By Doug Connolly, MNE Tax
The U.S. Treasury Department’s Green Book, released today along with President Biden’s 2022 Budget, sets out the specific tax rules the government plans to enact this year, including key proposals to revise international corporate tax rules.
Many of the corporate tax proposals were first published in the President’s Made in America Tax Plan in March.
The Green Book, the colloquial name for the formal title “General Notes on the Administration’s Proposed Revenue for Fiscal Year 2022”, contains the detailed legal explanations for these proposals.
The tax proposals in the Green Paper are divided into the American Jobs Plan and the American Families Plan. The American employment plan includes corporate tax reform, housing and infrastructure tax support, and clean energy taxation provisions. The American Families Plan contains individual income tax rules and provisions for tax compliance and administration.
Increase in the corporate tax rate
As expected, the administration is proposing to increase the corporate tax rate from 21% to 28%, dividing the difference between the rate set in the 2017 tax reform and the previously set rate (35%). It is proposed that the new tax rate apply to tax years beginning after December 31, 2021. The new tax rate will apply pro rata for non-calendar-related tax years starting in 2021.
Global minimum tax improvements
The government is proposing several changes to the US global minimum tax regime, formally known as the GILTI (Global Immaterible Low Taxed Income) regime.
The proposal would remove the current exclusion of the qualified QBAI (Business Asset Income). Under current law, U.S. shareholders can lower their global minimum tax by 10% of their return on QBAI, which generally applies to foreign tangible property. The government has argued that the QBAI exclusion is encouraging US companies, unlike the US, to invest in more tangible assets overseas in order to increase their minimum tax exclusion.
The administration would also increase the global minimum tax rate by reducing the deduction from the global minimum tax under Section 250 of the Internal Revenue Code. US shareholders currently receive a 50% deduction from a corporate tax rate of 21%, resulting in an effective global minimum tax rate of 10.5%. The administration would reduce this deduction to 25%, which together with the increase in the corporate rate to 28% would result in an effective global minimum tax rate of 21%.
US shareholders would also have to calculate their minimum global tax on a country basis as part of the proposals. Under current law, the tax is calculated as a whole, which allows income from low-tax areas to be mixed with income from high-tax areas to minimize the application of the minimum tax.
In particular, in adopting the calculation proposal for each country, the administration did not accept the proposal of the Chairman of the Senate Finance Committee, Ron Wyden (D-Ore), to simplify the calculation by using two “baskets” (high and low taxes) than requiring a separate calculation for each jurisdiction.
It is proposed that the global minimum tax changes apply for tax years beginning after December 31, 2021.
To prevent the erosion of the U.S. tax base by overseas corporations, the government is also proposing accompanying changes to tighten rules against inversion transactions. These changes will apply to transactions completed after the Effective Date.
Cancellation of the Fdii deduction
The administration proposes that the deduction for intangible income from abroad (FDII) should be lifted. Current law provides for a 37.5% FDI deduction, calculated as part of a U.S. company’s intangible income from exports. Like the QBAI provisions under the global minimum tax, the government believes that the FDII provision provides incentives for the relocation of certain economic activities out of the United States.
The Green Paper says that the administration will use the savings from the lifting of the FDII deduction to improve provisions that incentivize research and development (R&D). However, the proposals do not provide details on revised R&D provisions.
The cancellation of the FDII deduction applies to tax years beginning after December 31, 2021.
BEAT replacement by SHIELD
The government is proposing to abolish the property tax on erosion and anti-abuse (BEAT) and replace it with the rule “Stop harmful inversions and end low tax developments” (SHIELD).
Under current law, BEAT is an additional tax that only applies to certain large corporate taxpayers. The government has criticized the provision as being ineffective in preventing the US tax base from eroding and causing unintended consequences.
The SHIELD would seek to combat soil erosion by prohibiting deductions to domestic companies or branches in respect of payments made to any member of the same financial reporting group whose income is subject to a low effective tax rate.
To this end, a lower effective tax rate would be set with reference to the proposed US global minimum tax rate of 21%, unless or until a global minimum tax rate is agreed in international negotiations taking place under Pillar 2 of the OECD US Treasury Department recently suggested that the US would agree to a global minimum tax rate of only 15%.
The SHIELD is intended to apply to financial reporting groups with annual worldwide sales in excess of $ 500 million.
The administration proposes that the provisions replacing BEAT with SHIELD apply to tax years beginning after December 31, 2022.
Large Corporation Minimum Tax on Book Revenue
The proposals also include a minimum 15% tax on global book income for companies with global book income greater than $ 2 billion. The provision is intended as a backlash against tax avoidance by large corporations that show shareholders substantial profits while paying little or no corporate income tax.
It is proposed that the provision apply to tax years beginning after December 31, 2021.
Onshoring tax incentive
The administration proposes to create a new business loan equal to 10% of the eligible expenses paid or incurred in connection with onshoring a US trade or company. To that end, onshoring for a US business would mean reducing or eliminating a foreign business or trade while starting or expanding the same trade or business in the US.
It is proposed that the provision take effect for expenses paid or incurred after the Effective Date.
Other corporate tax regulations
The Green Paper contains some other proposals on corporate tax.
The administration proposes reforming the taxation of fossil fuel revenues by lifting the GILTI exemption for foreign oil and gas revenues.
Another proposal would limit foreign tax credits from sales of hybrid companies.
Finally, the corporate tax proposals include a provision to limit deductions for excessive interest by members of financial reporting groups in disproportionate borrowing in the United States.
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.