Joe Biden was inaugurated as the President of the US on January 20 2021. Tax policies and trade were major themes of his campaign, and in fact, President Biden’s campaign focused on significant tax policy changes including higher taxes for both corporations and for wealthy individuals.
However, since taking office, President Biden and his administration have sought to deal with other priorities that required their attention such as focusing their efforts on addressing the health and economic challenges of the COVID-19 pandemic, instituting policies that promote social and economic equity, and bringing a whole-of-government approach to advancing climate and sustainability policies and efforts. There also have been some noticeable developments on the international stage, with President Biden progressing relationships with key allies and pursuing new trade relationships.
As the COVID-19 pandemic in the US is trending in the right direction, the President and his administration have started to refocus on tax policy changes as well as infrastructure spending. So, what does all this mean for multinational enterprises (MNEs)?
Although it is still the early days of the administration pushing their tax policies – including discussions with the US Congress, some of his known and potential policies worthy of highlighting are reviewed below.
Since the US tax policy discussion also impacts the global tax discussions, especially the efforts by the OECD, interactions with the BEPS 2.0 project will also be highlighted.
The Biden proposals
President Biden has laid out tax increase proposals to fund the American Jobs Plan, the Made in America Tax Plan, and the American Families Plan. Many of the proposals date back to the presidential campaign, though there are some new starters, and ideas espoused during the campaign that were not included with the latest packages.
Since his presidential campaign, President Biden has made the case for major tax changes in speeches and reports, pledging to forward many policy initiatives on infrastructure, manufacturing and caregiving and to pay for them by reversing some of the tax measures in the Tax Cuts and Jobs Act, which Democrats have said disproportionately benefits corporations and wealthy individuals.
To achieve this goal, the Biden administration laid out the first broad swath of proposals in the aforementioned plans and more recently, the Administration provided new details on its earlier released proposals in the FY2022 budget and Treasury Green Book released May 28.
While the tax legislation will need to be negotiated and written in the US Congress, the long-awaited rollout of the two-part plan is done, and the President has put his cards on the table on tax increases.
The recent proposals address tax changes for both corporations and individuals. Although the debate over the design of the international tax system is not new, there is an increased focus on tax issues both as ways to pay for the administration’s other priorities and to address what some view as inequities within the system.
While narrow Democratic congressional margins mean the path to enactment will be challenging, Democratic leadership does have the ability to move tax legislation forward using budget reconciliation similar to what was done in 2017 for the Tax Cuts and Jobs Act, making it an area companies need to monitor.
According to the Treasury Green Book released by the administration, the Made in America Tax Plan proposed alongside the American Jobs Plan and the American Families Plan would, among other things:
- Increase the top corporate income tax rate to 28% from 21%
- President Biden has said 28% would still be lower than the 2017 rate, but acknowledged on May 5 he is “open to compromising”;
- Impose a 15% minimum tax based on book income for corporations with income over $2 billion;
- Increase the global intangible low-taxed income (GILTI) (or now referred to as the Global Minimum Tax) rate to 21%, calculate it on a country-by-country basis, and eliminate the 10% return on tangible assets
- More in line with BEPS 2.0 pillar two;
- Eliminate the foreign-derived intangible income (FDII) deduction;
- Replace the base erosion anti-abuse tax (BEAT) with the stopping harmful inversions and ending low-tax developments (SHIELD), which would deny tax deductions on related party payments by reference to the effective tax rate on the deductible payment in the local jurisdiction;
- Create a new general business credit equal to 10% of the eligible expenses paid or incurred in connection with onshoring a US trade or business, matched with a denial of deductions for expenses paid or incurred in connection with offshoring a US trade or business;
- Increase top personal marginal income tax rate back to 39.6% from 37%; and
- Impose a capital gains rate of 39.6% for taxpayers with incomes over $1 million.
Most of the proposals would be effective for tax years beginning after December 31 2021, though notably the changes to BEAT (i.e. which would be replaced with SHIELD) would be effective for taxable years beginning after December 31 2022.
OECD BEPS 2.0
The Biden administration has also called for a global minimum tax of 15% in a move to convince all 139 countries negotiating under the ‘inclusive framework’ at the OECD to agree to such a rate in connection with the BEPS 2.0 project.
“President Biden has started to take initial steps towards his promise of restoring America’s traditional international alliances and reengaging globally on issues such as climate change and the multilateral trading system.”
Although some OECD countries, such as Ireland, have voiced their concerns around a 15% global minimum rate, there is increasing evidence that the international community may ultimately be able to reach an agreement with respect to both a global minimum tax rate and the worldwide taxation of digital services.
A few developments have occurred recently. Finance ministers and central bank governors of the Group of Seven (G7) nations, the informal group of advanced economies consisting of the US, Canada, France, Germany, Italy, Japan and the UK, have announced that they strongly support the multilateral negotiations towards adopting global minimum tax rate of at least 15%.
The G20 finance ministers then subsequently endorsed the G7 positions in the latest rounds of meetings. Significantly, most of the countries that make up the OECD’s 139-member Inclusive Framework endorsed a high-level agreement of how the largest and most profitable MNEs should allocate their taxable profits to customer jurisdictions under BEPS 2.0 pillar one and to a global minimum tax model ensuring that MNEs pay a minimum level of tax (no lower than 15%) under BEPS 2.0 pillar two.
Other potential actions
Previously, President Biden signed into law the American Rescue Plan Act (ARPA), a $1.9 trillion economic relief and COVID-19 response package, bringing the federal government’s total response to approximately $5.5 trillion via six wide-ranging bills spanning approximately one year. With the ARPA in place, President Biden and congressional Democrats are now turning to broader, long-term economic growth and recovery proposals – largely embodied in the proposals introduced above, anchored in a broad and comprehensive infrastructure package.
Although President Biden has primarily focused on domestic issues during his first 100 days in office, President Biden has started to take initial steps towards his promise of restoring America’s traditional international alliances and re-engaging globally on issues such as climate change and the multilateral trading system.
President Biden has previously indicated that he believes in ‘fair trade’ and has signalled a return to more rules-based, pro-free trade environment that opens markets to US goods and services. However, with respect to China, President Biden’s policies to date are generally consistent with the policies of former President Donald Trump (e.g. the Biden administration has elected to keep former President Trump’s tariffs on Chinese imports in place).
Although members of the Biden administration (including Secretary of State Antony Blinken) participated in high-level discussions with their Chinese counterparts in March 2021, US Trade Representative Katherine Tai spoke to Chinese Vice Premier Liu He (her counterpart in China) for the first time on May 26. As such, it is too early to tell whether any subsequent trade discussions are likely to result in any meaningful changes to the current US-China trade environment.
The view from EY
Multinational enterprises with US subsidiaries and/or US operations should continue to closely monitor the status of President Biden’s current proposals as well as the further developments in the OECD’s BEPS 2.0 project. These proposals seem to be overlapping in general themes and could significantly change the US and/or non-US tax profiles of MNEs including the potential to significantly increase a MNE’s tax liability. The changes could also cause additional tax controversy as countries are looking to implement rules that will increase their tax revenues.
With respect to the President Biden proposals, although bipartisan discussions among Republicans and Democrats continue, the Biden administration and Democrats in US Congress have threatened to walk away from these bipartisan talks and seek to advance President Biden’s proposals without any Republican support. This will be a space to watch and follow in the coming weeks and months as there are many different ideas being pursued.
The Democrats currently have a razor-thin majority in the US Senate, so if Senate Democrats do decide to continue without any Republican support, they would need the support of all Senate Democrats. Certain Democratic senators (e.g. Senator Joe Manchin III of West Virginia) have already indicated that they are reluctant to support certain aspects of President Biden’s proposals, but could potentially support more modest proposals (e.g. raising the US corporate tax rate to 25% rather than 28%).
As a result, certain provisions included in President Biden’s current proposals could change during the legislative process. Therefore, it is recommended that all MNEs with US operations continue to closely monitor these events in the coming weeks and months.
It is also advisable to model the potential tax proposals to understand the impacts to the business. This will help to inform management and stakeholders, allow the business to provide a voice in the policy negotiations and proposal processes, and also look to potential business changes such as a review of its supply chain to keep its operating and tax efficiencies.
With respect to OECD’s BEPS 2.0 project, the conceptual agreement on both pillar one (the new nexus and profit allocation rules) and pillar two (the new global minimum tax rules) by the G20 and most of the members of the Inclusive Framework is a significant step in the OECD’s process. Although this was an important step, specific details have yet to be provided, and much work remains to be done. The Inclusive Framework group noted that “final decisions on design elements” of both pillars should be agreed upon by October 2021.
If the OECD members can succeed in reaching a consensus, the global tax law changes arising from the BEPS 2.0 project are expected to significantly change the global tax profiles of MNEs around the world.
Although the ultimate implementation of these global tax law changes may take time once a consensus has been reached (e.g. as participating jurisdictions may need to update their domestic laws and potentially their tax and non-tax treaties to reflect these changes), it is recommended that all MNEs continue to monitor any further developments in the BEPS 2.0 project and, in particular, any announcements leading up to and following the G20 meetings in October 2021.
As with the modelling recommendation for the US tax proposals, it is advisable to model the BEPS 2.0 project impacts as well for the same reasons. Tax policy changes seem to be on the horizon for 2021 and 2022 for MNEs and they need to be prepared to understand and manage these impacts as the final policies are enacted.
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Jeremy Litton is EY’s US tax desk network leader based in the Hong Kong SAR office. With more than 20 years of experience, his main line of practice has been in the international tax consultation area including planning and compliance.
Jeremy has worked on projects involved with international tax reform, tax planning, transaction tax structuring, supply chain structuring and due diligence considerations. He also has in-depth experience reviewing and advising clients on ASC 740 tax accounting issues from an international tax perspective.
Jeremy holds a bachelor’s degree from Millsaps College and a JD from the University of Mississippi School of Law.
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