By Doug Connolly, MNE Tax
President Biden’s corporate tax plan, released March 31, would raise the U.S. corporate tax rate to 28%, raise the global minimum tax and calculate on a country basis, and add a minimum book income tax for the largest companies. and promoting international cooperation on global minimum taxes. The plan would also eliminate the foreign intangible income (FDII) deduction and reinvest the savings in expanded research and development (R&D) incentives.
The corporate tax plan, dubbed the “Made in America Tax Plan,” would pay in full for the president’s accompanying infrastructure investment plan, the American Jobs Plan, over a 15-year period, the Biden administration said.
The government says the tax plan aims to ensure that companies “pay their fair share”, invest in jobs in the US at home, and stop shifting profits to tax havens. The plan cites a recent study that found that the effective corporate interest rate halved from 16 percent to 8 percent from 2017 after the Tax Cut and Employment Act (TJCA) went into effect. The Biden administration has also argued that the TJCA accidentally induced US companies to invest more overseas, as discussed in a recent Senate Finance Committee hearing.
Increase in corporate tax rate and minimum tax “book income”
The president’s plan would split the difference between the pre-TCJA corporate tax rate of 35 percent and the TJCA-enacted tax rate cut to 21 percent by setting a corporate tax rate of 28 percent. This would bring corporate tax revenue as a share of the economy back to about pre-21st century average, the government said. A Treasury official who recently spoke at the Senate hearing noted that corporation tax revenue fell from 2 percent to 1 percent of GDP after the TJCA went into effect.
To prevent large companies from using tax loopholes to avoid paying US income taxes while companies are reporting high profits to investors, the plan would create a new minimum tax of 15 percent on “book income” companies serving their investors Report back. The proposal would apply “only to the largest companies”.
Global Minimum Tax, VALID
The TCJA issued the Global Low Intangible Tax Income Regulations (GILTI), which is the global minimum tax on foreign income. The provisions include a tax exemption for US companies on the first 10 percent return on their overseas property, plant and equipment. The rest is taxed at about half the US corporate tax rate. Tax is calculated on the company’s total global income and foreign taxes, not a country basis.
The Biden Plan would keep the global minimum tax but increase the tax rate to 21 percent and make two additional changes to prevent profit shifting and remove perceived incentives for offshore investments.
The Biden Plan would keep the global minimum tax but increase the tax rate to 21 percent and make two additional changes to prevent profit shifting and remove perceived incentives for offshore investments.
The plan would remove the 10 percent foreign assets-based exemption that the Biden government has claimed is encouraging companies to make additional foreign investment to increase their exemption.
The plan would also require companies to calculate their minimum tax on a country-by-country basis. This change is intended to prevent the use of tax havens, as current law allows companies to combine their low-taxed income in tax havens with high-taxed income from other countries when calculating their global minimum tax.
R&D incentives, FDII
The Biden Administration believes that the deduction of the TCJA for overseas Intangible Income (FDII) such as the GILTI provisions inadvertently encourages U.S. companies to move more assets overseas in order to claim a larger deduction. Accordingly, the President proposes to delete the provisions on foreign direct investment.
The plan would use the revenue saved by abolishing FDI to “create more effective incentives for R&D investment”. The plan does not provide further details on his fiscal approach to promoting R&D, although the infrastructure side of the President’s plan also includes several proposals for more direct federal government investment in R&D.
Multilateral cooperation on minimum taxes, BEAT
The Biden administration has raised concerns about a global “race to the bottom” in corporate tax rates. To this end, the President is seeking a multilateral agreement on a global minimum tax. The government believes it could undermine corporate efforts to shift profits to tax havens if it could convince other countries to introduce strong minimum corporate taxes alongside the US.
The plan would include additional provisions to prevent US profits from being withdrawn. If a company is based in a country that does not have a strict minimum tax regime, the plan would deny the company deductions “on payments that could allow them to withdraw profits from the US.”
The plan would include additional provisions to prevent US profits from being withdrawn. If a company is based in a country that does not have a strict minimum tax regime, the plan would deny the company deductions “on payments that could allow them to withdraw profits from the US.”
Possibly in relation to the TCJA’s Ground Erosion and Anti-Abuse Tax (BEAT), although not named, the plan would also replace “an ineffective provision in the Tax Act of 2017 that sought to prevent foreign companies from withdrawing profits from the United States.”
Other provisions
The plan lists several other proposals for a corporate tax revision.
Without giving details, the plan states that it would be more difficult for US companies to acquire or merge with overseas companies in order to avoid US taxes by claiming a foreign company despite being managed and doing business in the US to be (commonly referred to as “inverting”).
To encourage job creation in the US, the plan would ensure that “companies can no longer write off expenses incurred by offshoring jobs.” In addition, a new tax credit would support onshoring jobs.
The plan would also remove the tax code “subsidies, loopholes and special foreign tax credits for the fossil fuel industry” and require the polluting industry to cover the costs by restoring polluter payments to the Superfund trust fund.
Finally, the President proposes stepping up corporate tax enforcement. To that end, the administration wants to ensure that the IRS has the resources it needs to audit corporate transactions and conduct corporate tax audits.
The plan calls for the administration to also announce a “broader enforcement initiative” in the coming weeks aimed at tackling tax evasion by businesses and high-income individuals.
Doug Connolly is the Legal Editor, International Tax, at MNE Tax. He has more than 10 years of experience in tax law developments and previously worked for both a Big Four law firm and a leading legal publisher. He holds a law degree from the American University’s Washington College of Law.
