While Congress and the White House aim to reach an agreement on the infrastructure by the summer, negotiations on changes to the tax law are continuing. Since our previous warning, progress has been made on a bipartisan infrastructure deal and a global minimum tax, but the details of most of the corporate tax proposals have not yet been decided.
Of course, the most pressing question remains: what will Senator Joe Manchin do? As a “swing vote” in the 50:50 split Senate, the Democrats need all members on board to pass all laws through the reconciliation process, which will inevitably be less ambitious than the more progressive proposals that the Democratic caucus in the House of Representatives wants representatives. While a bipartisan infrastructure bill is more likely, as discussed below, a major corporate tax reform is likely to have to be passed through the reconciliation process.
Below are updates on the key corporate tax provisions that are being negotiated as part of the larger negotiations.
- Corporate Income Tax: President Biden’s corporate income tax rate of 28% and the Senate rate of 25% have yet to be compromised. Republicans are reluctant to raise taxes, but many Democrats see a corporate tax rate hike as an important reward for the bigger package.
- Minimum Book Income Tax: The proposed 15% minimum book income tax remains at the forefront of Biden’s agenda. With many Republicans reluctant to pull back on TCJA tax rules like BEAT and FDII, book income tax could be a avenue for compromise.
- GILTI and the global minimum tax: President Biden’s original plan was to adapt GILTI to the global minimum tax of the second pillar of the OECD. On July 1, over 130 OECD member countries, including the US, agreed on a minimum global corporate tax rate of at least 15%, in line with the high-level agreement reached earlier at the G7 summit. The Biden government intends to qualify GILTI as a minimum tax, but it remains unclear whether the OECD will accept GILTI. Skepticism remains in Congress, however, as Senator Ron Wyden (D-Oregon) chairman of the Senate Finance Committee expects heavy domestic efforts to achieve a global minimum tax as Republicans in Congress have made it clear they are unlikely to see a global minimum tax treaty will support. Senator Mike Crapo, R-Idaho, ranked member of the Senate Finance Committee, and U.S. Representative Kevin Brady, R-Texas, ranked member of the House Ways and Means Committee, released a statement saying the G7 deal was off could negatively impact and ultimately harm American workers and businesses.
- FDII: Both the Senate and President Biden would make significant changes to FDII. While Biden would eliminate FDII and replace it with R&D incentives to encourage businesses to invest on land, the Senate plan would replace the FDII with an amount of income that would cover U.S. research and development costs, employee training expenses, and expenses for the headquarters corresponds. FDII remains largely up in the air and it is unclear how any of the “new” FDII proposals would coordinate with the proposed global minimum tax.
- BEAT: Biden’s BEAT replacement SHIELD (Stopping Harmful Inversions and Ending Low-tax Developments) would deny US tax deductions to multinational corporations with reference to payments to related parties individually or collectively subject to a low effective tax rate, including amounts referred to can be determined on the production costs of the goods sold. As suggested, SHIELD is much broader than the corresponding OECD Pillar II proposal. Biden had previously suggested that SHIELD’s interest rate would be tied to a multilateral agreement, likely the OECD’s current Pillar II work. The final OECD tax rate is likely to drop near the G7 minimum tax rate of 15%.
Eversheds Sutherland observation: While Republicans remain reluctant to roll back TCJA tax regulations like the corporate tax rate, FDII, and BEAT, Senator Joe Manchin noted his support for efforts to roll back such regulations through reconciliation. It is likely that the Democrats have the support they need to make changes to international tax and energy tax regulations, but the question remains whether there is enough support for corporate and book income tax increases.
The likely way forward
June, the White House and 21 Senators, 11 Republicans and 10 Democrats, including Senators Susan Collins (R-ME), Joe Manchin (D-WV), Mitt Romney (R-UT) and Kyrsten Sinema (D -AZ) voted a $ 1.2 trillion infrastructure package. A proposed $ 579 billion would be used to invest in roads, bridges, airports, passenger and freight rails, optional vehicle infrastructure, and water and broadband infrastructure. Proposed payments include reducing the tax gap, redirecting unused COVID aids, reinstating chemical superfund fees, and extending expiring customs fees. However, the details of the biggest pay-fors, such as book income tax and corporate tax hike, have yet to be agreed. The bipartisan support means the $ 1.2 trillion infrastructure package could be passed under typical Senate rules without the constraints of budget balancing. Congress hopes to pass an infrastructure bill before the Surface Transportation Act and state funding expire on September 30th.
The bipartisan group disagreed with Biden’s American Family Plan, which provides support for childcare, education, caring economy, clean energy, and tax cuts for lower to middle class families. The Biden Administration and Democrats will likely attempt to balance the American family plan through budget balancing attempts. Balancing the budget is made difficult by the fact that certain Democrats, including House spokeswoman Nancy Pelosi (D-CA), want a draft equalization bill along with an infrastructure package. Following the announcement of the bipartisan infrastructure package, President Biden agreed that the infrastructure bill must go hand in hand with a reconciliation bill that would treat climate change and tax hikes for businesses and high-income individuals as pay-for-in addition to the American Family Plan. This Biden statement was faced with immediate push back by Republicans for falling short of the bipartisan agreement, and Biden softened his stance on the two simultaneously moving bills.
Since the Senate is on break until July 12, according to the majority leader of the Senate, Chuck Schumer (D-NY), important reconciliation talks with possible votes on both the infrastructure law and the budget resolution for the budget year 2022 are expected in July in mid-July . . The Senate must approve the budget resolution in order to initiate the reconciliation process. However, the Senate must also deal with the reinstatement of the federal debt limit planned for August 1.
Eversheds Sutherland observation: While the Democrats want a budget equalization bill to be introduced alongside an infrastructure package, Republicans are not that keen on the idea. It remains to be seen whether Republicans would support an infrastructure bill to prevent a reconciliation bill from being passed. And of course, the Democrats’ reconciliation move is going nowhere without the support of Joe Manchin.