relatively straightforward, many computational questions remain outstanding at this early stage, including the proposed application of GILTI on a country-by-country basis. Given that many taxpayers’ GILTI cost is driven entirely by expense apportionment, the specifics of the Section 904 calculation on a country-by-country basis are key.
Taxpayers, many of whom already determine their base erosion payments as part of their BEAT calculation, can model the potential impact of SHIELD by disallowing deductions on related-party payments in jurisdictions subject to an effective tax rate below a certain threshold, for example the 12.5% used in the OECD’s preliminary assessment or the 21% proposed effective rate on GILTI. While a detailed analysis is subject to further details on the SHIELD proposal, it can help assess orders of magnitude to US taxpayers. Other provisions, such as the Made in America Tax Plan’s disallowal for deductions related to offshoring production, currently lack sufficient detail to model with confidence.
Global Tax Management will continue to provide updates as these proposals make their way through the legislative process. Please reach out to us if you have any questions on the proposals or on modeling the impact of the proposals to your fact pattern.
