The Biden administration published its green paper with tax proposals on May 28, 2021. Below is a brief summary of the main provisions that we believe will be of interest to the Fellows of Law 20/22/60 (as well as some corporate rules of general interest). [We show in brackets the revenue estimates for each provision and its effective date.]
· · No mention of 933 or 937: Proposal is silent on exemption from Puerto Rican sources of income for bona fide Puerto Rican residents.
· · Individual suggestions::
Ordinary income rates: The top rate would increase from 37% to 39.6% and apply to a lower tax base (e.g., the tax base for joint income of spouses would be decreased from $ 628,300 to $ 509,300). [Estimated to raise $132 billion over 10 years. Effective for taxable years beginning after December 31, 2021.]
o Taxation of capital gains: [Estimated to raise $322 billion over 10 years, with varied effective dates.]
- Maximum Rate: The maximum rate would increase from 23.8% to 40.8% applied to income from spouses over $ 1,000,000. [Effective for gains recognized after the date of announcement.]
- Estate and Donation Appreciation: Taxation on capital gains would apply to gifts and estates of valued estates, subject to numerous exclusions, exceptions and reservations. [Effective for gains on property transferred by gift, and on property owned at death by decedents dying, after December 31, 2021, and on certain property owned by trusts, partnerships, and other non-corporate entities on January 1, 2022.]
- Mark-to-market taxation after 90 years: If a certain property is held by a trust, a partnership or another non-corporation without recognition for more than 90 years (from 1.1.1940), it is considered sold as of the current date Market value. [Effective January 1, 2030.]
· · Business proposals::
o Taxation of carried interest: [Estimated to raise $1.5 billion over 10 years. You read that right – only $1.5 billion.] [Effective for taxable years beginning after December 31, 2021.]
- The Biden government would tax carried interest at normal income rates. It is unclear at this point whether the income would be treated as ordinary income or capital gains, which could have important implications for Puerto Rico procurement (e.g., income would be based on the taxpayer’s residence or where the taxpayer is located) Taxpayer provides services, related) to earn the carried interest).
- If carried interest results from an investment by the manager-investor, it would not be taxed as ordinary income: “Insofar (1) the partner. . . Brings in “invested capital”. . . , and 2). . . the partnership allocations to invested capital [are] takes place in the same way as allocations to other equity investments by shareholders. . . and . . . the assignments. . . are significant), the returns attributable to invested capital would not be re-characterized. “
o Self-employed taxes and NIIT: [Estimated to raise $237 billion over 10 years. Effective for taxable years beginning after December 31, 2021.]
- All commercial or business income from high-income taxpayers would be subject to 3.8 percent Medicare tax, through either NIIT or SECA tax.
- Limited partners and LLC members who provide service and materially participate in the business are subject to SECA tax on their distributing income shares.
- S shareholders who have a material interest in the company would be subject to SECA taxes on their distributing shares of the company’s income.
o Incentive for new onshoring companies in the US and Puerto Rico: The Biden government would create a new general business credit equal to 10 percent of certain expenses related to onshoring a foreign company to the US or Puerto Rico (or American -Samoa). The tax credit would be claimed by the US taxpayer or, if Puerto Rico / American Samoa enacts similar regulations (and the US Department of the Treasury reimburses Puerto Rico and American Samoa), their local taxpayers. [Estimated to cost $112 billion over 10 years. Effective for expenses paid or incurred after the date of enactment.]
Similar Art Bills: The Biden government would severely restrict the use of similar barter deals to defer profits from property swaps. [Estimated to raise $20 billion over 10 years. Effective for exchanges completed in taxable years beginning after December 31, 2021.]
o Information on crypto assets: “The proposal would expand the scope of information reporting from brokers reporting on crypto assets to include reporting on specific beneficial owners of companies holding accounts with the broker. This would enable the United States to automatically share such information with appropriate partner states in order to receive mutual information about US taxpayers who, directly or through passive companies, conduct crypto-asset transactions outside the United States according to a global automatic exchange of information framework. ” [Estimated to raise “negligible” revenue over 10 years. Effective for tax years beginning after December 31, 2022.]
· · C Corporation proposals::
o Corporate Tax Rates: The Biden government would raise the corporate tax rate to 28%. Senator Joe Manchin, who can play the kingmaker on these issues, has stated that 25% is the correct rate. [Estimated to raise $858 billion over 10 years. Generally effective for taxable years beginning after December 31, 2021. For taxable years beginning after January 1, 2021 and before January 1, 2022, the tax rate would be equal to 21 percent plus 7 percent times the portion of the taxable year that occurs in 2022.]
o Inversions: The Biden administration would facilitate the application of the inversion rules. These rules apply when a U.S. corporation becomes a foreign corporation that still has significant U.S. ownership and business. Under current law, the foreign corporation is treated as a US corporation if at least 80% of the company’s shareholders prior to the conversion continue ownership after the conversion. This percentage would be reduced to 50%. A rule that treated corporations with at least 60% remaining ownership a little more favorably would be repealed. [Included in the GILTI revenue estimate. Effective for transactions that are completed after the date of enactment.]
o FDII: FDII would be canceled. [Estimated to raise $0 because $124 billion of savings to be reinvested to provide additional support for research and development. Effective for taxable years beginning after December 31, 2021.”]
o VALID: [Estimated to raise $533 billion over 10 years. Effective for taxable years beginning after December 31, 2021.]
- GILTI’s exemption from 10% of the CFC’s QBAI would be abolished. All CFC income would be subject to the GILTI minimum tax.
- The GILTI rate would be increased from 10.5% to 21% (if the US corporate tax rate is 28%; if the assumed rate is instead 25%, the GILTI rate would be 18.75%).
- GILTI would be applied from jurisdiction to jurisdiction. If CFC1 earns $ 100 in a country with a tax rate of 40% and CFC2 earns $ 100 in a country with a tax rate of $ 0, then all of this income could be excluded from GILTI because the mixed tax rate (20%) Exceeds 90% of the current US tax rate (i.e. 90% of 21% is 18.9%). Under Biden’s proposal, CFC1’s income would be tax-exempt, but CFC2’s income would be subject to full GILTI.
- The GILTI exemption for certain foreign income from foreign oil and gas exploration would be lifted.
o Subsection F: Biden’s proposal would remove the high tax exemption for Subsection F. [Included in the GILTI revenue estimate. Effective for taxable years beginning after December 31, 2021.]
o BEAT replaced by SHIELD: SHIELD refuses to allow a US company or branch to make payments to a non-US group with a low effective tax rate (21% if the OECD does not agree to a lower rate under Pillar II) Prints. The proposal is complex and will be difficult to administer, but is intended to provide foreign countries with an incentive to enact rules similar to the revised US GILTI regime. This is one of the few suggestions that doesn’t take effect right away. [Estimated to raise $390 billion over 10 years. Effective for taxable years beginning after December 31, 2022.]