An examination of the Biden Administration’s proposed changes to the taxation of multinational corporations.
Biden Administration’s Proposed Changes to the Tax Code
On May 28, 2021, the Department of the Treasury released its General Explanations of the Biden Administration’s Fiscal Year 2022 Revenue Proposals, commonly referred to as the Green Book. The Green Book provides additional details on President Biden’s proposed changes to the tax code which are intended to fund his policy agenda; including the American Jobs Plan, the Made in America Tax Plan, and the American Families Plan. Many of the proposals date back to President Biden’s campaign, in which he made the case for policy changes involving infrastructure, manufacturing, and caregiving, and proposed paying for these changes by reversing some of the tax measures in the Tax Cuts and Jobs Act (“TCJA”) enacted under the previous administration.
Although there is debate over the U.S. international tax regime, there is an increased focus by the current administration on the issue in order to pay for President Biden’s Build Back Better (“BBB”) policy agenda. The following are some of the major changes to the international tax regime proposed by the Biden Administration in the BBB.
The GILTI Regime
The Biden Administration’s plan includes raising the minimum Global Intangible Low-Taxed Income (“GILTI”) tax rate from an effective 10.5% to 21% and calculating it on a jurisdiction-by-jurisdiction basis. The 21% effective tax rate will be achieved by increasing the corporate tax rate from 20% to 28% and reducing the GILTI deduction from 50% to 25%. By moving to a jurisdictional basis, a controlled foreign corporation (“CFC”) in a high-taxed jurisdiction would not be able to utilize its excess foreign tax credits against a CFC in a lower-taxed jurisdiction.
Additionally, the Biden Administration intends to eliminate the Qualified Business Asset Investment (“QBAI”) deduction from the GILTI calculation, as well as to repeal the Subpart F and GILTI high-tax exceptions. The net effect of these proposed changes results in the introduction of 21% global minimum tax. Currently, these proposed changes are stalled in Congress. However, the Biden Administration is confident it can enact a 15% international minimum tax under a scaled back version of BBB.
Repeal of the FDII Deduction
President Biden’s plan is considering repeal of the Foreign Derived Intangible Income (“FDII”) deduction to discourage domestic corporations generating profits from foreign revenue and from servicing foreign customers.
The Biden Administration’s proposed changes to the GILTI and FDII are meant to encourage domestic research and development investments and increase manufacturing operations (onshoring) and to deincentivize corporations from shifting manufacturing operations abroad (offshoring), thereby benefiting from both regimes and paying only a bare minimum tax in the U.S. The goals of these changes are to encourage R&D investments in the U.S. and to increase manufacturing operations.
Replacement of the BEAT with the SHIELD Proposal
President Biden also intends to replace the Base Erosion Anti-Abuse Tax (“BEAT”) and replace it with the Stopping Harmful Inversions and Ending Low-Tax Developments (“SHIELD”) proposal, the latter of which is meant to more effectively target corporations that shift their profits to low-taxed jurisdictions.
The SHIELD regime would apply to financial reporting groups with greater than $500 million USD in global annual revenues, determined based on a group’s consolidated financial statements. SHIELD looks to deny multinational corporations a U.S. tax deduction by referencing payments made to foreign related parties subject to a low effective rate of tax. SHIELD’s targets are financial reporting groups: groups of entities that prepare consolidated financial statements and include at least one domestic corporation, partnership or foreign entity with a U.S. trade or business, and have revenues of approximately $500 million. SHIELD would apply for tax years beginning after December 31, 2022.
Repeal of Parts of Section 245A Dividend Received Deduction
Currently, IRC Section 245A provides 100% dividends received deduction for the foreign source portions of any dividends received from a specified 10% owned foreign corporation, even in cases where the foreign corporation is not a controlled foreign corporation (“CFC”). The Biden Administration’s proposal would amend IRC Section 245A so the dividends received deduction applies to the foreign-source portions of dividends received only from CFCs.
Increased Funding for IRS Enforcement for Tax Evasion Among Corporations
The Biden Administration intends to provide $8 billion in additional annual funding to the IRS in order to improve tax enforcement, ensuring that wealthy individuals and corporations pay their fair share under current law.
Despite the BBB being stalled in Congress, the White House remains confident increased funding will be enacted in a scaled back version.