Biden Administration introduces tax plan to stimulate investment in infrastructure
April 08, 2021
Davies Ward Phillips & Vineberg
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President Biden and his administration recently released the American Employment Plan, which provides additional details on policies discussed during President Biden’s campaign and in the early days of his administration. Under the American Jobs Plan, released March 31, 2021, the government proposes significant investments in U.S. infrastructure projects, which could total $ 2.3 trillion over eight years . As part of the U.S. employment plan, the government is proposing to offset some of this expense through corporate tax increases and withdrawing or amending some tax changes under the Tax Cuts and Jobs Act of 2017.
President Biden’s tax proposals in the American Jobs Plan are expected to affect most taxpayers if they go into effect, but are primarily aimed at U.S. corporations, U.S. multinational corporations earning overseas, and High income individuals. Below, we provide a brief overview of the Biden government’s tax proposals and some observations on how these changes may affect investing and doing business in the United States.
Changes in corporate, international and corporate taxes
Important international proposals
- Change to the global GILTI regime (Intangible Low Tax Income), including by increasing the effective tax rate for GILTI to 21%, calculating the GILTI on a country basis and removing the exemption from a 10% return on qualified corporate investments (QBAI).
- Imposing a 10% surcharge on US companies that “place offshore manufacturing and service contracts with foreign nations to sell goods or provide services to the American market.”
- Eliminates the Foreign Deduction for Intangible Income (FDII) available to U.S. companies for sales to overseas buyers of goods and services linked to intangible assets (e.g., patents and trademarks) in the U.S.
- Abolition of the ground erosion and abuse tax (BEAT) and introduction of a “rule for under-taxed payments” in order to better align US tax legislation with the second pillar of the BEEC project of the OECD / G20.
Other business-related suggestions
- Increase in the corporate tax rate from 21% to 28%.
- Impose an alternative minimum tax of 15% on book income for companies with book income of $ 100 million or more. The current proposal provides that net operating losses and foreign tax credits can be applied when calculating the minimum tax due.
- To impose a “financial risk fee” on certain liabilities of certain financial institutions with assets in excess of $ 50 billion. The Biden administration did not publish the rate, but previous Obama administration proposals for similar fees ranged from 7 to 15 basis points.
These changes will result in higher effective tax rates for US companies and, therefore, may lower the total return for investors in US companies. In addition, these changes may cause US-based multinational corporations to rethink their international business structures. This could result in non-US business activities being removed from the US tax network through inversions to more tax-friendly jurisdictions or basic erosion transactions. In addition, Treasury Secretary Janet Yellen recently called for global coordination on developing an international minimum tax rate that would apply to multinational corporations to avoid incentivizing companies to shift profits to countries that offer the lowest tax rate. The Biden administration implicitly recognizes this danger by stating that it intends to prevent changes of residence by introducing “tough anti-inversion rules and penalties” and providing numerous “carrots” to encourage investment in the United States .
Proposed Incentives to Promote Investment in the United States
The Biden administration has proposed the creation, expansion, or reinstatement of various deductions and credits to encourage investment in U.S. manufacturing and renewable or “clean” energy technologies (while also proposing to eliminate certain fossil fuel tax breaks). These include the following:
- Introduced a 10% loan for investments in the US that creates manufacturing jobs in the US. Qualifying expenses for this loan include investments to restore closed facilities and the cost of bringing back production from overseas. This credit would be payable in advance to eligible taxpayers.
- Expansion and permanent tax credit for new markets and reintroduction of the energy investment tax credit and the electric vehicle tax credit.
- Providing tax credits to businesses to upgrade equipment and processes, invest in building and expanding factories, and use low-carbon technologies to develop a low-carbon manufacturing sector.
- Extending the deductions for upgrades in energy technology, intelligent metering systems and other emission-reducing investments in commercial buildings.
- Increasing incentives to develop and implement carbon capture, use and storage technologies.
Despite the rise in corporate tax rates, the new minimum tax on book income and changes in US international taxation, we expect the US to remain a favorable environment for foreign investors. In particular, the incentives proposed by the Biden administration should make it more attractive to invest in US infrastructure projects, US manufacturing companies, and US-based companies active in renewable and clean energy technologies. However, the impact of the proposals can turn into a balancing act that can work in different ways depending on developments in the US and the global economy.
Individual changes to income, salary and estate taxes
The Biden administration has already changed the existing tax law by expanding the tax credit for children in the American Rescue Plan Act of 2021. Additional proposals from the Biden government, such as the expansion or reinstatement of certain individual tax credits, may continue this policy of benefiting central and central government lower-income taxpayers, but most of the proposed changes aim to target the effective tax rate of high-income taxpayers increase.
Important suggestions for individual income and payroll
- Conversion of the highest individual tax rate to 39.6% (from the current 37%).
- Introduced a 12.4% Social Security wage tax on wages over $ 400,000 per year.
- Taxing capital gains and qualifying dividends at the highest marginal tax rate when the taxpayer’s income is above $ 1 million.
- Eliminate qualifying business income allowance for filers with taxable income greater than $ 400,000.
- Restricting the availability of single prints for those earning more than $ 400,000 per year.
- Reinstatement of the tax credit for first-time buyers and expansion of both the tax credit for earned income and the tax credit for those in need of children and care.
Important suggestions on estate tax
- Eliminate the “increase” in the tax base of a person’s wealth after death.
- Inheritance tax exemption decreased to $ 3.5 million ($ 7 million for married couples) and federal estate tax rate increased to 45%.
In addition to the administration’s policy proposals regarding inheritance tax, a group of senators led by Chris Van Hollen (D-MD) has introduced the Reasonable Taxes and Equity Incentive Act (STEP). The STEP Law proposes the following:
- Tax gain on the transfer of valued assets by gift (including transfers to trusts commonly used in estate planning) during the lifetime of the transferor with only a lifetime exemption of $ 100,000.
- Tax all non-grantor trusts every 21 years on all of their valued assets and impose additional reporting requirements for trusts with assets greater than $ 1 million or gross income greater than $ 20,000.
- On death, tax built-in profit on the deceased’s estimated assets with a $ 1 million exemption. Gains from personal residence of up to $ 500,000 for married couples and appreciation of assets held in retirement accounts would be exempt. Income tax paid by the estate on such gains would be deductible for estate tax purposes.
The American employment plan is an ambitious and remarkable first step for President Biden, who advocated the ideas of transformative infrastructure investments and the accompanying changes in tax law to pay for them. However, it remains uncertain whether the Biden administration can get the support it needs to achieve its full legislative agenda, given the small majority of Senate Democrats and the low likelihood of Republican support.
Wanting to win his election promise to fix the crumbling infrastructure of the United States, President Biden will surely push for legislation. Given the proposed price, it seems certain that some tax reform is in sight if he is to keep that promise.
The content of this article is intended to provide general guidance on the subject. A professional should be obtained about your particular circumstances.
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